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Manufacturing News, Source : The Manufacturer US
Published : 03 May 2005 22:04

Claus Heinrich, executive board member of SAP, tells Martin Ashcroft how real world awareness, enabled by technology, is set to transform business the same way it has done for aviation

As it happens /

A small measure, perhaps, of the reality of globalization can be taken from a meeting at National Manufacturing Week in Chicago earlier this year, where an Englishman and a German sat down to discuss the transformation about to take place in US manufacturing. The Englishman, of course, was your humble servant, editor-in-chief of the magazine you are currently reading, freshly arrived from The Manufacturer’s parent company in the UK to promote best practices in US manufacturing.

The German was Claus Heinrich, veteran of almost ten years on the executive board of SAP, the German owned business software company with 12 million users, more than 1,500 partners, and over 32,000 people employed in more than 50 countries. Heinrich believes we are standing on the threshold of a revolution in business. Why? RFID.

To illustrate the extent of the coming transformation, Heinrich draws an analogy between business and aviation. His new book, RFID and Beyond, published this year, opens with this analogy, and he cites it again in conversation. “The pilots of the past did not have a lot of information,” he observes. “They used to have to do everything. They had to steer, they had to navigate and so on.” The pilot’s role now, he says, has been redefined. With fly by wire and an autopilot, the plane flies itself. “The pilot is now the executive of the aircraft, a manager who defines the task that the automated systems should carry out and then manages any problems or exceptional conditions that arise.”

When you compare a pilot to a manager, he continues, “the manager is not in such good shape as the pilot. They don’t have the early warning systems. They have much less information.” RFID is about to change that. Information gathered from shop floor systems will transform the manager into the pilot of the enterprise. “We do a lot of things now in transactional systems which are triggered by human beings,” says Heinrich. “Somebody inputting a customer order or a goods receipt and so on. This can be automated. If an RFID tag just crosses a reader, it’s done.”

No-one, it seems, can mention RFID without referring to Wal-Mart. They are like the proverbial horse and carriage. Heinrich is no exception. “If you have a partnership between Proctor & Gamble and Wal-Mart,” he explains, “you do not have to manually create customer orders, because in a demand driven supply chain, the demand comes from Wal-Mart and it automatically triggers the order. This is the basic concept of real world awareness. We can automate different process steps by having the information. The manager then has the freedom to focus on the exceptions.”

Real world awareness is the phrase du jour, and the key ingredient is information. RFID, Heinrich points out, is merely one of the vehicles that carry it. The world and its brother are all hyped up about RFID, but Heinrich thinks they are missing the point. “For me the concept of real world awareness is more important than the technology of RFID. This is only one technology. You can also do real world awareness with some kind of bar coding.” The technology, exciting as it is, is simply a means to an end. Heinrich’s book, RFID and Beyond, is carefully titled for this reason.

On top of his senior role at SAP, Heinrich is also a professor at the University of Mannheim in Germany, lecturing in management science, but the book, he insists, is not an academic tome. “I hate reading boring books,” he says to me, with an expression that means he wouldn’t write one himself. “I describe the concept but I also give hints on how to implement, give examples of people who already did it. I have a lot of business partners whom I know really well who contributed to it.”

As befits a leading character on the world stage, Heinrich travels in exalted company. The list of contributors reads like a Who’s Who of global enterprise. Michael Dell, Ron Dennis (CEO of the McLaren Formula One Motor Racing team), the president of Nokia, the chairman of the German national airline Lufthansa, the CIO of Colgate, a senior VP from Delta Airlines – they’re all in there. One of Heinrich’s colleagues described the book to me as “something that any business executive in a decision making capacity will find useful.”

While aviation is ruled by the laws of physics, however, the world of business is less clear cut. Markets are dynamic, organizations complex, and the variables of human interaction are infinite. So there are challenges, Heinrich admits. He reminds us that the technology now commonplace in aircraft was initially despised by the pilots. Navigation computers now use global positioning systems (GPS) to completely automate the process of navigation, but when these systems were first introduced, pilots’ reactions ranged from suspicion through skepticism to outright hostility. “The electronic pig” was their term for it. So, in business, the changes involved in real world awareness are likely to be resisted at every level, from shop floor worker to manager to customer and consumer.

Jurgen Weber, chairman of Lufthansa, tells Heinrich in the book that aviation is reaching the end of the optimization curve of the hardware of flying, but there is much potential for improvement still in air traffic control, where some current procedures date back to the days of manual navigation which had a precision of plus or minus one kilometer. Now that precision is much higher, holding circles could perhaps be avoided, saving huge amounts of fuel, for instance.

So, leaving the technology to the tech manuals, where does Heinrich believe real world awareness will have most impact on manufacturing? The principle applies, however, that the more information you have, the more you can automate, and the more you automate, the more you free your personnel to operate at a strategic level. But the potential for information gathering is enormous, and as Heinrich points out, “not all information is created equal. Executives seeking to take advantage of real world awareness must first focus their attention on collecting the information that will make the most difference.”

Another thing is global sourcing. Purchasing – we had tons of people who only did the operational purchasing. The real thing is to make long term contracts. If you have an integrated shop floor system it can automatically call off the purchase items.

* * *

With competition now being between supply chains, rather than individual manufacturers, and as chains are proverbially as strong as their weakest link, supply chain management has become more critical than ever.

The demands facing manufacturing companies sometimes seem at odds with each other; they include reducing stock, boosting capacity utilization and reliable delivery, increasing the number of product variants, and cutting innovation times. Where do you see the biggest challenges?

Heinrich: The biggest challenges facing these companies today are those of flexibility and of adaptability. Successful manufacturing companies have to be able to respond flexibly in the supply chain arena. In addition, more and more companies have to serve the needs of a greater variety of customers and in turn respond quickly to their demands. Demand changes constantly, resulting in companies having to collaborate with new suppliers, outsource production, or use shared services (that is common resources) within one organizational unit.

To meet these demands, companies need to implement "adaptive supply chain management".

Heinrich: The difference lies in the adaptive element. For example, if a company operates a tight supply chain with supplier A today but wants to switch to supplier B tomorrow, this transition must be seamless.

Adaptive also means that the system can learn. For example, it recognizes when demand changes and issues a warning. This is extremely important.

Adaptive SCM is also closely linked to responding to problems with exception-based, automated processes.

The second difference is that adaptive SCM means being aware of the real world – individual companies in the supply chain are much more aware of what is happening in the real-time supply chain, for example, as a result of new technologies such as RFID. This means that the individual company automatically receives all the information from the warehouse and can recognize shortfalls straight away.

Shopfloor integration was not a primary concern for SAP up to now.

Heinrich: We will be focusing heavily on this area in the future, particularly with regard to the ISA 95 standard for integration between the shopfloor and topfloor. Together with customers and partners such as DuPont Engineering, Siemens, and Rockwell Automation, we aim to intensify our efforts.

Can you give some examples of best practice companies who have successfully implemented adaptive SCM?

Heinrich: Some of them I know very well, like Procter&Gamble in the US and Germany. Colgate, Nike, HP, or Dow Corning are further examples. In Germany, we are working on a very interesting project with L´Oreal and the DM-Markt supermarket chain. The project centers on the vendor-managed inventory process but goes one step further to allow L’Oreal to control merchandise planning for its own products in DM stores.

It's the same old story in the supply chain: Companies are far too short-sighted. They focus on their customers and, because their customers don't want to provide information, they end up building complex forecasting models to map out their buying patterns. But it's not the company's buying patterns that are important, it's the consumer's. This information has to be distributed right across the supply chain. This is one of the basic principles of the adaptive supply chain: knowing as soon as possible when the customer orders or changes something helps to organize a much more effective supply chain. It's precisely this approach that SAP is focusing on in consumer-driven SCM.

?? But you can only do this if your customers also want to adopt this approach...

Heinrich: Exactly. And this is why we work very closely with them. For example, I have regular meetings with one of the executive board members at Procter&Gamble who is responsible for production and logistics worldwide to discuss these issues.

This means that considerations for redesigning the supply chain are being made at the executive board level, underlining its importance.

The supply chain has to be redesigned to make the current push mechanism – the company delivers according to plans – into a pull mechanism – the company delivers according to consumer demand. We have to reach a point where companies in the supply chain pass on certain key information as early as possible. This approach is remarkable and is one whereby we are integrating Procter&Gamble's customers and suppliers.

You meet with your customer's customers and their suppliers?

Heinrich: Yes. International Paper is one of Procter&Gamble's major suppliers and provides Procter&Gamble with billions of dollars worth of containers and packaging. By talking to them, we can bring the customer and supplier together strategically

Does this not extend beyond your core business as a software provider?

Heinrich: We act as a facilitator. Don't forget that we have over 21,000 customers ourselves. When we ask our SCM customers who their suppliers are, we usually find that they are also SAP customers with whom we already have a good collaborative relationship.

Can an adaptive SCM solution for manufacturing companies really produce a measurable ROI?

Heinrich: To provide a neutral answer to this question, SAP has commissioned several studies, one of which was conducted by the market research institute PRTM. These studies clearly show that customers using adaptive SCM in conjunction with the SAP APO (SAP Advanced Planning & Optimization) component of our supply chain management solution are achieving net profits that are 75 percent higher than the industry average. These customers are also recording cost savings of up to 63 percent. And they have managed to reduce their stocks of obsolescence parts by up to 84 percent.

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