business process unification: cmm gets real

1. By Greg Gorbach, Robert Mick ARC STRATEGIES NOVEMBER 2003 Business Process Unification: CMM Gets Real Executive Overview .................................................................... 3 BPU Helps Achieve Real-time Performance Management................... 4 The CMM Model and BPU ............................................................. 6 Lean Manufacturers Benefit from CMM..........................................10 SCOR and Design Chain Reference Models ....................................11 The Enterprise Operations Platform..............................................13 Collaborative Supply Networks ....................................................14 Regulatory Issues......................................................................16 Recommendations .....................................................................18 THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN

2. ARC Strategies November 2003 2 Copyright ARC Advisory Group ARCweb.com Suppliers ManufacturingReceiving/ Inspection BOM Su pplier C riteria Inspection Criteria ERP Providers Patients Clinical Trials Orders Complaints Complaint Tracking M D R Service Design O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord CAPA Fulfillment Materials Mgt NPD & I Support Business Operations Plant Operations Suppliers ManufacturingReceiving/ Inspection BOM Su pplier C riteria Inspection Criteria ERP Providers Patients Clinical Trials Orders Complaints Complaint Tracking M D R Complaints Complaint Tracking M D R Complaint Tracking Complaint Tracking M D R M D R Service Design Service Design O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord O perator Certification O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord R oute A ssurance R oute A ssurance P roduct G enealogy P roduct G enealogy N CR R esolution N CR R esolution A ssy D w gs/ W ork Instructions A ssy D w gs/ W ork Instructions P roduct R elease P roduct R elease D evice H istory R ecord D evice H istory R ecord CAPACAPA FulfillmentFulfillment Materials MgtMaterials Mgt NPD & INPD & I SupportSupport Business Operations Business Operations Plant Operations Plant Operations Design Support Business Customers Production Suppliers Lifecycle Domain Value Chain Domain Enterprise Domain FulfillmentFulfillment Materials MgtMaterials Mgt RD&ERD&E ServicesServices OperationsOperations Suppliers ManufacturingReceiving/ Inspection BOM Su pplier C riteria Inspection Criteria ERP Providers Patients Clinical Trials Orders Complaints Complaint Tracking M D R Service Design O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord CAPA Fulfillment Materials Mgt NPD & I Support Business Operations Plant Operations Suppliers ManufacturingReceiving/ Inspection BOM Su pplier C riteria Inspection Criteria ERP Providers Patients Clinical Trials Orders Complaints Complaint Tracking M D R Complaints Complaint Tracking M D R Complaint Tracking Complaint Tracking M D R M D R Service Design Service Design O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord O perator Certification O perator Certification R oute A ssurance P roduct G enealogy N CR R esolution A ssy D w gs/ W ork Instructions P roduct R elease D evice H istory R ecord R oute A ssurance R oute A ssurance P roduct G enealogy P roduct G enealogy N CR R esolution N CR R esolution A ssy D w gs/ W ork Instructions A ssy D w gs/ W ork Instructions P roduct R elease P roduct R elease D evice H istory R ecord D evice H istory R ecord CAPACAPA FulfillmentFulfillment Materials MgtMaterials Mgt NPD & INPD & I SupportSupport Business Operations Business Operations Plant Operations Plant Operations Design Support Business Customers Production Suppliers Lifecycle Domain Value Chain Domain Enterprise Domain FulfillmentFulfillment Materials MgtMaterials Mgt RD&ERD&E ServicesServices OperationsOperations Complex, Interoperating Processes Demand a Unified View for Achieving Real-time Performance Management (RPM) Business Process Unification Links Operational Processes and Systems

3. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 3 Business Process Unification refers to manufacturers use of new platforms to transform existing processes and systems to support new business initiatives or enhance performance. BPU also refers to the fusion of technology platforms and applications by suppliers. Executive Overview Flexible. Adaptive. Responsive. These terms and others like them are commonplace in suppliers marketing presentations, but they also present a distinct irony for IT managers in most manufacturing companies. True, these are much-needed characteristics for manufacturers who compete in todays demand-driven marketplace, where global outsourcing, increasing regulation, supply network competition, shorter lifecycles, and customer-imposed technologies create challenges. But the reality is that legacy systems are inflexible, and manufacturers efforts over the last few years to build out business processes within applications, and knit together processes that span business and application silos, have usually created yet another inflexibility that IT must somehow conquer as business needs change. Its time to address this problem head-on. There is a revolutionary change coming in IT technology, and it is already beginning to help. The emer- gence of Business Process Unification solutions based on Service-Based Architectures will not only change the way manufacturers approach their IT strategy it will eventually change the dynamics of the software market and shake up the existing platform supplier/application supplier/system integrator market structure. Early evidence of the coming change can be seen among the software behemoths as SAP morphs from a monolithic application company to a platform company, and in parallel begins to target SMB customers, while Mi- crosoft extends its platform and adds business applications. The impact on smaller software suppliers, automation companies who provide software and system integrators is harder to determine at present, but it is clear that they are likely to face substantial changes in their business and technology models as the large new service-based platforms proliferate among their customer base, driving new expectations for applications and systems. Achieve Business Goals Systems and Architecture People, Processes, and Organizations Achieve Business Goals Systems and Architecture People, Processes, and Organizations CMM Unifies Business Goals, People and Processes, and Technology

4. ARC Strategies November 2003 4 Copyright ARC Advisory Group ARCweb.com BPU Helps Achieve Real-time Performance Management CMM models a real-time enterprise that combines advanced technology with a focus on business processes. Business Process Unification refers to the fusion of technology platforms and applications by suppliers, and to the use of these new platforms by manufacturers to transform existing processes and systems in order to support new business initiatives or enhance overall performance. Achieving business goals increasingly depends on the ability of an enterprise to link business processes end-to-end, together with operational, management, design, and support processes. Business Process Unification provides the technical means to integrate the business processes, link them together as appropriate, present them to involved users, and manage and maintain them. A real-time enterprise also needs the ability to quickly adapt to market changes. This drives the need to be able to quickly, clev- erly, and flexibly create, link, and change business processes, because the execution of the business processes directly impacts the creation of value for customers. In addition, the processes must be enabled to run in real-time, and must span all of the value chain, not just certain segments or bottle- necks. Business Process Unification (BPU) turns the CMM concepts around and looks at the whole underlying collaborative system from the point of view of an individual employee. From this standpoint, a single unified work- space, supporting individualized work processes and connected to the whole of the enterprise, allows each user to become one with the goals and processes of the enterprise. Business Process Unification component applications combine previously independent processes to improve both individual performance and management control. These applications will eventually provide a means for companies to quickly innovate, adapt and change their processes, in order to be more competitive without large BPU Component Applications within the Service Based Architecture

5. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 5 additional investments to modify existing software applications. Instead, they will build new cross-application integrations. Business Process Unification component applications are built around specific business processes, and leverage the newly available platform functionality and emerging composite application technology. They will improve business agility, efficiency, and productivity. BPU typically requires data from multiple domains, but it needs more than data integration. Process-level synchronization is the key. Because this new class of applications focuses on those business processes which span multiple traditional application spaces, implementing certain of these applications will require support from System Integrators or others capable of dealing with the cul- tural/behavioral as well as technical/system aspects of automating business processes. BPU Component Apps are different from traditional applications which provided either a generic functionality, such as document or database management, or specific business functionality such as ERP or SCP. These new applications cut across departmental and enterprise boundaries, provide functionality within a unified, end-to-end business process context, and typically tap existing applications. They leverage a portal for integrated presentation to the user, a service based architecture, and Business Process Management. Companies such as SAP, Microsoft, IBM, PeopleSoft, Siebel Systems, Ramco, Invensys, and Apriso are strong early players in providing BPU platforms or platforms and component applications. Other companies are building individual component applications using these platforms. For example, in addition to its collaborative platform, Lighthammer developed and co-markets an xApp (cross application), built using the SAP Net- Weaver platform, that addresses opportunity/problem discovery, analysis, and closed-loop monitoring of manufacturing business processes. Process Model A Collection of Business Processes Operations Model Resources Model People, Plants, Systems, etc. Performance Metrics, Targets, operational & costing data ManagementModel Business Model Strategy Map, Financials, Shareholder Value, Global Initiatives, Acquisitions, Partners, Channels, etc. Process Model A Collection of Business Processes Operations Model Resources Model People, Plants, Systems, etc. Performance Metrics, Targets, operational & costing data ManagementModel Business Model Strategy Map, Financials, Shareholder Value, Global Initiatives, Acquisitions, Partners, Channels, etc. Business Process Unification (BPU) Unifies a Manufacturers Business Strategies, Processes, Resources, and Performance Management

6. ARC Strategies November 2003 6 Copyright ARC Advisory Group ARCweb.com The CMM Model and BPU Much of manufacturing is inherently complex. Whats needed is a unified approach to all of the market, business process, and technical dynamics that must be leveraged in order to craft and execute a winning strategy. ARCs Collaborative Manufacturing Management approach is based on a multi- dimensional, cross-industry, multi-layered model which illustrates these complexities in a simple, straightforward manner. It connects technology and architecture to the business model and strategy map the way an enterprise creates value for its stakeholders as well as to the business processes, people and other resources, and management model that make up the daily work of operations. ARCs CMM model has proven to be a useful device for both suppliers and manufacturers. The evolution of collaborative value networks requires that manufacturers visualize the relationships among plant and enterprise applications, markets, value chains, and manufacturing nodes in order to understand the context for planning and implementing collaborative manufacturing systems. A collaborative manufacturing network can be modeled as spheres or manufacturing nodes connected by material, information, and process flows. The nodal sphere encompasses three axes: Enterprise, Value Chain, and Lifecy- cle. Above the central plane or disc are business functions. Below it, are production functions, now performed using a number of manual processes and legacy applications. These will be supported by collaborative components capable of orchestrating the designated functions in concert with the business goals of the node and the competitive dynamics of the value chains in which the node or enterprise participates. ARCs CMM model establishes the requirements for an information system that addresses the key elements of collaborative manufacturing outlined above. The model also recognizes the need to support internal and out- sourced execution of all enterprise activities by defining solutions for different functional units and for an extended enterprise or supply chain. CMM Model: Functional View Lifecycle Domain Lifecycle Domain Value Chain Domain Enterprise Domain Lifecycle Domain Value Chain Domain Enterprise Domain Product & Process Support Internal Collaboration Value Chain Domain Enterprise Domain Business Operations Plant/Factory Operations Supply-Side Materials Management Customer Order Fulfillment Product & Process Design, N PI

7. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 7 Win with Game-Changing Technologies Technology has played a huge role in increasing manufacturing productivity and will undoubtedly play a growing role in responding to business drivers. Web services, business process management, mobile computing, and RFID are likely to be among the technologies that change the game over the next several years by radically changing the competitive possibili- ties: faster to market, lower cost, better features, better available information, better packages of products/services delivered through vari- ous channels. But it is important to create a structure and approach that will ensure process flexibility, because business processes change. In doing so, the infrastructure must also provide for controlled migration from legacy systems, often using an Embrace, then Replace strategy. The underlying technology should also be capable of supporting philosophies and best practices such as Lean Manufacturing and Six Sigma. Enterprise Level Performance and Control Many manufacturers are embracing the dual strategies of Specialization and Collaboration. These strategies go hand in hand, because great efficiencies can potentially be gained by specializing in a core competence and outsourcing the rest. However, these efficiencies may only be achieved if sufficient attention has been paid to creating the connectivity and business process collaboration that enables the manufacturer to take advantage of the new order. Globally distributed manufacturing operations that par- ticipate in both localized and global competitive supply networks can benefit from BPU. Manufacturers who are part of a multinational company or an independent partner in a separate collaborative value network use BPU to maximize their versatility and Real-time Performance Management (RPM), and to enhance their competitive position. Collaboration at the Shop Floor and Plant Floor Level Collaborative manufacturing is a competitive strategy that leverages Inter- net technologies, fosters collaboration with value network partners, creates electronically driven workflows, and promotes a focus on core manufacturing competencies. This creates an environment for manufacturers to compete as a highly flexible and responsive operation that can meet the expectations of customers and value network partners, but it also demands a high level of integration. Todays shop floor and plant floor systems must integrate with plant floor control systems, business systems (ERP and sup-

8. ARC Strategies November 2003 8 Copyright ARC Advisory Group ARCweb.com ply chain), engineering systems (PDM and PLM), and maintenance systems (EAM and PAM). Collaborative manufacturing lies at the intersection of the enterprises Value Network and Lifecycle dimensions, and shares certain business processes along each dimension. Optimize the Value Network A manufacturers value network extends along the supply chain from the suppliers suppliers to the customers customers. It is useful to consider this continuum in three segments: supply side, internal manufacturing and logistics, and demand side. Supplier-facing processes include Supply Network Planning, Sourcing, Purchasing, and Inbound Supply Chain Logistics, including Transporta- tion, Warehousing, and Distribution Management. Manufacturing or operations-centric processes include materials storage, handling and stag- ing, plant and shop-floor production, production management, quality, automation, and packaging. Customer-facing processes include demand and forecast management, sales, order, and revenue management, and fulfillment, outbound logistics, and transportation, warehouse and distribution management. Today, a globally distributed supply network can deploy technology to unify processes linking all three of these segments and the rest of the manufacturing enterprise to dramatically tilt the competitive balance in its favor when facing networks built on a traditional business model. Effective Product Lifecycle Management Designing new products and their manufacturing processes is collaborative in nature, and new BPU-based tools will emerge to support these activities. As manufacturers adapt to the broader emerging collaborative environment, these systems will enhance their ability to provide quick and effective responses to demand changes and accelerate time to market for new products. For discrete manufacturers, this must include the management and collaboration of specification and product development information, as well as the design and collaboration on manufacturing processes across multiple spe- cialized contract manufacturers. Collaborative systems must support a

9. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 9 number of processes, including assembly sequence planning, constraint- based design, distributed process planning, and layout. In addition, they must be integrated with plant business systems. After the initial product and process design and documentation, collaborative systems must support new product introduction, ramp to volume, local process optimization, change management, and manufacturing improvement projects such as throughput reduction, cost reduction, and automation. Hybrid and process manufacturers have an analogous situation in the development and deployment of recipes and manufacturing processes. Collaborative solutions for these chemical, food, and pharmaceutical plants should support recipe-related business processes in R&D, manufacturing, and marketing. They must ensure consistent recipe maintenance across enterprise boundaries. Plant and Asset Lifecycle Management Special attention must be paid to processes involved in plant and asset lifecycles, which occur in a different time scale than product lifecycles. These processes include plant and asset design/engineering, simulation, startup, operation and support, and eventually, decommissioning. The future clearly involves a closer integration of in-house and OEM service organizations. Rather than managing staffs of technicians and stores of spare parts, modern service managers will have to learn to manage service networks that include multiple sources for service personnel, parts, and information. Service activities are always considered time- and cost-critical since they involve assets being unavailable for use. Even when the focus is on a single machine, the entire production line is often affected. Manufac- turing improvement initiatives, like lean manufacturing, are further Function Typical Applications Business Operations ERP, MRP, Financials, Cost Ac- counting, HR, Strategic Enterprise Management (SEM), Business In- telligence, Analytics, Decision Support, Capacity/Resource Plan- ning, Value Network Design, Portfolio Management Supply-Side Materials Management SCM, SCP, SRM, BPM/SCPM, Pur- chasing, supplier scorecarding, supplier performance monitoring, sourcing analytics Customers & Order Fulfillment CRM, SFA, Demand Forecasting, APS, TPS/TMS, BPM, Distribution Planning, WMS Product & Process Design, New Product Introduction (NPI) PLM/D, PDM, Formulation Manage- ment, Specification Management, CAD, CAM, Line Design & Simula- tion, Plant Design & Simulation Product & Process Support PLM/S, CALM, EAM, MRO, CRM/Help Desk, PAM, PSM Plant/Factory Operations Production Management, CPM, LIMS, Plant Services Connector, CPAS, CDAS, APC, PAM, AMHS, Production Planning & Scheduling, Tool Management, Batch, Energy Management, Waste Management Internal Collaboration BPM, KM, Portals, Enterprise Inte- gration, Plant Data Services, Change Management, Document Management CMM Applications

10. ARC Strategies November 2003 10 Copyright ARC Advisory Group ARCweb.com aggravating this situation by tightly coupling all manufacturing stages. Managing even the most basic service activities today requires sophisticated planning and flawless execution. At the same time, supplier and customer relationships must be continuously nurtured. While site support for installed assets is the most pressing responsibility of any service organization, close management of spares and off-site repair operations can be equally important to maintaining overall effectiveness and achieving service cost/profit goals. Lean Manufacturers Benefit from CMM In recent years, many large discrete manufacturers have devoted significant energies to achieving a lean enterprise. Lean manufacturing started as the Toyota Production System, and found early acceptance in manufacturers in the automotive industry. Typified by its emphasis on core competencies, just-in-time (JIT) inventories, error-free production, and continuous re- moval of waste, a successful lean manufacturing strategy turns on the ability to apply the right resources and the right tools in an efficient and coordinated fashion. Companies moving to Lean can benefit through im- provements in cycle times, inventory reduction, throughput, cost reduction, and quality. Although the practice of Lean manufacturing does not require special software, most manufacturers today are comfortable with the idea of using appropriate software to support operations. Lean Design Lean manufacturing is often thought of as flow manufacturing or production lines and cells, with a goal of minimizing inventory handling and any activities that do not add value to the product. Changing products may require cell design or redesign, line balancing and production leveling. Lean Production A key mechanism for gaining the benefits of Lean manufacturing often de- rives from the change from the economies of scale of large lots/few changeovers to small lots produced only when needed. In practice, this requires an manufacturing operation based on speeding decision-making and problem resolution with real-time process control, dynamic, pull-based

11. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 11 scheduling, process visibility through portals, inventory techniques such as kanban, and event management and alerting so that problems are quickly addressed and resolved as they occur. Systems that build quality management into the process are also important. Lean Material Supply Successful Lean manufacturing requires that the Lean concepts extend be- yond the four walls of the plant. Demand based delivery signals, release against purchase orders, supplier visibility into production and demand forecast data, parts sequencing, and vendor managed inventory techniques may be required to extend Lean to the supplier network. Lean Demand As manufacturers face increasing pressures from customers for lower prices, faster turnarounds, smaller order sizes, more customization, and more information to accompany the product, they look for ways to differen- tiate themselves. Excellent product quality, excellent service, automated replenishment, and short lead times are examples of potential customer benefits from a manufacturers move to Lean. Lean Management Executive support is critical for successful Lean programs, but specific techniques such as tracking/managing the cross-training of the workforce and using a structured approach to continuous improvement can help in- crease yield and reduce scrap. SCOR and Design Chain Reference Models CMM and the SCOR model differ substantially, but they are in general agreement in their view of the Supply Chain or Value Chain dimension. CMM explicitly connects technology and architecture to the business model and strategy map the way an enterprise creates value for its stakeholders as well as to the business processes, people and other resources, and man-

12. ARC Strategies November 2003 12 Copyright ARC Advisory Group ARCweb.com agement model that make up the daily work of operations. SCOR focuses on processes and benchmarking. Supply-Chain Council The Supply-Chain Council has developed and endorsed the Supply Chain Operations Reference-model (SCOR) as the cross-industry standard for supply chain management. The process reference model integrates the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework. As the name suggests, the SCOR models strength lies in its coverage and modeling of extended supply chain processes. It explicitly does not attempt to cover the Product and Process Design functionality, and in practice, it tends to fall down a bit in the MAKE area, which often gets treated as an afterthought. The SCOR model is intended to cover all supplier/customer interactions, from order entry through paid invoice; all physical material transactions, from your suppliers supplier to your customers customer, including equipment, sup- plies, spare parts, bulk product, software, etc.; all market interactions, from the understanding of aggregate demand to the fulfillment of each order; and returns. SCOR intentionally does not include sales administration processes, technology development processes, product and process design and development processes, and some post-delivery technical support processes. Design Chain Council At this writing, a new industry group being formed to develop and imple- ment an open standard operations reference model for managing the design chain in product development and engineering. This promises to be a valuable activity, particularly if the group visualizes the models they de- CMM Positions the Enterprise within its Value Networks and Includes the Product and Process Lifecycle Dimension; SCOR Focuses Strictly on Supply Chain Processes

13. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 13 velop to extend from product and process design, through new product introduction and ramp-up, to product and process ongoing support and service, as envisioned in the CMM model. More information about the new group is available at www.design-chain.org. The Enterprise Operations Platform Todays supply networks are distributed around the globe. Manufacturers need a single IT solution that can support all of their globally distributed operational activities. A solution which can be deployed globally will have the expected global calendars and calendar visibility, multiple language user interface and multi-language document links, multiple media format support, and global time stamps. An EOP goes a step further, and also provides manufacturers with the ability to ensure legal, regulatory, and financial compliance in all of the appropriate markets. In order to adapt to varying manufacturing types, models, and vertical in- dustries, as well as individual operating requirements, the EOP should be assembled from components or business objects. A workflow engine, business rules engine, and analytics engine should work together to automate, drive, and monitor operating processes throughout the enterprise network. The Enterprise Operations Platform must be capable of being deployed in small targeted chunks, instead of a big-bang implementation but must scale up readily. The EOP will have a native Internet-centric architecture, with web services throughout, and will utilize XML standards-based mes- saging and integration. It will have multi language, date, and time-zone management. It will be a scalable n-tier platform, capable of supporting multiple servers per tier and per location. It will also support emerging technologies such as RFID and mobile devices. In operation, users must be able to configure the network and connect the nodes, manage change, and easily extend the infrastructure. They must also model and manage business processes and workflows throughout the network. Manufacturers need to be able to extend their Lean operations by extending the product-type and sequence-type demand pull kanban signals from within their nodal manufacturing organization out to their network partners.

14. ARC Strategies November 2003 14 Copyright ARC Advisory Group ARCweb.com In order to meet corporate objectives for profitability, performance, and, compliance, manufacturers must drive their own supply network to their best advantage. Manufacturers need an EOP that can be created, deployed, and managed at an enterprise level, while supporting individual nodal (plant, warehouse, etc.) requirements for receiving, storing, and shipping material, allocating and tracking labor, deploying equipment and tools to manipulate or move the work, and all other operational activities. Collaborative Supply Networks Manufacturers have always built their competitive advantage by leveraging their expertise and know-how in finding and dealing with suppliers. Typically, manufacturers cultivate robust relationships with key suppliers, and understand what kind of pricing/availability concessions should be expected in any given set of circumstances. In turn, the suppliers reasona- bly expect to benefit from business the manufacturer wins with their help. The Japanese kieretsu model takes this one step further, grouping suppliers up and down the value stream in a close working relationship, usually physically close together as well. Today, a globally distributed supply network can deploy technology to dramatically tilt the competitive balance in their favor when facing this traditional business model. By focusing on processes that touch the plant floor, warehouse and logistics, and other supply network nodes, manufacturers can use technology to enhance their competitive position by making their internal operations and supply networks more responsive, more flexible, and less costly. In practice, manufacturers can use an EOP to link corporate goals and performance to operational realities. Logistics Providers Distributors Retailers SuppliersSuppliers Contract Manufacturers Logistics Providers You Logistics Providers Distributors Retailers SuppliersSuppliersSuppliersSuppliers Contract Manufacturers Logistics Providers You

15. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 15 Nodal Operational Processes A collaborative manufacturing network consists of nodes connected by material, information, and process flows. Nodes may include transportation providers, distribution centers, retailers, contract manufacturers, and other suppliers. In some cases, this network remains essentially fixed for periods of time, while in other cases the network may come together in support of a specific market opportunity, then dissolve and reform. While every node is unique, each node must deal with essentially the same fundamental processes. Every stage receives, stores, and ships material. Labor is allocated and tracked. Machines and tools are deployed to manipulate or move the work. Value may be added to the work in production processes, or it may be stored or moved. Equipment within each node must be maintained. All of this is ideally done based on customer demand as reflected in the downstream node. Network Operational Processes Other processes can and should transcend the nodal processes and exist in the network, or business-to-business dimension. Examples are Lean/Six Sigma, or regulatory traceability, tracking, and quality requirements. With a Lean approach, forecasts can be used for planning purposes and contrac- tual arrangements, and demand can drive the production rate and supplier deliver rates throughout the network. This not only potentially reduces operating expenses and reduces working capital, but can also create capacity for growth by helping the network use its capacity more efficiently, which allows individual companies to reallocate capacity to growth products. Enterprise Operational Processes It is the manufacturers responsibility to create and administer a responsive supply network which meets its needs. Doing so involves planning, designing, and executing across multiple supply network partners to deliver products of the right quality and design, in the right quantity and packaging, at the right time and place. Once the composition of the network has been determined, systematizing the network requires configuring the network and connecting the nodes, and deploying the infrastructure. This can be a challenge as the number of nodes increases. In operation, there needs to be a central point for monitoring performance and feedback from all of the nodal partners and for maintaining and optimizing the overall process.

16. ARC Strategies November 2003 16 Copyright ARC Advisory Group ARCweb.com Regulatory Issues Although government regulations do not directly drive the need for CMM systems, they do mandate certain reporting requirements as well as certain manufacturing practices that may be difficult or impossible without these systems. Some of the regulations which are driving manufacturers toward a more unified approach to systems are discussed here. Sarbanes-Oxley Act (SOA) The Sarbanes-Oxley Act of 2002 (SOA) affects corporate governance, disclo- sure and financial accounting. Among other provisions, it requires that CEOs, CFOs and independent auditors and committees certify the accu- racy of financial statements and other disclosures, document its existing controls, and a management assessment of the effectiveness of internal controls and procedures and financial reporting. Operational performance and effective business process management are key impact areas for the plant floor. WEEE The European Waste Electrical and Electronic Equipment (WEEE) Directive became European law in February 2003. It sets collection, recycling and recovery targets for all types of electrical products. By 2007, European manufacturers will be responsible for the treatment of waste from electric and electronic equipment. WEEE targets have not yet been established in the U.S., but the EU precedent may be a bellwether of how future regulations might affect the U.S. electronics industry. These rules will force even tighter linking within already complex supply networks. In order to establish closed-loop product lifecycle management (PLM), manufacturers will have to design and engineer products for reus- ability and sustainability. Many of today's business systems look downstream. Tomorrow's supply networks will have to look backward as well. To exploit potential opportunities from the return flow of products and to adequately handle the increased exchange of information that WEEE responsibility will trigger, manufacturers will increasingly need support from sophisticated systems.

17. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 17 The EU has set the stage for a new integrated business ecosystem. As supply networks adjust to the return flow paradigm, the current selling and buying mechanisms will change. This will impact the complete product lifecycle, and will drive more process connectivity through to the shop floor. TREAD ACT The Transportation Recall Enhancement Accountability and Documenta- tion Act (TREAD Act) represents a sweeping piece of legislation that will require large manufacturers and their OEMs to report on a wide variety of warranty, customer service, and legal data to the federal government, specifically, the National Highway Traffic Safety Administration (NHTSA). The TREAD Act includes provisions in four major areas: 1) Tire Safety, 2) Child Passenger Safety, 3) Vehicle Rollover, and 4) Defects Re- porting/Non-compliances/Recalls. The implementation of this legislation includes dashboard tire pressure monitoring systems on consumer vehicles, warranty issues, and safety related reporting such as accidents caused by defects. However, the most relevant issue that impacts manufacturers of either components or fully assembled vehicles is the TREAD Act Early Warning Reporting clause. This clause requires manufacturers to rapidly report information about claims resulting from serious injury or death, aggregate statistical data on property damage, and all incidents involving fatalities and serious injuries due to defects. 21 CFR 820 The Quality System Regulation (QSR) is contained in Title 21 Part 820 of the Code of Federal Regulations. It helps to assure that medical devices are safe and effective for their intended use. The regulation covers quality management and organization, device design, buildings, equipment, purchase and handling of components, production and process controls, packaging and labeling control, device evaluation, distribution, installation, complaint handling, servicing, and records. For drug development, current Good Manufacturing Practices (cGMP) are used. These are different than the QSR and are contained in Title 21 Part 210 and 211. The FDA is currently looking at modifying these regulations towards a risk-based approach, which will provide a more systematic approach with regard to development and compliance.

18. ARC Strategies November 2003 18 Copyright ARC Advisory Group ARCweb.com It is the manufacturers responsibility to ensure that all manufacturing op- rations comply with all applicable FDA requirements. For example, manufacturers must maintain a Device History or Batch Record (DHR, DBR), a process for Corrective and Preventive Actions (CAPA), and a process for investigating, evaluating, and documenting nonconforming products. Formal processes are also expected for complaints, inspection, and test procedures, together with evidence that the formal processes are being adhered to throughout the development and manufacturing activities. In addition, there must be proof that these processes are tied to management review and control. The FDA audits medical device manufacturers on their ability to manage the complaint handling process (21 CFR Part 820.198) because it provides the FDA with a systems approach towards assuring that the manufacturer is compliant with the QSR. Managing customer-focused quality is the most important part of a medical device manufacturers existence. Not having the best system in place to identify, solve and prevent quality problems in the field presents a very high risk to manufacturers. Preventing and quickly solving quality problems significantly affects a manufacturers bot- tom line by eliminating costs of recall, logistics, testing, scrap, overhead and other related areas. Recommendations Embrace CMM. Manufacturers should use CMM to model their enterprise a real-time enterprise, operating within a value network, and to visualize the interplay of systems and technology, business processes, management control, and business goals. Focus on Business Processes. Making business processes the focus of man- agements attention can yield significant operational benefits. Managers should begin to think about new ways of doing business. Get experience with the new BPU platforms. If you havent piloted one of these platforms, do it now. Involve IT managers in educating business managers about the new possi- bilities BPU can enable. Team IT managers and business managers to create specific business visions.

19. ARC Strategies November 2003 Copyright ARC Advisory Group ARCweb.com 19 Analysts: Greg Gorbach, Robert Mick Editors: Ed Bassett, John Moore, Andy Chatha Distribution: All EAS and MAS-D Clients Acronym Reference: For a complete list of industry acronyms, refer to our web page at www.arcweb.com/Community/terms/terms.htm AMHS Automated Material Handling System APC Advanced Process Control APS Advanced Planning & Scheduling BPM Business Process Management CMM Collaborative Manufacturing Management CPAS Collaborative Process Automation System CPM Collaborative Production Mgmt. CPS Collaborative Planning & Scheduling CRM Customer Relationship Mgmt. CSR Customer Service Representative EAM Enterprise Asset Management EMS Electronic Manufacturing Services ERP Enterprise Resource Planning LIMS Laboratory Information Management System MRP Materials Resources Planning NPI New Product Introduction OpX Operational Excellence PAM Plant Asset Management PDM Plant Data Management PLM Product Lifecycle Management (/D = Design; /S = Support) PSC Plant Services Connector PSM Product Service Management SBA Service-Based Architecture SBI Service-Based Infrastructure SCM Supply Chain Management SCPM Supply Chain Process Management SEM Strategic Enterprise Management SFA Sales Force Automation SRM Supplier Relationship Management TMS Transportation Mgmt. System VMI Vendor Managed Inventory WMS Warehouse Management System Founded in 1986, ARC Advisory Group has grown to become the Thought Leader in Manufacturing and Supply Chain solutions. For even your most complex business issues, our analysts have the expert industry knowledge and firsthand experience to help you find the best answer. We focus on simple, yet critical goals: improving your return on assets, operational performance, total cost of ownership, project time-to-benefit, and shareholder value. ARC Strategies is published monthly by ARC. All information in this report is proprietary to and copyrighted by ARC. No part of it may be reproduced without prior permission from ARC. You can take advantage of ARC's extensive ongoing research plus experience of our staff members through our Advisory Services. ARCs Advisory Services are specifically designed for executives responsible for developing strategies and directions for their organizations. For subscription information, please call, fax, or write to: ARC Advisory Group, Three Allied Drive, Dedham, MA 02026 USA Tel: 781-471-1000, Fax: 781-471-1100, Email: [email protected] Visit our web page at ARCweb.com