new momentum’s rainmaker1000: greening the grey market in

Joshua Greenbaum, Principal

Enterprise Applications Consulting

Spring, 2005

New Momentum’s RainMaker1000:

Greening the Grey Market

in Electronics Parts

EAC

2 3 0 3 Sp a u l d i n g Ave n u e

Berk eley CA 94703

t e l 5 1 0 . 5 4 0 . 8 6 5 5

f a x 5 1 0 . 5 4 0 . 7 3 5 4

[email protected]

www.eaconsult.com

Table of Contents

Introduction: Electronic Components, Inventory Inefficiency, and Financial Risk ..................... page 1

Excess Inventory and the Supply Chain: The Price of Inefficiency............................................ page 3

New Momentum’s RainMaker1000: Optimizing Inventory Management and Capitalization .... page 7

A Sample Process Flow: Parts Shortage .................................................................................. page 12

Conclusion: The RainMaker1000 Advantage............................................................................ page 13

New Momentum’s RainMaker1000: Greening the Grey Market

Copyright 2005 EAC 1

Introduction: Electronic Components, Inventory Inefficiency,

and Financial Risk

Electronics manufacturers and manufacturers that depend on electronics parts face extraordinary

pressures to bring new products to market in both a timely and cost-effective manner. With

margin pressures growing, and time-to-market shrinking, managing the procurement, use, and

eventual disposal of parts inventories has become a key success factor for companies at all levels

in the manufacturing supply chain. Rapidly changing supply chain and engineering requirements

often wreak havoc with parts inventories and procurement management, creating excess

inventory for many manufacturers. At the same time, manufacturers are forced to engage in costly

spot-market purchases to meet rapid demand fluctuations or to overcome the occasional gaps in

their lean manufacturing operations. For all, the risks of poor excess inventory management can

be high: missing or significantly delaying a major production run due to an inventory shortage or

constrained parts condition can have a significant impact on earnings and relations with partners

and customers.

While a grey market consisting of some 3000 independent distributors and brokers exists that

attempts to balance the supply of excess electronic parts inventory with spot demand, the

inefficiencies in current business practices result in considerable wasted opportunities for buyer,

seller, and broker. Shortened product life cycles create both excess demand and excess inventory,

and buyers often end up trying to smooth the bumps in supply and demand by either buying

supplies they don’t necessarily need or paying a higher price than they should. Meanwhile, their

counterparts on the production and operations side lack the tools to dispose of excess inventory in

an efficient way.

The result is that billions of dollars in excess inventory go to waste, leaving the finance

department to grapple with the aftermath of inefficiency, lack of visibility, and a hard-to-evaluate

inventory. Manufacturers have little or no means to either find willing buyers for their excess

inventory, or locate the excess inventory available from other manufacturers that could provide a

low-cost, timely solution to a parts shortage. This latter issue is perhaps the greatest waste of all:

manufacturers could significantly lower their cost of goods if they could efficiently tap into the

excess inventory that for now goes largely unused.



Meanwhile, brokers and distributors, whose job it is to mediate these inefficiencies, are

themselves limited by the lack of automated tools to help match sellers and buyers. Further

hampering the efforts of all are the often antiquated and incompatible systems that each

stakeholder must deal with: many manufacturers have grown through merger and acquisition

activity that have left them with literally dozens of disparate systems that make it impossible to

have a single view of their inventory supply or parts demand. While most manufacturers can look

at supply and demand at the plant level, they lack any means to look at these issues from an

enterprise-wide level. Those that do have some degree of enterprise-level reporting are unable to

obtain a single, aggregate view of inventory, parts supply and demand, and most importantly,

overall financial exposure due to excess inventory.

Inevitably, most manufacturers find themselves exposed to costly excess inventory write-downs

or inventory devaluations due to market price erosion, each of which directly hits the earnings

line at end-of period reporting. In recent times, Sarbanes-Oxley has only served to heighten the

need for accurate, timely information in order to avoid the improper reporting of volatile

inventory.

What is needed is a means to turn this inevitable supply of excess inventory into an opportunity

for improved fiscal management, revenue enhancement and loss reduction, while at the same time

improving on a functional but inefficient grey market. Armed with tools that can automatically

match excess supply with spot demand – at an enterprise-wide level – through a managed, secure

environment, manufacturers on both sides of the equation could lower costs, increase efficiency,

and improve the profitability of individual product lines as well their entire supply chain. When

combined with a market-pricing mechanism that calculates inventory value based on real-time

market information, a highly rationalized and efficient market could emerge from the relative

chaos of the existing grey market. The result would be a boon for financial as well as production

and procurement management: such a service would give management greater direct control over

total inventory costs, provide a means to lower excess inventory write-offs on the supply side,

and improve costs and time to market on the demand side.

An emerging new company, New Momentum, based in San Clemente, California, is poised to

bring to market a combined software product and content-driven service that promises to fulfill

manufacturers’ pent-up demand for a highly leveraged and highly automated market in

constrained parts sourcing and excess electronics parts resolution.



Enterprise Applications Consulting’s initial review of New Momentum and its forthcoming

product, RainMaker1000, shows a well-designed solution that can help minimize the costly

inventory write-downs, missed production schedules, and instances of customer dissatisfaction

that are too often the norm in the electronics parts market. Most importantly, the New Momentum

solution can be tightly integrated to the manufacturers’ disparate enterprise software systems,

regardless of whether they are buying or selling excess inventory, and the solution is designed to

provide an enterprise-wide view of supply and demand while remaining virtually transparent to

the IT department’s current operations and projects. While New Momentum and RainMaker1000

are still untested in the market, a predecessor product to RainMaker1000 has already proven its

capabilities in automating grey market procurement activities. EAC believes that this early

success augurs well for the success of RainMaker1000 as it reaches the market in the spring of

2005.

This white paper is organized in three parts. The first is a general discussion of the problems

endemic to excess inventory in electronics manufacturing and the inefficiencies of the existing,

unautomated grey market. The second section discusses New Momentum’s RainMaker1000 in

terms of how it solves the problems of the grey market and provides a means for all stakeholders

– CFOs, buyers, sellers, and brokers – to better manage excess inventory and its disposition. This

white paper concludes with Enterprise Applications Consulting’s evaluation of New

Momentum’s prospects for success in solving what has long been a costly and intractable

problem in most discrete manufacturing enterprises.

Excess Inventory and the Supply Chain: The Price of Inefficiency

The problems of excess inventory can be seen in the financial reports of manufacturers at every

reporting cycle. While not as potentially dramatic as Cisco’s infamous $2.2 billion excess

inventory write-down in April of 2001, the cyclical nature of supply and demand in electronics

manufacturing and its related industries has an all-too common effect on the profitability of both

suppliers and their OEM partners. By most industry estimates, the cost of excess inventory can be

measured in the billions of dollars each year. (See Figure 1.)



Figure 1: Excess Semiconductor Inventory in the Global Electronics Supply Chain

Source: iSuppli

The dynamic nature of the market notwithstanding, other more controllable factors also

contribute to the deleterious effects of excess inventory. Chief financial officers frequently lack

the means to effectively evaluate excess inventory, and even fewer ways in which to dispose of it

in a cost-effective manner – all while ensuring that these processes are closely integrated with

their existing ERP, MRP, or supply chain systems. These problems have to do in part with the

slippery nature of excess inventory: excess inventory is notoriously hard to count and hard to

evaluate, and it comes with its own carrying costs in terms of interest costs, warehouse, logistics,

personnel, and other charges that are often hard to evaluate.



F A C T O R S I N T H E C O S T O F E X C E S S I N V E N T O R Y

Cost of Invested Capital

Interest on Inventory Value

Warehouse Space

Spoilage

Damage

External Warehouse Space

Personnel Costs (Overtime, etc.)

Excess Handling Costs

Lost Opportunity (Delays, Poor Service)

Management Waste

Source: Positive-Way

One tool at the CFO’s disposal for dealing with the cost problem is the grey market in excess

inventory – a largely unautomated marketplace of brokers, distributors, and manufacturers that

tries to match excess inventory in the market with spot demand. This grey market, however, while

relatively well-established, is also highly inefficient and inadequate. These inefficiencies are both

endemic to the electronics supply market and the systematic result of how the grey market is

currently organized.

Excess inventory is notoriously hard to match to spot demand, whether that demand comes from

inside the manufacturer’s own four walls or from some external manufacturer or partner. Even

more difficult is the ability of manufacturers to use excess inventory in the spot market as a

means to lower parts and inventory costs related to active production. Matching this supply and

demand is extremely complex: Different ERP or MRP systems label the same parts differently,

and engineering change orders result in highly dynamic bills of materials that are notoriously hard

to match to existing or even in-coming inventory. Ensuring that parts meet product specifications,



as well as quality requirements, can also be difficult, and the effects of storage and transportation

only multiply these problems.

Grey Market Inhibitors

The problems with how the grey market is constituted only exacerbate these issues. The grey

market is largely made up of loosely-coupled networks of brokers, distributors and buyers,

operating in a fundamentally unautomated world. Demand and supply are communicated by

phone and fax, and even the on-line marketplaces run by some brokerages still require significant

hands-on interaction in order to establish if a buying or selling opportunity exists. Precise

matching of parts specifications and quality requirements is difficult, time-consuming, and error

prone.

Further compromising the grey market’s value is the imprecision with which it identifies the

supply and demand for spare parts. All too frequently the same spare part lot appears in multiple

marketplaces, with no visible means to know that what looks like multiple offers to sell is really a

single deal. Matching parts and specifications is done manually, and deal-making usually takes

place off-line, out of the reach of fiscal controls. With no historical transaction data to use for

analysis, no one knows if the deal was at a fair market price or not.

Buyers and sellers waste enormous efforts in trying to make deals, and take unnecessary risks on

both sides of the interaction: the seller risks selling at a price well below market value, while the

buyer risks buying the wrong parts, and for the wrong price. If a deal is even possible: the ability

to match supply and demand in the grey market is notoriously ad hoc – more often a successful

deal is the result of personal contacts and verbal agreements that leave much of the market

demand unfulfilled and the supply languishing.

The result is that the CFO is left with a set of largely untenable tasks: how to minimize the

company’s exposure to excess inventory, find the best possible price for the supplies that can be

sold, and obtain an accurate and defensible evaluation of the remaining inventory for reporting

purposes. The lucky CFO can have some modicum of effect on the first two tasks and none with

respect to the third. The result is a lack of fiscal control that puts the company’s profitability at

risk, and its executives potentially out of compliance with regulatory requirements.



New Momentum’s RainMaker1000:

Optimizing Inventory Management and Capitalization

New Momentum’s first product, RainMaker1000, is an application that runs in a secured,

networked environment, and that seeks to meet the needs of all the stakeholders in the excess

inventory market – CFO, seller, buyer, distributor, and broker – with a comprehensive product

that fully automates the disposition of excess inventory supply and demand and provides

comprehensive integration with existing enterprise software systems. The product and its

functionality are managed as a hosted service – allowing extremely rapid deployment – and users

are able to access the system using a secure Web browser interface.

RainMaker1000 functions as a market-making environment for buyers, sellers, and brokers, by

automatically obtaining supply and demand data from manufacturers, building parts requisition

requests and overstock notifications, and notifying brokers of the resulting buy and sell

opportunities. In its full configuration, manufacturers share supply and demand data – on a totally

anonymous basis – with the RainMaker1000 marketplace, which then automatically matches

potential opportunities and notifies buy and sell-side brokers of a possible match. Brokers are

then able to check for supply and demand matches, create a quote, negotiate a deal, and manage

the purchase order, invoicing, quality control, and other details of the transaction from within

RainMaker1000.

R A I N M A K E R 1 0 0 0 C F O B E N E F I T S

Enterprise-Wide View of Parts Supply and Demand

Guaranteed Anonymity and Security

Evaluate Supplier Relationships

Benchmark Performance against Industry Data

Manage and Predict Inventory Expenses

Minimize Inventory Exposure

Dispose of Excess Inventory at Market Prices

Obtain Accurate Inventory Reporting for Regulatory Compliance



The functionality of RainMaker1000 also greatly enhances the capacity of the CFO to manage

these excess inventory transactions. The ability of RainMaker1000 to track the processes, manage

the transactions, and obtain market-pricing information, combined with its ability to integrate

directly with the buyer and seller enterprise software system, provides the CFO with a wealth of

information and analysis of the status of the entire company’s inventory supply and production

capabilities. The CFO can see key market and product trends as they unfold, evaluate supplier

relationships, accurately benchmark performance against industry data, manage and predict

inventory expenses, and manage by exception in a near real-time environment. The resulting

visibility allows CFOs to lower risk due to inventory exposure, maximize profitability by

disposing of excess inventory at market prices, and provide accurate reporting on inventory-

related issues in order to maintain regulatory compliance.

Figure 2: RainMaker1000 Web Interface View

Source: New Momentum



RainMaker1000 is organized around four main components: a content database that includes a

master parts inventory list, data sheets, look-up tables, and transaction information; a deal-flow

tracker; a market-maker environment for brokers; and a set of analytical tools for managing the

transactions and analyzing supply, demand, and inventory value. The product is specifically

designed to serve the needs of the four principal user classes – CFO, seller, buyer, and

distributor/broker – as well as provide key information to other stakeholders, such as engineers,

supply chain managers, and warehouse managers. One of the key features is the marrying of

customer-specific data with global market data, which greatly facilitates the matching of

inventory supply and demand. RainMaker1000 also includes an integration layer, based initially

on Microsoft’s .NET infrastructure, that allows the integration of ERP, MRP, order management,

and financial data from the enterprise into the RainMaker1000 environment.

Content Database

There are three major components to the Content Database: a master BOM, a set of look-up

tables, and a transaction archive. The BOM is used to manage and synchronize specific part

requests and availability between different buyer and seller systems via the look-up tables, which

allow different part numbers to be matched in order to determine their viability for fulfilling a

specific requisition. The transaction archive maintains and manages information about the deal-

flow, from initial shortage or overstock opportunity through final delivery and payment. These

data in turn provide the basis for the analysis and alerting functions in the Analytical Tools.

Deal Flow Tracker

The Deal Flow Tracker instantiates a set of best practices around shortage and overstock

opportunities and the interactions between buyers, sellers, and their brokers. The process flow in

the Deal Flow Tracker fully automates the previously unautomated transactions between buyers,

sellers, and brokers, while populating the transaction archive with analytical data. The Deal Flow

Tracker uses RainMaker1000’s Web interface to push opportunity information to the broker, who

can then use the Deal Flow Tracker’s deal synchronization capabilities to find a best fit for an

overstock or shortage opportunity. The Tracker then allows the broker to negotiate a deal, manage

the quotation, purchase order and invoicing process, and oversee quality control and delivery

functions as needed.



Figure 3: Deal Flow Tracker: Requisition View

Source: New Momentum

MarketMaker1000

MarketMaker1000 consolidates the functionality in RainMaker1000 that is specifically targeted

towards the needs of distributors and brokers, and includes some broker-specific functionality as

well – not a just a retread of Rainmaker. As the name implies, Market-Maker’s main role is to

enable distributors and brokers to see the supply and demand opportunities in the marketplace and

respond accordingly. MarketMaker1000 also facilities deal-flow management for the broker, and

enables brokers to manage the quality and track the delivery of products in the sales pipeline.

Like RainMaker1000, MarketMaker1000 operates in a hosted, secure network.



Analytical Tools

The analytical tools provide a rich environment for managing the entire RainMaker1000

environment, and include functionality for the CFO, and broker, as well as for buyers, sellers,

engineers, manufacturing schedulers, supplier managers, and other stakeholders. The data

captured by the Deal Flow Tracker and the Content Database can be made available as standard

reports, user-defined alerts, and dashboards.

The User Experience

It is important to note that New Momentum has invested considerable resources into perfecting its

user interfaces and producing an extremely user-friendly environment. This is a key part of the

product’s potential value. By delivering exactly the information needed by each stakeholder in the

buy/sell environment, New Momentum hopes to ensure that accessibility and usability will be

extremely high. This is essential to RainMaker1000’s success: automation without usability is a

classic dead-end for new products. New Momentum’s emphasis on what it calls the “New

Momentum Experience” is intended to ensure that products like RainMaker1000, which automate

a host of previously unautomated processes, don’t fall into the trap of automating at the cost of

too much complexity and alienating the very user base the product is supposed to help render

more efficient.

Integration, Security, Hosting

There are three other aspects of RainMaker1000 worth noting: integration, security, and hosting.

Integration to the enterprise software stack of both the buyer and the seller is an essential part of

the functionality of RainMaker1000, and the elimination of redundant information and re-keying

of data is part of RainMaker1000’s value add. There are three key data elements that

RainMaker1000 needs from the enterprise in order to automate its market functionality: the

manufacturing BOM, a parts list (if separate from the BOM), and purchase order and requisition

integration information. Much of this information can be captured directly from either

transactional systems or an existing data warehouse, depending on the individual system

configuration. Or it can be populated directly from output of most report writers and reporting

tools.

RainMaker1000’s security profile is a key component in its usability: this is due to the fact that

the amount of sensitive data RainMaker1000 stores in its Content Database and the hosted nature

of the application requires New Momentum to pay particular attention to security issues. There



are two main components to RainMaker1000’s security profile. The first is that RainMaker1000

maintains a separate instance of the entire environment for each customer on the system – in total

anonymity – ensuring that data and security integrity are maintained. The second is that New

Momentum delivers a security management device, the Network Security Appliance, or NSA, to

the customer as part of the RainMaker1000 license that is installed at the edge of the firewall in

order to manage the security of the interactions between RainMaker1000 and the customer’s

enterprise software systems. This allows New Momentum to remotely manage security from the

hosted environment and ensure that RainMaker1000 customers will be protected from security

breaches. The NSA provides its security services and a fully automated systems administration

capability without degrading enhanced system performance and it is designed to be implemented

in an inexpensive, rapid manner.

The hosted nature of RainMaker1000 is another key asset, though the company is working on an

“inside the firewall” version for companies that want to maintain strict controls over their IT

environment. By offering a hosted, subscription model for RainMaker1000, New Momentum

allows its customers to participate in the RainMaker1000 market without a significant investment

in IT and financial resources. The subscription, pay-as-you-go model minimizes financial risk and

provides a highly predictable cost model for RainMaker1000 usage.

A Sample Process Flow: Parts Shortage

New Momentum’s RainMaker1000 has two main processes that it seeks to automate: spare parts

shortage and overstock. In each process, the initiating event is the need to either sell or buy spare

parts. Those events can be captured automatically by RainMaker1000 or entered manually into

the RainMaker1000 Deal Flow Tracker from a web interface.

In the case of a parts shortage process, once the shortage has been captured by RainMaker1000

and a requisition has been created, the system automatically notifies the manufacturer’s preferred

broker or a more general set of brokers that are part of the RainMaker1000 broker network.

RainMaker1000 then begins to match the requisition to existing excess inventory information in

the system, either directly from manufacturers’ ERP systems or from other broker or spare parts

services. Once a likely match is found, RainMaker1000 notifies the broker and/or vendor and



then either provides a template for the creation of an offer or creates an offer directly in the

buyer’s ERP system.

RainMaker1000 can then notify the buyer or the buyer’s broker about the offers and use Market-

Maker Pro to build a quote be delivered either directly to the buyer’s ERP system or through the

RainMaker1000 portal. Once the quote is accepted, the vendor creates a purchase order that is

logged in the RainMaker1000 Deal Flow Tracker and then a set of processes are initiated to

complete the order, issue the invoice, track the delivery, quality, and payment processes, and

otherwise monitor the deal flow until the parts arrive at the buyer’s site.

Because RainMaker1000 has captured the entire deal flow in its content database, including

offers and final prices, the CFO is able to closely monitor the status of the company’s excess

inventory and make adjustments to financial reports and forecasts as needed. RainMaker1000’s

analytical tools provide further assistance by analyzing a given deal’s value as it relates to current

market data as well as providing supplier and broker performance data.

Conclusion: The RainMaker1000 Advantage

EAC’s first look at RainMaker1000 shows a well-developed understanding of the needs of

electronics manufacturers and brokers in automating an inefficient grey market. The analytical

tools that RainMaker1000 brings to the CFO provide an excellent means by which the cost of

excess inventory can be evaluated and the disposition or acquisition of spare parts can be

accurately tracked and accounted for. Buyers and sellers are able to not only match supply and

demand accurately, but also ensure that deals are conducted in a timely fashion and that important

issues such as quality and on-time delivery are not left to chance. Finally, brokers already

working in the existing grey market will find that RainMaker1000 can greatly improve the

efficiency of their operations while allowing them to focus on competitive value-added services,

such as quality management, that will aid in establishing competitive advantage over other, non-

automated brokerages.

Importantly, RainMaker1000 accomplishes these tasks without requiring the acquisition of

complex technology or the wholesale replacement of existing business processes with entirely

new ones. Rather, RainMaker1000 leverages an existing business model – the grey market – and



an existing set of processes and significantly improves their functionality and efficiency.

RainMaker1000’s ability to leverage existing enterprise applications and the data they manage is

a major point in its favor. All this augurs well for the uptake of RainMaker1000: buyers, seller,

and brokers can work with the already-established partners and contacts, and perform the same

set of tasks as before in a more automated and efficient manner, making use of existing

applications functionality or information whenever possible.

Finally, the tools that RainMaker1000 brings to the CFO provide a welcome degree of visibility

and control to a process that for too long has lived outside the boundaries of proper fiscal

management. Removing the guesswork from evaluating inventories could by itself cost-justify the

adoption of RainMaker1000 for many companies that have grappled for years with the problems

of evaluating excess inventory. The ability to better evaluate supplier and broker relationships, as

well as better manage overall costs in the supply chain, provide important and long-awaited

capabilities to the CFO.

In the end, New Momentum and RainMaker1000 still need to prove their capabilities in the

market place, and to that end the success of RainMaker1000’s predecessor product provides a

significant assurance that the product can perform as needed. Enterprise Applications Consulting

believes that manufacturers looking at the ever-present problem of excess inventory and spot

market demand, would do well to consider New Momentum’s RainMaker1000 as an important

weapon in their competitive arsenal.

new momentum’s rainmaker1000: greening the grey market in

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