COST ACCOUNTING

On August 20, QAD Inc. (NASDAQ: QADI), a global provider of collaborative enterprise applications for manufacturing and distributing organizations, reported upbeat financial results for the fiscal 2004 second quarter and six-month period ended July 31, 2003. The improved financial performance has not come without astute moves with regard to product functionality enhancements. These moves include:

• A partnership with Johnson Controls (NYSE:JCI) to develop a next-generation Just-In-Time (JIT) Sequencing software module for MFG/PRO

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• Announcement of Kanban Visualization, which enhances QAD's existing Supply Visualization (SV) solution

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• More than two dozen important new functions and enhancements to MFG/PRO eB2, specifically designed in collaboration with QAD's manufacturing customers to help address their specific needs

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• Announcement of healthy sales momentum in Asia, with the MFG/PRO suite becoming a platform of choice for automotive manufacturers in China to automate business operations and collaborate with partners worldwide

The "fortune favors the bold" and "patience is a virtue" adages would be applicable to QAD's endeavor of finally getting far beyond its most trying days. "Patience" would stand for the reason of QAD staying true (and being finally vindicated) even during its most difficult times in the last few years (see Figure 2), to what had made it successful in the first place—solving manufacturers' real-world problems.

Figure 2

This is Part Three of a six-part note.

Part One detailed the above moves.

Part Two presented the company background.

Part Four will continue the market impact.

Part Five will cover challenges and Part Six will make user recommendations.

QAD Response

QAD tried to answer to all the concerns expressed in Part Two with a total commitment to comprehensive object-oriented technology. By rebuilding its package at the object level with the help of a company called Enterprise Engine, which QAD subsequently acquired, QAD aimed to bypass many of the still ongoing debates about which was the best approach for users—either 1) to build their systems up from "best of breed" but only loosely integrated components, or 2) to buy one tightly integrated application.

QAD's goal was to offer best of both worlds by building up functions and assembling groups of objects, or frameworks, which means that other non-MFG/PRO components can be integrated at an object level with the core application using commonly accepted industry standards. That would also mean that new tools can be used in place of Progress Software, should users require this—although QAD remains committed to Progress with regard to MFG/PRO, for a long time to come.

Consequently, these new products (e.g., eQ and SV) are based on Java and other contemporary Web-based open technologies (e.g., Simple Object Access Protocol (SOAP), XML, etc.). As already mentioned, eQ, the relatively recent addition to QAD offerings, is a series of applications designed to address Internet-based sell-side, buy-side, and replenishment operations via trading exchanges. The product was designed with support for XML messaging, Java code, HTML-based screens, and with no need for client-side downloading. The programming environment supports SOAP, whose virtue is to "penetrate" corporate firewalls, so that the applications can interoperate at both the messaging layer, and, by use of subroutines, to communicate at the programming level so that users can, for example, access costing or currency exchange functionality written in another language and resident as a third-party web service.

eQ applications were initially based on the former IBM San Francisco framework, which was a set of object-based business process components or business tasks that work together to form the basic structure of an application, and which adhered to CORBA (Common Object Request Broker Architecture) standards established by the Object Management Group (OMG). Since the introduction of San Francisco in late 1997, Sun Microsystems has meanwhile introduced Java 2 Enterprise Edition (J2EE) (formerly Enterprise Java Beans (EJBs)), a Java-based system to implement distributed objects based on the CORBA specification. As a result, IBM ported its San Francisco framework to the J2EE standard and evolved San Francisco into the IBM WebSphere platform.

Consequently, QAD has migrated towards support for WebSphere, which should provide eQ customers greater adaptability and flexibility. Namely, they can organize objects or entities (e.g., customer, product, site, supplier, etc.) by a number of attributes like geography or credit limit. Entity objects can also be associated with policy objects, which should help in rules-based relationships management throughout the supply chain.

Conversely, MFG/PRO initially ran on Progress RDBMS only (therefore being the most proven there, and with a majority of installations). The support for Oracle databases was introduced a few years ago, still with the Progress development tool. Because the Progress database is less scaleable than the Oracle database, it has less appeal to large organizations. Further, QAD's core MFG/PRO applications, which use electronic data interchange (EDI) as the basis of information exchange, also support Web-based ordering and purchasing, but to a more limited extent than eQ, which targets companies that need Internet-based sell-side, replenishment and buy-side functions.

Hence, QAD has also reevaluated its core MFG/PRO applications, rewriting selected sections of the code and componentizing the applications to make them messaging-oriented and HTML-based as appropriate. Namely, back-end functions, such as general ledger (GL) or MRP, will not have been completely rewritten but were Internet-enabled by incorporating HTML screens to accommodate Web access, while the products having a direct interaction with customers and suppliers were rewritten in Java with an Internet business model in mind.

The above MFG/PRO and eQ disparity predicament has resulted in part in stalled sales during the last few years (see Figure 2). However, the difficulties seem to be winding down, as the array of hefty losses has been stemmed for quite a while (see Figure 1), while the company has concurrently delivered products and resolved their interconnectivity, which should keep it abreast with ever increasing market requirements. The openness and interconnectivity mantra of QAD's entire offering (via its Q/Link product) are commendable and quite needed given the company's strategy of penetrating individual plants of large worldwide dispersed corporations, although they have yet to be demonstrated "en masse" in practice. Look for more MFG/PRO ready-made APIs to e.g., SAP, Oracle, and PeopleSoft, to further open up the system, and more native functionality in both MFG/PRO and eQ.

Figure 1

Figure 2

Consequently, having long focused on the upper-end of the ERP mid-market, QAD has apparently demonstrated an understanding of this market's dynamics and its pragmatic requirements of robust multi-national functionality and intra- and inter-enterprise visibility within an inexpensive product, fast and simple implementations, and reliable service and support. The latest technology advances have been making it easier for manufacturing plants to achieve needed autonomy while still being integrated or collaborating with the "big brother" and external supply chain. Decentralization is often required because remote plants in esoteric geographic locations have to be near the sources of materials and labor, while a centralized environment (with shared services) is indisputably more appropriate when customers, suppliers, and products are the same across multiple plants.

QAD's Strengths

For all the above reasons, QAD has been pulling through the downturn with a real strength (i.e., growing revenues overall—with maintenance, new licenses (whereby 40 percent are reportedly coming from new accounts and the rest goes to add-on modules and upgrades for existing customers), and service revenues all holding up well, a strong balance sheet and declining debt), a result of its focus on manufacturing (which QAD recently coined in the slogan "a passion for manufacturing"), and its satisfied customer base.

The "fortunate" and "bold" adage from earlier on would stand for the fact that a number of factors have lately turned out in QAD's favor as well, but the company deserves admiration for its protracted innovativeness and endurance as the only assets it could muster as to compensate for limited resources compared to many larger competitors, notwithstanding. As mentioned earlier, from its inception QAD has focused on developing sharp vertical manufacturing functionality long before most of its competitors. By delivering functionality specific to selected vertical industries, QAD has made its name within the automotive, CPG, medical devices, industrial, electronics, and food and beverage segments. The company has also done a masterful job in identifying and developing add-on, vertically focused functionality through partnerships in the areas of demand management, warehouse management, product configuration, sales force automation (SFA), and manufacturing execution system (MES).

Another factor that bodes well for QAD's future is its international coverage, product localization features, and a broad geographic revenue mix, which no vendor of its size can tout—QAD applications run at more than 5,400 sites in approximately 83 countries and in 26 languages; further, QAD sells and supports its products through its over 20 offices and over 30 indirect sales organizations located throughout the world, and it derives nearly 60 percent of its revenue from the international market outside of North America. It also has a strong and dedicated international implementation channel among mid-market manufacturing-oriented regional services companies such as Atos Origin, Minerva, PacifiQ, or Eagle Consulting, although the bigger consultancies like Deloitte Consulting and IBM have long given their pledge too. The focus often renders QAD and its partners as credible business advisors rather than mere software purveyors.

One could even attribute what looks like quite rare success nowadays partially to the firm's recent acquisition of former integration partner TRW Integrated Supply Chain Solutions (TRW ISCS), giving it greatly increased strength in terms of corporate level consulting and implementation services. The transaction was quite a profitable effort, since the cost of $1 million in cash plus transaction and integration costs of close to $5 million at time of acquisition brought QAD nearly 15 million in additional revenue as a result. It also provided QAD with TRW's AIM Warehousing product that integrates with MFG/PRO. For the future, QAD will still be selling and implementing direct to manufacturers around or above the $250 million in revenues, with the small-to-medium (SME) sector below that level being serviced by partners.

QAD Strategy

The vendor, being traditionally less aggressive, has recently also embarked on more assertive marketing and conveying a message that seems to be resonating better with the market. In its clear positioning, QAD has been very vocal about distinguishing the split between those vendors that try to be "all things to all people" and those who focus on a narrow and credible niche, whereby QAD logically belongs to the latter.

The first group would be the Tier 1 vendors (i.e., the market-leading "over-evolved mega-suite" vendors like SAP and Oracle) having humongous cash, R&D, sales and marketing resources, as well as global coverage and strong corporate-level financial and HR modules, but their implementations—due to complexity of overblown, spaghetti-like code—often come without benefits and with a risk (see What's Wrong With Application Software? Businesses Really Are Unique - One Size Can Never Fit All).

Another way to be all things to all people is to acquire a number of fading, marginalized, or distressed vendors and then largely milk the service and maintenance fees associated with the plethora of systems, some of which have long been past their prime. QAD calls these companies such as SSA GT, MAPICS, Geac, Agilisys, Epicor, and even PeopleSoft in part (due to J.D. Edwards's acquisition) "the rollups," and says that while it might currently look like a strategy that works, profitability and market share wise, it leaves many questions unanswered, such as how these amalgamated vendors will move their multiple solutions forward.

While these vendors appear to have assembled an impressive collection of software that should, in theory, be able to meet the needs of any organization, still, each of these vendors and their new software properties face a nightmarish integration process that could take years before a cohesive product strategy is presented to their customers, let alone an integrated and collaborative collection of software applications. The big question is whether any of these mergers have made these companies better able to compete with various best of breed vendors by offering a truly complete suite of ERP and SCM solutions.

Finally, there is a group of vendors QAD calls "regional" or "multinational" enterprise vendors, with a strong presence in one or another distinct geographic location, such as Microsoft Business Solutions (MBS), Exact Software, and Sage/Best Software being multinational, while Made2Manage or Lilly Software are regional examples. These vendors often have rather loose relationships with their affiliates in other parts of the world, and disparate regions often work on diverse code bases, which will present a real hurdle as globalization continues.

This would leave QAD in a small group of focused vendors with a single code-base and flexible product, and a decent geographic coverage, where IFS, Glovia, SYSPRO, Scala, Intentia, Cincom Systems, or Intuitive Manufacturing Systems would belong too, albeit QAD cites some of these vendors' currently dubious or subdued new revenues, quite stressed financial situation or support for a limited choice of platforms. Some are not direct competitors either, given QAD's focus on repetitive manufacturing rather than on job shops and engineer-to-order (ETO) environments.

In support of the above-espoused differentiating direction, QAD has spent over $40 million during the last eighteen months developing a connectivity-laden version of its latest ERP suite release—MFG/PRO eB2, which was released in the second half of 2002. The vendor's philosophy was to take stock of what it already had, and to build on, and, hence, enhancing MFG/PRO as an ERP foundation has been ongoing and unabated.

Any manufacturer that is still not connected, and that is manually sending faxes and e-mails every hour to keep track of the business, will not be successful over the long term. Thus, QAD has embraced industry standards to ensure that MFG/PRO eB2 interoperates easily with other QAD and third-party applications. QAD believes that in order for collaboration to happen, the following three things are needed: 1) an application architecture, 2) communication protocol, and 3) common language. As for an application architecture, there is a system of record (e.g., MFG/PRO or any other ERP system), a system of process (a PTX such as eQ), and the system of venture (a public exchange such as SV). SOAP is the common communications protocol, while the core languages are Java and Progress, but there will be interoperability with systems based on Microsoft .NET or any other commonly accepted platform.

As part of its MFG/PRO 9.0 software, the predecessor to Release eB, QAD introduced a Web-based architecture providing integration and connectivity capabilities. Called QAD/Connects A2A (application to application), the architecture facilitated connectivity in many areas of an enterprise, such as internal applications, a variety of information sources (both internal and external databases), business partners, and internal and external users, such as mobile users and trading partners.

The latest release of QAD MFG/PRO, eB2, however, is a full web-enabled ERP foundation suite covering sales and distribution (sales order processing (SOP), customer and supplier schedules, products configuration, purchasing, etc), engineering (bills of material (BOMs)/formulas/recipes, routings/work centers, engineering change control, cost accounting management, etc), manufacturing control (inventory management, work orders, quality management, repetitive manufacturing, shop floor control, etc), manufacturing planning (master production scheduling (MPS), material requirements planning (MRP), capacity requirements planning (CRP), etc.) and a slew of typical financial modules. Additionally, both natively and through OEM partnerships, it features advanced pricing management, advanced planning and scheduling (APS) including a supply chain optimizer, factory optimizer and global planner with available to promise (ATP) and shop floor sequencing, demand management, sales force automation (SFA), electronic data interchange (EDI), and service and supply chain modules (with distribution requirements planning (DRP) and enterprise operations management).

Thus, the vendor has recently experienced a broad acceptance of its latest web-enabled ERP solution as customers realized the significant new functionality and value built into this new improved edition of enterprise software. Complementary products from QAD such as QAD eQ are integrated with MFG/PRO eB. The new release includes enhancements to the manufacturing, distribution, financial, and service and support applications of the solution. For manufacturing, Kanban Sizing automatically sizes and resizes Kanban quantities and the number of Kanban cards or containers. For distribution, Customer Sequence Schedules address the need to ship product in a particular customer-specified sequence. For financials, an Extended Account Structure offers up to 32 characters for setting up general ledger accounts. For service and support, the Project Realization Management Module manages the execution portion of customer service, implementation, and configuration projects, including the procurement and shipment of project inventory, labor, and expenses involved in field installation. It also tracks project budgets and manages invoicing.

Although QAD keeps abreast of the latest developments, it tries not to alienate its more conservative customers with abrupt new technology introductions. A good example is that eB2 features a choice of user interfaces (UIs): 1) a Windows-like graphical user interface (GUI), 2) a character-based interface that is still overwhelmingly popular with plant-level users, and 3) the new QAD Desktop 2 UI, which provides access to full functionality of MFG/PRO within a Web-browser in an intranet environment.

SOURCE :http://www.technologyevaluation.com/research/articles/qad-pulling-through-patiently-but-passionately-part-three-market-impact-17063/