CSCMP's Supply Chain Quarterly
Technology
December 08, 2019
Technology

The most important supply chain software that you don't know much about

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Distributed order management systems have been around since the 1990s and have proven to be essential for conducting omnichannel fulfillment. But many supply chain managers still do not know the full range of applications that the software can provide.

A relatively new and certainly not well understood type of software is having a dramatic impact on supply chain execution. Called distributed order management (DOM), it can be defined simply as a software system that provides integrated fulfillment planning and execution across multi-echelon, multi-node, multi-partner, and multi-channel supply chain networks.

More completely, a DOM system serves as a powerful hub that enables omnichannel commerce; integrates the extended supply chain; optimizes inbound and outbound order routing; provides real-time network inventory visibility, allocation, and management; automates complex channel and customer requirements; and maximizes profitability while meeting customer service commitments. While the software was first developed for e-commerce fulfillment applications, it is now expanding its reach well beyond retailing and into other industries.

Article Figures
[Figure 1] Traditional order management vs. distributed order management
[Figure 1] Traditional order management vs. distributed order management Enlarge this image
[Figure 2] DOM enables interaction of three e-commerce nodes
[Figure 2] DOM enables interaction of three e-commerce nodes Enlarge this image

Although its industry profile is changing greatly, DOM has not received significant attention from the supply chain trade press and analyst community, leaving it relatively unknown compared to many other types of supply chain software. In spite of this lack of attention, DOM, with its Swiss Army knife worth of capabilities, is becoming the central force of the supply chain execution ecosystem.

What is distributed order management?

Distributed order management is related to, but generally different, from traditional order management systems (OMS). DOM systems were first developed at the end of the 1990s by a very small number of software firms, primarily to solve issues with the then just evolving e-commerce business model. Many of the new "dot coms" were only electronic storefronts, which didn't maintain their own inventories and instead relied on vendor drop shipping to fulfill orders. They therefore needed systems to check vendor inventories, communicate order information, and receive vendor acknowledgements, among other functions.

The order management systems available at the time primarily focused on order processing and addressing all the activitiesneededto successfully complete that task, including pricing, promotions, credit checks, and credit card processing, to name just a few. They were not able to handle the order management needs of the new e-commerce companies. And so distributed order management software was born.

In contrast to more traditional order management systems, DOM systems are order-fulfillment centric. (The differences between DOM and traditional order management are shown in Figure 1.) They look at how to source an order in a way that meets customer service commitments at the lowest total cost or in a way that fulfills some other objective of the company. At the heart of a DOM, therefore, is a powerful, configurable rules engine that enables companies to define sourcing and fulfillment policies and logic. As a further point of differentiation, a DOM system often sits over top of multiple traditional OMS systems.

With the bursting of the dot-com bubble in 2001, interest in DOM waned for a few years. Since about 2010, however, as omnichannel commerce has exploded, DOM has become essential for managing e-fulfillment, andit is now expanding into other non-retail applications.

DOM use cases

As DOM has evolved over the past 20 years, its fundamental capabilities and benefits have largely remained the same. At a high level, DOM solutions deliver:

  • Real-time visibility to inventory and constraints (such as labor availability) across an extended network.
  • "Orchestration" of order fulfillment. This orchestration involves applying an automated set of dynamic rules to each order so that it is executed precisely according to the company's desired business logic. An example might include when to ship from a retail store, or when an order should be sent to a vendor for drop shipping. This capability will generally be based on a "rules-engine" foundation underlying the DOM.
  • Connectivity to other internal and external systems, such as enterprise resource planning (ERP), warehouse management system (WMS), and e-commerce front ends.
  • Automation of order handling processes so that orders are automatically sent to the right node for processing.
  • Flexible order fulfillment. With DOM, order routing is no longer static but instead dynamic, based on actual inventory positions across the network.

While the rise of omnichannel commerce has pushed DOM into prominence, there are actually a number of different use cases for DOM in supply chains. Here are what we believe to be the top six current use cases for DOM.

1. Enable and optimize omnichannel retailing. Omnichannel retailing has been the catalyst for DOM interest and deployment, and it continues to be the area that sees the greatest number of deployments. This is true both for retailers as well as for consumer goods companies and wholesalers that are selling consumer-direct. The key is DOM's ability to enable omnichannel processes, such as buy-on line, pick up in-store (BOPIS); store-based fulfillment; returns; drop shipping; and more, without modifying the existing system.

DOM is generally used in "fulfill from anywhere" practices by enabling order routing based on real-time visibility to inventories at every node, such as stores, internal distribution centers (DCs), external DCs, vendor inventories, and more. To understand how DOM accomplishes this, it is important to understand three key omnichannel concepts:

  • Points of interaction (POIs): The physical or digital locations from which orders can be placed.
  • Points of fulfillment (POFs): Locations from which a customer order can be shipped/fulfilled.
  • Points of return (PORs): Physical or digital locations from which a customer can return all or part of an order.

Figure 2 shows how these nodes interact with each other.

A critical early step in the omnichannel journey is to identify current or planned points of interaction, points of fulfillment, and points of return. The next logical step is to map what points of interaction will potentially have customer orders fulfilled from which POFs. This, of course, then provides a clear roadmap for which combinations of POIs and POFs need to be technically enabled—capabilities that DOM was designed to deliver.

Of course, other POIs, POFs, and PORs will emerge over time, in new combinations, that need to be technically supported. A key advantage of DOM is the flexibility it brings to changing strategies and policies over time, decreasingdramatically the time it takes to effect such changes versusthe largely "hard wired" systems most companies operate.

Given the need to enable multiple combinations of POIs and POFs, retailers and consumer goods companies have two high-level options: They can spend a lot of time and cost to modify existing systems (such as their order management and allocation systems), or they can deploy DOM to provide these new omnichannel-specific capabilities with integration to (but little to no modification of) those existing systems.

For many companies today, the choice is obvious—use powerful DOM capabilities to enable the new processes needed for e-commerce rather than modify existing systems, layering DOM over the top of the existing enterprise software.

2. Optimize order sourcing. But enabling omnichannel processes is only part of the answer. Most retailers and vendors are struggling to make profits in e-commerce. They are also looking for new sources of revenue and, of course,to delight online customers in this Amazon-driven world. This is where the order-fulfillment optimization capabilities of DOM come into play.

When an order is received, from whatever channel, the DOM will use its rules-engine logic to identify where to source that order from in a way that results in the lowest total cost while also meeting customer commitments and considering network or node constraints.

Let's take a very simple example of a retailer that has several DCs in different time zones across the United States. As the day proceeds, the DOM may route orders (even those from the East Coast) to DCs in the western part of the country in order to meet cutoff times for parcel carrier pickup, depending on the service commitments to individual customers. So, if a customer chooses free ground shipping with somewhat loose commitments for order delivery, the DOM might route that order to a DC that would incur the lowest shipping cost. However, if a customer chooses to pay for one- or two-day delivery, the DOM system may dynamically change where that order would be fulfilled from in order to take advantage of the later cutoff times at DCs located fartherwest.

DOM systems make it possible for companies to be more flexible about fulfilling orders from a wide variety of fulfillment points. The result is not only lower fulfillment costs. In many cases, companies see a bump in revenue as well, as items that are ordered online but are not in stock at a DC can now be fulfilled from store inventories. DOM also allows companies to set all kinds of complex business rules around order fulfillment. For example, companies can set a minimum in-store inventory level and a maximum number of online orders that a store can process over a period of time, so that online order fulfillment does not disrupt store operations. DOM can also be used to support vendor drop shipping.

Retailers and consumer goods companies aren't the only types of companies that can benefit from the ability of DOM to apply rules to optimally source orders. Any company with some network complexity and constraints relevant to fulfillment is a potential DOM candidate.

For example, one major company providing pharmacy services uses DOM to automatically route orders to one of more than a dozen potential distribution facilities based on a variety of attributes, including fixed capacities at each facility for processing certain types of orders.

A major industrial company faces a similar challenge in determining when and where to route orders from its direct customers to its distributor network for fulfillment if it is out of stock on an ordered item. It is currently using DOM in a proof-of-concept stage to execute its desired business logic.

3. Create enterprise order hubs. Many companies have a mishmash of different traditional order management systems, often acquired as a result of mergers and acquisitions over many years. The systems can be OMSs from multiple ERP vendors, different versions of order management systems from the same ERP vendor, and/or legacy systems.

In the past, a number of companies sought to address this scenario by trying to get all of their units and operations to use a single ERP system. But that is a long and expensive journey, and one that is often never completed due to the effort required and more mergers, divestures, and acquisitions getting in the way.

Increasingly, DOM is the answer instead. Rather than trying to get the whole company on a single OMS, the decision is made to implement DOM on top of all these myriad systems to provide a single repository for all orders. The DOM system can route those orders to the appropriate OMS and provide visibility and rules-based decision making.

This type of DOM deployment is often referred to as an "order hub."

4. Optimize inbound inventory. DOM is often generally viewed as a solution for fulfillment challenges, meaning outbound customer orders. But a small number of providers are also using DOM to reverse that logic and optimize the flow of inbound goods across many nodes in a distribution network.

This application is especially powerful for goods coming from offshore into domestic ports. Using information from an advanced ship notice (ASN) and facilitated in many cases by a vendor web portal, the DOM determines just before arrival where that merchandise should best be deployed. It makes that decision based on a number of variables, including on-hand inventory levels at each node, in-transit inventory, forecasts, upcoming promotions, and more. The received goods are then cross docked at the import DC and shipped to the optimal node, whether that be a company's own DC, third-party fulfillment center, or direct-to-store.

5. Manage multi-echelon orders and returns. Many large companies operate multi-echelon networks, with inventory in master DCs, regional DCs, local warehouses, and—in the repair and maintenance sector especially—service technicians' trucks or vans.While companies in several sectors have multi-echelon distribution networks, we will focus on the service parts supply chain. The principles for that industry sector should be relevant for companies in other segments as well.

DOM can help service parts companies answer what may seem to be a basic sourcing question: When a technician needs a part, from where in the network should it be allocated and shipped? This is a more difficult question than it might seem at first, as a number of factors need to be considered including: current on-hand inventory by node, in-transit inventory, shipping costs, customer service commitments, customer expectations/urgency, and other factors. For example, the rules may be configured such that in some cases a part is sourced from a distribution point fartheraway from the point of demand if that node has an excess of that stock-keeping unit (SKU) on hand. Or, nearby inventory might be bypassed if customer service contracts commit to a certain response time from the repair company, whichrequires a certain local inventory level must be maintained. (This is a common situation in the technology sector, for example.)

But there is also a second dimension to this DOM use case, which involves the reverse logistics process. More specifically, what happens when a technician has a part that needs to be returned because it wasn't needed, is damaged, or for some other reason? Where should that part be sent within or outside of the company's network? That of course depends on many variables, including on-hand inventory at each node, forecasts, existing orders' shipping costs, and more.  DOM can apply the same basic logic that it uses to makes decisions about where to optimally source inventory to also determine what location a product should be returned to. (This logic can also be used for more traditional returns management applications, such as product being returned to a retail store or DC.)

In both dimensions of this use case, the visibility and rules-engine foundation of DOM prove valuable.

6. Management of complex customer requirements. Many companies have complex processing requirements by individual customer. This type of situation is common in the third-party logistics (3PL) sector, but it also exists in other types of companies as well.

A WMS may be able to handle some of the processing requirements—such as for a customer-specific barcodelabel or shipping documentation. But a DOM system that is integrated to the WMS will be needed to handle others, especially those having to do with inventory allocation, shipping, and other fulfillment requirements.

DOM in action

DOM is being used successfully in hundreds of companies today. While it is most commonly used in the retail/omnichannel world, applications in other industries are growing. Many companies, in fact, are using DOM systems for more than one of the applications highlighted above, as can be seen in the four real-world case studies presented below.

An omnichannel retailer, which began with an online- and catalog-only business model, decided to build out a network of physical stores. Just a few years later, it now has more than 40 stores, and the network continues to grow.

Wanting to be able to fulfill online orders from its stores as well as its DCs, the retailer implemented a new DOM system. As online orders are received, the DOM system identifies the best sourcing location, based on a variety of factors, choosing from its own distribution center, another DC run by a 3PL, or any of its stores. The DOM system also allowed the retailer to rapidly launch a BOPIS process with very little modification to existing systems. It additionally provides granular visibility to orders, inventory, store labor, and more across the network.

The retailer also uses DOM to optimize the inbound flow of goods. As merchandise is received into U.S. West Coast ports, the DOM system considers on-hand inventory, in-transit inventory, demand forecasts, promotions, and more to determine where the inventory should be shipped. In this way, the system continuously rebalances inventory across the network, and ensures inventory is positioned optimally for demand fulfillment, automating a process that managers once did manually, using spreadsheets.

In another omnichannel example, a consumer packaged goods company uses DOM primarily to support drop shipping to end customers or retail channel partners. Additionally, some of its own online orders are automatically sent to vendors for fulfillment. It uses its DOM system to manage these orders to the vendors and the confirmations back from them. Sometimes the company's retail customers send drop-ship orders to the CPG company, but some of the items on the order are out-of-stock. In these cases, the DOM system auto-routes those orders to the company's vendors for drop shipping, in what might be considered a "double drop ship."

An entertainment media company provides a much different DOM use case. Traditionally one of the company's business units provided production, packaging, and distribution services for DVDs, CDs, games, and other disc-based products for various internal business units, including a major Hollywood studio, a video game unit, and a music division. But of course, those volumes have been falling as online delivery has increased. To make up for lost volume, the company decided to become a third-party manufacturing and distribution provider for others in the industry, many of whom were competitors to the company itself. To succeed, the company needed to be able to provide its third-party clients with dramatically improved levels of speed, capabilities, and flexibility. The key to that strategy was DOM.

The rules about when and how a new media product can be released via numerous channels are quite complex and vary significantly. DOM is the repository in which customer-specific order processing rules are configured and then executed as products are introduced into the system and customer orders are received. It also provides a flexible platform for adapting those requirements over time. What's more, to provide the service to clients requires significant integration with their ERP, order management, and other systems. The company is using its DOM system to handle that integration.

As a result, the company has dramatically reduced the time it takes to onboarda new client. Before DOM, that process took many months, now in some cases it only takes a few weeks.

In another interesting DOM example, a major appliance repair company operates a complex, multi-echelon network, with master DCs, regional and local facilities, and thousands of service vans. The company uses DOM to provide real-time visibility to those parts anywhere across the network. It then uses sophisticated order-sourcing logic to determine where to fulfill an order for a needed part, which could be from a master DC or a nearby technician's truck, minimizing logistics costs and helping to reduce overall network inventories.

The DOM also optimizes reverse logistics processes. As parts are replaced in the field, the system decides whether the replaced part should be returned to one of a number of company-owned repair centers nationwide, to the original manufacturer, or to another destination.

The DOM system has improved service order cycle time, first-time completes, inventory utilization, customer visibility of the status of the repair service, order accuracy and tracking, and overall process productivity.

The order is still king

In 1992, Benson Shapiro, Kasturi Rangan, and John Svioloka published an influential article in the Harvard Business Review titled "Stapling Yourself to an Order." The article emphasizes how important order management is to customer satisfaction, saying, "The truth is that every customer's experience is determined by a company's 'order management cycle'—the ten steps, from planning to post-sales service, that define a company's business system." It later makes the point that, "Every time the order is being handled, the customer is being handled at the same time."

Order management processes and technology have come a long way over the almost 30 years since that article was written. The business environment has changed dramatically too, transformed by globalization, e-commerce, mobile technologies, new and varied channels of distribution, and much more.

For many companies, it may be time to re-staple themselves to a (multi-channel) order and once again see how the order and customer are being handled from initial engagement to after-sales support and all the critical steps in between. Doing so might make clear that a new approach to order management is needed.

That is what distributed order management is. The ability to orchestrate order capture and fulfillment according to precisely defined yet highly flexible rules is a real breakthrough in supply chain execution.

Years ago, in the supply chain world, we used to follow the axiom: "The order is king." While that specific term isn't heard much today, its fundamental truth continues on. Initially developed for the new needs of the e-commerce era, DOM can deliver significant value to companies in many sectors and will continue to drive important changes in supply chain planning and execution for many years to come.

Dan Gilmore is chief marketing officer at Softeon, a supply chain software company. Satish Kumar is vice president of professional services at supply chain software company Softeon.

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