AX firm in 2008 Canadian Technology Fast 50 ranking

Calgary-headquartered company WellPoint Systems (TSX:WPS) that specializes in AX implementations for the energy industry, primarily oil&gas, appeared in Deloitte's ranking of 50 fast growing companies in Canada in 2008, with 695% of revenue growth over 5 years. This news is a good contribution to AX popularization in Canada.
With the oil price dropped significantly since July 2008 and oil&gas companies being seriously challenged, the sustainability of WPS' further growth is jeopardised for the nearest future. Even though a bounce back in the price of oil is expected by many experts - as soon as the economy recovers, there is no certainty about when it would happen. The share price of WellPoint Systems has dropped by ~ 55-60% since the middle of the last year, based on TSX data.
This could be a good time for strategic M&A and partnerships in the AX segment as well as for other strategic moves to make a difference in the stagnating economy.

© Andrey Maslov

A2A and B2B integration with Microsoft Dynamics AX

Below, I've tried to summarize both technical and functional key options available in Microsoft Dynamics AX for A2A (Application-to-Application) and B2B (Business-to-Business) integration:

Primary framework for integration with Microsoft Dynamics AX

Microsoft developed Application Integration Framework (AIF) as a primary platform for A2A and B2B integration with Dynamics AX. It's actually more secure replacement for the Microsoft Axapta Commerce Gateway used in previous versions of AX.

AIF represents an XML-based technology stack that provides document-oriented interface to support multiple asynchronous transports, as well as synchronous transport to reliably exchange documents in XML format with trading partners or other systems. The framework includes adapters and Web services that enable document exchange.

The asynchronous information exchange in AIF is provided by transport adapters of the following types (by transport mechanism): MSMQ adapter (Microsoft Message Queue), File System adapter (documents exchanged to and from folders on a computer), BizTalk adapter (uses the .NET Business Connector in Microsoft Dynamics AX to send messages to and receive messages from BizTalk Server), and Outbound Web Services. The adapter converts the document into the proper format for exchange by means of a particular transport mechanism.
Adapter-based exchanges are asynchronous - the document is moved into a queue where it waits for processing by a Microsoft Dynamics AX batch job. Customized transport adapters can be added to address specific needs.

The AIF also provides a Web services interface for exchanging documents synchronously using Inbound Web services (require IIS). This interface provides a seamless integration experience for Microsoft .NET and other Web clients. The Web services are generated automatically from the Microsoft Dynamics AX business logic, so that developers with limited Web experience can easily create their own Web services.

AIF includes out-of-the-box support for sending and receiving commonly used documents such as free text invoices, inventory transactions, etc.

EDI with Microsoft Dynamics AX

EDI standard, being quite old but mature and still in wide use, is conceptually supported in AX - with the use of BizTalk server. You can either: implement EDI for AX by customizing schemas in BizTalk (it's packaged with thousands of EDI schemas that can be used as starting point); or implement specialized partner solutions for AX (e.g. this one to mention) or for BizTalk (e.g. another one). EDI solution for AX can be based on AIF or can use its own (alternative) code base.

Intercompany transactions in AX

Intercompany transactions are basically trade operations between affiliated legal entities/business divisions of a holding-like organization (for example, between production plant and distribution organization of one same company).

In AX intercompany transactions can be set up for multiple companies residing in one common database. This means that all companies involved in intercompany operations should use centralized AX solution. For affiliated companies that's usually not a problem.

Intercompany transactions in AX represent next level of business integration support in business solutions - process integration when process in one company can electronically trigger processes in other companies, as opposed to traditional data integration.

The intercompany functionality in AX includes such operations as purchase and sale between companies, price check between companies, conversion of order charges, ledger dimensions, and warehouse transactions, and etc. The intercompany mechanism adds visibility into the intercompany supply chain so it becomes traceable and transparent accross companies involved, with interconnected sales and purchase orders referring each other.

AX also provides intercompany accounting functionality. It allows you, for example, to manage distributed operations in branches while having centralized accounting - when transactions from branches transfer to the head office for further processing. In general, a single transaction entry in one company can be posted to multiple companies by using intercompany accounting.

The intercompany mechanism in AX is technically based on AIF.

Sharing data in AX using Virtual Companies

Virtual companies ('technical' term) in AX help share data between (affiliated) companies residing in the same database. For example, all (or some of) the companies in the holding organization can share the same common chart of accounts, customers, and inventory items. So, once you update the inventory item, all updates become visible in all companies that share the same item master data.

This is one of the mechanisms available in AX that help maintain compliance practices and uniformity in the organization.

Financial Consolidation in AX

There is a special functionality in AX for consolidation of financial information (in the form of consolidation transactions) - from subsidiary companies into a parent company, to finally provide consolidated financial reports for the entire group. The companies involved in the consolidation can reside in the same or different databases.

Other integration options for AX

The list of options available for A2A and B2B integration with AX can be further extended with customized tools and partner solutions of various kinds. I'd welcome your comment on this post if you are aware of other compelling options for integration with Microsoft Dynamics AX.

© Andrey Maslov

Post-merger business integration and how business solutions can help

As many companies have become much cheaper in the current economic situation and their respective markets squeezed, the volume of M&A transactions is expected to grow accross various industries.

And as always in most of M&A transactions, the post-closing business integration is the key success factor that defines if the companies would succeed in realizing expected sinergies from the deal.
The business solutions play a critical role in post-merger business integration helping streamline and establish visibility into business processes, capitalize on shared information, and empower decision makers with the tools to cope with the new scale of business operations.

The business solutions in merging companies can be of different nature:

The question is how to integrate them in a most effective way. Of course, it heavily depends on the chosen business strategy: is it planned to completely reorganize and recombine business functions of merged companies to establish new headquarters, shared services centers, and geographical divisions? or to include acquired entities into the company's supply chain in case of vertical integration? There is a broad variety of cases with specific goals being pursued.

It is important to develop the relevant IT strategy and Enterprise Architecture that will provide the road map for solution integration and transformation in 'post-merger life'.

From technical perspective, there is a number of technologies commonly used for application integration:

• Database access technologies
• Message-oriented middleware
• Remote procedure calls
• Transaction processing monitors
• Object request brokers
• Application servers
• Web services
• Enterprise service buses
• Several hybrid and proprietary products

In the next post I'll focus on Microsoft Dynamics AX capabilities for integration.

© Andrey Maslov

Theory of Constraints (TOC) with Microsoft Dynamics AX

This post is in process ...

As it follows from the previous post, a constraint is a kind of 'philosophic' category in a sense of its proliferation, as it can be found anywhere throughout an organization, not only on the shopfloor. So that, the management framework should be comprehensive enough to cover the whole business with the tools for integrated problem solving. And it actually has its beginning in the business strategy.

Basically, the TOC can be supported by the business solutions at two levels:

1. Decision-making
2. Operations

For efficient decision-making in terms of figuring out constraints and the ways to deal with them there is a performance management system (PMS) that can help. Again, proper selection of PMS measurements is of great importance here. And The Goal showed quite well how the old system based on irrelevant measurements failed in helping identify problems and foster appropriate solutions.
The performance management system should cover all critical functional areas and be compehensive enough to involve the staff throughout the organization. The balanced scorecard (BSC) approach can be examined for to provide linkage with business strategy. Also, the continious improvement approach at operational level - when the processes are assigned with their specific measurements that are subject to constant imrovement.

At the same time, the overall performance management system shouldn't be overcomplicated - it rather should be simple and logical to be a driver to proper changes in the organization.

Draft notes:

• Business strategy management framework, functional strategies
• Key success factors: measurements, alerts, and correct data entry
• Performance management system
• Management accounting and corporate reporting framework
• Operational business intelligence
• Production functionality and Master Planning
• Lean horizontal solution for manufacturing, extending lean to cover other business areas (e.g. accounting)

© Andrey Maslov

Theory of Constraints (TOC) in brief

I've summarized the key outcomes of TOC here to further show how they relate to AX functionality. This post was again inspired by our Operations Management course, particularly, by refreshing through The Goal.

These are the key outcomes from The Goal:

• Main goal of any commercial organization (manufacturing plant in the book) is to make money.
• Goal of making money translates into three key financial measurements: net profit, ROI, and net cash. But these measurements, while being useful for high-level monitoring of organization's progress in achieving the goal, can not be directly applied to driving operational efficiency.
• So that, same goal of making money is also translated into three key operational measurements: throughput, inventory, and operational costs.

Throughput – the rate at which the system generates money through sales (not production).

Inventory – all the money that that the system has invested in purchasing things which it intends to sell.

Operational expense – all the money the system spends in order to turn inventory into throughput.

The mainstream quest in the book was about struggling with bottlenecks (or constraints in general) while pursuing the main goal expressed as increasing throughput while simultaneously reducing both inventory and operating expense (not just improving one measurement in isolation).

Bottleneck was defined as any resource whose capacity is equal to or less than the demand placed upon it (by maximum possible throughput).

Eventually, the universal thinking process framework was formulated in the book - as fundamental ability of manager to answer the questions:

1. What to change? (identify core problems that cause bottlenecks/constraints) It's important to have a "coordinate system" here as a tool - in case of operational analysis it was comprised of those three key measures - throughput, inventory and operational expenses, bundled with the goal to incease throughput while simulteneously reducing inventory and operational expenses.
2. What to change to? (construct and check solutions that solve negative effects without creating new ones)
3. How to cause the change? (smoothly, without creating resistance, but opposite, enthusiasm)

There were some practical options implemented through the whole story such as marking materials and parts and cutting size of a batch. Reducing batch size caused reducing the time it took to process a batch (lead time). In that way, they got increased throughput, reduced inventory, and smoother work flow through the plant.

Much effort was undertaken to increase the capacity of the plant by increasing the capacity of the bottlenecks, particularly by:

• Making sure bottleneck’s time is not wasted:

1. Increasing resource utilization (time it’s active). For example, they put dedicated operators in bottleneck's area to oversee the resource's continious operation and provide timely setup.
2. Putting quality inspection in front of bottleneck (for incoming parts).
3. Ensuring process controls on bottlenecks parts are very good, so these parts don’t become defective in later processing.
4. Making bottlenecks work only on what will contribute to throughput today (not .. months from now).
5. Optimize bottleneck’s loading (e.g. by incoming materials pre-packaging for bottleneck).

• Offloading – taking some load off the bottlenecks by using other resources (non-bottlenecks)

1. Ensuring all parts really need to be processed by bottleneck (any processing alternatives ahead of bottleneck?).
2. Using other machines to do the same process (e.g. old ones).
3. Outsourcing parts processing.

There also were described some negative effects caused by:

• Prioritizing parts to be processed (parts for bottlenecks were processed first - even for 'fictitious' orders after order backlog was cleared). That finally caused increased inventory at bottlenecks and lack of parts at final assembly. So, priority tags were removed eventually for the sake of principle: 'first come - first served' with material requirements planned backwards - from orders through bottlenecks.
• Reduced amount of spare capacity on the non-bottlenecks (after they broke their machines’ bottleneck constraints with faster material flow and took more orders) caused longer lead time for the products and orders, uneven material flow through the floor and the plant working overtime. This problem was fixed by no longer accepting orders with short lead time and increasing buffer inventory in front of the bottlenecks and assembly.

Overall, the ideas described in the book are fairly simple, but provide good foundation for problem solving skills development in operations management and beyond.

© Andrey Maslov

Practical use of Reorder Point and EOQ with Microsoft Dynamics AX

EOQ formula mentioned earlier is usually applicable to operations where demand is relatively steady. Even though, it can also be used in the cases where demand varies. In those cases the standard formula for EOQ can still be applied to shorter periods where demand is steady.

There are also some research papers available on the optimal order quantity calculation for changing demand, for exapmle: An Economic Order Quantity Model For Time-Varying Demand.

The reorder point can be automatically calculated in standard AX using Safety Stock journals. The functionality for automatic Economic Order Quantity calculations is available in Microsoft partner solutions, particularly for the wholesale industry.

Automatic calculation of EOQ should be used cautiously - you need to understand exactly what algorithm is used in the system and have correct input data required for EOQ calculation.

© Andrey Maslov

Reorder point and EOQ in standard functionality of AX 2009: using Master Planning for automatic replenishment

In standard AX automatic replenishment is realized by Master Planning functionality that can suggest you to buy, produce, or move certain quantity of your inventory:

Those suggestions (Planned orders) are based essentially on the current inventory (including e.g. purchase orders in process), forecast data (demand we expect) and item parameters.

The reorder point and order quantity (EOQ) can be set up in the coverage paramenters of the item. They need to be calculated manually and set up as Minimum (reorder point) and Maximum (order quantity) stock for specific location (site and warehouse). The Minimum and Maximum parameters can take different values in different periods for the same item - to adapt reorder point and economic order quantity for uneven forecasted demand.

© Andrey Maslov

Inventory management: reorder point and economic purchasing

In the assignment (see previous post) our decision making in regard to Inventory Management was focused on combination of only two parameters: reorder point and economic purchasing.

The reorder point is the inventory level that, when it’s reached, triggers new purchase ordering. The reorder point is calculated to ensure we won’t get short of materials while waiting for new purchase order to arrive. The reorder point usually embraces some reserved quantity – safety stock for the cases of higher demand than it was predicted:


Diagram based on picture from Managing Business Process Flow by Ravi Anupindi and others

The size of purchase order was to be a compromise between fixed costs per order and losing or earning interest on our cash balance, e.g. a large purchase order quantity could help us save on order fixed costs but might also cause more loses (opportunity cost) from interest that wouldn’t be earned. The optimal size of purchase order can be calculated using the formula for EOQ (Economic Order Quantity):



In case of our assignment, fixed cost per order was given to us, expected annual demand could be calculated based on sales forecast, and unit holding cost per year could be calculated based on annual interest we would lose if we buy one unit of material and keep it for one year. There are some considerations for practical use of this formula that I’ll mention later.

© Andrey Maslov

Inventory management in Microsoft Dynamics AX and beyond – Intro

This posting has been inspired by the assignment we did recently in our Operations course at my business school taught by Professor David A. Johnston. We had special software application on the Internet that simulated the production facility consisted of: incoming customer orders, outgoing purchase orders, incoming materials from supplier, buffers and queues, stations (machinery), cash and completed jobs shipped to customers.

So, basically, our work on that assignment split into the following integrated streams:

• Capacity management – to ensure we don’t have bottlenecks and growing queues of materials and WIP at our stations on the shop floor
• Inventory management – not to get short of materials and ensure economic purchasing
• Cash management – the goal of the assignment was to maximize our cash position by the end of the simulation period of 268 days. We could pay for materials, receive payments from customers, buy and get rid of machines, and accumulate interest on our cash balance.
• Output management – focused on customer service quality in terms of customer’s order lead time (order lead time directly affected our prices and margin)

As we had several competitive teams going through this simulation in parallel, each team needed to be as lean as possible in terms of saving its cash and at the same time trying to maximize its net cash flow.

Even though that was a simplified model, it gave me some good practical sense of being in COO’s position and called for my experience in the real world of inventory management improvements in ERP implementation projects. In this series of posts I wanted to focus on various aspects of Inventory Management best practices and how they could be realized with Microsoft Dynamics AX.

To be continued ...

© Andrey Maslov

Follow-up comments on "Discover Microsoft Dynamics AX"

Well, we've got a really great session over there! Some of the interesting points that came up during the Q&A part of the discussion were:

• Shared services centers - how AX can support them for better efficiency of distributed businesses
• How to prepare for IFRS that are coming to North America to become a mandatory requirement
• How enterprise solutions can support the business with very limited operations in spokes (in 'hub and spokes' configuration) with poor communication channels
• Global company's strategy and options for integration of newly acquired businesses

These are some of the questions we will be following up on with our clients and here on this blog. Let's keep in touch ...

© Andrey Maslov