In our last post, we reviewed Infor‘s top ten demand planning strategies. In this post we’re going to illustrate why you need to put your demand planning strategy into action immediately using a recent case study from Global Logistics & Supply Chain Strategies as our example.
In Free The Enterprise! Bust the Silos in the Supply Chain, Robert Bowman tells us how, not too long ago, Linksys (the router division of Cisco Systems Inc.) had a record of only 20% accuracy and could only manage supply and demand for its top 200 SKUs. However, after taking appropriate actions, it was able to reduce inventory by 35%, backlog by 60%, and obsolete inventory by 40% in only twelve months. It also increased supplier fill rate from 65% to 95% while reducing expedited shipments more than tenfold from 40% down to 3%. And forecast accuracy at the SKU level increased 350% to a much more acceptable 70%.
How did Linksys do this? The Vice President of Operations tore down the silos between the demand forecasting and product management teams and created a formal S&OP organization that served as a data clearinghouse and a foundation for a company-wide demand forecast. No longer was forecasting a monthly spreadsheet exercise conducted in isolation by the demand forecasting team. In the new structure, a cross-fuctional forecasting team was formed that solicited input from finance, sales, marketing, purchasing, and supplier management before constructing a forecast. This is a much better situation than the one where no one trusted the forecast and sales would inflate its numbers to insure product availability.
In addition, the VP instituted an aggregated view of forecast, inventory, and production data for each SKU that he called “gameboards” supported by a an underlying software platform. No purchase was permitted unless it was based on factual information from the gameboard.
However, the effort ultimately succeeded because the internal walls were torn down and all organizational groups learned to work together in harmony and trust the forecast that was produced as a group. This is not always an easy effort. As the author astutely notes, “companies might find it easier to tear down functional walls separating them from external partners, such as suppliers, than those between internal departments“. In addition, “independent partners understand the need to work closely together, while individuals with a common employer tend to gravitate toward their immediate areas of responsibility“. And this tendency to stick to silos will continue unless you align incentives. If sales is incented to push product even if inventory is high and factories are incented to increase production even if the demand is not there, everyone ultimately loses. Everyone needs to be incented against the same goal and off of the same metrics, which must capture TCO reductions and ROI improvements. And the organization needs to move to a collaborative demand-driven mentality focussed on compliance with the agreed upon operational procedures.