Category Archives: Forecasts

Giving Your “Ugly” Supply Chain a MakeOver

Is Your Supply Chain “Ugly”? asked a very important question – is your supply chain an “ugly baby” — which it is if your distribution is slow, if your products are unpopular due to quality issues, and, most importantly, if your warehouse and inventory management is in shambles. This is a very important question because a $100 million dollar company can lose $3 million to $6 million a year by the time storage costs, depreciation and disposition costs, and losses are factored in (because it can lose $1 million a year alone on an inaccuracy of just 5%!)

To that effect, as my last post pointed out, if your inventory is not in order, you need to get it in order — fast — because a warehouse in shambles could be your undoing in a down economy. But how do you get your inventory in order? Supply and Demand Chain Executive, who ran the article by Rene Jones of Total Logistics Solutions, Inc. that highlighted the problem, comes to the rescue with an article titled “Get Control of Your Inventory” by Sumit Chandra, Mirko Martich, Shalin Shah, and Kumar Venkataraman of A. T. Kearney who provide insight on getting to the root of the problems, and fixing them.

Inventory management is an enormously complex job these days. Some retailers have to track hundreds of thousands of stock keeping units (SKUs) from thousands of suppliers across hundreds or even thousands of stores and distribution centers. They must also differentiate the products based on consumer demand in local, regional, national and global markets while dealing with inefficient processes and inappropriate systems that only serve to complicate the process. And good inventory decisions must balance five key business drivers: consumer demand, lead time variability, pack mix, merchandising presentation requirements, and visibility.

However, many inventory managers don’t have a clear understanding of what drives inventory levels, don’t have metric-based tools to track the key drivers, and don’t have anyone providing them with this information. Add to this the fact that there is a margin of error for each driver you try to account for, and that most companies don’t have a good forecasting process, and you can easily start to wonder how today’s supply chains can even function! The slightest error in a forecast can be very detrimental, resulting in too much inventory, which comes with unnecessary storage costs and disposition losses, or too little, which results in lost sales. So what can you do?

  • Better Forecasting
    Use good software that can take into account different demand patterns and distribution methods for various markets, as well as the seasonal, geographic and competitive position of each store. And focus on the process, and not just the software or final result. A tightly integrated S&OP process will produce better data, and better forecasting intervals, which will in turn produce better forecasts.
  • Lead Time Variability Reduction
    De-list suppliers with erratic lead times and distributors with low reliability. Track performance data against key metrics, provide regular feedback on performance and introduce supplier recognition programs.
  • Pack Mix Improvements
    When possible, optimize the pack mix size from the supplier. When not (due to complexity or cost), “break-pack” the item at local distribution centers to insure that only the needed level of inventory is shipped to a store.
  • Merchandising Presentation Management
    It might be case that extravagant visual presentations get a potential customer’s attention, but it’s also the case that such presentations can lead to excess inventory. Pack and presentation can increase inventory over a base level by 15% to 25% for an average retailer! In addition, specials on seasonal items can cause dramatic one-time boosts that can disrupt the normal inventory flow. The employment of advanced inventory flow-path techniques to determine cost and service-level tradeoffs can lead to significant savings.
  • Track Inventory Accurately
    Make sure that both outbound flows and inbound flows are carefully monitored by state-of-the-practice inventory management systems. If your system is not tracking and managing returns, you really don’t know how much inventory you have where, and whether or not it is resalable or able to be refurbished – both of which lower your overall inventory costs and losses.

Finally, make sure you have across-the-board visibility into what is where in your supply chain, and where the demands are.

The Complexities of Strategic Service Management

I first introduced you to Strategic Service Management in February of last year where I indicated that it was a proactive approach to making the customer satisfied and efficient while making a profit that balances strategy, resources, commitments, and pricing. It supports the integration, optimization, and efficient management of core business processes, adds to your overall business solution, and helps to differentiate your offering from that of your competitors. And it is a practice that is growing rapidly at many consulting firms as it is a topic that is now become common in many boardrooms that are feeling the squeeze in both directions on the product front: production costs are rising rapidly but prices need to remain flat in order to move any product at all.

For many companies, Strategic Service Management is now the only way to increase profits – as it not only allows premium prices to be charged for quality services that are perceived as valuable by the customers, but can also substantially reduce service costs when the right product is in the right place at the right time to be put in the hands of the right technician to do the job. The fact of the matter is that poor service often translates into real losses – which go beyond the financial penalties specified in your SLAs. If the product isn’t available or is priced too high when a customer wants it, that can result in a lost sale as well as dissatisfaction that may prevent the customer returning to you in the future. If your service team is unresponsive, not only will you lose repeat business, but your brand can take a hit. And if you price too low, you’re losing profit.

So what is involved in Strategic Service Management? As I covered in depth in my piece on Strategic Service Parts Management a few months ago, a lot of it revolves around parts and price management – having the right product available at the right place at the right time and at the right price – and this involves forecasting, inventory management, and price optimization, but it also involves having the right technician available to install the part and get the repair right the first time and making sure the technician has access to the knowledge she needs to do her job – and this involves workforce management, scheduling, routing, and knowledge management.

In other words, good strategic service management has to address all aspects of the entire service value chain (that may also include other suppliers, distributors, OEMs, dealers / value added resellers, and after market services) and not just the part or the price of the service. It also has to go beyond just the short term issues of problem diagnosis, replacement part location and delivery, technician scheduling and dispatch, and price optimization and address the long term issues of regular re-orders of parts when inventory reaches threshold levels, appropriate workforce training and staffing, and performance monitoring to insure that price levels and service remain at optimal levels.

Furthermore, the fact that this has to be done across geographies, diverse customer segments, product types, various types of SLAs, various levels of customer commitments, and both company-owned and third-party resources, should be enough to convince you that this requires a dedicated solution designed to address strategic service management. A spreadsheet (despite the fact that Aberdeen found that 91% of companies still use spreadsheets to plan and forecast parts and service levels in its report on “The Emergence of the Chief Service Officer”) is NOT enough. Furthermore, neither is your ERP.

An ERP was designed for inventory control, work order processing, basic product tracking, catalog management, simple case management, and, maybe, basic call center management. Enhanced add-ons may also handle inventory forecasting and planning, replenishment planning, exception monitoring and analysis, simple GANTT scheduling, and work order tracking, but this barely covers stage 2 (operational control) of SSM (where stage 1 is firefighting) and doesn’t even begin to address stage 3 on the optimization of performance management, and definitely doesn’t even hint at stage 4 where true integrated service management is reached and strategic service management acts as a growth engine for your company. To get there, you need the foundational capabilities that include parts optimization, integrated PLM, order planning and sourcing optimization, manpower planning and optimization, knowledge management for issue diagnosis and resolution, and performance analysis which then enable multi-enterprise collaboration, integrated part location and technician dispatch; integrated parts, labor, and pricing optimization, contract and market profitability analysis, and integrated service offerings – the ultimate key to successful strategic service management.

As my previous entries on Servigistics and MCA Solutions addressed strategic parts, pricing, and warranty management, my next two contributions to this series will cover workforce planning and knowledge management for service success, and, specifically, Servigistics’ new offerings in these areas.

Stacking the Supply Chain

Industry Week recently ran an article that asked the question “How does your supply chain stack up?” Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.

To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.

Specifically, they found the seven following commonalities:

  • Too much product complexity
    Too many models and lack of a good process to eliminate underperforming products.
  • Too much slow-moving and obsolete inventory
    Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
  • Supply chain considerations not part of the product design process
    Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
  • No supply chain strategy
    Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
  • Ineffective matching of supply with demand
    In most companies, sales is driven by revenue generation while operations strives to cut costs.
  • Physical network problems
    Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
  • Global issues and outsourcing problems
    Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.

Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.

So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:

  • Product Line Consideration
    Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
  • Pre-Launch Price Reduction Planning
    Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
  • Include supply chain in product design
    When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
  • Sync the Plans
    Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
  • Forecast with Foresight
    Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
  • Network Modeling
    Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
  • Outsource Intelligently
    Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.

Forecast with Foresight

A short while ago, Supply & Demand Chain Executive ran an article by Romit Dey and Joy Prakash Somani summarizing the results of an Electronics Supply Chain Association and Infosys Technologies Limited study on “re-thinking demand management”.

The study, which was designed to assess the impact of consumerization on major sub-segments within the high-tech industry, understand issues and challenges, and identify industry leading practices, found that 87% of respondents stated that consumerization had significantly impacted product proliferation and customer experience. The demand for new products at an increased product refresh frequency has put increased pressure on design and supply cycles and customer expectations on product customization and error-free operating performance have heightened considerably.

The study found that performance was still as critical as ever, but that 70% of the respondents did not consider their performance in forecasting to be satisfactory. The challenges identified included:

  • Poor Data Quality
    There is often a lack of synchronization on product numbers between manufacturers, distributors, retailers, and customers; a mismatch in the granularity of the expected demand data provided by retailers and customers; over-forecasting by optimistic partners; and POS data is not always available, especially in global distribution networks. Furthermore, raw data is often not adequate enough for many tools to provide a robust estimate.
  • Lack of Formal Processes
    There’s a lack of process for measuring forecast performance and generating feedback on current performance to future estimates.
  • Forecasting Tools are Not Fully Leveraged
    Sometimes this is because of a lack of integration into data sources, sometimes it’s because the available data is not considered adequate, sometimes it’s because data exchange is still paper-based, and sometimes it is because users resist switching to new and improved processes and tools.

As a result, the authors recommend a shift from passive/reactive demand management to a more active/predictive form of demand management that:

  • senses the demands of customers early & correctly,
  • influences the demands to favorably align to capability,
  • budgets for variability in demand during fulfillment, and
  • focusses on innovation to realize a first mover advantage.

Furthermore, they indicate that organizations should:

  • streamline information gathering and analysis,
  • formalize forecasting processes,
  • leverage demand shaping opportunities, and
  • collaborate within and beyond the organizational boundary.

The latter is a good start, but the article fails to point out that it is essentially impossible to correctly sense the demand of your target market before production begins – which is when it is most important. Nor does it provide you strategies to account for the unpredictable variability that is going to be incurred as a result of this inability to accurately sense demand early.

Why can’t you accurately sense demand early? Sure you can measure excitement about a new product announcement or highly anticipated feature, but this can change overnight when a competitor announces a new capability or rolls out a new stealth product that you had no knowledge of. As a whole, leveraging demand shaping opportunities, polling the market, and connecting with retailers to get a better sense of actual demand will greatly increase your forecasting performance across the board, and increase the chance of a big win, but, on a project basis, there is still the opportunity for a big miss, and it will still happen occasionally.

That’s why I’d recommend including the following two steps in the process checklist:

  • utilize advanced demand & price point prediction technology based on optimization and simulation (such as that employed by Rapt, which was recently acquired by Microsoft) to make sure you get a reliable demand prediction at a target price point and
  • focus on contracting capacity, not specific products.

What do I mean by capacity contracting? Your statistical chances of predicting the total number of cell phones, laptops, etc. that you will sell are much better than your chances of predicting the number of units of each specific cell phone, laptop, etc. that you will sell. If you’ve properly rationalized your supply base, you probably only have a couple of manufacturers making cell phones, and each is probably making multiple models. Instead of guaranteeing them 100,000 units of M1, 50,000 units of M2, and 50,000 units of M3, because you have a high statistical confidence that you’re going to sell at least 250,000 total units this year, guarantee them 200,000 units and allow yourself the ability to specify the actual order quantities at the latest date possible required to meet your turnaround time. Your suppliers win because they are guaranteed business. You win, because you don’t get stuck with a heap of unmovable inventory, which can happen if you incorrectly forecast which model will be your best seller. Furthermore, contract for a quarter or a year, not a month. Demand varies month by month, but is much more predictable quarter by quarter and year by year.

It’s a Recession, But That’s Okay

World Trade Magazine recently ran a great article by Dan North on “Policy Perspectives: Reading the Economic Tea Leaves: Confessions of a Successful Forecast”. It was short, sweet, to the point, and dead-on – even though it used one of the words that is obviously not in George W. Bush’s vocabulary.

The article points out how many brave economists strayed from the consensus opinion last year because they saw a set of circumstances so compelling that it led them to forecast – very much counter to the consensus at that time – that the economy was likely headed for recession. They were right, and this is the best article that I found that explains why. In short, there were three major forces at work against the economy (and we all know that 3 is enough to cause chaos):

  • inflationary pressures started to bubble
    When the Federal Reserve warned that the economy was growing too fast back in May of 2004, it was right. They raised rates to curtail the effect, but there is normally a lag of at least 3-5 quarters, and more if the market is especially exuberant.
  • crude oil reach a record high in May of 2004 – and then started to skyrocket
    every time crude oil spiked in the last thirty years, a recession followed
  • in August of 2006, the median sale price for an existing home fell on a year-over-year basis for the first time in 11 years
    and this was at a time where the camel could barely stand as the Federal Reserve corrections and crude oil spikes were starting to pile on

Thus, by the summer of 2007, there were three strong negative forces battering the economy. Each on their own had consistently caused recessions in the past. And then:

  • the sub-prime crisis hit
    battering the real estate market with the force of a tsunami
  • other debt crises surfaced
    the storm just couldn’t get any more perfect

A recession was inevitable. But it’s nothing to worry about.

  • First of all, it’s the nature of the market, it surges, it drops, it corrects, and then it emerges stronger than ever!
  • Secondly, these same brilliant economists have noted that the necessary conditions for a quick exit are falling into place and the recession is not likely to last very long, with the recovery curve predicted to start by year end – meaning that we’ll be back to a growth cycle in mid 2009 or early 2010.
  • Thirdly, this is the perfect market for supply and spend management to really take off! Now that savings are on top of everybody’s mind, sourcing and procurement is going to start to get the respect it deserves in all the laggards out there. They’re going to need good solutions. It’s a good time to be a provider of stable sourcing software solutions. Time to kick the development and marketing cycle into full gear. (And don’t make me tell you again where you should be putting those dollars!)