Togetherness pays
How demand management strategies and synchronization pay off for Sun Microsystems, Corning, and AAi FosterGrant
By Alex Anderson, contributing editor -- Manufacturing Business Technology, 6/1/2002 12:00:00 AM
Excess inventory. The phrase is the four-letter word of supply chain management. But for most manufacturers, excess inventory is a necessary evil. You have to carry some safety stock to meet the ebb and flow of demand.
The real question is to find ways to minimize those safety stocks. One of the best ways to do that is to arrive at the most accurate forecasts possible, using collaborative techniques that expand forecasting toward the broader notion of demand management.
Anyone who doubts the benefits of a well-synchronized demand management strategy need look no further than Sun Microsystems. The Santa Clara, Calif.-based maker of computing platforms has squeezed $350 million out of its supply chain since radically overhauling its approach to replenishment in June 2001.
"We've always been a very supply chain-focused company. We see some very dynamic market conditions with wide swings in demand, so we have to be as efficient as possible," says Wayne Brown, supplier readiness manager in Sun's procurement strategy and supplier relations group. "We can't truly be effective without being collaborative with the suppliers."
Sun owns three manufacturing facilities—two in the U.S., and one in the U.K.—where mid- to high-end server products are manufactured, while all the volume products, such as desktops, are outsourced. In its most recent fiscal year, Sun spent $9 billion in its supply chain.
Sun's Demand Replenishment initiative triggers replenishment based upon actual demand rather than forecasts, reducing Sun's acquisition of raw materials. By sharing information, this initiative is enabling Sun's suppliers to work smarter and more efficiently, and has resulted in reduced lead times and improved fill rates to customers.
"We wanted to optimize our supply chain," says Brown. "Now deliveries are synchronized to the exact demand on the shop floor."
The Sun program is a mix of home-grown technologies based on open standards, such as Sun's Open Net Environment (ONE); and third-party applications from Dallas-based i2 Technologies and San Francisco-based Rapt. Sun uses i2's software to formulate the supply plan, while Rapt's software is used to analyze it for availability and financial risk.
Collaboration and connectivity are central to the initiative. Although the demand information can be inputted via a portal, Sun's ideal model, and the process it is moving to, involves the use of electronic data interchange (EDI) and eXtensible markup language (XML) to fully automate information exchange. These technologies allow the demand signal to be transmitted directly into the suppliers' system. To date, more than half of Sun's suppliers are using EDI, though Brown points out that many still use the portal.
"One of the things our suppliers wanted to see is actual consumption data—customer orders," says Brown. "How was their inventory being consumed, and when? In the past we would give them that data periodically, when we had the opportunity. Now they can see it whenever they want. The factory requirements are updated several times each day, while customer orders are updated on a daily basis."
While Sun's approach to the demand management issue was partly home-grown, there are literally dozens of software vendors tackling this problem, and many of them in different ways. A common trend, however, is the evolution toward broader-based demand management strategies.
Right for the times
According to John Bermudez, an analyst with Boston-based information technology advisory firm AMR Research, there has been a resurgence of interest in demand management since the recession. "Awareness has been heightened because the recession is proof that companies don't know as much about their supply chains as they would like," he says. "It was a wake-up call that they weren't doing it all that well, even if they had the appropriate tools in place."
The Internet has introduced some new thinking about demand management and forecasting, Bermudez says. While the concept of pulling demand data from different sources within an enterprise—such as the sales and promotions groups—and using it to generate a "consensus demand plan" is not particularly new, this concept now is being extended beyond the enterprise to collaboration with external partners.
"Consensus demand management allows you to bring your customer into demand management cycles," says Bermudez. "It provides visibility across all the different customers' independent inventory forecasts, and this area is gaining a lot of interest. People realize that when you're trying to figure how much to make, it's good to take input from different groups."
A large cast of software vendors are involved in the demand management challenge, from best-in-class specialists such as Futurion, Englewood Cliffs, N.J., and Belmont, Mass.-based Smart Software, to large vendors of collaborative enterprise and supply chain suites. Additionally, solutions from supply chain event management (SCEM) vendors, as well as suite vendors with event management capability, complement demand management strategies.
According to Andy De, director of solutions marketing for i2, three distinct demand planning processes are seeing use. "Forecasting is generally based on historical statistics, and demand planning adds market intelligence to develop a consensus plan. That's what we're seeing the most of today. The new and emerging demand management process is more collaborative, and involves getting an understanding of what is driving and shaping demand.
"To date, that consensus plan has been a stake in the ground and everything was based on it," De continues. "Now we are seeing the move to real-time synchronization of the supply chain to the demand signals. The reality is the demand is constantly changing and you have to do that iterative planning as the signal comes in. It involves everything across the whole value chain, from getting the order to shipping the product."
Demand planning applications from i2 have been retooled to reflect these changes in the marketplace. Some of the new features include real-time data availability, on-line analytical processing (OLAP), and non-proprietary data storage.
"The reality is that companies and partners have a variety of different systems, and you have to be able to pull data from all of them in a heterogeneous way," De says. "OLAP has been seen as the industry-standard method for pulling that data."
Like most suite vendors, i2 sees demand management solutions as most effective when paired with other supply chain applications. Says De, "having an accurate picture of demand is irrelevant if you don't have a supply chain that can meet it."
Beyond forecasting
"Demand planning is so much greater than forecasting," says Rick Beers, director of supply chain technology at Corning, a Corning, N.Y.-based manufacturer of high-tech products. "With forecasting, the downstream demand [i.e., toward the customer] always moves a little quicker. They see change first, and we have to react. The key to demand planning is to figure out how to synchronize our demand processes with those of our customers. If we run it monthly and they run it weekly, it will never line up. One has to have a tool to enable a more frequent run of demand."
Corning has turned to Pleasanton, Calif.-based PeopleSoft to provide that synchronization, and currently is in the process of deploying demand planning tools at two of its 13 operating divisions. PeopleSoft supply chain tools of some kind are installed at 10 business units depending on the individual need of the operating divisions, which span six industry verticals.
"We are deploying supply chain around the company in a very flexible way," Beers says. "We determine the needs of the individual division, and deploy them. Some have demand planning, others don't. One of PeopleSoft's greatest strengths is its modularity. We can chunk it and it has been very friendly in that way."
But Beers has a word of caution for those looking to automate processes and speed up the flow of data across the enterprise. "The problem is that it can speed up the flow of bad information," he says. "The customer is trying to read the tea leaves and will pad estimates. You have to be careful how you remove people from the process, because people often are the filter that takes out the bad information. This is a prime reason why the telecom industry got stuck with inventory [during the recession]. Unless you have a tool that can replace that function, you have to be careful how you do it."
CPFR hums along
Collaboration, even in industries such as consumer goods, still has a long way to go, say some observers. "Collaboration is in its infancy," says Jane Hoffer, president and CEO of Prescient Systems, a West Chester, Pa.-based supply chain management suite vendor. "There is room to improve—particularly in consumer products, which is traditionally a little behind other industries in the adoption of new technologies. Most companies are still basing their demand plans on a single stream of information. That has to change."
Hoffer takes the suite vendor view that demand planning is only one part of supply chain planning, which consists of several processes that contribute to the overall manufacturing plan. According to this view, the best way to manage the manufacturing process is to aggregate all that information in an overall, dynamic plan.
One approach that has been the focus of a lot of industry buzz is collaborative planning, forecasting, and replenishment (CPFR), a process by which manufacturers and customers work together in an open, secure framework to make sure retail shelves are stocked with the right goods at the right time. However, says Hoffer, this approach is being adopted only by the "biggest of the big."
Hoffer maintains the enterprises need to get their internal demand management processes in order before CPFR initiatives can yield maximum benefits. One example of getting your own house in order, says Jeff Rose, a vice president for Demantra, a Cambridge, Mass.-based vendor of demand management software, is connecting the different groups that have a stake in the demand process.
"The promotions group exists to drive and create demand. The irony is that this almost never is connected to the operational group. Sometimes the marketing group is so disconnected that it spends money pumping a product that that you can't deliver."
Like Corning's Beers, Rose stresses that collaboration without intelligence is meaningless. " If you don't know what's driving your demand, how do you know what decisions to make? Use demand data to make the right decisions," he says.
POS-driven overhaul
When Darrin Weigle joined AAi.FosterGrant in early 2000 as vice president of supply chain management, it was with the mission of driving cash out of the consumer optical goods manufacturer's supply chain while supporting growth. This required a complete overhaul of the Smithfield, R.I.-based company's supply chain processes.
"Significant gaps existed within AAi.FosterGrant's demand planning, supply planning, and order fulfillment operations that caused the company's overall supply chain performance to fall far short of best-in-class," says Weigle. "I put together a vision of what we wanted to do, and then figured out what key enablers were required to make that vision a reality."
The company chose a solution from Prescient that enabled it to forecast demand at the store level. "In some cases, we knew before our customers did how much point-of-sale activity they were going to see," says Weigle. "Our whole approach to supply chain management is based on synchronizing inventory with the rhythm of point-of-sale [POS] data. That's what has made us so successful."
According to AAi.FosterGrant, benefits realized include:
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The company can forecast consumer POS demand five months in advance with only 30- to 35-percent forecast error.
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Order fill-rates have increased to 98 percent, up from 94 percent in 2001, and 88 percent in the previous year.
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Inventory has been reduced by 33 percent (versus prior year) and down 46 percent (versus 2001's peak levels).
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Required warehousing space has been reduced by 40 percent when compared to 12-18 months prior.
The next step for AAi.FosterGrant is the launch of a vendor-managed inventory (VMI) program. "There are a number of premier customers that have entrusted us with their replenishment," says Weigle. "With that power, we can ensure lower inventory and better fill rates. We are only given so much real estate in the store. We can now analyze the trends and make sure that the best selling SKU's [stock-keeping units] are maximized while those that don't sell well are phased out."
This program, which also is largely based on Prescient's software, is already up and running with Zellers and Wal-Mart Canada, and will launch with Rite-Aid this summer.
The broader loop
What's ahead for demand management? Richard von Hirschberg, general manager of the AIM business unit of EXE, a Dallas-based vendor of supply chain execution software, contends that increases in computer power now accommodate the sheer volume of data coming in from different forecasts. "With that threshold reached, people are going to be moving increasingly to real-time responses, rather than doing this on the basis of batch snapshots taken periodically," he says.
EXE's AIM unit developed EXceed AIM, a suite of decision-support applications that address demand forecasting, replenishment planning, order sizing, product allocation, and sourcing. EXE sees this type of decision support—along with its more traditional supply chain execution systems and its newer event management functions—as closing the loop on the overall demand-fulfillment process. In the past, says von Hirschberg, a lack of complete solutions led to disconnects that are "typically compensated for by holding excess inventory."
Excess inventory: there's that dreaded phrase again. Collaborative applications of various types—and a demand management strategy—may just be the best bet for ridding supply chains of that well-known phrase.
| For More Info: | ||
| Demantra: www.demantra.com | EXE: www.exe.com | Futurion: www.futurcast.com |
| i2 Technologies: www.i2.com | Peoplesoft: www.peoplesoft.com | Prescient Systems: www.prescientsystems.com |
| Rapt: www.rapt.com | Smart Software: www.smartcorp.com | |
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