The continuing shift to demand-driven or "pull" supply chains has intensified business's focus on demand management-the science and art of understanding, predicting and even shaping customer demand. The reason is clear: As companies restructure operations to make their supply chains more customer-responsive, their reliance on demand signals grows.
A good reading of the tea leaves translates into synchronized supply chains with little unsold inventory and more complete, error-free orders, benefiting the bottom line. AMR Research, Boston, has quantified this effect, estimating that profits go up 1 percent for every 3 percent improvement in perfect order fulfillment, while a 10 percent improvement plumps earnings by 50 cents per share.
This potential gain is not easily realized, however. An explosion in the number of new product introductions, shorter product life cycles and more special-events selling make today's customers notoriously hard to predict, adding complexity and risk to the demand management challenge.
"The dilemma for most companies is that increasingly fewer supply chains have normal demand distributions," says Lora Cecere, research director at AMR. As a result, she says, the value of traditional statistical forecast modeling "gets increasingly limited each year."
Moreover, the combination of lean inventory management and global sourcing of parts makes companies less able to recover from planning mistakes. "In the past, if you missed badly on the forecast, you could run to the plant and ask them to slot something in," says Ann Grackin, CEO of ChainLink Research, Cambridge, Mass. "Those days are gone."
Indeed, constrained supply and capacity is a second key factor driving companies to improve demand management capabilities, says Ian Watson-Jones, supply chain planning consultant at IBM Global Business Services, Armonk, N.Y. "We are seeing a lot of supply constraints in different raw materials, components and sub-assemblies, depending on the industry," he says. "We believe that's one reason our work in this area has increased noticeably over the past six months, where before it had not been a focus of investment."
This is a driver for IBM internally as well. "Our current focus is more around coming up with what is really a constrained demand plan that maximizes profitability for the corporation," says Joe DiPrima, manager of supply chain planning and optimization for the IBM Integrated Supply Chain. "We want to understand where the supply constraints are and make sure that we apply those supply constraints to get the right product mix. That's different from what did in the past, which was using all sorts of different modeling techniques to figure out the future unconstrained demand plan."
The next advanced step is to then begin shaping demand, DiPrima says, "seeing what levers we can pull to make sure that the plan that we have can support the customer demand that is out there. There are things we can do from a pricing and promotions standpoint to try to generate demand around the supply that we have. That's the focus that we are on now and, to my mind, this really is what defines the difference between demand planning and demand management."
IBM has long used a solution from i2 Technologies, Dallas, and recently upgraded its global operations from i2's Demand Planner to its latest, more advanced Demand Manager solution.
|"The dilemma for most companies is that increasingly fewer supply chains have normal demand distributions."|
- Lora Cecere of AMR Research
|Three Short Lessons In Demand Planning|
|Company: Hercules Bulldog, Clearwater, Fla.|
Business: Global distributor of hydraulic seals and parts
Goal: Improved forecasting of individual parts
Solution Provider: IFS
Hercules Bulldog needed to improve forecasting for the many different parts that it carries, says Chris Breierly, purchasing manager. "Our prior system could give us a minimum stocking point or an average monthly demand, but we still had to do a lot of calculations almost by hand," he says. "We struggled with it and the results just weren't as good as we wanted them to be."
Hercules already was using an MRP system from IFS and decided to implement IFS Demand Planner. "The IFS solution allows us to forecast each part individually and we can use several different forecasting models, which is a nice feature," Breierly says. "We have categorized products so we can forecast some categories with one method and then use a different method for other categories."
Different forecasting methods also can be used for different sites. "For example, our satellite facilities are much smaller and have more intermittent demand than our main facility in Florida, and I am able to separate those facilities and use a forecasting method that is better suited to the wide variability in their sales patterns," he says.
Also, the IFS solution is able to filter out spikes in sales that do not represent typical demand, Breierly says. "We might sell 50 pieces a month of something for five years and then, out of the blue, someone shows up and buys all 800 that we have. The IFS solution allows us to filter out those kind of exceptions. This is a nice feature and certainly something that wasn't in our prior software."
Overall, Hercules' inventory management has significantly improved. "When we started with IFS, we typically would be out of stock on around 2,200 of the 26,000 items we carry. Now, at any given time, we are out of about 450 or 500 items," he says.
Company: Vicor, Andover, Mass.
Business: Manufactures custom power conversion components
Goal: Reduce raw materials inventory and improve delivery performance through better demand forecasting
Solutions Provider: SmartForecasts
Vicor makes more than 8,000 highly configured products involving such options as input and output voltages and power levels. The company sells to about 10,000 customers worldwide. "The first thing to understand is that we are a make-to-order business," says Doug Richardson, vice president of information systems. "We don't carry finished-goods inventory. Second, the components that we use to make our products have longer lead times than our quoted lead times to our customers. That creates a situation where we have to rely on our forecasts for decisions about purchasing components."
In the past Vicor has dealt with this by buying lots of raw materials, Richardson says. "What we wanted to do was minimize raw materials inventory, while ensuring that we have the right components on hand to make whatever we need to make."
Vicor selected SmartForecasts in 2001 to work with a PeopleSoft ERP system that also was being implemented. "We looked for a moderately priced package that could handle our base-line business, which is more statistically forecastable, as well as the variable input we get from sales. Before, we were doing this pretty much manually and not very well," he says.
SmartForecasts enabled Vicor to integrate its statistical and sales forecasts and it now is able to adjust this figure as real demand becomes known. "For example, Richardson says, "if the sales folks forecast that we will sell 1,000 units this month, when we get 1,000 units booked as orders we adjust the forecast going forward." Richardson says this approach, along with the PeopleSoft implementation, has helped Vicor improve on-time delivery, "which was a big issue with our customers," while significantly reducing raw materials inventory.
Company: Poclain Hydraulics, Paris, France
Business: Makes hydraulic motors
Goal: Improved production planning and sourcing through a centralized picture of demand
Solutions Provider: John Galt Solutions
Poclain has manufacturing facilities in the U.S., the Czech Republic and at its headquarters in France, which support 13 sales subsidiaries around the world. "A great deal of coordination is required to properly plan which plant will manufacture which product for a given customer," says Bob O'Neill, North American planning manager. "In addition, we source raw materials on a global basis and have to designate which of the three factories will receive which materials, so a lot of coordination is required there as well." Factory allocations are based on a number of factors, including a product's time sensitivity and cost competitiveness.
"We used to manually plan products into factories and raw materials purchasing, both based on sales predictions," O'Neill says, "It was a slow and painful process. And, since salesmen are eternally optimistic, very often our numbers were missing by large sums, both high and low. We really needed to find a way to statistically forecast what our existing client base would be doing in the next 18 to 36 months and to calculate probable new business."
Poclain implemented The Atlas Planning Suite demand management solution from John Galt a little more than a year ago. Since then, forecast accuracy has improved 14 percent, says O'Neill. Over the same period, inventory has gone down significantly and the company has improved on-time performance. "For the past year, our on-time delivery performance has been in the high 90s, which is just phenomenal given the engineering and assembly that goes into our product," O'Neill says. "At the same time, we have reduced inventory to the lowest it has been in three years, so right now our planning is more precise than has ever been." These improvements have improved cash flow, "allowing us to go out and find new customers and invest in new designs," he says.
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