Q: How many SKUs in your organization are you actively planning for right now? Give us a sense of how large your planning organization is.
A: Hochstatter: We plan for 4,700 SKUs. About 1,600 of them have a lot of activity, but all are active. They have to have a forecast, with supply matched with demand. We have to make sure that we're not driving excess and obsolete materials, or having shortages when our customers come in. We try to plan for a 100-percent service level for these products - we want our customers to be able to get them at almost a moment's notice. Achieving that for all 4,700 SKUs, with just 10 demand planners worldwide, has proved to be quite a challenge. It's something we address actively every day.
Q: We know that all forecasts are wrong. So you're facing a challenge with products that have regular demand patterns, not to mention the high-volatility, high-mix stuff.
A: Hochstatter: Exactly. The volatility makes it even harder to project demand accurately, and more challenging to get the right product landed at the right time. To not have stockouts, you have to hold a lot of inventory. But if you do that, you're going to have a lot of excess at some point. It's almost impossible to land exactly on a dime.
In order to mitigate that situation, we've tried to break down the 4,700 products into different service-level requirements. Understanding that you can't meet the 100-percent service-level goal without an extraordinary cost to the organization is something we have been addressing with our executive and sales teams.
Q: Do you divide those SKUs into a distinct number of categories, or is there more of a gradation of demand?
A: Hochstatter: There's a gradation, when you're being honest about the situation. But in order to have rules and policies that we can put in place, you have to draw the line somewhere, and try and put them into buckets. You can't put your hands on 4,700 SKUs with 10 demand planners across the globe and maintain supply-demand balance. You have to just let the system run, allow for some statistical projections of demand - then, when you're looking at having the supply to support it, having some flags or some warnings. When is supply not going to be sufficient to support the demand you've projected?
Q: Is it all based on historical demand - is that the raw data that gets fed into the engine? Or are there other things you take into account, in order to arrive at as close to an accurate forecast as you can?
A: Hochstatter: There are inputs from our customers and from the sales team projecting demand. Again, you've got to prioritize. There are a lot of SKUs for which we say, let the system run - those for which there's just history to go on. They're de-prioritized for sales inputs also.
Q: What about your lead times? What are they like, and how does that affect your forecasting challenges?
A: Hochstatter: The lead times in consumer electronics, unfortunately, have been getting longer and longer. Especially when you're using contract manufacturers, which we are. Because of long cycle times and high volatility of demand, you can't have a ton of product on the water.
One reality we've been facing lately, in order to make sure we're not tying up a bunch of inventory that could become obsolete, is the need to utilize airfreight. The products that we make - headphones, power cords, cables - are all fairly large and heavy items to put on a plane. We're talking about a very substantial investment in transportation costs, in order to help smooth out that signal and have product available for the customer at the point of sale, as opposed to having it tied up on the water.
Q: So airfreight becomes part of your regular, ongoing way of fulfilling demand, and not something you turn to in an emergency, to expedite something that didn't make it in time?
A: Hochstatter: Exactly.
Q: It's not a dirty word with you, although many companies get very scared when they have to deal with the high price of that mode.
A: Hochstatter: It's not a dirty word, but it's still a tough pill to swallow. As long as you plan for it, make it part of the strategy, let everyone know this is part of the budget for this product, and that we're doing it deliberately in order to have better customer service and less risk of obsolete materials and stockouts, then it's easier to get accepted by the organization.
Q: Talk a bit more about how you're maintaining supply-demand balance across all these SKUs.
A: Hochstatter: It has to come down to prioritization, by SKU and strategic product segment. Our 10 demand planners have a limited amount of time. Even if we worked them as hard as they can, there are only 168 hours in the week! You have to ask, what are the most important products to be micro-managed, to have accurately forecasted to the best of our ability? You've got to watch inventory levels, keep track of the projected supply coming in from overseas. With such high volatility of demand, you almost can't not do it manually for the most important product.
Q: Is it also about prioritization by customer? Your products can be found in big-box stores, obviously, as well as in smaller shops and on the internet. Do you have to decide what's the most important channel, to ensure the greatest degree of accuracy?
A: Hochstatter: Absolutely. I wish that our customers, beloved as they are, were a little bit better at forecasting as well. That would help us a lot. Unfortunately, given the demand volatility and difficulties of keeping track and projecting even from a current state, projecting out is rather challenging for all of those customers. Knowing that, all of our customers are probably going to do a poor job of forecasting their own requirements. We have to judge that for them, figure out how to make sure we're prioritizing the right customers and the right channels, to have a good spread of product around the world.
One approach that we've been using a lot lately is picking a few key partners from the very beginning of a new-product launch, and saying: You guys are going to have the best supply availability that we can provide, and we are going to de-prioritize other customers in order to support in full these launch partners. Then we advertise that on the website - and say that these are the few key places around the world where you can go and find this product.
Q: In exchange for that preference that you're according to those particular customers, are you asking something back from them, in terms of more accurate and collaborative forecasts?
A: Hochstatter: Absolutely a more collaborative forecast. Pushing more forecast accuracy onto the customers, at least in my experience, has not worked very well. Holding them accountable to an accurate forecast is a really good concept, but it simply doesn't work in the consumer electronics industry, at least not in our experience. But having more collaborative forecasts with them, showing them what we think they might need, and having them come back with what they believe - it might end up changing their mind, or providing us with a rationale for why they show a lower number. And that has shown some real promise.
Keywords: supply chain, supply chain management, supply management, inventory management, inventory control, transportation management, logistics management, supply chain planning, retail supply chain, high-tech supply chain, consumer electronics supply chain, sourcing solutions, supply chain risk management
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