Nobody expects a demand forecast to be perfect. But a record of 20-percent accuracy for an entire product portfolio crosses the line of acceptability.
Nevertheless, that was the situation at Linksys, the division of Cisco Systems Inc. that makes routers and other networking hardware. Not only was the company unable to forecast sales with reasonable accuracy, it could only manage supply and demand for its top 200 SKUs. The rest of its products weren't even covered by a formal sales and operations planning (S&OP) process.
Some companies try to fix the problem by acquiring expensive new software. At Linksys, the true culprit was elsewhere. "It all starts with business process," says Mark Payne, vice president of operations. The company was hindered by a series of functional silos, each with its own set of assumptions about demand, and little communication between them.
That wasn't a problem in the early days, when the SKU count was low and the supply chain relatively straightforward. But success brought complexity, as Linksys found itself grappling with a more diverse product portfolio and a much larger community of suppliers.
Under the old system, S&OP was the responsibility of the demand forecasting and product management teams. Other departments rarely joined in the exercise. Demand signals were generated on a monthly basis, with a heavy reliance on spreadsheets. And the focus was entirely on the company's top-selling SKUs.
The result was a huge gap between inventory levels and actual demand. No one trusted the demand forecast; sales would inflate its numbers to ensure the availability of product, and forecasts would be repeatedly altered. A flurry of last-minute production changes would lead to heavy reliance on expedited transportation. The company was resorting to airfreight for nearly 40 percent of its product line.
Payne was determined to revamp business processes to allow for the simultaneous management of inventory, production and sales forecasts. First, though, he would have to tear down the silos within the organization. All of the links within the supply chain had to operate from a common set of terms and business rules.
Payne created a formal S&OP organization which would serve as a clearinghouse for data as well as the source of a company-wide demand forecast. The former global forecasting team was given the lead role in the new S&OP process, which incorporated input from all aspects of the supply chain, including finance, sales, marketing, purchasing, forecasting and supplier management.
Payne devised what he calls "gameboards," presenting an aggregated view of forecast, inventory and production data for each SKU. Underlying the process was a software application known as FS&OP Manager (the "F" standing for financial) from Palo Alto, Calif.-based Symphony Metreo Inc. No purchase order could be cut unless it was based on information from the gameboard.
The destruction of silos allowed everyone in the organization to work together, drawing on the common well of data. The forecast was supplemented by a new focus on inventory management and production planning. For the first time, planners could see how their decisions affected inventory weeks on hand (WOH). They were less likely to make independent adjustments based on a mistrust of the forecast. At the same time, WOH was allowed to fluctuate within certain limits to account for changes in demand.
One key to making the project work was harmonizing employee incentives. Before, notes Payne, the sales force was rewarded for pushing product into the channel, even if inventory was already high. The factories, too, were encouraged to keep turning out product regardless of the level of existing stocks. Once inventory, sales forecasts and productions were managed centrally, build plans became more rationale and false backlogs were eliminated.
Results of the reorganization were fast and impressive. In the first year, Linksys saw reductions of 35 percent in inventory, 60 percent in backlogs and 40 percent in excess and obsolete inventory. Expedited shipments were reduced to just 3 percent and supplier fill rate went from 65 percent to 95 percent. Forecast accuracy at the SKU level, still not perfect, rose to 70 percent. What's more, Linksys was able to bring every one of its global SKUs into the S&OP process.
The next step is to eliminate a major external silo-the supplier base. "We want to get suppliers on the gameboard so that everybody will be in balance all the time," says Payne. "So they can remain in a steady-state flow and avoid whiplash."
A Bigger Challenge
In terms of scale, Linksys's exercise in silo-busting pales beside that of IBM. The global high-tech giant launched a massive reorganization effort back in 2002, under the leadership of Bob Moffat. The former head of IBM's Personal Systems Group was put in charge of a new Integrated Supply Chain (ISC) organization, which encompassed all customer-facing processes as well as procurement, manufacturing and logistics.
The idea was to create what IBM termed "the world's first on-demand supply chain." At the same time, the company was out to save billions of dollars by streamlining redundant processes. But neither goal could be reached without devising an organization that cut across traditional job descriptions.
"The whole concept was to look at the process from end to end, from the order desk to procurement, manufacturing, global logistics, invoicing and cash collections," says Dave Eagle, distinguished engineer within the ISC. No longer could a manager within one discipline complete one task, then "throw it over the wall" to the next stage in the chain.
The initial challenge, says Eagle, was largely cultural in nature. It required aligning departmental goals so that all participants worked under a dominant metric - in IBM's case, delivering to the customer exactly what it wants and when. For example, procurement used to be satisfied with simply getting parts to the manufacturing plant within a specified quarter, even if they arrived too late to be of use. "Now," says Eagle, "the understanding is, if the product is not shipped out to the customer, then you've all failed."
Collective responsibility is a large part of any successful silo-busting effort. Under the old organization, manufacturing might have had a target of three days for making a particular product. As long as it stuck to that time frame, it considered itself compliant. But logistics might need to get its hands on the product a day earlier in order to deliver on time. In a siloed organization, manufacturing neither knows nor cares about such concerns.
Change happens when managers of various functions are brought together. Eagle recalls the first official meeting of the components of the newly formed ISC. There were roughly 300 people in attendance, all grouped at tables according to their functional or regional affiliations. One year, they were no longer segregated like high-schoolers at their first dance. "That was the real cultural shift," Eagle says. "People got to understand what other people did."
IBM has also done a lot of work in creating "one version of the truth"-in other words, a number on which all can agree. Forecasts used to pass through multiple levels of review, with each department contributing its own "spin," says Eagle. "By the time they got to the global consolidation level, they really wouldn't reflect what people on the ground thought was going to happen."
Now, IBM combines insights from the sales force on the front line with those of other parts of the supply chain, including suppliers. "We have sanity checks to make sure we're aligned with industry expectations," Eagle says.
One key piece of technology in the transformation was the implementation of customer relationship management (CRM) software from Siebel Systems, Inc. (now part of Oracle Corp.). The tool told planners how close the sales force was to closing various deals, a piece of intelligence that helped in creating reliable demand forecasts. IBM also linked its enterprise resource planning system with a demand-forecasting application from i2 Technologies, in order to determine the proper inventory levels.
Still, the major obstacle to silo-busting remains the human element. The goal, says Eagle, is to "get [employees] to take on ownership and accountability. The key is the consistency of the message."
Easier on the Outside?
Ironically, companies might find it easier to tear down functional walls separating them from external partners, such as suppliers, than those between internal departments. Independent partners understand the need to work closely together, while individuals with a common employer tend to gravitate toward their immediate areas of responsibility. "Most of the time what we hear in industry is about collaborating with vendors, suppliers and customers," says Suresh Bharadwaj, senior principal within the consulting group of Infosys Technologies in Bangalore, India. "Rarely do we hear about internal collaboration."
Conflicting incentives are a major reason for the failure of different departments to work together, Bharadwaj says. The retail industry is a particular source of siloed behavior. With all of the category managers and buyers that make up a retail supply chain, it's not unusual for different departments to make separate purchases from vendors within the same region-or even the same vendors. Often that oversight results in the excessive use of less-than-truckload transportation, which is slower and pricier than full truckload carriers. Consolidating purchases from a given area can greatly reduce logistics costs, Bharadwaj says.
Working for one client, Infosys uncovered multiple LTL shipments coming from vendors as close to one another as five miles, shipped on the same day to the same retailer's distribution center. But companies can do better than merely consolidating those kinds of loads, Bharadwaj says. Internal cooperation can uncover shipments scheduled from the same region over a period of several days-a redundancy that standard transportation management system software typically won't spot. If the consignee is willing to reschedule some delivery dates by a day or two, the supplier can realize even greater opportunities for consolidation.
Using this technique, says Bharadwaj, Infosys projected savings of between 3 percent and 12 percent on one client's inbound transportation costs. Following a three-week review of some 21,000 purchase orders, Infosys was able to demonstrate, on an annualized basis, savings of around $1m on a base expenditure of $35m. Such a strategy becomes even more valuable as fuel prices soar, Bharadwaj says.
Ritu Jain, product marketing manager with Cary, N.C.-based SAS Institute Inc., sees an inherent lack of trust between internal functions that must be overcome. The customary result is a lack of operational transparency. "It makes it difficult [for employees] to come together and share data," Jain says. "There's almost a fear of sharing the knowledge."
The solution begins with a commitment by top management to restructure the company and alter key business strategies. But the view of individuals further down the organizational ladder must also be sought. Often they have a better sense of how to make the new strategy work. Jain says all employees must drive toward a common goal, whether that's customer satisfaction, a higher profit margin or improved market share.
More transparency between jobs allows employees to see how their actions reverberate throughout the company. Jain cites one example of a large retailer that had separate and independent groups dedicated to warranty management and field services operations. When a warranty claim came in, the first group wouldn't share with the second exactly what needed to be fixed. The disconnect was solved when the company created an umbrella organization with one department head overseeing both groups. The common goal was customer satisfaction, leading to a realignment of metrics on the service side.
That level of cohesion must also take place at the planning end of the chain. In this area, information technology can be of help. SAS recently launched an application that allows companies to develop consensus forecasts at any level of product. It creates a baseline which can be shared by multiple departments, who can then run "what-if" scenarios of actual demand to determine whether the forecast needs to be adjusted.
Collaboration in A&D
Few industries face as many collaboration challenges with outside suppliers than aerospace and defense. But companies in that sector also grapple with everyday issues of internal cohesion. Exostar, the Herndon, Va.-based creator of a collaboration platform for A&D suppliers and manufacturers, also addresses that side of the equation.
Exostar works to narrow the chasm between engineering, sourcing and general supply chain activities, says chief executive officer Kevin Lowdermilk. The application known as ForumPass allows for the sharing of key documents pertaining to product design and other activities.
Still, the tool depends on a change in human behavior, which can defeat the most cutting-edge technology. "I don't know that Exostar is going to be able to break down [the silos]," says Lowdermilk, "but we can start bridging the gap."
To make it work, companies must clearly communicate which business processes they are tackling and who is involved in the effort. Employee training on the back end is equally important, Lowdermilk says.
Rolls-Royce is deploying Exostar's collaboration tools to ensure the transmission of data in a timely fashion. It uses ForumPass to conduct cross-organizational meetings in real time around the world. "Within one to two hours," says Lowdermilk, "several thousand users are getting the same version of the truth. They use that regularly for internal meetings and for shareholder meetings." Other companies rely on Exostar's technology to harmonize procurement, parts pricing and vendor relations.
Simply putting everyone on a single communications platform isn't enough, however. The many individuals who make up an internal supply chain tend to be measured differently, according to their geographic region, day-to-day activities and professional level, notes Ann Grackin, managing director of the Supply Chain Intelligence Service of Marsh Inc., in Boston. "Sometimes it's embedded in what the person's job is," she says. "There's an inherent conflict in what these people are bringing to the table."
Grackin often sees a disconnect between procurement and logistics. The first is out to secure the cheapest parts regardless of location, while the second must deal with the realities of transportation, such as port congestion. Often the savings derived from buying the lowest-price part will be more than offset by higher transportation costs. A similar level of tension might exist between individuals in forecasting, with backgrounds in materials management, and dispatching, where employees tend to have gotten their start driving delivery trucks.
The solution, says Grackin, lies in coming up with a total cost of sourcing that encompasses all of the elements involved, from purchase to delivery. This single metric, incorporating such often-ignored factors as insurance and risk management, can help the entire company see where saving money in one area drives up costs in another. Such an exercise should be accompanied by the designation of a vice president of supply chain, whose high-level view will allow that individual to function as "a champion of working capital," Grackin says.
Richard Howells, senior director of solution marketing for supply chain management with Germany's SAP AG, says companies are driving toward common business processes that can span departments and regions of the world. In response, SAP has been developing a suite of S&OP software that allows for cross-functional demand and supply planning in collaboration with sales, field personnel and customers. The suite is built on a service-oriented architecture (SOA), the latest concept in software development for melding disparate software applications into one coherent system.
Companies adopting best practices in the area of silo-busting are transforming themselves into demand-driven organizations, Howells says. On the retail side, Procter & Gamble focuses on two "moments of truth"-when a customer buys one of its products, and when the product is consumed. All processes within the company are geared toward satisfying those two basic actions.
Companies looking for a place to begin with silo-busting might consider the area of procurement. Getting all employees on board with regard to vendor selection can be a daunting task. Various departments have their own ideas about which ones to use, and how much to pay.
Corporate United, based in Cleveland, is a group purchasing organization that seeks to create master contracts at reduced prices, reaching across departmental boundaries. Vice president David Clevenger says that many of the company's procurement contacts are relatively inexperienced and unable to enforce compliance across their organizations. In many cases, he says, the inter-company relationships "are flatly adversarial."
Clevenger urges that companies bring together all of the parties that might utilize a purchasing contract, with senior management ensuring cooperation. But change doesn't happen overnight. Often it takes time for procurement to prove its value to functions such as marketing or information technology. "Some of those doors remain locked," he says, "but far more are open than five to 10 years ago." Once the benefits of cooperative purchasing become evident, reluctant elements of the company are likely to fall in line.
Don't expect silo-busting to get much easier. The growing complexity of global supply chains, coupled with the pressures caused by outsourcing, will continue to frustrate efforts to achieve internal harmony. Still, SAP's Howells sees cause for hope. The existence of boundary-spanning business processes "is becoming the norm rather than the exception," he says. "The breaking down of silos is only going to continue."
Symphony Metreo, www.symphony-metreo.com
Corporate United, www.corporateunited.com
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