Demand Planning Optimizing Operations Across the Supply ChainCFBS

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    DEMAND PLANNING:

    OPTIMIZING OPERATIONS ACROSS THE SUPPLY CHAIN

    DEMAND PLANNING TECHNOLOGIES REDUCE INVENTORIES, SPUR COLLABORATION

    JohnBrandt

    Compliments of

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    DEMAND PLANNING

    Demandplanningsoftwarepackagescanhelpmanufacturersto:

    Establish

    baseline

    sales

    forecasts

    ,incorporating

    multipleinputs;Performsophisticatedanalysisthatimprovestheiruseofhumanandcapitalresources;

    Optimizepricingcapabilities;andBetterunderstandtheirmarketsandcustomers.

    Yettogetthemostoutofthesefunction-richtools,manufacturersmustbewillingtoreorganizetheirplanningprocessesandtosharetheresultinginsightswithsupply-chainpartnersandcustomers.

    PREDICTING THE FUTURE

    HowdoesBMWknowhowmanyMiniCoopersitwillsellinNorthAmerica?HowmanyPriusesshouldToyotabuildtomeetdemandintheU.S.thisyear?Worldwide?Whenisittimetotweakproductionupwardordownwardtoreflectachangeinthemarket?

    Theshortanswertoallthesequestionsis:Nooneknowsforsure.Thelongansweris:Everyoneneedsandwantstoknow.

    Thatswhydemandplanningexists.

    Demandplanninghasntgottentheattentionthatenterpriseresourceplanningsystems(ERP)orcustomerrelationshipmanagement(CRM)havereceivedinrecentyears.Butthatsnottosayitisntasorespotformanyinthemanufacturinganddistributioncommunities.WhenI speakinfrontofindustrygroupsandaskhowmanypeoplearehappywiththeirsalesforecasts, I dontseeanyhandsatall,saysJohnPavain, presidentofNorwalk, ConnecticutbasedMaxQTechnology, adeveloperofdemandmanagement

    systemsandaMicrosoftpartner.Demandplanningisanareathatmostcompaniesneedhelpin.

    POORFORECASTING =POORPROFITS

    Whetheritsforconsumerpackagedgoods, industrialmanufacturing, hightechandelectronics, orautomotivedemand, salesforecastsoftenlackthesophisticationneededtooptimizebothoperationsandprofits.Wevebeenprettywrongonforecastinginboth

    directionsforoursuppliersandforourcustomers,saystheCEO ofamultibillion-dollarhightechmanufacturer.Infact, wevebeenwrongpretty

    massively.With

    sales

    forecasting

    ,its

    sort

    of

    ,why

    bother?Thepeoplewhodotheforecastdontknowbecausethecustomersdontknow.

    Manufacturersanddistributorsroutinelyaccepttheideathatsalesforecastswillerrbyasmuchas10%, andoften20%ormore.Insomecases, companieshavenotonlyacceptedthefactthatforecastsaresoft,theyvebegunusingsoftwaretoolstoenablethemtotrackthelevelofvarianceovertime, adjustingtheirmaterialsprocurement, operations, anddistributionplansaccordingly.Wetrackourforecastaccuracy, sothatwecanseeaforecastwanderingoutofthenorm,says

    thedirectorofproductionplanningandforecastingatalargepackagedfoodsmanufacturer.Wewanttoknowexactlythenumberofweeksweareaboveorbelowacertainaccuracylevelinourforecast.Thatway, webuildupaconsistenttrendoferror.

    Granted, thisfoodmanufacturerhasaspecialbusinessneedtominimizetheamountofproductlostduetoexpirationatdifferentwarehouses.Addsthisexecutive,Thesoftwareweareusinggivesustheabilitytolookatthefreshnesslevelandinventoryforeachproductatdifferentwarehouselocations.

    Hiscompanyisabletoadjustproductlevelsatitswarehousesasneeded, whileavoidinglossesduetoproductexpiration.Thisfeedbackcapabilityallowsthebusinesstotweakbothproductionandinventoriesformaximumprofitability.

    Theseproblemsaresimilartothoseexperiencedinotherindustries, includinghightechandelectronics,wherechips, subassemblies, andevenfinishedproductssuchascomputershavelimitedeffectiveshelflives.Here, too, inventoriesmustbemanagedinsuchawayastomaximizesalesandminimizespoilageasproductsbecomeobsoleteorunwanted.

    Inindustriessuchassteel, excessfinished-goodsinventoryendsupasexpensivescraplatermelteddowntofillneworders.Meanwhile, steelproducersloseproductiontimeandwastelaborproducingandstoringtheunwantedinventory, someofwhichwasrejectedbecauseitsproductionwastoolateforcustomerdemand.Indeed, anentireindustrythesteelservicecenterhasarisentocatertotheneedsofsteelcustomerswhocouldntwaitfortheirordersto

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    DEMAND PLANNING

    becoated, slit, shipped, anddelivered.Theautomotiveindustryfacesanevenmorecomplexproblem.GeneralMotors, forinstance, begantrimmingproductionthis

    yearat

    certain

    plants

    in

    late

    summer

    and

    early

    fall

    to

    bringinventoriesmorecloselyinlinewithslowingsalesfigures.Yetevenasdealersaroundthecountryfoundthemselvesburdenedwithunusuallyhighinventoriesontheirlots, GM keptshippingvehiclesbecausethecompanybooksrevenueandprofitatthetimeitbuildsandshipsvehicles, notwhentheyarepurchasedbyconsumers.

    Thissystemhaspredictableandpainfulresults:AsofJuly, theaveragetimeittooktosellanewGM vehiclewasuptoarecord91days, forcingthecompanytooffersalesincentivesofupto$4,500inrebatesper

    vehicle.If, however, aneffectivedemandplanningprocesshadbeeninplace, timelyanalysisofkeyfactorsincludingsharplyrisinggasolinepricesandnegativeconsumerattitudestowardthesafetyandenvironmentalfriendlinessofSUVswouldhavepromptedGM toscalebackproductionofHummersandotherlargeSUVs, whosesaleswerehitthehardestinthefirsthalfoftheyear.

    Now, however, withthe2005modelsreadytohitshowroomfloors, inventory-swampeddealerswereunderstandablyreluctanttoacceptadditionalinventories.Inturn, thereductionindealerorders

    finallycurtailedproduction.Yetexistinginventoriesremainhigh, costlytobothcarryandunloadatdiscountedprices.SaysonesecuritiesanalystregardingthesituationsimpactonGMsearnings:Itsthecompanyschoicewhethertheypayitbacknoworpayitbacklater.

    Poordemandmanagementiscostlyformanufacturersanddistributorsinotherwaysaswell.Onelargemakerofdatastorageproductsthatdistributesviaconsumerelectronicsretailersfounditwasconstantlyplayingcatch-upwithitsdealers, routinelymissingshipmentsandorderdates.Althoughwewerespendingmorethanaweekeachmonthplanningandforecasting,wewerestillfacingfinesbyourretailersformissingshipmentdates,reportsthedirectorofsalesplanning.

    Tohelpsolvetheproblem, thecompanypurchasedademandforecastingsoftwarepackage.Thesoftwaretakesintoaccounteachproductsdemandpattern,whileallowingdecisionmakerstoadjustforecastsandinventoriestomeetthecompanysgoals.

    Otherdownsidestoinadequatedemandplanningincludepoorcustomersatisfaction, out-of-stockitems,andhighinventoriesallofwhichdrainthebottom

    line.Any

    time

    acustomer

    finds

    an

    item

    out

    of

    stock

    andgoestoanotherstoreandbuysacompetitorsproduct, boththemanufacturerandretailerhavelostsales.

    Evenwithdemandplanning, forecastingremainsdifficult;variablesrangingfrompromotionstostoreopeningstoretailchannelshiftsmustbeincludedinestimatingdemand.WhenDellmailsoutcatalogsandsendsoute-mailblasts,saysMaxQsPavain, theymustusepasthistoryasaguidetoplanhowmuchofasalesincreaseisexpected.

    Stillmoredifficulttoassessisthedemandforanewproduct.Youcandomarketresearchandlookatsimilarproducts, butforproductsthatareinstanthitsorfads, itsverymuchliketryingtopredictthefuture,saysPavain.WhoknewApplesiPodwasgoingtotakeoff, whereastheNewton[anearlyhandheldPDA]wasadud.

    DEMAND PLANNING TECHNOLOGY

    Wherejustfiveyearsagoonlylargeenterpriseclients

    couldafford

    sophisticated

    demand

    planning

    systems

    ,

    newsoftwarepackagesarewellwithinthebudgetsofmostcompanies.Yetdespitetheavailabilityofnewtechnology, manysmallandmidsizemanufacturersanddistributorscontinuetoforecastusingsimplespreadsheets.Saysonetechnologyanalyst, [Microsoft]Excelisthemostwidelydeployeddemandplanningtool.

    Unfortunately, spreadsheetstypicallylacksophisticatedforecastingalgorithms, arentbuilttotrackmultipleinputs, andfallshortinperformingsophisticatedanalysisforvarioususergroupswithinabusiness.Companiesinterestedinmoreeffectivemanagement

    oftheirsupplychainshavefoundthatfunction-richdemandplanningsoftwarecanbeapowerfultooltohelpmanagerstakeguessworkoutoftheplanningprocess.

    Why?Becausedemandplanningsoftwarerecognizesawidearrayofvariablesthatinfluencesalesprojections.Forexample, whilesalesrepresentativestypicallyviewdemandinaparticularregionbasedonthetotal

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    DEMAND PLANNING

    revenueitproduced, operationsplannersinthesamefirmviewdemandbyquantitiesofeachproductsold.Demandplanningsoftwareaccountsforbothvariables.

    Demandplanningsystemstypicallyproduceabaselineforecastbasedonshipmentororderhistory.Onceestablished, userscanchangethebaselinetoaccountforotherdata, includingpromotions, advertisinginserts, seasonality, newsalesoutlets, andotherfactors.

    Atthesametime, demandplanningsoftwarefactorsinpotentialconstraintssuchasmaterialsavailabilityandplantcapacity.Youcansetupthesystemtoswitchfromamaketoabuyapproachforacertainpartorcomponentanytimeinsufficientin-housecapacityexists.

    Thesesystemstypicallyyieldfourorfivedatastreams,withvaryingforecasts.Atthispoint, managementplaysaroleintheplanningprocess, overlayingbroaderstrategicgoals, suchasreducinginventoryandimprovingcustomerservice.Inaddition, thesesystemsusuallyoffernotificationfunctions, providingplannerswithautomaticupdateswhencertaineventsoccur, suchasachangeofmorethan30%fromthepreviousmonthsforecast.Mostdemandplanningpackagesalsooffersimulationcapabilitiestocomparemultipleforecastsandtheirimpactsonbothrevenueandprofitability.

    AutomotivemanufactureranddistributorHyundaiMotorAmericausespoint-of-saledatatobuildademandforecastforitsserviceparts.Thecompanyusesademandmanagementsystemtodigestmorethanthreeyearsofpartssalesdatatocalculatedemandforecastsbypartnumberforfourwarehouses,leadingtoanorderplanforsome50,000parts.TheorderisthensenttoKorea, wherethecompanyisheadquarteredandwheremanyofitspartssuppliersarelocated.Asaresult, thecompanyhasreducedinventoryandboosteditsfillrate.

    SUPPLY-CHAIN COLLABORATION

    Manufacturersanddistributorsseekingtooptimizetheirforecaststrytoincludetheirsupply-chainpartnersintheplanningprocess.Yetaccordingtooneestimate, only10%ofmanufacturersanddistributorsareusingcollaborativesupply-chainplanningsystems.Therealityisthatwhilemanysuppliersworkwithkeycustomerstobuildforecasts, fewperformthisexercise

    online.Why?Tworeasons:First, manycompaniesarereluctanttosharedata, andsecond, evenwhenwilling,fewfirmsareabletocommitthemanagerialand

    technologicalresources

    necessary

    to

    make

    this

    kind

    of

    collaborativeplanningwork.Saysonemanufacturer,Yourerelyingonyourcustomertohavethesameexpertisethatyoudo, andthatsnotalwaysthecase.

    Anotherobstacletocollaborationistechnologicalintegration(oritslack)amongvariousplayersinthesupplychain.Soonerorlater, companieslargeandsmallmanufacturers, distributors, andretailersalikewillconnectusingtrueapplication-to-applicationintegrationtechnologiessuchasXML andMicrosofts.NET initiative.Inthemeantime, companieslookingtocollaborateregardingsupply-chainneedsand

    demandforecastsgenerallydosoonacustomized,one-on-onebasis.

    OnetechnologythatisprovingaboontodemandplanningistheWebportal.Manyprogressivemanufacturersanddistributorsareusingportalstolinktheirdealerandretailernetworksforbothproductorderingandsalesforecasting.Forexample, FleetwoodEnterprises, aleadingmakerofrecreationalvehiclesandmanufacturedhousing, isusingaWebportaltouploaddealersalesdatatoimproveforecasting.

    ForFleetwoodandothers, thepayoffsderivedfroma

    moreeffectivedemandplanningsystemripplethroughthesupplychain.Butfortheindividualmanufacturerordistributor, theytendtocenteraroundkeyfinancialbenefits:

    Reductionofinventories,Reducedwarehousespace, andImprovedcustomersatisfaction, resultingin

    increasedsales.

    Forinstance, bysimplyusingademandplanningpackage, onemanufactureroftireproductswasabletocutsupplyordersbyhalfandreducepeakinventoriesby25%inthefirstyear.

    Thesebenefitscanbesosignificant, infact, thatsomemanufacturersanddistributorsaregoingtheextramileforcustomers, providingvendor-managedinventories.Youdothereplenishmentforthecustomersandmanagetheirinventoryofyourproductsforthem,explainsMaxQsPavain.Distributorsofferthesameservicewhentheystockretailersshelves.Customersappreciatetheextraattention, whilemanufacturersanddistributorsgetdirectdemandsignalsfromthe

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    DEMAND PLANNING

    efficient, andmoreresponsivesupplychainsandhappiercustomers.Collaborativeforecastinggivesthesuppliermoreinformation,saysPavain, and

    themore

    information

    [a

    supplier]

    has

    ,the

    better

    thesuppliercanserve[customers].Thebenefitsaresignificantreductionsininventoryandwarehousespace, animprovedabilitytosupplythecustomer,andincreasedsales.

    SUMMARY

    Manufacturersindiverseindustrieshavedramaticallyimprovedtheirforecastingaccuracywithdemandplanningsoftwarepackages.Buttoturntheircrystalballsintoimprovedbottomlines, organizationsmust:

    Developtheproductsandservicesbasedoncustomerdemand, notguesswork;

    Establishpricingbasedondynamicmarketfeedback;

    Manageeffectivelytoforecasts, therebyoptimizingtheperformanceoffacilities, people,inventories, andsuppliers;and

    Extendtheirforecastingcapabilitiesacrosstheentiresupplychainwithcollaborativeplanning.

    marketremovingmuchoftheuncertaintyfromtheplanningprocess.

    Onecompanyusingvendor-managedinventoryisGMBrazil.Usingcustomerdemanddataprovidedthroughitsdealernetwork, thecompanysvendor-managedinventorysystemdrivessalesforecastsformorethan20,000parts.Withthenewsystem, initialforecastaccuracywasmorethan90%.

    THE PAYOFF

    Effectivedemandplanningcanprovidesignificantbenefits, including:

    Moreprofitablelinkingofpricing, promotions,andothersalesincentives;

    Betterinformedsupply-chaindecisionsasaresultofmoreaccuratedataregardingcustomerdemand;

    Moreefficientandpredictableuseofplantcapacity, equipment, andlabor;and

    Betterunderstandingofcustomerneedssothatmanufacturersanddistributorscanimproveproducts, deliveries, andsatisfaction.

    Manufacturersanddistributorswhohaveinvestedin

    newdemandplanningsystemshavebenefittednotonlythroughimprovementsininternaloperations,butalsofromthegreatercollaborationfosteredbythesetechnologies.Theendresultsaretighter, more

    MicrosoftDynamicsisalineofintegrated, adaptablebusinessmanagementsolutionsthatenablesyouandyourpeopletomakebusinessdecisionswithgreaterconfidence.MicrosoftDynamicsworkslikefamiliarMicrosoftsoftwaresuchasMicrosoftOffice, whichmeanslessofalearningcurveforyourpeople, sotheycangetupandrunningquickly

    andfocusonwhatsmostimportant.AndbecauseitisfromMicrosoft, iteasilyworkswiththesystemsyourcompanyalreadyhasimplemented.Byautomatingandstreamliningfinancial, customerrelationshipandsupplychainprocesses,MicrosoftDynamicsbringstogetherpeople, processesandtechnologies, increasingtheproductivityandeffectivenessofyourbusiness, andhelpingyoudrivebusinesssuccess.

    Worldwide(1)(701)281-6500U.S./CanadaTollFree(1)(888)477-7989www.microsoft.com/dynamics

    2004MicrosoftCorporation.Allrightsreserved.MicrosoftandWindowsareeitherregisteredtrademarksortrademarksofMicrosoftCorporationintheUnitedStates

    and/orothercountries.Thenamesofactualcompaniesandproductsmentionedhereinmaybethetrademarksoftheirrespectiveowners.