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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

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and/orothercountries.Thenamesofactualcompaniesandproductsmentionedhereinmaybethetrademarksoftheirrespectiveowners.