Category Archives: Supply Chain/Demand Planning Blogosphere

Demand Planning blogosphere: Yokohama and BusinessWeek’s “Plan V”

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“Yokohama Tire Canada: Forecast Accuracy and the Cost of Being Right“

Offering some comment and reaction to supply chain, forecasting and demand planning blog posts that caught my eye in recent months. In April, Jonathon Karelse, marketing manager of Yokohama Tire, teased a then-upcoming presentation he was giving at an Institute of Business Forecasting event.

While I did not have the opportunity to see Jonathan’s presentation, one claim he makes in his preview post did catch my eye. I bring it up because I often find myself in some version of this discussion when I’m talking with companies that want to attack their supply chain management issues and become more profitable.

Consider that the result of demand planning is only profitable to the extent that it is actionable – that is, if links above or below in the participant’s supply chain are unable to respond to the data, it might be a purely academic exercise.

I contend that it is not academic at all — even if your supply chain can’t react — because the issue isn’t forecast, the issue is timing. If the forecast identifies a demand signal that a company can’t or won’t respond to, it’s still good to know in the first place. Secondly, perhaps next time the company can learn and adjust for the opportunity by adding extra capacity or additional storage in a more favorable location or what have you; again, tough to say without seeing the speech. Last, you can calculate the opportunity cost of not having acted.

Karelse correctly points out the importance of keeping cost and benefits in mind — no argument from me — but the business Intelligence that he mentions should be integrated into a company’s demand planning, S&OP and forecasting processes with the software being used — not as a parallel process. Upper management is absolutely correct to drive for utmost accuracy, because even if the company decides not to act on a forecast (e.g., someone is optimally supplied), at least they are able to measure the difference and understand the opportunity cost.

“Why Every Business Needs a ‘Plan V’”

A BusinessWeek guest blog from Harold L. Sirkin used the recent volcanic eruptions in Iceland as a jumping-off point for musings on modern-day continuity planningn for business in the global age:

We may or may not see more such disruptions; who knows? What we do know is that any disruption that does occur will have far more serious ripple effects than anything seen in the past. That’s what happens when companies from everywhere are competing for everything with companies from everyplace else.

Wouldn’t debate this any more than I would over apple pie being good; however, how do you move from the theoretical stance below to the potentially unsustainable practice of simultaneously being ready for everything from global warming to Godzilla? For manufacturers, he recommends strategic inventory reserves, redundant manufacturing locations and alternative distribution networks. I don’t know many mid-sized manufacturers who can afford such preparedness.

It is extremely hard to run a profitable business focused on the .1% scenario and still make enough money to be alive when the .1% scenario comes to pass. This isn’t to say that you shouldn’t do the planning. This is something that can be helped by a process (and supporting technology) that combines comprehensive short- and long-term (high-level and execution-level detail, as well) forecasting and planning scenarios, taking into account the day-to-day business and what is most profitable right now.

From this assumption, you can then allow management to consider some strategic options. For example, “It may cost us a bit more to have an extra DC in South Africa, but the sales forecast shows growth that would support that DC in about three years. Why don’t we accelerate that investment to provide more fleixibility now and provide competitive insurance in case the .1% scenario happens.” That may be a more practical and sustainable approach.

It’s time to raise the bar for forecasting and demand planning outcomes

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 Raising the Bar for Demand Planning Outcomes

I recently happened across this post on Ashish Mendiratta’s Supply Chain Edge blog that touched a few nerves. We spend a lot of time overcoming chronically low expectations for forecast accuracy with potential customers. One of our biggest stumbling blocks is that supply chain, manufacturing and purchasing pros still don’t really believe the incredible potential that exists for improving forecast accuracy — and how much better the entire supply chain could perform.  Because they don’t believe in the potential, they are not putting the necessary pressure on the sales and demand planning professionals (and, quite honestly, the C-Suite, with whom all responsibility ultimately lies for EBITDA performance)  to realize the accuracy improvements. For example:

Few days back I was interviewing candidates for Demand Planning position. I asked one of the candidates to share his greatest frustration as a demand planner. What he shared was quite shocking. He had been given a target on forecast accuracy that he missed completely due to uncertainty of tender business, which contributed about 15-20% of the total business. Though the company could book the sales and sales team earned handsome incentives, the poor guy lost his annual bonus.

A missing component here? The salespeople had no incentive for forecast accuracy. A customer behavior-related miss is something that can be avoided with the proper input from sales — and it should be expected that salespeople have detailed knowledge of transactions such as tender, and that they input that information into the forecast by whatever mechanism provided by your process. Any company that’s serious about forecasting should have sales contributing to the forecast. It was fair to hold the demand planner to the numbers, but not fair in that nobody had incentive to help — and that management failed to build and support a holistic process. However, the demand planner should have also built the case that sales is equally responsible for the forecast, and at the very least, should have actively engaged the sales team for the necessary information — with the help of his manager, if necessary.

Many companies have a utopian belief that by having a dedicated demand planner and / or a sophisticated tool, any demand could be forecasted with an accuracy that should touch 90% or more. Such obsession leads to frustration and demoralizes the entire supply chain staff. The fact of the matter is that one should forecast what is forecast-able and not forecast what is not forecast-able.

There is no such thing as “non-forecast-able.” The minute you label something as such, you’ve just issued an organization-wide “Get Out of Responsibility Free” card. Ultimately, your supply chain people will have to deal with all the “non-forecast-able” variables that nobody wants to think about. So there will be a comprehensive forecast, just not one that leadership wants control of or responsibility for — which is basically unprofessional.

While I agree that there is no utopia around 90% — it’s just a number, after all — the indisputable fact is that more accurate forecasts equal more effective supply chains and a higher EBITDA in turn. This is backed by all the research, including AMR/Gartner.  So anything that can be done to increase forecast accuracy at the execution level (detailed level) is well worth it.  It is an issue of getting the forecast as accurate as possible with a continuous improvement cycle. There is nothing more important to bottom line performance over time for your supply chain than forecast accuracy.

Mendiratta goes on later in the post to work through a hypothetical demand management problem that I would not characterize as difficult. In fact, our customers manage problems like this and far worse all the time. Your company’s forecast system should allow multiple aggregations of forecast detail — SKU, SKU by customer, by location, by business (B2B vs. B2C, e.g.) — so that the detail variations (differences in ordering patters) can be quickly identified. This is not difficult and I would argue that the entire last half of the article is the type of work that should be going on 24/7 as part of the demand planning and forecasting process.  Otherwise, as suggested before, you are just throwing the problem over the wall and telling the supply chain to deal with it. That isn’t right. It means your company is underserved and therefore missing out on profitability and competitive advantage because of the approach expressed in this article.

Here’s a question that any supply chain pro should be asking themselves right now: “What if I could reduce my forecast error by a minimum of 25% at the execution level? What would that mean to my supply chain performance? My EBITDA?”

Want to find out? You know where to find me.

IT’s fiduciary responsibility for business performance: Best-of-breed versus the failed ERP approach

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A few months ago, I wrote about IT and the competitive disadvantages inherent in an ERP approach. The short version: one-vendor suites are not a competitive differentiator and they’re not a business strategy. With the market requiring CIOs to be more business- and customer-driven than ever, I’m frankly surprised that salvos like Rick Veague’s (CTO, IFS North America) still get any serious credence. In the back-and-forth about best-of-breed and ERP, I appreciate the multiplicity of perspectives. But I say without equivocation that the assertions in this article are just plain wrong, top to bottom. Unfortunately, this seems to be the default perspective for too many CIOs.

In recent years though, there has been a growth in the number of stand-alone software solutions — “best of breed” applications as they are called — that threaten to roll back the progress experienced by manufacturers  these many years. These software products deal with only a segment of the enterprise, inhibiting the free flow of communication and reducing efficiencies. The more these software products proliferate, the more expensive and confusing enterprise technology becomes, and he [sic] more difficult it is to coalesce data for reporting and manage enterprise-wide security.

First of all, the big ERP suites are fundamentally a collection of best-of-breed functionality that was acquired piece by piece from competitors who outperformed them in a particular process or function. ERP vendors are essentially marshaling functions and integrating them in the background in the same way a best-of-breed, or bolt-on, strategy would. You’re just paying a hefty premium for the brand name.

ERP cannot provide the best in all things, all the time. Instead of empowering critical teams to seek the best way to do business, everybody is yoked to lowest-common-denominator performance. My thinking is uncomfortable and inconvenient for many CIOs who know that big suites make their life easier and provide a dependable supply of embroidered shirts and free rounds of golf. But it ultimately comes down to this: once a company is strategically clear about how they’re going to compete, they should then go find the technology to execute, giving their people the absolute best tools they can to beat the competition. ERP vendors routinely blur three critical areas of focus: best of talent, process and platform. This is old-school, reflexive protection of IT empire. It’s locked-in thinking that is killing companies’ ability to compete.

Selected facepalm moments from this article

Late in the article, Veague highlights a number of disadvantages of best-of-breed. On the whole, I found these objections were shallow, ticky-tacky or low-level. What they collectively miss, and it’s a big miss, is the imperative that all technology should directly support your strategic initiatives. One vanilla system cannot possibly help your company do this. If you have an ERP that’s sub-optimizing critical functions that your team needs to better compete, I can guarantee you that it’s costing you a lot more than the growing pains of integrating a best-of-breed ever would. I’m talking about revenue, cost-efficiencies and EBITDA. If you can’t point directly to how IT is driving all those factors, your IT isn’t doing its job.

That’s the standard we hold ourselves to, and the linchpin of our company’s value proposition: we guarantee that our software will deliver outstanding performance (like reducing forecast error by 25%) and a bottom-line impact (minimum 5% increase in EDITDA) that would offset any issue listed below 100 times over. It is this type of performance that underlies the strength in best-of-breed. Companies need to understand it, utilize it, and let their IT help them be more competitive rather than dummied down and made to be like everyone else. But on to Veague’s points…

Integrating best of breed solutions requires the work of systems integrators, adding cost and substantially extending implementation time. These efforts are typically unnecessary with a Suite application.

Ain’t necessarily so. Today, integrating can actually be faster and cost less.

Reporting and access to information can be more expensive using a best of breed solutions because corporate information is spread across multiple applications and platforms.

Technologically, this is completely wrong. This has been proven time and time again. For example, having a data warehouse that supports best in breed/performance architecture bears a cost that is certainly no more, and possibly less expensive than an ERP.

A best of breed solution can increase costs for supporting technology acquisition and maintenance costs.

Only if mismanaged. The amount you pay for installs, maintenance and upgrades of an integrated suite are going to more than erase any savings you get here.

Different best of breed solutions tend to have distinct or unique security models, and that means it is harder to maintain security and privacy across an integrated collection of products.

Sorry, but this sounds like garbage to me. There are many applications that will exactly mirror the security model from your ERP and/or financial systems.

Usability and the ability to collaborate are often diminished with a collection of best of breed solutions because users that must work cross-functionally must learn different user interfaces and systems. This is in contrast with a Suite product that offers a consistent, well-thought-out user experience.

I think that this is fundamentally wrong. If you have a big ERP suite with a forecasting module that is there because, well, it just comes with the rest of the bundle, your people aren’t going to use it to the degree they they should. Your best performers aren’t going to adopt some perfunctory, clunky what-not just because it’s integrated. However,if you give them a tool that is tailored to the way that they work and they see how it will make them better, then they’ll see the value and usability will go up accordingly. If you go down to the lowest common denominator, people don’t get deeply involved and they won’t collaborate anyway.

There are a lot of companies out there that are less competitive than they could be because thinking like Veague’s is taken for granted. I’ll be blunt about it: any officers at any company who swallow this stuff wholesale are abrogating their fiduciary responsibilities to their teams, their bosses and their shareholders.

Around the supply chain and demand planning blogosphere

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Combing through my RSS feeds, I found some SCM and demand planning-related blog posts from the last few months that got my wheels turning…

HP Supply Chain Management Blog: “Closing the Loop: Optimizing the Supply Chain”

In his “Closing the Loop” series on an HP Community blog, Christian Verstraete cites a resigned attitude toward forecasting error that drives me crazy and costs companies a lot of money:

Yesterday I was at a conference titled “Achieving Excellence in Capacity Planning”, and pointed out one of my favourites. “Forecasts are always wrong” and that is what we are starting from to manage our Supply Chain with the hope to have neither stock-outs nor excess stock.

He discusses how we can be sensitive to changes in the supply chain, all of which is just purely reactive if you’ve resigned yourself to getting the forecast wrong every time.

In all fairness, Mr. Verstraete penned a subsequent post in the same series that touches on proactive thinking. Yet his example showed that his conference presenter — and a lot of people in the space — begins by assuming that nobody should be on the hook for getting a forecast right. Whence comes this assumption? Why take that capability off the table at the outset? What would happen if you could reduce error by 25%?

Forecasting software has become way too good. Don’t handicap your company — and force you and everybody in your value chain into a reactive position — by not looking at new approaches to your forecast.

21st Century Supply Chain: “Three SCM table stake capabilities for the twenty-tens”
Luc Vezina of Kinaxis takes a poke at three big capabilities that will be critical for supply chain performance, and how ERP SCM has missed the mark. I don’t disagree, but this gave me some pause:

1. SPEED.  When a customer calls you with a potential order, how long does it take you to get back to them with a promise date?  Increasingly, customers will want feedback in a matter of minutes – not hours or days. If you’re saying to yourself “That’s impossible.” Well, it is possible.

I would say that it needs to be a matter of seconds, not minutes. I would also offer the perspective that Mr. Vezina’s three capabilities — speed, accountability and view — are not ERP modules. They’re the very definition of the things that drive good demand planning. A company that’s serious about demand planning will have groups that focus on it intensely, and be fanatical about supporting them. We just happen to know of a wonderful solution that supports the discrete and vital functions of demand planning, demand forecasting, and demand management.

CIO: “Can SAP get its supply chain mojo back?”
This headline implies that they had some to begin with. I kid, kind of. Thomas Wailgum of CIO writes about how SCM capability has suffered over at SAP. The Tohamy being quoted below is Noha Tohamy, vice president of supply chain research over at AMR:

Yet SAP has long relegated SCM to the status of RHSC (red-haired step-child), and the company has stumbled articulating its SCM and supply chain planning roadmaps, according to Tohamy.

“Overall,” she writes, “the software giant has been sluggish in bringing to market an SCM offering that makes SAP not just the largest SCM vendor in revenue, but an innovator and leader in meeting increasingly complex supply chain needs.”

To me, the true thrust of Mr. Wailgum’s piece is that the software business model is essentially broken: it’s OK to put junk out there; over-promise and under-deliver on functionality and ROI; and tie people to big contracts that make them commit to an under-performing supply chain.

In pursuit of a one-vendor, one-platform world, corporate officers are abrogating the responsibility to make sure that every one of their teams has the best possible tools they need to compete. I covered the competitive dangers of IT standardization in my open letter to the C-suite.