Key Focus Area: Demand Management

Lately, we have seen that the behavior of the different type of supply chains in different industries varies a lot in case of managing demand. Make to stock style companies tend to focus on demand management using a combination of statistical techniques and collaboration to gain market force knowledge to deliver a forecast for the purpose of setting inventory/ service policies whereas make to order businesses forecast only as a starting point, but more frequently use sales driven “consensus” forecasting with limited statistics, and use the forecast to drive procurement decisions and capacity management, rather than build plans for end items. Moreover, best in class organizations use supply chain techniques to gain control in the demand execution window.

The focus areas for all of them are usually the same:

• Improving demand forecast accuracy using internal demand planning
• Creating customer driven forecasts through robust sales and operations processes
• Creating sell side collaborative processes to manage demand within the demand execution window

These focus areas are important because of the current economic conditions that put pressures like increased volatility of demand and escalating customer service demands. These pressures drive the organizations to keep on improving demand forecast accuracy and developing a more responsive inventory placement strategy to stay ahead of time and to remain best in class. So, how do we improve the forecast accuracy, you might ask this question?

Let us discuss on few steps that I think have the capability to improve the forecast accuracy and brings it closest to the actual demand:

• First of all, we need to utilize the multiple roles within the organization to generate their independent forecasts giving the full set of assumptions that they took
• Include product promotion, competitive pricing, demand shaping events and historical ups and downs into the forecasts
• Collaborate with all internal stakeholders by consolidating the forecasts and having an open forum discussion on what was missed and what can have more impact on the demand in coming time – please note that this should not take more than 15 minutes per product and everybody should come prepared to quickly nail down the numbers
• Collaborate with external stakeholders like customers and/or suppliers
• Integrate trading outbound supply chain partner data with internal process organization
• Ensure that the application that sores the historical data of demand has excellent data accuracy as lot will depend on this data

All above will work for sure in case your organization follows the make to stock strategy but for the make to order organizations, more focus will be on external collaboration like with customers and suppliers so that desired accuracy in the forecasts can be achieved. We have seen different opinions on whether we should follow the make to stock option or got for make to stock option. The summary of the push-pull model of demand management is that the organization finds and continually operates at the optimal operating point between a pure build to stock environment and a pure build to order environment. This optimal operating point varies by model, by market, and over time. Pure build to stock is undesirable because of the cost of deployed inventory and the inevitable mismatches between inventory and what customers want. Even pure build to order is undesirable because of the cost of the deployed capacity required to support highly uneven demand. The optimal solution is somewhere in-between and a blend of both will be the best option to go for.

Strategy: Catalysts to achieve your Lean Objectives

Few weeks back, I wrote an article on the role of demand planning, forecasting and inventory optimization in achieving Lean Manufacturing. This article evoked a great response among readers and since the comments on this blog were not working for some time in between, I got maximum comments in my mail box or in the discussion I posted on one of the social media sites.

The responses were largely questions and expert opinions and I thought to share some of them here with the readers as these are highly rich in content and will be helpful for all of us to think about our strategies to achieve lean manufacturing with or without the help of planning.

Largely, there were two schools of thought on whether planning (forecasting and demand planning) helps in achieving lean manufacturing to an extent that the investments made in these areas are justified and are able to provide the returns accordingly. Thoughts were divided and one group was sure to say that forecasting is just a guess and will remain a guess so it is sheer time wastage to improve your guesses and hope that these will help you in your lean objectives whereas the other group was as sure as the first one on the fact that forecasting can surely help in achieving lean objectives as it reduces inventory and improves the service levels, which makes easier for the manufacturing operations to stick to a single product line for optimum period so that the manufacturing line efficiency improves.

To quote some of the responses, Wally Johnson (VP Supply Chain/Operations at EPIC Technologies LLC) said, “A forecast is nothing more than an educated guess. The better your guess, the closer you get to maximizing you revenue and minimizing the waste in either lost sales or excess inventory. As you reduce your lead times and your ability to respond, the forecast becomes less important. At the limit, planning is reduced to communicating needs to suppliers and aggregating immediate needs from customers. So, no planning doesn't help you get lean, but the less lean you are, the more you need it”. Another comment from Michael Pitcher (President, Operations Excellence LLC) is - “Forecasting can be used, at least initially, to size buffers and marketplaces. This is especially true for new products, cyclical/seasonal products, or short life-cycle products. Once buffers are established, actual pull must be used to recalculate and resize buffers and marketplaces. So, there can be value to demand planning and forecasting. On the other hand, it can be a huge waste of time and energy when over emphasized.”

We had quite an opposite viewpoint from Connie Wendzicki (COO at Griffin Technology), who says – “The demand planning is what you do to calculate the correct inventory levels when you implement the lean system. These inventory levels have to be revised frequently as the demand and supply patterns change. Even Toyota had an extensive planning department to accomplish this function. If you set-up lean without figuring out the right inventory levels you can be in for a few big surprises! On the other hand - analysis paraysis is not good either. Better to put the system in place with the best inventory levels you have vs. wait forever until you figure out what the "perfect" inventory levels and reorder points should be. There is some tolerance for error. You will at least see where the problems are (where inventory is piling up or where lines are starved for inventory) if you implement the system and you can tweak it then”. Connie is helped by the comment from Ron Golan (Director at XML Limited) who mentioned that, “…my experience taught me to believe in continuously trying to optimize demand planning and forecasting - you may not hit bulls-eye, but the closer you get, the more efficient you are in minimizing lost sales and excess inventory. And the build-to-order approach - that might work for Dell, but is completely unpractical for so many other companies. Plus, in many cases you'll just be passing the issue to your suppliers, and remember some of us may be on the receiving end of this”.

Carlos Moreno (Senior Logistics and Supply Chain Analyst with Medtronic) mentioned a third approach with his comment – “Lean is a tool for continuous improvement is a cycle that never ends. It may be applied to improve lead times, supplier performance, operations and supply chain processes just to give some examples. Forecast and demand planning are useful as strategic and long-term planning tools and also subject for continuous improvement. Since forecast and demand planning are estimated guesses based on crystal ball projections (marketing and sales forecast), I would see them as variables out of the control of the supply chain management processes for inventory control and customer order fulfillment”.

These were few of the responses and comments and the one thing that came out clearly and I replied to them in most of my replies is that alone forecasting or demand planning is not enough and the another part of our strategy here needs to include reduction in lead times so that the dependence of operations on accuracy of forecast reduces. Basically, if the supply chain responsiveness is fast (in other words lead times are low) then the organizations have more capability of responding faster to the changing demands and hence they can achieve leaner manufacturing processes as well as lower inventories with improved service levels.

I liked the idea of freeing up of operations with their dependence on forecast accuracy and as put up by Swaminathan Appu Iyer (DGM – Distribution & Logistics at Reliance Retail Limited), “The manufacturer whose efforts to effectively forecast and plan demand are being undermined by an increasingly complex business environment. Manufacturers large and small are struggling with the fact that demand forecasting and planning, never a simple process, are today being made much more difficult by trends such as globalization, shortened product lifecycles, and customer demand for more product variety. In fact, many manufacturers are finding that, despite what they thought were their best efforts, forecasting error rates are actually rising”. This shows that planning is something that most organizations are still struggling with.

All these comments and inputs lead me to think about a joint strategy that has to have a blend of both i.e. a focus in planning as well as supply chain responsiveness to achieve our lean objectives. I echo comments from Charles Stuart (Director at TGX Limited) who says that – “Puneesh, I would like to clarify my view - it is as you also approach it - a blend of both. A forecast is a forecast - a guess, a prediction etc. Good tools and good process will generally make a better forecast. But fewer businesses put the same kind of effort into LT reduction which can have responsiveness and an inventory benefit. I have worked in businesses that have done both approaches with significant benefits from each element. I suggest it should not be either/or but both”

Before I sign off, I would like to thank all the experts who shared their approaches and thoughts on the topic. I could not highlight comments or inputs from all contributors in this post due to similarity in thought communication in rest of them but tried to capture the essence of all so that readers get to know from who’s who of the corporate world on the future strategies on the topic and accordingly design the same for their organizations.

ERP Strategy after Go-Live

We have all seen lot of material available all over the internet in vendor white papers, research articles and independent blogs about the best practices on improving the ERP implementation cycle in terms of cost, cycle time and return on investment. Most of these articles stop at Go-Live and do not capture the challenges and the opportunities after Go-Live so that the envisaged benefits from ERP can be realized.

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If you ask me, I would say that Going Live successfully with the application is the first milestone in the whole business transformation exercise and we still need to not only measure and benchmark the process efficiencies as well as automation levels at fixed intervals to continuously improve them, but also make sure that the changes that have been brought in the organization as a result of the ERP Application Implementation, have gone down well with the users and they also see long terms benefits in switching to this new ERP, leaving behind their favorite legacy systems.

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I have tried to capture few challenges and opportunities that we stumble upon after Going Live with ERP that we all should consider so as to reap the benefits to the maximum. Let me first start with the challenges:

1. The first and foremost challenge after Going Live is to stop running parallel systems. While few organizations have really matured on this part and wither switch off the entire legacy systems or those functionalities in them that are now available in the new ERP and users are expected to work on them only in ERP, but still a very large number of organizations still do not have a well charted process in this regard. This poses multiple issues, the biggest being division of data in 2 or more applications and the very objective of having one source of truth is defeated.
2. Transition of Project Managers. While, all ERP projects have dedicated project managers who go well beyond the go-live to post production support period and make sure that the Live system is stable from bugs perspective before they off board, but often, role and responsibility clarity after that phase, dissolves and there are multiple owners (or shall I say Managers) and very less number of contributors that are needed to take it to the next level of change management, ongoing trainings, user access process, upgrade or enhancement decision processes etc.
3. Over dependence on support teams for knowledge management. It is often seen that after setting up a vendor team for providing post production support, organizations depend totally on their teams for preparing and updating the user manuals and other soft training material for users and new employees. Though they claim to review the documents before releasing to the business teams but I have my doubts on the review process. Again, not only the ERP documentation but defining the complete process of knowledge management for the process improvements using the application is a challenge.
4. Independent customizations in multi country rollouts. One of my friends, is working in an European company and they implemented ERP in 1999 and never upgraded after that. The implementation was done in 23 countries across the globe and finally when they thought of upgrading the ERP this year, they came to know that their ERP system is not a standard system any more. Every country has got done some or more country specific customizations in the ERP, making this a bunch of disparate systems that do not offer a standard process. The pain that they are going through now for upgrading the ERP is enormous and it has increased their costs multifold. The challenge here is to keep the standard system, standard enough so that future upgrades are done with minimum costs
5. ERP is not a magic wand. As soon as we go live with ERP we start expecting it to take over the organization and transform it to a world class organization. We want to be Best in Class as soon as possible, being done so much hard work during the implementation period. Keeping the expectations of business users to realistic levels is another challenge that needs to be addressed.

Likewise there are more Post Go-Live challenges that we all need to consider while making a strategy to realize maximum benefits from your ERP. I do not want to paint a gloomy picture by just highlighting the challenges here. It is not that you only have challenges after Go-Live and ours lives will revolve around them forever. Successful ERP implementation offers multiple opportunities to business beyond the expected benefits. Some of them are:

1. Standard and predictable process lets you plan future initiatives as well as further improve the process efficiencies
2. Improve the KPIs. Now that the as-is values of the KPIs are known to you, it is easier to make desired KPI model by benchmakring with the Best in Class and charting a roadmap to reach there
3. Rationalize the staff. It provides you with an opportunity to relook at the staffing levels and use them in more productive areas as automation will free up some staffing hours/days
4. Flank it with Best in Breed Systems. ERP might not be there in its present role for eternity. While ERP will give a standard platform and one source of truth, there are chances that it is not the best system in all areas. It might be the best transaction system (or financial reporting system) but still might need to be complimented with best in breed systems for niche areas like service parts planning, demand driven supply chain planning, procurement auctions or product lifecycle management for that matter. Having an ERP system tells you where you are currently and what do you still miss to reach the pinnacle of success

I have not captured the direct benefits that an ERP will provide to an organization but I understand that these opportunities sometimes look like the benefits (due to a thin line difference between them) only but believe me, you will still need to do some good amount of work to explore these as against the direct benefits that you will get after implementing ERP successfully. Essentially, the challenges are required to be part of our overall Benefit Realization Strategy from ERP and opportunities are the areas which show the way for reaping the by product benefits from ERP.

Demand Planning, Forecasting and Inventory Management's Role in Lean Manufacturing

Years (or is it decades) have passed after the introduction of Lean Manufacturing and the Lean Pandits still differ in their thoughts on what exactly is Lean and how it should be performed to get maximum benefits. A new school of thought that is emerging these days is that we need to identify first that 'how much lean' is lean enough and the role of technology (read ERP and SCM Software) plays a major role in maximizing the Lean Manufacturing benefits. The typical gains that a manufacturing organizations aim to attain through Lean is reduced inventory but still better fill rates, lower cost of manufacturing and distribution (Lean Distribution) , shortened cycle times and hence low inventory carrying costs are always on the wishlist. These objectives though, can be hit substantially with the limited knowledge the organizations have on their current performance but often they are caught trying to make out how can they measure where they were before the exercise and where they have reached. How much exactly they improved in terms of key performance indicators? Without additional software modules (such as forecasting, demand planning or Inventory optimization), a basic materials resource planning (MRP) or enterprise resource planning (ERP) system, it will not be easy for them to drive lean benefits completely.

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Lean focuses on execution, but you cannot get the most out of execution unless you do a better job of planning. You can perfect your shop floor execution according to lean principles, but if you're not making the right item at the right time, you are not going to win in the market. Execution alone is not enough. Demand planning, forecasting and Inventory optimization are areas of focus when applying technology to aid your lean initiative. Other than this, the major technology input is in the field of automation of manufacturing and distribution processes.

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While Demand Planning and Forecasting engines will help in right sizing your inventory, automation of manufacturing processes will help reduce the MFG lead times, increase MFG schedule compliance and will contribute in improving inventory turnover. The latest research report by Aberdeen "Lean Manufacturing: Five tips for reducing waste in the supply chain", also suggests that the one of the top actions for becoming best in class organization is that we need to leverage automated Lean Manufacturing and Supply Chain Tools.

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But the facts suggest that Manufacturers are understandably reluctant, especially now, to buy a lot of software modules they may not end up using right away. This is true more for the SMBs as they can not afford to have the same budgets as their larger enterprise counterparts and hence less utilization of technology in maximizing Lean Benefits. Moreover, they don't want their managers staring at the terminals as opposed to walking around the shop floor. But that is beginning to change now with at least some SMBs taking lead to incorporate technology inputs as part of the whole exercise as they have understood that have an equal need for supply chain visibility and better forecasting as their larger enterprise counterparts.

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The mantra, in my view, should be to Think Big, Start Small and Scale Fast when the organizations, specially the SMBs start to use the technology in this endeavor.