Hinnts Wireless has been fortunate to weather a bleak two years. As CEO, I watched annual revenues fall 20% to approximately $225 million. A maker of wireless and radio frequency components for OEMs and system integrators, Hinnts is highly dependent upon commercial and industrial markets. As they slowed, we slowed. Now we are beginning to see our sales trickle back, and our major customers indicate that within six months they expect their orders to get back to prerecession levels. In addition, we are launching a number of new products over the next six months that promise to hit new markets and bring in new customers.
While the severity of the market slowdown came as a surprise, I do not want us to be surprised when our markets rebound. Our management has always believed — perhaps, erroneously — that Hinnts has fairly level month-to-month sales volumes for all product lines, and so we relied on simple methods for scheduling production and triggering our supply chains. But as our markets get more complex, our scheduling will as well, and we cannot afford to overestimate or underestimate — as we've done in the past. I see now that every dollar counts, and the money we've lost on obsolete or discounted inventories, overstaffing, or missed sales would have made the last two years more bearable.
I would like to have a more accurate picture of our customers and their plans and forecasts, and use that information more proactively to integrate production with our suppliers and to staff our plants. With a recovery likely, is it time to invest in processes and technologies to help Hinnts and our suppliers sense and respond to demand quickly and cost effectively? Can I afford the investment, and what can Hinnts expect to gain?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Larry Lapide
If misery loves company, then Hinnts Wireless can take refuge in the fact that many companies were surprised by the severity of the market slowdown. As an upstream supply chain supplier, your company's changes were exacerbated by the bullwhip effect. Your desire to be prepared for and not be surprised by a market rebound is admirable. However, as CEO, you shouldn't be asking whether Hinnts can afford to change planning processes to get a better picture of future demand — your company can ill afford not to.
Hinnts is fortunate to be holding its own during the downturn; many companies are withering on the vine and dying. It should be looking at the rebound as a one-time opportunity to increase its competitive position. The changes needed are twofold: on the demand-side, change to more demand-driven forecasting, and on the supply-side, integrate with demand planning to develop supply plans that are flexible enough to rapidly respond to the rebound.
Prior to the economic downturn there were decades of robust growth as the U.S. continued down the path as the most affluent, consumer-oriented economy. Demand planning processes were implemented that inherently assumed continual growth. The most successful forecasting approaches were largely "history-driven" and based future demand largely on historical demand patterns adjusted for market intelligence, and demand-shaping plans developed, for example, during sales and operations planning (S&OP) processes. Forecasting largely relied on internal information such as shipments, orders, and market intelligence gleaned from marketing and sales managers.
The economic downturn drastically changed demand patterns: history became less relevant toward gauging the future. Forecasting methods that work better in the new economic realities are "demand-driven." In contrast to history-driven forecasts, these methods put more weight on downstream demand signals, while still relying on analyzing historical patterns for recurring variations in demand (e.g., seasonal and long-term trend factors). Hinnts' talking to customers to get their perspective on future business is one type of demand-driven forecasting. However, while "the customers are always right," when it comes to forecasting, like everyone else, their forecasts will likely be wrong.
To detect the economic rebound sooner, Hinnts needs to monitor external downstream demand signals that are closer to where consumption occurs, including customers' sales, inventories, production schedules, and warehouse withdrawals. In addition, it needs sensors-in-the-ground that are based on external economic data, such as commercial construction starts, capital investments, and industry inventories to assess the health of the economy. These are important to a commercial- and industrial-market supplier.
Hinnts should use the signals to project future downstream product movement and consumption, and to forecast shipments (especially to gauge how well Hinnts' new products are doing). This will improve forecast accuracy. Forecast errors, however, will be high given the economic realities and new product introductions. To cope with these, Hinnts also should incorporate risk-management techniques into its supply planning.
Getting a clearer picture of the future should include a picture of demand uncertainties as an input to managing supply. Hinnts' forecasters should provide demand scenarios and range forecasts to supply-side managers and, possibly, to suppliers as well. Production managers can use this information to implement supply strategies aimed at mitigating risks. These strategies include buffering methods, such as inventory safety stocks and excess production capacities. Manufacturing and distribution postponement is another strategy that can be leveraged to cope with demand uncertainties.
Other strategies are based on the concept of acquiring supply for more forecastable demand earlier, and waiting to acquire supply needed for less-forecastable demand. Production schedules should reflect the manufacture of forecastable products earlier, and later for those less certain to sell. Working with suppliers, flexible purchasing contracts can be crafted — especially to supply new product production — that support different levels of potential future demand. These contracts first guarantee purchase of inexpensive supply required to meet the lowest level of demand possible, and provide more expensive supply to meet the most likely level of demand. Lastly, it should provide supply to meet the most optimistic (and less likely) level with spot-market procurement. (HP was an innovator in crafting these types of flexible procurement contracts.)
To summarize, improve planning processes and implement the requisite enabling technologies. Hinnts should implement demand-driven forecasting, fully leveraging downstream signals, to improve its future picture of demand including uncertainties. It should also plan supply based on these uncertainties, and this will lead to more reliable supply. Hinnts can ill afford to miss the rebound's golden opportunity to improve its competitive position, and maybe even drive a few competitors out of business.
Larry Lapide Ph.D. has over 30 years of experience in industry, consulting, research, and academia. He recently worked in and is a research affiliate with MIT's Center for Transportation & Logistics, where he managed the launch of
MIT's Supply Chain 2020 Project and oversaw its Demand Management research. He also worked at AMR Research, Accenture, and Data General, and is a
part-time lecturer at the University of Massachusetts. He is a frequent presenter
at supply chain events and has written numerous publications, including his co-authorship of a book on the impact of e-business on supply chain. Larry holds an SMEE from MIT and a Ph.D. in OR from the Wharton School. Larry can be
reached at llapide@mit.edu.
By Trevor Miles
Hinnts is not alone in its need to adapt to the "new normal" now that the recovery appears to be starting. But you are different from many CEOs, who have yet to ask questions about preparing for the new normal.
The most apparent response to the economic downturn — other than people losing their jobs and companies going out of business — has been a sharp reduction in inventory across entire supply chains. With reduced inventory buffers throughout a supply chain, there needs to be much greater responsiveness in the supply chain to changes in customer demand or availability of supplies. Given the state of many companies' finances, building large inventories is not an option because of the large amounts of cash this will tie up.
On the demand side, Hinnts will need to get a much better understanding of the forecasted demand for each customer. You indicate that Hinnts has fairly stable month-to-month demand. I suspect this is based upon monthly shipments from the factories, and that a more granular analysis of demand at the customer and SKU level would reveal a lot more demand variability. Consider as well that demand from three years ago was a poor predictor for demand over the past two years, and that the past two years are a poor predictor of the sales volume in an upturn; it is clear that statistical forecasting methods, while perhaps being an improvement on existing forecasting methods, will not be sufficient.
Hinnts needs more frequent demand updates from customers — both forecasts and orders — and the ability to consolidate and evaluate demand across customers in order to provide manufacturing and purchasing with a more accurate statement of supply needs: Get weekly updates of demand from many of your industrial customers, and get daily updates, if possible, from key industrial customers. Get daily updates from commercial customers (this is mandatory), and also get inventory data and, if possible, point-of-sale data. The forward visibility this information provides, for both industrial and commercial customers, is crucial to building an adaptable supply chain that can satisfy the anticipated increase in demand.
I can imagine the response from operations when you tell them that you will be going to a daily planning cycle, especially if they are running MRP systems that take a couple of hours to run and manufacturing cycles that far exceed your customers' expectations for delivery lead times. These concerns can be overcome by segmenting demand into:
- Base volume that is certain to be ordered by your customers (given that you are anticipating an upturn, this could be as simple as assuming 80% of the shipments over the last three months),
- Likely volume, which would be the difference between a pessimistic forecast and the base volume, and
- Hopeful volume, which would be the difference between an optimistic forecast and the pessimistic forecast.
This will allow operations to establish some longer production runs for the base volume and perhaps build up some inventories to manage the differences between demand patterns and production cycles. I will go so far as to suggest that Hinnts use different production lines or facilities to produce the base volume, likely volume, and hopeful volume. For the base volume, Hinnts should focus on manufacturing efficiency, while for the hopeful volume, Hinnts should focus on quick changeover and flexible working hours.
Above all else you need processes and systems that allow you to capture and analyze demand very quickly, and the ability to propagate the demand through the various bills of material very quickly so that any mismatches between demand and supply are identified early. Similarly, demand that is at risk because of late delivery of component supply should be identified immediately so that corrective action can be taken.
This won't necessarily be quick or easy. But it is possible and necessary. Adopting such an approach, processes, and systems will give Hinnts a competitive advantage by providing the ability to respond to uncertain demand without building inventories.
Trevor Miles is director of industry and applications marketing at Kinaxis (www.kinaxis.com), and is responsible for identifying market trends and translating these into high-level functional requirements for the company, and opportunities for value capture by Kinaxis customers and prospects. Prior to joining Kinaxis, Trevor worked for i2 Technologies, where he held a number of sales and marketing roles and worked with global industry leaders such as Continental, Volkswagen, Nokia, and Thomson. Previous to i2, Trevor worked for Coopers & Lybrand performing several studies in supply chain reengineering for companies such as Levi's, Burmah Oil, TNT Logistics, AGA Gas, and Schneider Electric. Trevor has degrees in Chemical Engineering and Industrial Engineering. He can be reached at tmiles@kinaxis.com
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