Shnouws Semiconductor has never had an easy time of clearly identifying short- or long-term demand and triggering our supply chain based on that demand. Other manufacturers may have the luxury of classic A, B, and C product categories, but at Shnouws we have the entire alphabet. We design and produce nearly 4,000 different electronic SKUs (radio frequency circuits, oscillators, controllers, sensors, semiconductors, etc.) for nearly 11,000 customers worldwide. Nearly half of our business is contract manufacturing.
Managing our complex supply chain and outsourcing relationships — not unlike that of many electronics companies today, including our competitors — has always been a mix of science and art when trying to balance demand and supply. Within the current recession, though, we've gone from complex to volatile to absolutely unpredictable: customer orders disappear overnight; outsourcing contracts (for which we've already invested in material and assets) are cancelled; suppliers can't get credit to buy raw materials; other suppliers fail without warning; customers go out of business; and yet some of our markets (green technologies) experience huge growth.
Shnouws needs to develop a more cohesive approach to identifying and segregating our demand and then quickly sharing those signals throughout our diverse vendor base — even amid the current chaos. We must be able to predict demand more clearly, more efficiently aggregate the design and manufacture of our products, and more productively manage our supply chain. We're not looking for a magic potion, just some better ideas, processes, and tools.
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Steve Banker
Making well informed and intelligent decisions on how to best balance supply and demand during volatile economic times requires robust applications as well as good processes in the areas of risk management, collaboration, and sales and operations planning (S&OP).
Collaborative demand management more important during a recession
Demand forecasting tools have a difficult time making accurate forecasts when large exogenous events, like a deep recession, occur. Demand decomposition functionality can improve the performance of forecasting during a recession. In many instances, the historical demand pattern can be somewhat misleading due to external factors such as competitor price breaks, promotions, and other market events. Demand decomposition segments the demand history into base-level demand, based on historical time series data and the impact of external market events on the demand of a stock keeping unit (SKU).
The goal is to decompose the forecast to the base-level demand and then make the appropriate adjustments to the baseline level. For many SKUs, that would involve adjusting the baseline forecast down. However, not all SKUs should be adjusted down, nor should the baseline forecast be decreased by a uniform factor across the board. Some SKUs will actually sell better during a recession. But it is only after several quarters of history during a recession that a company will begin to better understand how to make the appropriate adjustments to the base-level demand. If there is good historical data from past recessions, the process of improving the forecasts during this recession can be improved. Insights will be available on which SKUs will be most likely to grow, and which SKUs are likely to experience negative causality by the economic downturn.
In contrast, highly collaborative demand management solutions that are coupled with quick-response manufacturing planning capabilities become much more attractive during a recession. You just can't fully forecast your way out of a recession. Companies can do a much better job of making the appropriate adjustments to the recession.
Take multi-echelon approach to inventory management
When I hear that companies are attempting to classify their inventory as being an A, B, or C, I realize that they don't know about the advances that have been made in inventory management. How much inventory of a particular SKU needs to be held can, and should be, a more precise mathematical exercise. Solutions exist to calculate, based on demand and SKU variability, not just what the safety stock level should be, but where in a multi-echelon supply chain it makes the most sense to hold that inventory. Again, however, as there are demand inputs to these calculations, recessions can lead to companies carrying excess inventory until their forecasts improve.
Implement supplier risk management program
It is clear that Shnouws Semiconductor does not just face a demand problem; they also face a supply problem ("suppliers can't get credit to buy raw materials; other suppliers fail without warning"). Specifically, they do not have risk management practices in place to "red flag" potentially unreliable suppliers. As Beth Enslow of Marsh Inc. has already devoted a well-written column to this issue, I will just refer you to her column (http://www.iwchallenge.com/0109/).
Balancing demand and supply requires S&OP process
The best applications in the world may not help Shnouws all that much without a robust S&OP process. Most S&OP processes operate in one-month planning horizons. Based on the way Shnouws describes the volatility in its business, a one-month planning horizon is too long. However, getting the leading supply chain and sales and marketing executives together on a regular basis — thinking through the tradeoffs and understanding how different supply/demand balancing decisions will impact the budget, profit, revenue goals, and satisfaction of key customers — can make it easier to make dynamic decisions. Having a good S&OP process allows key planners to understand what they should do when an unforeseen event occurs or if a decision needs to be kicked upstairs, and this can make it much easier to get fast feedback from key executives on how to respond.
There is no one size fits all S&OP process. The S&OP process needs to be adjusted to fit a company's industry and strategies. However, S&OP is becoming more integrated with company budgeting and financial planning processes, and companies are beginning to do a much better job of factoring granular cost data into their decision making.
Shnouws reports nearly 4,000 different electronic SKUs. Whenever I hear that a company has thousands of SKUs, I realize that the odds are high that many SKUs can be profitably eliminated. The supply chain organization always favors this. It makes their job easier. The sales organization always opposes it. They fear it will adversely impact sales. The S&OP process becomes a good place to address these issues if there is good cost data. What do the extra SKUs cost you? What sales result from the extra SKUs? What is the profitability associated with those sales? S&OP processes supported with good supply chain planning applications and good cost and profitability analytics help companies make informed decisions on these kinds of questions.
Steve Banker is director of Supply Chain Management (SCM) and part of the Supply Chain & Logistics consulting team at ARC Advisory Group (www.arcweb.com). Steve has authored many market research and strategy reports and has managed consulting projects for manufactures, supply chain and warehouse software providers and other clients. Steve's focus areas include warehouse management, supply chain planning, operational excellence in SCM, supply chain visibility, supply chain risk management, tax-efficient supply chains, and supply chain management for the food and beverage and consumer goods industries. Steve can be reached at sbanker@arcweb.com
By Randy Littleson
You have a series of challenges, not unlike many companies today. At the core, you need to replace inventory with information, which will require you to invest in a collaborative planning and execution system that allows you to swiftly evaluate if you can meet the demand you are experiencing as well as respond to changes on either the demand or the supply side.
From a strategic perspective — especially for the near-term — you must focus on growth areas for Shnouws Semiconductor. Your company's design capabilities allow you to innovate and attract customers with new products, and, importantly, applying a growth focus to your supply chain and inventory issues will allow you to sunset many of your current SKUs (as many as possible).
Some specific actions that you also should undertake include:
- Postpone production of specific products as long as possible, especially for common source items (i.e., items used in many finished goods).
- Ensure rapid and effective delivery to customers. In this market, while many companies are understandably focused on their internal cost-reduction efforts, you can't take your focus off customer satisfaction. This should be an area where you excel to differentiate yourself and retain every customer you can in these difficult times.
- Find reliable sources of materials. Supply chain risk management has become a major issue today given the economic challenge for many suppliers. This is not a short-term fix, but will require a long-term commitment.
- Bite the bullet and have a fire sale of the finished goods you already have in the channels. Clear out this excess inventory, which is tied up cash and poses a substantial risk to the business.
- Ship as many of
your deliveries as possible via a parcel delivery service to enhance
traceability and reliability:
- You will likely need to take a hit on logistics costs, at least in the short-term, but you will benefit from improved customer service.
- The costs will also be offset by avoiding any stranded inventory in the channels.
- This will make Shnouws Semiconductor much more responsive to demand. Even the demand you know about is very unpredictable, so postponing finished-goods manufacturing as late as possible is critical.
To support these initiatives and deal with the current economic uncertainty, tools that enable simulations and what-if analysis are more important than ever. These tools can be leveraged in a variety of ways to address your specific business challenges:
- Demand planning simulations: When developing the demand plan, it is not usually about one number. Companies that can do "what-if on demand" can quickly analyze current demand along with optimistic and conservative views of the plan. These analyses can drive inventory strategies through the supply base to the contract manufacturers and suppliers. Being able to run these analyses on demand also means you do not have to wait for the next planning cycle to respond to changes that would drive policy changes. For example, safety stock policies could drive excess or shortage conditions if demand changes and the policies are not reviewed in a timely manner.
- "Stuff happens" simulations: This second type of simulation can allow you to deal with the unplanned events that cripple companies, age the young, and keep the distilleries running. If a supplier goes out of business, what customer orders are impacted? Where else could I get supply? How should I allocate the limited supply I have? In today's world, you need these answers in seconds. It has to be as easy as going to Google maps and finding New York City. It's the speed of knowing now that will differentiate the winners from losers.
In addition to quickly performing simulations, you need the ability to alert those that need to participate in the solution. The barriers and silos in yesterday's supply chain are disappearing (and they should be in yours as well). Being able to alert, communicate, and collaborate with supply chain tiers oceans away will be vital in responding to the volatility of the supply chain in a recession.
Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the provider of an on-demand service that empowers multi-enterprise manufacturers with the integrated demand-supply planning, monitoring, and collaborative response capabilities required in today's complex and dynamic world. Randy can be reached at rlittleson@kinaxis.com
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