Gremalles Graphics is a manufacturer of computer printers and peripherals, targeting high-end markets of photography, architecture, graphic design, etc. Ours is a rapidly changing market, dictated by the many computer makers for whom our products interact as well as the professional fields that push us to make new and better devices that take advantage of the very latest digital technologies.
We sell a high volume of innovative, high-quality products, and Gremalles Graphics is fortunate to be in such a dynamic business. But this also creates challenges, especially in efficiently managing inventory. We incorporate material and components from more than a 100 different suppliers and from many varied supply chains (e.g., circuit technologies, plastics, packaging). Demand signals race to us from our markets, and so we try to quickly research and anticipate trends, develop products, source supply inventory, and make devices in order to quickly get our products out first to these markets. Since the market window is open for only so long, speed is the top criteria.
But to achieve speed, Gremalles and our supply chain is growing all sorts of inventory. The priority of our supply base is to get us the goods so we can get to market, and so we’re pulling in ample quantities of assembly and components inventory for products that must be shipped within 48 hours of order receipt. We also have plenty of work-in-process (WIP) inventory so that we can reconfigure product if the market shifts. And since we beat the drum for the supply chain, our vendors are similarly ramping up, pulling materials, holding WIP, and building finished-goods inventory that may or may not find a buyer. This ultimately increases inventories throughout the chain, which eat away at all our margins.
Are we recognized as first to market? Yes. Do we have a lot of inventory throughout the supply chain because of it? Absolutely. But how can Gremalles Graphics begin to reduce supply-chain inventory while maintaining (and even improving) customer lead times and lowering costs?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Bob Ferrari
The challenge posed by Gremalles Graphics is not unlike many day-to-day challenges experienced by manufacturers within the high-tech or consumer electronics industry where supply chains are driven by active and frequent product innovation cycles. In high-tech and consumer electronics, it is the earlier phases of product launch where profit potential tends to be highest, which makes the effects of out-of-stocks painful to the bottom line. Innovation-driven supply chains often experience high forecast error rates, anywhere from 40% to 100%. The existence of a forecast-driven inventory management process in this type of planning environment will often fuel the "bullwhip effect," where forecast signals are amplified throughout the network, driving more inventories within this network. The fact that the Gremalles supply chain is growing all sorts of inventory provides evidence that the overall inventory planning process needs to be anchored by actual customer demand.
My recommendation to Gremalles Graphics is to transition to a more demand-driven, assemble-to-order or pull-driven environment, where customer demand becomes the primary driver for value-chain supply activities. Moving to this type of environment should be phased among a number of near- and longer-term initiatives focused around a PPP-T approach — product, process, and people, along with most appropriate supporting technology.
Near-Term Initiatives
Process and people are the fundamental near-term key for Gremalles, and the overall planning and inventory management process has to have one unifying plan to tie together both the supply-chain functions as well key suppliers. I recommend that Gremalles supply-chain managers, if they have not done so already, initiate the formation of an active sales and operations planning (S&OP) process, anchored by top management sponsorship that would tie all customer demand and available forecasts to all supply planning. The goal of the S&OP team is matching demand with supply, in the context of customer service and profitability, targeting Gremalles' key customers and channel partners to secure the most timely actual customer demand signals. Internal and external supply-chain participants need to have the timeliest information to ensure that supply plans are aligned to the S&OP objectives, with the goal shifting from information sharing to more collaborative planning across the supporting supply network.
Since there is currently ample WIP inventory available to reconfigure product with market shifts, an additional goal of the S&OP team should be to facilitate the implementation of an assemble-to-order fulfillment process, driven by actual customer orders. Over time, the process should move toward extending pull-driven planning to more extended participants of the supply chain.
Another key enabler to improve inventory management would be to gain broader visibility to inventory levels across the extended supply chain. Successful innovation-driven supply chains promote the free flow of information among all major players of the extended supply chain. Leveraging any of the supply-chain-wide collaboration applications that provide extended visibility to both inventory and current demand has the potential to pay back high dividends in this type of situation. This technology can also provide more up-to-date visibility regarding the overall demand and supply picture, providing inventory planners the ability to make more informed decisions on inventory deployment.
Longer-Term Initiatives
Longer-term initiatives should focus on the dual objectives of more supportive product strategy and more advanced inventory management techniques.
Product development can play an active role in initiatives that address the concurrent design of products in consideration for supporting a pull-driven or product postponement strategy, where products are final assembled based on actual customer orders, and where key components can be shared among different product platforms or families. Integrated product design and design for supply-chain strategies have demonstrated positive payback for companies driven by high innovation cycles.
Once product strategy is aligned, other advanced inventory-planning and management-process initiatives can focus on a risk-pooling strategy, where inventory components associated with a broad family of products are pooled together for planning purposes to buffer the burden of having to deploy individual component inventory for each discrete product. Pooling of inventory needs at the family level buffers the amplification of inventory at the individual component or SKU level.
The longer-term goal of inventory management for Gremalles Graphics should target supply-chain-wide inventory optimization, vs. local-entity or individual-supplier optimization. Inventory-optimization modeling and planning techniques are aimed at optimally setting inventory parameters such as safety stock, reorder points, or order quantities at all locations across the network, optimizing the aggregate network to target required customer-service levels. There are advanced supply-chain planning or specialized supply-chain-wide inventory-optimization software applications available that can aide in this effort.
Many high-tech or innovation-driven companies have made the transition to demand-driven, and have demonstrated that they can reduce overall supply-chain inventories while improving lead times and service levels and lowering costs. The good news here is that fast does not have to result in inefficient management of overall inventories. With the above actions, Gremalles Graphics has the opportunity to also achieve these objectives.
Bob Ferrari is the Managing Director of the Ferrari Consulting Group (www.theferrarigroup.com), and a supply-chain technology consultant, executive, industry analyst, and published author with over 20 years of experience and insights within supply-chain business planning, process and information technology transformation. His professional experience spans supply-chain strategy, business planning, process consulting, and IT systems implementation assignments. Bob is a longstanding member of the Council of Supply Chain Management Professionals (CSCMP) and holds APICS (The Association for Operations Management) certification as Certified Supply Chain Professional (CSCP), as well as Production and Inventory Management (CPIM). He is the author of the internet blog Supply Chain Matters, and delivers supply-chain consulting and services for manufacturers and retailers. Bob can be reached at bob.ferrari@theferrarigroup.com.
By Randy Littleson
Gremalles, like many manufacturers, is finding that the pace of change today is creating a variety of supply-chain management challenges. While your company is successfully capitalizing on the growth opportunities in their face-paced market, you are not doing so in a profitable way. The current approach is burdened by a lot of expensive inefficiencies that are creating a corporate margin sinkhole. In order to reverse these trends, Gremalles would be well served by implementing processes supported by tools that enable the organization to do integrated demand-supply planning, monitoring, and collaborative response to the inevitable changes that you face daily.
There are a variety of specific actions that Gremalles should be taking immediately:
- Understand what your inventory position is today throughout your entire supply chain. Visibility is the first step to fully leveraging the assets you have efficiently while avoiding unnecessary purchases that can lead to costly excess and obsolete inventory situations. Cancel any supply that is not needed. Understand what is excess and obsolete and start planning on how to capture the maximum value from it (sell it off using demand-shaping strategies, etc.). Many companies don't have the tools to do this today and end up procuring more inventory when they had excess elsewhere in the network that could be leveraged more cost effectively, for example. The more complex and dynamic the supply chain, the more critical the need for a holistic view of inventory as the basis of your planning and response strategy.
- Put in place processes to monitor and review the inventory position at regular intervals (e.g. weekly) and make any required adjustments (e.g. Monday morning action report) on a much more proactive basis. This leverages the enhanced and holistic visibility detailed above, but layers on top of that proactive and regular processes to manage the inventory in light of the volatility in the business.
- Segment your inventory (ABC sort) and ensure that the proper buffer quantities and order policies are in place for each segment. The goal of a responsive supply chain is to ensure the minimal buffers necessary to meet the dynamic needs of the business without putting customer orders in jeopardy. Unfortunately, as supply chains become more globally distributed and multi-enterprise in nature, many companies find that inventory piles up throughout the supply chain without being noticed. Again, proactive actions will go a long way to staying on top of this and produce measurable reductions.
- Look at instituting collaborative forecasting with your key customers. At the pace your business is changing, statistical forecasts based on past history have less validity than they did when the business was more static. One of the best ways to improve forecast accuracy is to develop processes to collaborate directly with your largest customers on a regular basis. The statistical forecast remains an input, but the collaboration with customers provides a more direct and timely insight to their changing needs. Likewise, if there's an opportunity to leverage point-of-sale (POS) data as another input, you gain more up-to-date insight into the true demand for your products and can leverage demand-supply balancing techniques to align the supply chain to a more accurate understanding of demand. Of course, there's no such thing as a completely accurate view of future demand. So you equally need to ensure that the organization has the tools to respond to unplanned demand changes (good or bad). Make sure you have armed your team with tools for collaborative response — tools that can simulate demand changes and evaluate various action alternatives that can be scored against your corporate metrics to ensure you are able to quickly and profitably respond to these inevitable situations.
- If a formal sales and operations planning (S&OP) process is not in place today, put together a strategy to implement the associated pieces. At the very least, ensure that sales, marketing, and any demand-management people in operations are constantly aligned. Given the impact that new product introductions (NPI) can have on demand and inventory requirements, S&OP principles should be utilized to improve NPI processes.
- Work with suppliers to reduce lead times throughout the supply chain as much as possible. The lower the lead times, the more responsive your supply chain will be, and the more responsive your supply chain, the less inventory is needed. (Often lead time reduction strategies drive reductions to cost so this would help on the cost side too!)
- Search for and leverage common components across products and, wherever possible, use existing components when designing new printer models to avoid costly excess and obsolete inventory. Likewise, Gremalles should leverage postponement strategies to reduce the amount of finished-goods inventory. Instead maintain buffer inventories of common parts further down the supply chain. For example, if printer A and printer B use the same chassis, maintain a larger inventory of the chassis and a smaller inventory of the end items. Align these initiatives with the buffer inventory strategies outlined above.
The actions outlined above provide a series of integrated capabilities for gaining the upper hand on the volatility that Gremalles faces. Together, they will reduce inventory, improve the company's understanding of demand, improve supply-chain responsiveness, and, most importantly, position Gremalles to capitalize on the market opportunity in a profitable way.
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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