Improving visibility

Apple Computer Inc.'s story is the stuff corporate executives and MBA students pore over again and again in search of breakthrough business formulas.

Like all legends, though, Apple's comeback story--especially the part about the runaway success of its iPod--has a less-fascinating element that few have bothered to explore.

A lean and flexible supply chain structure saved the company from the embarrassment of a wildly inaccurate forecast and the potential for huge sales and profit losses--a problem that the electronics industry is still prone to, even after years of intense focus on accurate demand and supply planning.

While forecasts are still necessary for capacity planning, nowadays more intelligent, collaborative methods are being employed to increase visibility down the supply chain. Where electronics companies once relied largely on sales goals or hindsight to generate forecasts, they are now moving toward a demand-driven model that uses more-immediate data from sales channels to provide a clearer picture of what customers actually want, and an agile supply chain to execute rapidly when inevitable, sometimes daily, changes in demand occur.

"We're seeing better emphasis to take what is a well-understood process in high tech-demand planning and forecasting and extend it deeper into understanding the customer, feeding that [information] back into the enterprise strategy around managing that particular demand, and preparing to counter the variability that exists in the forecast," said Raja Chandrashekar, vice president of the high-tech industry group at i2 Inc. (Dallas).

An example would be using point-of-sale information from retail stores to find out that a model mix between two products was actually 60/40, whereas the forecast had assumed 50/50. The brand owner could tell its downstream supply chain to start adjusting how many of each of the models to make.

More than a near-miss

It's nothing less than a huge understatement to say that Apple missed its iPod sales forecast. When Apple released the iPod in 2002, it expected to sell only 1 million units. That forecast was off by a wide margin.

"From the introduction of the iPod in 2002 through 2005, the company has sold approximately 28 million iPods," Apple (Cupertino, Calif.) stated in its latest annual filling with the Securities and Exchange Commission.

Sales of the music player topped $4.5 billion in Apple's fiscal year ended Sept. 24, 2005, up 248 percent from $1.2 billion in the prior year. During the same period, unit sales of the iPod climbed to 22.5 million, from 4.42 million in fiscal 2004 and only 939,000 units in fiscal 2003.

Had Apple depended solely on forecasts, it would have lost sales and profits--and potentially would have done irreparable harm to its brand reputation. Instead, it relied on a supply chain constructed to turn on a dime when demand fluctuates up or down.

That, industry executives say, is the new reality in supply chain management.

Anyone who was a part of the industry as recently as the late 1990s learned this lesson all too well when overoptimism led many companies to ignore alarm bells when the demand signal shut off, leaving billions of dollars in excess inventory in the pipeline.

Forecasts often miss actual demand--indeed, they are rarely better than 70 percent accurate, executives say--resulting in disastrous inventory pileups, missed financial targets and supply chain management conflicts among OEMs, EMS companies and their networks of suppliers.

But supply chain management is more than just materials planning. It must also take into account what is happening with demand. That process involves collaborative forecasting, downstream data and pull-based replenishment. And those areas, supply chain software vendors say, are where the dollars are being spent.

"This area is front and center with pretty much everybody, especially in the high-tech industry, where you have quick product model revisions," said Greg Clark, chief executive officer of E2Open Inc. (Redwood City, Calif.). "Being able to ramp them very quickly into high volume and being able to step on the brake very quickly require demand and supply forecasting processes as well as replenishment processes to be best-in-class."

New models

Indeed, best-in-class companies these days are designing their supply chains by looking at the risk elements and figuring out the decision points where they can accomplish particular things, noted Bill Swanton, vice president of research at AMR Research Inc. (Boston).

"In general, we see people looking at supply networks, looking at the alternatives ... and making decisions on what they're going to contract for out into the future, and, as much as possible, trying to do some risk management there," Swanton said.

"Apple might know it can sell between this range and that range of iPods, but isn't exactly sure which options and how many they would be likely to sell--how many are going to be the 2-Gbyte model vs. the 4-Gbyte model," added Swanton. "That makes a big difference in terms of how far the parts will go; but they can start acquiring the other things, including the manufacturing capacity to make so many units, and later in the cycle decide how many are going to be of what model."

Enabling that kind of supply chain management requires accurate information and better visibility into real demand events--for instance, knowing that someone consumed a pallet of disk drives, as opposed to starting 1,000 more disk drives per the forecast, even though there are 10,000 piled up in a hub and no one's using them.

Forecasting has come a long way since the mid-1990s, and software vendors are making their tools more sophisticated and easier to use within a complex supply chain, said Noha Tohamy, senior analyst at Forrester Research Inc. (Boston).

As visibility became the catchphrase in supply chain management, forecasting based on historical data has been pushed aside in favor of methods that provide more immediate information. The trend has spurred a new generation of forecasting engines that Tohamy refers to as "real-time demand forecasting."

"There's a lot of real-time or as-it-happens data that we can get and incorporate into supply chain management," Tohamy said. "As a consumer electronics manufacturer, for instance, if I can get information about what products are selling at Circuit City or Best Buy and take that into account when doing the demand forecast, then that will create much more accurate, much more up-to-date forecasts than just relying primarily on historical information."

Real-time planning

This real-time or "downstream" data is critical for being able to sense demand and drive inventory replenishment systems based on pull signals, a key element of lean-supply- chain theory.

"Everybody that we know has an initiative right now to move to more of a lean supply chain," said E2Open's Clark. "People need tools for that. And the intersection of the forecast and the commit process with demand-driven execution is really the secret sauce.

"If you can get your internal plants and your supply chain working on a demand-driven model, you [gain efficiencies], and you waste less."

Leaning out the supply chain will require gaining a better understanding of demand and of the market, by using good statistical techniques and by leveraging demand history down to specific customer segment levels and specific product and subassembly levels, said i2's Chandrashekar.

"The level of detail at which you have to do forecasting to be lean is going to increase," he said. "You have to pay attention to that at a much more granular level."

Chandrashekar noted that when a company understands its demand structure and its customers extremely well, it's in a better position to steer customers to products that are already available--the flip side of forecasting--as computer maker Dell Inc. has done with its Dell.com mass-customization model.

Many large OEMs are using demand-driven supply chain management techniques to move in the direction of mass customization. Midsize companies, however, are a long way from emulating the Dell model, said Anandan Jayaraman, solution marketing manager for industry verticals at SSA Global (Chicago).

While the middle tier has made investments in enterprise resource planning (ERP) and core applications, as well as in the materials-management and procurement aspects of the supply chain, "they have not made as much investment on the demand chain side," Jayaraman said. "Clearly, they have not been able to match demand with supply."

Response management

By and large, though, OEMs are putting greater emphasis on the ability to respond to things that weren't in the forecast, said Randy Littleson, vice president of marketing at Kinaxis Inc. (Ottawa).

"Sure, they're looking to improve [forecasting] and are moving away from absolute numbers to relative ranges," Littleson said. "But they also recognize very strongly that ... we need to make equal or more investment in dealing with the realities that exist in our world."

A demand-driven supply chain involves more than just advanced forecasting and response capabilities. At its core is a word that, though overused, is the linchpin in any successful supply chain: collaboration.

"It's all about building the collaborative discussion with the supply chain," said Dave Cooper, vice president of supply chain solutions at EMS provider Solectron Corp. (Milpitas, Calif.).

If a company has outsourced all of its manufacturing, the EMS provider becomes a key player in the supply chain. That contractor should be involved in forecast planning to contribute information concerning the implications of driving the supply chain to meet that forecast, Cooper said.

"When we did this for one of our customers, we increased their on-time performance by 40 percent and doubled their turns, just by changing the way forecasting is done and by changing the speed at which that forecast gets to the supply chain," he said.

Putting the tools in place to enable collaborative supply chain management has never been easier. According to sources, leading vendors of ERP systems are making it easier to integrate third-party tools into their core solutions. The road maps of ERP vendors like Oracle and SAP indicate they are opening up to a service-oriented architecture approach, which enables more integration points for third-party applications.

That's good news for midsize and smaller companies, which are adopting ERP software to form the backbone of their supply chain management systems, rather than use a series of disparate, disconnected systems that don't share data.

"In the mid-'90s, there was so much investment in supply chain endpoints, and the solutions were so disconnected from the core ERP stuff, that people have had a lot of challenges on the integration side," said SSA Global's Jayaraman. "I think people realize that having it all together definitely decreases the complexity of integration and makes it easier to manage in the long term."