In layman’s terms, no one saw it coming. In supply chain language, executives from leading European manufacturers described the recession this way: We’ve flunked demand forecasting.
That was the consensus among manufacturing executives at the Extended Supply Chain conference in London late in March, where supply chain experts from a diverse group of companies, including mobile phone maker Sony Ericsson, appliance innovator Dyson, and PC stalwart Lenovo, agreed that they did not foresee the falloff in demand that came with the recession.
They also concurred that visibility on the supplier side has become more challenging. Still, a top executive from German chemicals giant BASF implored industry to develop sustainable, efficient, and innovative supply chains, while a supply chain expert from AMR Research encouraged manufacturers to integrate intellectual property and digital distribution into their supply chain equations. He also stressed the importance of aggressive demand management in making supply chains a competitive weapon.
If supply chain improvements are to start somewhere, then demand forecasting would make an excellent jumping-off point, given how many companies have suffered the ripple effects of erring on their demand outlook.
“The forecast accuracy really has not improved in the mobile phone industry over the last five or six years,” said Patrik Jansson, vice president and head of supply chain operations for cell phone maker Sony Ericsson.
In a presentation on customer support, Jansson said, “Actually, in the month of February, I was noticing probably the lowest forecast accuracy numbers since I started with mobile phones in 1990. We need to find out newer ways of managing that.”
Forecasting Gap
Sony Ericsson’s forecasting gap will contribute to a financial loss that the company recently warned could hit €390 million for the first quarter, ended March 31, as consumers bought half the number of phones in the quarter compared with the previous three months. The company also predicted that mobile industry sales would drop globally by roughly 10% this year.
The domino effects of overestimating demand can cost a company significantly as it has to support unwanted inventory and pay for supplies. Costs can hit hard, for instance, if demand drops while goods travel for weeks overseas on ships, said Tom Carroll, supply chain director for British appliance maker Dyson. “We’ve got to get better at the early warning signs when the market is going to decline,” he said during a panel discussion on supply chain excellence. Dyson manufactures its acclaimed Airblade hand dryer in China and ships it globally from there.
“The whole demand forecasting environment is incredibly complicated,” agreed Mick Jones, EMEA global supply chain vice president for Chinese PC giant Lenovo. “You think about most forecasting tools — they rely on historical data for the last three quarters.” In the recession, such an approach makes it “virtually impossible” to forecast accurately, he said.
Few, if any, manufacturers claimed to have a catchall solution to demand forecasting woes. Jansson said Sony Ericsson plans to shorten forecasting periods in those geographic regions where its forecasting has missed. While its forecasts have remained reliable in Europe, the February falloff came from other areas of the world, he said. The mobile phone maker will send more people to those regions to keep closer track of demand, he added.
On the supply side, Robert Blackburn, senior vice president and head of global supply chain operations for German chemical giant BASF, implored manufacturers during his conference keynote address not to focus solely on low cost, but to select partners that have the financial wherewithal to survive the recession. Manufacturers should choose suppliers that innovate and become part of an extended supply chain innovation process, he said.
But just as manufacturers are finding it difficult to gauge demand, they are also finding that gaining visibility into their suppliers’ financial viability is becoming more of a challenge. That applies particularly in countries with less established regulatory and financial reporting regimes. “It’s becoming more difficult,” Dyson’s Carroll said. “It’s becoming harder to get the visibility you need to make sure that you collaborate with the right [suppliers]. It’s particularly difficult on the global stage. As we move further into Eastern Europe, how do you get that visibility?”
Lenovo’s Jones also debunked the notion of supply chain agility. He pointed out that as manufacturers and suppliers implement their own cost-cutting and consolidation manoeuvres, “what we’ve found is, as we tightened up as you normally would to preserve cash, that means our suppliers are doing exactly the same. So they become less agile and less flexible and less able to react. It’s almost this bullwhip effect: As you tighten up, they tighten up.”
Extending Visibility
Still, companies such as Lenovo are not strictly looking to cut supply chain costs. In some instances, manufacturers are spending money on, among other things, technologies that will help them gain knowledge about goods at various stages of the supply chain, from materials sourcing through sales of finished goods.
José Luis Nueno, a professor at Spain’s IESE Business School, said Spanish fashion retailer Zara, for instance, deploys wireless and video technologies to record customers’ in-store feedback, and can send that information rapidly to manufacturing floors so that Zara can make and ship, say, Madonna-replica skirts to retail shelves within a week after detecting demand.
And Lenovo, according to Jones, is adding wireless devices to shipping containers to help track goods in transit. “We’ve actually started to look at GPRS [general packet radio service] tracking of containers, which is a weird thing to do in the environment right now when you’re trying to reduce costs,” he said. “We’re working with a DHL company that adds these little tracking systems onto the containers. We’re using that to map our supply chain and to look at little black holes in our supply chain.” The technology helps alert Lenovo if, for instance, a container’s temperature rises to a level harmful to PCs.
Jon Chorley, vice president of product strategy for software supplier Oracle Corp., said that while information technology will not single-handedly shake industry out of the doldrums, it will play a significant role. “As somebody said the other day, a recession is a terrible thing to waste,” Chorley quipped as he encouraged manufacturers to consider IT strategies.
Kevin O’Marah, chief strategy officer for AMR Research, said some of the best supply chain operators, such as Apple and Disney, leverage their brand and physical distribution in a way that supports relatively inexpensive digital distribution of intellectual property — for example, iTunes songs. He encouraged all manufacturers to consider doing this.
AMR plans to publish its yearly ranking of companies’ supply chain performance in May. Last year, Apple ranked first, followed by Nokia.
O’Marah gave the conference a compelling reason to look hard at all aspects of supply chain operations, including demand management and IP: The AMR Top 25 supply chain companies, he said, financially outperform companies on the DJIA and S&P 500 indices.