Restructuring the Supply Chain

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Qualcomm’s top management, including its CIO, recognized that if the company wanted to boost its order-fulfillment rates, it needed a longer-term demand forecast that took into account suppliers’ capacity capabilities. And to this end, the company would need to encourage collaboration not only in the supply chain division but across the organization. Qualcomm would have to produce a more detailed and frequently updated demand plan to serve as a road map for the entire company. First, the company had to beef up its sales and operations planning (SOP), a process that requires supply chain, finance, product marketing and sales executives to work together to devise a more accurate demand plan. That involves plugging all forecasting and demand data into Oracle demand-planning software, which has reduced errors and now allows for more analysis of the forecasts than the previous Excel-based process. "Ultimately, a company needs one system that represents the truth," says Mitchell of The Hackett Group. "Through sales and operation planning, the company can take its forecasts and turn them into a demand plan that everyone in the company will march to."

Bringing Suppliers into the Loop

At Qualcomm, supply chain executives meet on a weekly basis with sales and marketing to review the forecasts and prepare for a larger, monthly gathering. The monthly planning meeting brings together the company’s top management with finance, sales, marketing and supply chain to discuss and analyze an overall demand forecast. "The end goal is to get a longer view of capacity requirements," says Vinay Asgekar, Qualcomm’s senior director of supply chain management. Through this change in process, Qualcomm now creates 12-month SOP forecasts, and plans to extend that to 18 months in the near future. "The mind-set has changed completely when it comes to supply chain," says Asgekar. "Now we know we have to get a much longer view of demand in order to make these perfect orders."

At P&G, sales and operations planning is even more important now that the industry is moving toward 20 percent to 30 percent of goods on promotion or sale, says Arlequeeuw. Promotions can easily boost demand and lead to an out-of-stock at the store. That means that sales and marketing people, who are in charge of promotions, need to share this information with logistics and supply chain in order to put together the best possible demand plan.

"Sales, logistics and general managers need to work together to get an aligned picture of demand," says Arlequeeuw. In general, key leaders within each product category at P&G meet at least once a month to go over the demand plan. But some units, especially those facing pressure from consumers to frequently offer new and innovative products, meet more often. For example, the cosmetics division, under consumer pressure to produce new items on a constant basis, gets together on Mondays to exchange demand data.

In addition to improving collaboration within the company, organizations seeking higher perfect order rates need to share information on promotions and demand with suppliers. And that goes for more than just manufacturers. At West Marine, the largest boating supply retail chain in the United States, company executives learned this lesson the hard way. Trouble at the California boating giant’s supply chain started as early as 1996, after the company acquired a competitor, E&B Marine. New distribution centers were poorly connected, and out-of-stock levels during peak season in 1996 climbed to more than 12 percent. At the same time, sales dropped by almost 8 percent. By 1998, with earnings sagging, the company’s board of directors brought on a new CEO who quickly recognized that the supply chain was broken and moved to turn the boating company around by putting together a team to fix it.

Larry Smith, West Marine’s senior vice president of planning and replenishment, says the company was able to right itself through a multiyear effort to link stores with warehouses and provide demand forecasts to its primary suppliers. Although he does not measure perfect orders in the same way that Qualcomm and other manufacturers might, he says that efforts to link sales data to suppliers have dramatically increased on-time replenishment rates. Over a period of three years, the boating supply company integrated its distribution center with store-level replenishment systems, linked to suppliers with EDI, and invested in a range of vendor and customer-forecasting and replenishment systems that connect stores to distribution centers and suppliers. Smith says West Marine is now collaborating with 200 suppliers, 70 of which are loading its forecasts into their ERP systems. As a result, the retailer has been maintaining peak-season in-stock levels at its stores at 96 percent or better.

Five years ago, the company’s on-time fill for vendor orders at its distribution centers had sunk to between 30 percent and 40 percent. Now, they are at 80 percent, and Smith attributes the increase to the company’s ability to quickly share sales information with suppliers. Every night, the company electronically polls all of its 390 stores for sales, updates the in-store replenishment systems and, with that data, projects sales and orders. West Marine sends the aggregated forecast data to its vendors via automated e-mail. Every Monday, the company sends in-stock reports to 200 suppliers. Then, with a year’s worth of data, it creates an annual forecast, runs order calculations for distribution centers and sends its order forecast to suppliers. On a quarterly basis, company officials measure the accuracy of vendor orders.

According to Stanford’s Hau Lee, West Marine’s internal aggregation of the data helps suppliers understand demand according to specific regions and seasons. For example, boating supply sales in Boston in the summer will go up, whereas demand might be spread across the year in Florida. "They are helping their suppliers make sense of their POS data, and their on-time delivery performance has risen because of that," Lee says.

Qualcomm is also working to improve the way it shares information along the supply chain in its effort to boost its perfect order rate. Right now, Qualcomm shares information with suppliers via Web connections, or by sending them downloaded files. Over the coming year, the company plans to build an "e-hub" to connect to its growing stable of suppliers, although they have not yet decided whether to go with an EDI-type model, build their own system or use some sort of a mix. Fjeldheim and Asgekar say that while they are better prepared today to react to a sudden spike in demand such as the one that shook the company in 2004, Qualcomm is "not fully there," and has more work to do to better understand its suppliers.

The goal? More perfect orders and better profits.

"As you improve your perfect order rate, you squeeze losses—such as extra inventory and wrong quantities shipped—out of the system," says P&G’s Arlequeeuw. "What we’re seeing is that perfect order can lower your costs if you do it right."

Senior Writer Susannah Patton can be reached at spatton@cio.com.

Copyright © 2005 IDG Communications, Inc.

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