Posts Tagged ‘forecasting’

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I wrote an earlier blog post titled “Supply chain lessons learned from the credit crisis” which looked at the importance of cash management and the need to understand the inventory liability in the channel in the context of cash management. The Wall Street Journal reports that Circuit City may be closing 150 stores and liquidating the inventory in an attempt to avoid bankruptcy. While the seeds of Circuit City’s lackluster performance are not rooted in the credit crisis, the Wall Street Journal does report that getting short term loans to pay for operations is proving difficult, hence their need to cut costs by closing 150 stores and liquidating up to $350M in inventory to pay for real-estate costs, such as abandoned leases.

While the fate of Circuit City is interesting, what does this mean for the Consumer Electronics companies which are Circuit City’s suppliers? How are they going to reduce their exposure not only to finished goods inventory liabilities but also to raw material purchase commitments made to satisfy anticipated demand from Circuit City? I think traditional forecasting and supply chain planning systems that rely on historical sales data are not the right solution. And speed is imperative. You can bet that all the other Circuit City suppliers are trying to solve the same problem, and many of them, especially the Consumer Electronics companies share common contract manufacturer’s and component suppliers. I suspect that customer relations principles and sound financial management, not to mention human behaviour, will mean that the first few brand owners that request a large change to supply commitments from the contact manufacturers may get a favourable response, but the ones last in line might get a different response.

What the brand owners need is a system that provides:

• multi-tier visibility to all inventory and commitments
• a collaborative environment that includes suppliers and customers
• rapid what-if capabilities, shared with their customers and suppliers, in which they can evaluate alternatives

An optimization engine run by the brand owner is not the solution. First of all the optimization engine will not be able to incorporate the compromises needed in such a situation. Second, a collaborative environment which allows all participants to understand their shared liability is likely to achieve a speedier and more widely accepted resolution than one in which only the brand owner’s needs are satisfied. They need a system in which any suggested changes can be evaluated immediately by other participants in the supply chain. Using a collaborative system as described above, the brand owner can also work with other retailers to understand how much of their finished goods they can divert from Circuit City, perhaps even running promotions to increase demand. Again speed in this context is imperative. Retailers will only be willing to run a few promotions at any one time, so being first to the table is very important in being able to shift the inventory.

Using RapidResponse, all parties along the supply chain can collaborate and immediately respond to the event and eliminate the unwanted inventory, thus cutting shipping costs, manufacturing costs, storage costs, etc.

Last week, I visited both Japan and Hong Kong. I’d been long looking forward to this visit, but dreading the 20+ hours of travel both ways. I finally figured out the best way to beat the jet lag…do not succumb to the urge to pull out the laptop during the first half of the flight – sleep, then work. I was surprisingly well adjusted upon arrival for a change.

Several things struck me during my week long voyage. The economic meltdown was front-page-top news story every single day. In Japan, there was talk of their own “lost decade” in the 90’s, largely caused by the same challenges being felt in the US – poor loan performance. One major difference between the challenges experienced by Japan in the 90’s, and the US today – The Japanese financial crisis was contained within the banking industry. The US induced challenges have spilled onto other financial industries and spread to other countries making it more difficult to contain.

I couldn’t help but wonder how “ready” the large and well known Japanese electronics manufacturers are given the lack of global economic stability.  How would companies like Hitachi, Pioneer, Sony, Sharp, or Nikon manage their pervasively outsourced supply chain given the lack of confidence in future demand? Surely their forecasting systems would not have predicted the current conditions, nor can they assist in determine what will happen in the coming weeks/months.

Some companies are responding by setting in place gross assumptions – such as an overall reduction in demand of 20%. I believe, however, the leaders (and winners) will not make such macro assumptions, and rather draw their attention to learning how to listen and respond quickly to what actually happens with demand. Time will tell as we watch these global electronics giants weather the storm.