Information instead of inventory: going agile

Customers are becoming more demanding and more unpredictable. And, with global over-capacity, manufacturers are having to compete more on their ability to supply what customers want when they want it. That requires 'agility' – at least if there's a high degree of unpredictability and a lot of product variants, as in the automotive, electronics and increasingly consumer packaged goods (CPG) sectors. Or does it? Before seeking to become agile it's worth thinking about the source of your volatility. Sometimes variation is predictable – once you have information from the customer, or customer's customer on promotions etc. Sometimes volatility is introduced by inter-and intra-company systems and processes: the way distributors place orders, reflecting the way sales are turned into production orders by waiting for economic batches. Other initiatives can work to defeat agility: going lean, for example. As Simon Bragg, European research director for analyst ARC Advisory Services, explains: "For a retail product with low volatility, lean thinking would point you in the direction of vendor-managed inventory (VMI). You'd monitor each day's sales and dedicate a production line to making just enough to replenish the shelves. "But agile thinking would suggest you make an economic batch occasionally and keep it in stock – after all, you know you're going to sell it. That leaves plenty of room in the production schedule for the flexibility you need to respond to demand for genuinely unpredictable lines." Taking this approach, the manufacturer virtually abandons forecasting for the most volatile products, but plans for capacity and prepares to execute against demand. The point: there are different ways to achieve agility. Traditionally, the answer was to keep stock of finished goods, which is expensive. The problem is that alternatives also come at a price, in systems and management. The trick is to get on the right side. So where do you start? Most manufacturers have addressed efficiencies within their organisations, with process re-redesign, lean thinking and so on. So while there's always more to be done, the next step is to look outside, and get a better understanding of what's happening both upstream and downstream: in effect, to replace inventory with information. Paul Martin, group IT director for beverage can giant Rexam, says: "It's very important to integrate and collaborate with customers and suppliers so you get responsive both ways. Competition is no longer about company versus company; it's supply chain versus supply chain. You need a rock solid information management system so you can all be efficient and responsive." Making it work But before data passed up and down a supply chain can be considered meaningful, everyone must agree on how to interpret it. "And they must all accept that any numbers accurately represent the real situation," says Bragg. Collaboration with suppliers and customers must be built on trust and co-operation. Collaboration also entails technical ability, so it's the customer interface, says Peter Anderson, managing consultant in supply chain strategy at IBM, that may be the best place to start. "For smaller companies, the argument is to go down towards their customers rather than up towards their suppliers. Their customers are probably marginally more advanced in the areas of electronic communication." Better information from customers is also hugely beneficial. The more there is, and the earlier it's available, the easier it is to cope with changes in demand. "You can get benefits straight away by understanding more about your customers' business," says Anderson, "whether from collaboration through spreadsheets or fully integrated systems." Accurate information is essential for Calsonic Kansei Europe, which manufactures radiators, air conditioning units, exhausts and cockpit modules for automotive manufacturers. For one customer, Calsonic operates synchronous delivery of exhausts, and has only 90 minutes to get the right system to line-side. To be that responsive, it's vital that Calsonic receives accurate information in advance: 10-day forecasts are used to determine stock requirements, and three-day forecasts are the basis for preparing finished goods. Information from suppliers is also a necessity, and Ceri Small, Calsonic's CIO, explains it's all tied together by a Glovia ERP system. "What we've had to do is move to more integrated systems, so we have an accurate idea of customer demand, our own stock, what's on order and what's in transit from suppliers. It depends on having integrated systems all the way from demand management to shipment: better information, more accurate information and proactive information." Information on its own though isn't the answer. Next, manufacturers must look at what needs to be changed in terms of processes – and planning is usually first. There would be little point, for instance, in Calsonic operating a three-weekly cycle, if the customer provides 10-day forecasts. "If you look at integrated processes in terms of planning, the best way to make it work is to align things like the planning day, planning period and planning parameters," says Anderson. This won't always be as straightforward as it sounds: "That customer may only be 5 or 10% of your sales revenue, so you have to question whether you have a separate process for just that customer." It also doesn't help if it takes too long to produce the plans. Ricoh is a leading European manufacturer of photocopiers, and supplies mid-range and recycled copiers as well as toners and photo-conductive drums. The company plans on a quarterly basis, but couldn't reduce that time to become more agile because it took the full three months to produce the plans. John Gittins, finance manager at Ricoh, says: "Using Cognos Enterprise Planning, it now takes three weeks: in fact, that's one week for data entry from all the departments, and two of review. Preparation of a forecast using contributions over the web from the various parts of Ricoh can now take as little as five minutes to create and disseminate." Ricoh is conducting a trial with Optimus software that would allow automated collection of sales data, including volatility information such as seasonal trends. "With something like this, we can perhaps move to a monthly planning cycle to take account of market volatility," says Gittins. Returning to Rexam, with 19.5bn out of 23bn cans per year ordered through the Internet, the company now has all the information for it and its suppliers to respond quickly. Agility used to be achieved by a large buffer stock of aluminium sitting on the factory floor. Now, a SAP supply chain implementation has enabled initiatives like VMI to reduce inventory by 25%, with a total reduction of 50% expected. Closer co-operation with customers will help achieve that target. As Martin explains: "We are in the process of implementing the SAP demand planning module, which allows collaborative planning over the Internet. We'll be creating an electronic planning book that will provide access to promotional events, historical patterns, statistical analysis and what-if scenarios for both the sales group and the customers." The next important step is to work with suppliers to reduce lead times for purchased components and raw materials, something that both Rexam and Ricoh are working on. At Ricoh, Gittins says: "Once we have the monthly plans, we could also expand the sales plans to inventory plans right out to parts level, thus providing detailed forecasts for our suppliers." And at Rexam, Martin says: "We launched the SAP supplier portal, and seven of our strategic suppliers are now online, accounting for the majority of our annual spend. We use it as a way for our suppliers to participate in a VMI programme, so when we take a coil of aluminium off the factory floor, that sends a replenishment signal. They can see our inventory position and also our production plans." The Rexam experience also illustrates the next step for agility: automatic initiation of business transactions between companies in the supply chain to cut down on time and admin. First, master agreements are created, whether it's with a customer or supplier, whereby orders can be placed within certain thresholds without going through approval processes. Next, minimum and maximum thresholds are established as the basis for automating the transactions. Once orders are being shared, the next goal is to swap demand information. "Our suppliers were very pleased with this programme," says Martin. "They now have information they never had before, and this in turn helps them become more efficient." Armed with Rexam's production plans, suppliers can plan ahead, thus reducing lead times and increasing on-time deliveries: all boosting Rexam's agility. Not everyone has an SAP-size budget, but Anderson says: "Tier two ERP vendors have come on a mile in terms of capability, and with the integration software from companies like IBM around today we can achieve a great deal with different systems." Even so, Anderson concedes that "it does get harder to justify the cost of the technology necessary to achieve agility as you go down to smaller companies." But there are additional, less obvious benefits that may make the investment in agility worthwhile. One knock-on effect is that as well as providing the information necessary to respond in an agile fashion, it makes the manufacturer easier to do business with: and harder to do without.