Monthly Archives: November 2013

Who Owns the Forecast?

As our small company has grown, my team has repeatedly asked the question, “Who owns the forecast?” When we were smaller, with just a handful of products and employees, that question didn’t matter much. We all agreed together on what we hoped to sell, and then we bought inventory in anticipation of that growth. Since we only had a few items, the decisions weren’t complicated. Purchasing too much wasn’t a problem either. We’d have overstocks, but it was only a few thousand dollars, which we could easily liquidate.

Today we face a much different situation – one in which we’re fighting hard to figure out the forecasting process. Compared to our beginnings, our customer base, order quantities, and SKU count have all increased exponentially. We’ve long passed the point at which our one purchaser could keep track of everything in her head. More precarious, however, is that overbuying has gone from a few thousand dollars of overstock to millions.
Hot Potato Forecast
We also began experiencing company misalignment as each departments moved forward with its own projection. Our salespeople set revenue goals, our controller had a year-over-year budget, and Operations had its excel sheets and run rates. All three pseudo-forecasts were vastly different. What resulted were overstocks, stock-outs, and unrealistic budgeting. We needed someone to take ownership of the forecast – but who?

Should Sales Own the Forecast?

Being in operations, my natural instinct was that Sales should own the forecast. After all, they interacted most with the customer, so they were obviously the best at translating those insights into numbers. However, the job of our small sales team was to build relationships with customers that brought in revenue. This required almost all of their time and effort; understandably, they wanted to focus on selling instead of forecasting. Sales agreed to give as much input as possible, but they needed someone else to own the forecast.

Should Operations Own the Forecast?

Our company looked to Supply Chain and Operations to own the forecast, but we hadn’t been doing a great job so far. We had workbooks upon workbooks of Excel forecasts, but it was only as good as past data could predict. Our limited MRP tool wasn’t robust enough to meet our products’ erratic patterns, so we had to manually calculate and guess every order. Because excess inventory was piling up, we tried to scale back our purchasing to preserve cash. However, this often forced us to use expensive airfreight to keep items in stock. We quickly realized that our current processes and tools wouldn’t suffice. While we could play a leading role, we couldn’t own the forecast. We could lend our analytical skills and champion the process, but without help from other departments, the forecast would continue to be unacceptably poor.

Should Finance Own the Forecast?

Even though our controller (our head accountant) wasn’t involved with purchasing or selling our product, she had to present budgets and revenue forecasts to our CEO and Board of Directors. Most of this forecasting was similar to the following:

Controller: “How do you feel about next year?”

Executive: “I see big things coming; I think we’ll grow by 25%”

Controller: “Ok, how about we budget conservatively at 15%”

Now to be fair, quite a bit more went into this analysis, but we never approached the level of detail that would make the forecast useful to Operations.

Recognizing this misalignment, our company met together to address the problem. Sales, Operations, and Finance all agreed that we needed one forecast the entire company could rely on. It needed to be as detailed as stating that, “we will sell Walmart $1.64 Million of Item X next year, and here is the week by week breakdown.” In fact, we needed that same level of detail for every item going to each significant customer. However, without structured collaboration, this level of specificity would be impossible to achieve.

The S&OP Process Owns the Forecast

Recognizing the need for collaborative ownership of the forecast, we began consulting other companies our size and researching best practices. Specifically, we learned that we must create a robust Sales and Operations (S&OP) planning process. S&OP is something that most companies are still learning, but the ones who figure it out seem to thrive. S&OP calls for structured and disciplined sharing of information to build a forecast that unites the company. Thus, everyone involved in the S&OP process becomes the owner of the forecast.

My great fear, however, was the business proverb that that reads, “When an issue becomes everyone’s responsibility, the issue becomes nobody’s responsibility.” In order to avoid the “nobody’s responsibility” syndrome that often plagues forecasting, we all sat down together to define the role each department would play in our S&OP process. Sales would provide customer insight and commitments, Operations would provide historical analytics, and Finance would ensure cash and budgets were in line with the company’s strategy. Most importantly, the CEO would make S&OP a top priority, hold each department accountable to the process, and offer support as needed.
The S&OP Process Owns the Forecast
Many articles and publications suggest S&OP process timelines, but below is what our monthly S&OP process currently looks like. We do our best to improve and tweak the process each month.

Week 1: Review and Fine-tune

At the beginning of the month, Operations reviews the accuracy of the previous month’s forecast against actual sales. Using every bit of data available, we analyze and fine-tune a rolling 12 month-forecast. For example, in May, we forecast the next month, June, through May of following year. We re-forecast every month because accuracy improves as we move closer to each month. The team does its best to serve up the recommended forecast “on a silver platter” to Sales. The goal is for the forecast deliverable to be so easy to understand and tweak that Sales can’t help but give their input.

Week 1 Deliverable: A complete 12-month rolling forecast based on history and known data points for Sales to evaluate, review, and tweak. Currently, this takes the form of a formatted spreadsheet generated by our forecasting software.

Week 2: Sales Input

During the second week of the month, Sales reviews the forecast. Specifically, they review and add customer commitments of new items going in and old items coming out of each channel. Sales incorporates upcoming events, customer feedback, and promotions to help modify what the historical data predicts. If possible, week two also includes a deep dive into our customer’s systems to review their sales and inventory levels.

Week 2 Deliverables: A completely reviewed and approved forecast from Sales, which incorporates as much customer knowledge as possible. Sales also shares feedback on how to improve the Week 1 deliverable.

Week 3: Supply Planning and Vendor Communication

Based on the Week 2 Deliverable, Operations then builds a supply plan to support the demand forecast. Operations meets with Sales about potential stock outs and capacity issues. Sales, Operations, and our CEO approve any significant issues, such as large stock outs or airfreight expense. After signing off on the significant issues, the CEO also signs off on the entire forecast. Operations locks and archives the forecast, which means everyone can now rely on the forecast to remain unchanged (except in extreme circumstances) until next month. With a locked forecast, Operations can now move forward with building a purchase order plan. From that plan, Operations sends purchase orders and forecasts to key vendors. They also schedule conference calls with those vendors to discuss and plan for the new forecast.

Week 3 Deliverables: An approved and locked demand plan, approved purchase orders, and vendor forecasts for key vendors.

Week 4: Meet, Plan, Reflect, and Improve

During week 4, we round out the process with vendor meetings and continued data analysis. We also hold a reflection meeting to review that month’s S&OP process. We ask, “What went well, what went poorly, and what can we do better?” We then make assignments that incorporate the feedback into changes for the following month. During this week, we also format the forecast and purchasing plan so that Finance can incorporate them into cash planning and budgeting.

Week 4 Deliverables: Assignments to improve next month’s S&OP process and a forecast formatted to Finance’s needs.

Results of the S&OP Process Owning the Forecast

We still have a long way to go before our S&OP process and forecasts are world-class. However, we’ve already seen fantastic results from our collaboration. Our controller absolutely loves the level of detail in the forecast, which helps her finance the rest of the company in realistic ways. Our executive team can now see their corporate strategy rolled out in a week-by-week plan. Sales is able to focus on selling, but they’re now armed with detailed analytics of each customer’s performance. This helps them sell even more. Not least of all, Operations has been able to better support customer demand while also reducing inventory. Being on the same page with the rest of the company ensures that we order what we need, and avoid ordering what we don’t need. Additionally, Operations now has a forecast for our vendors. We are now working on reducing vendor lead times with the forecast as a tool. Shorter lead times will let us hold less safety stock inventory, which will help free up even more cash.

Perhaps the best result from our S&OP process is the structured collaboration between departments. The discipline and teamwork required to build a single, detailed forecast has helped us unite and become a stronger company. We all are tied into the decision making process so there is less blame when a problem occurs. Roles are more clearly defined so we are able to work on what is expected rather than guessing what we should be doing. Best of all, we’re reducing errors and inventory, which helps us continue our growth and success.

What have you do at your company to build your S&OP process? Please share your thoughts and advice in how we can improve.

Five Supply Chain Mistakes that Kill Companies

Supply Chain Epitaph
Any good cowboy knows to be wary of rattlesnakes and stampedes, but the wild west of supply chain also has some precarious situations to avoid. A great supply chain strategy can help you dominate the market over time, but big mistakes can destroy your company in just days. Dozens of smart managers have unintentionally killed or maimed their businesses from these five blunders.

1. Automation – Too Much Too Soon

Supply chain professionals face strong pressures to reduce cost, and automation is an attractive option to accomplish that goal. However, jumping into a new technology without thinking through the strategic process could blur the fundamental problems and goals you face, which often results in investment misalignment. Seven of the incidents described in Supply Chain Digest’s 2006 list of the 11 Greatest Supply Chain Disasters involve poor implementation of new technology and automation. Specifically, the systems were unjustifiably large, unhelpful, or just didn’t work. Sometimes in our zeal to reach the shiny future, we become overly optimistic. Whenever I hear that investing in a new system will, “solve all our problems,” I pause and remember how many failed firms came to that same conclusion. The harsh truth is that the implementation of a new system is much more difficult than is usually anticipated. Furthermore, all too often, companies purchase a system before the demand justifies the investment.

How to Avoid the Mistake:

Don’t use technology as a replacement for a sound strategy and profitable processes. Instead, look to people and processes before technology to solve problems. If you determine that a new system is your best option, be sure to pilot it thoroughly before full implementation so that you don’t make unnecessarily large and risky jumps.

2. Trying to Do Everything Great Results in Doing Nothing Well

As customer needs diverge, you can quickly find yourself trying to provide a wide range of products through many different channels. Lacking a focused strategy can lead your supply chain down the dangerous path of trying to do too much. Richard Rumelt of UCLA compares this lack of a clear, focused strategy to an inept quarterback. If a quarterback were to conduct every huddle with nothing more than the words “let’s win,” then I doubt that team would score many touchdowns. Instead, by narrowing focus and developing a specific strategy of what your supply chain will do – and more importantly, what it won’t do– you can become great at a few objectives instead of being good at nothing.

How to Avoid the Mistake:

Create a supply chain strategy with focus. Strive for a few objectives with which to excel. Avoid vague, all encompassing “let’s win” goals and coaching.

Note: More thoughts on Rumalt’s strategy advice applied to supply chain available at Vivek Sehgal’s Supply Chain Musings.

3. Death by Inventory

Companies die when they run out of cash, and inventory has a nasty habit of eating cash faster than the cookie monster eats cookies. Small companies are especially vulnerable to stock piling inventory in anticipation of opportunities for growth. Never wanting to stock out, some businesses consistently over-order and over-build to capture all remote chances of demand. However, warehouses soon fill with obsolete or expired inventory that is essentially pallets of cash that you can’t use to pay the bills. Small companies aren’t the only ones with inventory issues; big businesses make similar mistakes. For example, Cisco took a $2.2 Billion write-down on obsolete inventory in 2001. More recently, Toyota, a company that prides itself on lean inventory, found itself with too many Trucks and SUVs that it couldn’t sell because demand for those vehicles dropped after the 2008 recession. However, less inventory isn’t always the answer either. Having too little inventory, or having the inventory in the wrong place, can quickly cut your market share and create angry customers. In reality, inventory is a complex creature that requires diligent attention to master.

How to Avoid the Mistake:

Don’t be afraid of politely turning away a few, less-profitable customers and custom items if it means freeing up significant amounts of cash through less inventory. Utilize data to back your decisions to avoid emotional purchasing. Build your company’s sales and operations (S&OP) process to ensure all departments are working on the same realistic forecast

4. Single Sourcing – “Help Me Supplier One, You’re My Only Hope!”

As supplier relationships become more collaborative, having only one primary vendor for key products can make financial sense. However, when your company’s destiny becomes married to your supplier’s future, you’re taking on unnecessary risk. Using one supplier for most of your business often makes good financial sense, but you must also stay vigilant in maintaining good back-up sources. Natural disasters, political unrest, or bankruptcy can quickly make your only supplier unavailable, leaving you in an uncomfortable predicament.

How to Avoid the Mistake:

Always have one or two back-up vendors for critical parts and services – preferably in different geographic locations or countries. Even if they are more expensive, give them a small percentage of your business so they stay engaged with you.

5. Complacency – If It Ain’t Broke, Why Fix It?

Last on the list of supply chain mistakes is complacency – getting too comfortable with a good solution. As Alex Rogo learns in The Goal, it’s difficult to push for improvements without a crisis encouraging change. However, remaining stagnate on a profitable model invites competitor disruption. New business models and supply chain improvements frequently disrupt the dominant firms in a market. Clayton Christensen, in his book The Innovator’s Solution, talks in detail about this phenomenon and offers advice on how to survive and prosper from disruptive innovation. To help our supply chains from losing their advantage, we should strive to improve and innovate before our competition forces us to do so.

How to Avoid the Mistake:

Become passionate about continuous improvement. Keep an eye on competitors, new business models, and emerging best practices. Work today to address risks your supply chain will face in the near and more distant future.

Which of these mistakes could your supply chain be facing – and what can you do to help avoid it? What other advice do you have to avoid these mistakes? Share your thoughts below, and be sure to subscribe free to receive future articles by email.

Thoughts on the Standard Pig Game

Pete Abilla over at Shmula.com has put together an excellent 5-minute video exercise on standard work. The training teaches the “Standard Pig Game.” It asks you and your team to go through three different scenarios of drawing a pig. The first is with no standard, the second is with a written standard, and the third is with a visual standard. You can access the video here:

The Standard Pig Game Video at Shmula.comThe Standard Pig Game

Note: You will need to supply your email address to view the video, but when I entered mine, I only received one email asking if I would like to receive more information from Smula.com.

Thoughts on Visual Standards

I like this video because it makes a clear point, and it’s easy to share with my team. From this, I plan to work more on creating visual guides for standard work. Diagrams in the warehouse of how to package a product properly is an easy start, but what about the many processes in the office such as writing a purchase order or analyzing sell-through data?

In an effort to train on standard work, I have written scores of step-by-step procedures, similar to the one in round two of the game. However, when I refer others to learn the process from the document, they often soon return to me and ask that I walk them through the process. Essentially, what I have failed to hear is that they are asking me for a visual standard. Written procedures are just too confusing or overwhelming for most standard work. Small businesses especially are always working to document their processes, so this is an important rule to learn early in the creation of standard work manuals.

Recognizing that visuals are the key to standard work has given me a couple ideas. The written procedures that seem to work well have many graphics and screenshots in them. I now strive to add a visual for every step of instruction. (If you don’t take screenshots often, then here’s a great visual process of How to Take a Screenshot)

A great example of visual standards are the instructions for changing the toilet paper in our office’s bathrooms. The toilet paper dispensers in our building are actually quite difficult to figure out; you have to rip off the cardboard to change the roll. However, after posting the directions below, our problem of empty toilet paper rolls quickly resolved.

How to Change the Toilet Paper in the Restrooms

The next level of visual standards that I am striving for is creating how-to videos. When I want to learn how to do something new, I go straight to YouTube and look for a tutorial. I hope to build that same type of resource in my company so that employees can easily learn standard work on their own. Whether it’s a quick video taken with a cellphone or recording your screen as you walkthrough how to access information from a database, videos showing how to do something are gold compared with pages of text. I have yet to find a screen recorder that I absolutely love, but I’m evaluating a list of free screen recording programs for windows.

What can you do in your company to increase visuals for standard work? How can you create training resources that employees will actually use and apply? Share your thoughts below, including how your team liked the Standard Pig Game training.

Could Driverless Vehicles Lead to More Pollution?

The operations and logistics departments of a company often have a greater impact on the environment than most other business functions. This is why when a company wants to “go green,” it often looks to its supply chain to play a leading role. Best practices in sustainability are becoming more crucial to a supply chain’s success as managers balance the triple bottom line of financial, social, and environmental good. All of this led to my interest in a recent Freakonomics podcast on environmentalism.

Driverless Truck Polluting

Electric Cars Could Cause More Pollution

In the podcast, Harvard economist, Ed Glaeser, suggests that electric cars, marketed as a “greener” travel option, could actually do more environmental harm than good. His reasoning is that the incremental cost of driving one more mile in an electric car is drastically less expensive than one more mile on gasoline. Naturally, this will lead to increased driving distances. Although that mile also impacts the environment to a lesser degree, the increased mileage might actually have an overall negative impact on the environment. If each mile produces half the pollution, but you drive three times farther, then you’re not moving forward environmentally.

Driverless Vehicles Means More Driving

This concept of unintended environmental side effects made me rethink one of my favorite technologies – driverless vehicles. I’m passionate that the future of logistics is in driverless semi-trailer trucking. It may be fifteen or more years away, but the pressures to reduce freight costs will eventually lead to driverless freight transport. However, as driverless shipping becomes cheaper, it will likely encourage more trucking.

For example, the main reason that I don’t go on more road trips is not the price of gas but the personal discomfort of driving. If I could simply sleep and then wake up at my location, I would travel by car much more often.

Extrapolating to the logistics arena, I foresee that driverless freight making shipping drastically less expensive. This would affect companies in numerous ways. For example, big-box retailers such as Walgreens could start shipping inventory between their stores to level out over stocks and stock outs. Freight could travel more quickly to greater distances, which would reduce the number of needed warehouses. If UPS and FedEx deliveries could make driverless deliveries, small parcel shipments would skyrocket. Online retailers would grow in dominance as the cost to serve consumers would drop.

Yet with my enthusiasm for the benefits of driverless vehicles, I had not considered the environmental consequences this technology might have. As the cost of freight decreases from not having to pay drivers, the number of miles that trucks drive will increase. The rise in pollution from trucks driving day and night could easily cancel out the advances in fuel efficiency we hope to make in the next few years. However, the decrease in costs and risk to human life involved in accidents still make the widespread use of driverless vehicles appealing.

Now What?

This is article is an open-ended thought, not a call for immediate action. The world is moving toward logistical automation, so anticipating each aspect of that future paradigm is essential. Widespread use of driverless vehicles will require support from society and public policy. Awareness of all the consequences will help the supply chain industry usher in this next generation of technology.

If you’re interested in the topic, here are a couple more articles worth reading:

Thoughts on Driverless Trucks by Kevin Gue of Auburn University

Daddy, What Was a Truck Driver? by Dennis Berman of the Wall Street Journal

The First Driverless Cars Will Actually be a Bunch of Trucks by Evan Dashevsky of Tech Hive

How will driverless vehicles influence your supply chain? Will our society allow the widespread use of driverless trucks? What other consequences must we consider to best utilize driverless trucks?

Please leave your thoughts in a comment below. In addition, if you’re interested in starting a venture into driverless trucks, please let me know. I’d love to be part of the endeavor.