Isn't it wonderful how patient your customers are when they receive your products a few weeks later than promised? Isn't it marvelous how understanding they can be when they call in to report items missing from a shipment? And, don't you just want to hug them when, despite the delays and errors, they promise never to buy from your competitors? With customers as loyal as these, your company will be in the Fortune 500 in no time.
OK, enough of the sarcasm. You get the point. Even companies already in the Fortune 500 know there are just as many fickle customers as there are loyal ones. Customers willfully drop suppliers at the drop of a hat - or, rather, at the drop of one-too-many botched shipments. If you can't deliver the goods (literally), there's always some other company that can. And, buyers will hold that over your head every time.
Listen to this from Gary Kahler, director of sales and operations planning for Sara Lee Household & Body Care - USA (Sara Lee H&BC), a division of $17 billion Sara Lee Corp. (#115 on Fortune's latest list): "Some large customers have formal scorecards they use to rate their suppliers' abilities to ship completed orders on time. Their buyers are held to those numbers. If you get in hot water with buyers, you'll hear about it. If you drop below their scorecard thresholds, you can get delisted." Chopped, whacked, dropped, sacked - however you interpret it, delisted can only mean one thing: you're out as a preferred supplier.
For the Exton, PA-based Sara Lee H&BC, the danger is that consumers will be left wanting in the search for Kiwi shoe polish, Endust furniture cleaner, Ty-D-Bol toilet cleaner, Ambi Pur LiquiFresh toilet cleaner/air freshener, and other popular brands. Consequently, the company doesn't take any chances when it comes to grabbing and maintaining shelf space - including space for household products that, unlike Endust and Ty-D-Bol, aren't yet household names. Vying for a share of Kiwi's fame in the shoe care arena, for instance, are such lesser known contenders as Bama, Tuxan, and Golden Rooster. So, to ensure in-store availability of all of its brands, Sara Lee H&BC restructured its administrative staffing to focus more heavily on demand planning. It also made corresponding investments in supply chain software upgrades. As Kahler puts it, "We now have the horses to devote to demand planning and get it right."
Demand Planning - ERP's Ace In The Hole
If you think a $200 million division of a global corporation must have always gotten it right, you're wrong. Not long ago, it had only one staff member dedicated to sales forecasting. No kidding - numerous product lines, one forecast analyst. Go figure. That lone staffer could hardly be expected to carve out time to generate the thorough reports needed for foolproof demand planning and inventory replenishment. Instead, the forecast analyst relied heavily on SKU (stock keeping unit)-level reports generated by product marketing managers - useful, but limited, resources.
Moreover, Sara Lee H&BC was constrained by legacy databases and financials programs, as well as by outdated DOS-based forecasting software. None of these systems could scale up to the levels demanded by the growing company. "As our U.S. division became more closely aligned with the mission of Sara Lee Household & Body Care worldwide, we knew there would be acquisitions," Kahler explains. "We were concerned about our ability to support a lot of new business and to integrate acquired product lines."
To address the limitations of its software, the company finally pulled the trigger on the purchase of a full-scale ERP (enterprise resource planning) system from J.D. Edwards. Connected to the ERP package is another key new purchase: demand planning tools from Prescient Systems' XEi suite. To deal with the staffing limitations, Sara Lee H&BC assembled a demand planning team, stocking it with three full-time demand planners. Each demand planner is responsible for one or more of the company's product lines: shoe care, air care, furniture care, and personal care.
With a demand planning group now in place, Sara Lee H&BC can base its sales forecasts on information culled from a much broader range of sources. While the product marketing group still contributes key information (e.g. market share, competitive activity, new product development), it is just one resource among many. The demand planners also receive tactical input from sales managers in the field, who monitor consumer activity and generate rolling four-month forecasts for each brand. To measure the rate and amount of sales for particular items, the demand planners also study data pulled from major customers' consumption reporting packages, such as Wal-Mart's Retail Link. Doing much of the heavy lifting for the demand planning team are the Prescient tools, which produce detailed statistical forecasts.
The demand planning group weaves the information from all sources into what it calls a "SKU-by-location forecast." Initially generated 18 months out from anticipated shipping dates, that forecast reflects inventory needs for each of the five outsourced warehouses through which Sara Lee H&BC distributes its products. During operations planning cycles, SKU-by-location forecasts are reviewed and approved before being passed from the demand planning group to the product supply group, which sends purchase orders and shipping directives to the company's third party suppliers. The forecasts also drive budgeting activities within Sara Lee H&BC's accounting systems.
To maintain one- to three-day order turnaround windows for its customers, Sara Lee H&BC keeps the warehouses stocked with several weeks' worth of finished goods inventory for all products. "Depending on the source, lead times for getting products in stock can vary from three weeks to four months. That's why accurate forecasting is so important," Kahler says. "It helps us to keep aggregate inventory levels as low as possible and still hit our target of shipping 95% of orders on time."
Baby Needs A New Set Of SKUs
In addition to helping Sara Lee H&BC achieve its goals for on-time orders, the staff restructuring and systems upgrades have contributed to other gains. In 1999, the last year before the demand planning initiative got underway, the company's perfect order fill rate was just over 80%. That number has already jumped to 92%. SKU-level forecast accuracy, a measure of how well sales predictions for each SKU match actual consumption, has made a similarly steady climb in percentage, from 62% to 73% so far.
Having better tools for predicting and monitoring SKU-level consumption should also push what is perhaps a surprising goal for a growing company. Sara Lee H&BC actually intends to downsize its product lines. In the early '90s, when the U.S. household products division of Sara Lee Corp. still comprised only shoe care products, the company carried 1,200 SKUs. Even with the acquisition of brands in furniture care, air care, and personal care, Sara Lee H&BC has cut 400 SKUs from its product offerings and intends to eliminate 100 more. "We had a SKU for everybody and every purpose. The problem was that 90% of our business was generated by only 10% of those SKUs," Kahler explains. "So, we've been fairly aggressive at SKU reduction. We want to have enough to generate high volume without complicating our supply chain execution."
Cutting unnecessary and underselling SKUs from the product line is particularly important for a make-to-stock supplier. With its product base at 800 SKUs, Sara Lee H&BC must maintain $12 million worth of finished goods inventory in its warehouses. "If we can reduce our average inventory from $12 million to $10 million, that's a steady $2 million we will have freed up for research, new product development, and acquisitions," Kahler says.
Even though the company can point to percentage gains and dollar figures, Kahler admits that hard number calculations weren't the primary drivers behind the purchase of the new tools. "We never justified the purchases on an ROI basis. We based them on a technology basis," Kahler admits. "Our systems simply couldn't scale, so we had no choice but to upgrade."