The Perfect Order - Editorial

In late 2003, Qualcomm's CIO Norm Fjeldheim started seeing = signs that=20 the demand for cellular phone chips was rising much faster than = expected.=20 Consumers around the world were snatching up cell phones at an=20 unprecedented rate, and manufacturers of the popular handsets were = scrambling for more chips. For Qualcomm, which sells chips to the = cellular=20 industry, the unexpected cell phone frenzy hit its supply chain = where it=20 was most vulnerable. "Our customers were not getting everything = they asked=20 for," says Fjeldheim, noting that demand for the chips rose 37 = percent in=20 one year. "We could not increase our supply, and some deliveries = just=20 weren't possible."

Out of stock. Whether referring to semiconductor chips or = potato chips,=20 these are dreaded words for those in charge of far-flung and = increasingly=20 complex supply chains. In Qualcomm's case, the company not only = missed an=20 opportunity to significantly boost revenue but also was forced to=20 reevaluate the way it did business.

Since that period of panic (which lasted for most of 2004), = Fjeldheim=20 and his colleagues at Qualcomm have reorganized the supply chain = so that=20 they won't get caught by surprise again. Company officials are = bringing=20 supply chain, finance, IT, and sales and marketing together for = regular=20 demand-planning sessions. And the company is trying to increase = the=20 flexibility of its supply chain by working with multiple = suppliers, rather=20 than single suppliers, to build a set of chips. It has also = started=20 sharing more information (via Web connections and file downloads) = with its=20 10 chip makers. Should there be another unforeseen spike in = demand,=20 Qualcomm will be better able to shift production back and forth = between=20 suppliers, if necessary. So far, Qualcomm, which ships 140 million = chips=20 per year to cell phone manufacturers such as Samsung and Motorola, = has=20 improved its on-time product delivery rate=97which had fallen = below the 90=20 percent level during the chip shortage=97to 96 percent, a high = rate in an=20 industry grappling with shorter lead times for its products than = many=20 other manufacturers.

Top 10 Supply Chains
AMR Research recently ranked the world's best-performing = supply=20 chains, based on ratings from a panel of experts, as well as = three=20 metrics: return on assets, sales in 2003 and rate of growth = over the=20 previous 12 months.
Dell=20 Nokia=20 Procter & Gamble=20 IBM=20 Wal-Mart Stores=20 Toyota Motor=20 Johnson & Johnson=20 Johnson Controls=20 Tesco=20 PepsiCo
SOURCE: AMR RESEARCH

AMR Research says the payoff for companies with high rates of = "perfect=20 orders"=97those that are complete, in the right place, undamaged = and=20 on-time=97can be substantial. AMR recently ranked the world's top = supply=20 chains (see "Top 10 Supply Chains," this page). Companies that = ranked=20 high=97such as Dell, Nokia and Procter & Gamble=97carry less = inventory,=20 have shorter cash-to-cash cycle times and are more profitable. A 3 = percent=20 improvement in perfect order fulfillment translates to a 1 percent = increase in profits, AMR says, while a 10 percent increase means = an=20 additional 50 cents in earnings per share. (Qualcomm, with revenue = of $4.9=20 billion in 2004, is too small to make it onto AMR's list, but the = company=20 qualifies as a top supply chain because of its ability to = effectively=20 collaborate with handset makers and cell phone service providers, = says=20 Kevin O'Marah, a supply chain analyst at AMR.)

To get to this Holy Grail of order fulfillment, however, takes = more=20 than plugging data into software programs. In fact, companies that = want to=20 achieve and then maintain high perfect order rates may have to = restructure=20 their supply chain processes from end to end. They have to build = systems=20 that connect them in real-time to both suppliers and customers, = thus=20 enabling the development of tighter relationships with both = parties. They=20 have to feed information from customers back to suppliers and get = a clear=20 forecast of customer demand. And internally, they have to improve=20 long-term demand visibility through constant collaboration between = supply=20 chain leaders and the sales and marketing departments.

Striving for perfect orders can be costly. In order to get the = most=20 from investments in supply chain technology and processes, = companies need=20 to take a targeted and gradual approach. "If you don't first = determine=20 where the gaps are in your supply chain, you might be shooting = blindly,"=20 says AMR's Debra Hofman. In fact, for some companies=97for = example, those=20 that make commodity parts such as ball bearings or other items = that can be=20 stored cheaply=97the cost of striving for perfect orders may not = be worth=20 it.

For most industries, however, including automotive, electronics = and=20 retail, the payoff for high order-fulfillment rates can be = substantial.=20 And CIOs who want to be key players in their companies' strategic = planning=20 need to play an important role in overseeing the new supply chain=20 strategy. Since they understand what information technology is = capable of,=20 they are in a good position to argue the business case for greater = investments in the supply chain. "Supply chain is no longer a = back-office=20 activity," says Kevin O'Connell, director of manufacturing and = procurement=20 processes at IBM's integrated supply chain division. "It has = become a=20 potential competitive weapon in the boardroom, and IT is extremely = important because technology ultimately enables the various=20 processes."

O'Connell and others stress that companies must first revamp = their=20 business processes and then choose the technologies that support = those new=20 processes. "Getting our supply chain in order is 75 percent = process and 25=20 percent tools and technologies," Fjeldheim says.

In Pursuit of Perfection

Semiconductor manufacturers in Silicon Valley were among the = first to=20 use the term "accurate order" in the early 1980s, according to Hau = Lee,=20 the Thoma professor of operations, information and technology at = Stanford=20 University's Graduate School of Business. By the 1990s, this focus = on=20 measuring order delivery rates had spread to other industries, = including=20 food service, which was losing money because food distributors = (the=20 companies that deliver food to restaurants and other outlets) = would=20 withhold payment for what they considered imperfect orders. Lee = says that=20 while manufacturers understand the importance of aiming for = accurate=20 orders, many have underestimated the cost consequences of = imperfect=20 orders. At Seven-Eleven Japan, says Lee, the company noticed that = highly=20 paid truck drivers were often idle because of an imperfect order. = As a=20 result, the company started measuring perfect order rates and = noticed that=20 when an order is perfect, the driver can leave right away.

Top 25 Supply Chains

Analyst AMR Research recently ranked the world's top supply = chains. To=20 read their full report and get the full list of top supply chain=20 companies, go to The AMR Research Supply Chain Top=20 25.

Companies trying to boost their rate of perfect orders need to = first=20 identify what makes an order imperfect. According to AMR's Hofman, = orders=20 can be imperfect for any of the following reasons: out of stocks,=20 manufacturing and transit delays, late and inaccurate shipments, = poor=20 quality of finished goods or damage to finished goods in transit.=20 Companies striving for perfect orders can end up increasing their = supply=20 chain costs, Hofman says, especially if they are trying to deliver = goods=20 more quickly. Pierre Mitchell, supply chain analyst at The Hackett = Group,=20 says that companies should benchmark their supply chain costs = against=20 others in their industry and balance that against how important = perfect=20 orders are for their customers. Companies that manufacture parts = for=20 automobiles, for example, may have a very short window of time for = delivery of their product. "If you're not on time, the vehicle = assembly=20 line may shut down," Mitchell says. If a manufacturer is not = serving a=20 customer well in this type of scenario, it could face steep = financial=20 penalties. However, if a company is making a commodity item, such = as=20 packaging material that can be stored at little cost, achieving = perfect=20 order is less important.

For those companies that decide perfect order fulfillment is = worth=20 pursuing, the process starts with demand forecasting, a famously=20 unscientific approach that some have compared to gazing into a = crystal=20 ball. Most experts agree that demand-forecasting software alone = can't=20 guarantee an accurate forecast. As a number of well-publicized = mishaps at=20 companies such as Nike have shown, ensuring the accuracy of the = data going=20 into the forecasting algorithms is key to avoiding expensive=20 miscalculations.

So companies are changing their supply chain processes to get a = better=20 view. At Procter & Gamble, for example, the company started to = revamp=20 its supply chain four years ago to increase efficiencies and focus = on=20 getting a clearer picture of demand from actual consumers to = supplement=20 the traditional use of historical sales data. The idea is to = provide=20 information to suppliers on what is sold today through aggregate=20 point-of-sale (POS) data. P&G, of course, has been exchanging = POS data=20 with some of its top retail customers, such as Wal-Mart, for the = past 20=20 years through its automated replenishment system. When a cashier = at=20 Wal-Mart sells a box of Tide, that data flows back to a P&G=20 distribution center. Once a certain number of boxes has been sold, = a=20 trigger goes off to send another shipment of Tide to the = appropriate=20 Wal-Mart distribution center so that it can be shipped to the = store. But=20 today, P&G is working to provide its suppliers (the companies = that=20 make ingredients for P&G products) better access to production = data.=20 The company is doing this by collecting POS data from its = customers and=20 then transmitting production requirements to suppliers on its = supplier=20 portal. "This allows [the suppliers] to better plan their = production, and=20 deliver raw and packing materials on a just-in-time basis," says = Patrick=20 Arlequeeuw, vice president of the global supply network at = P&G.

Collaborating End to End

In the past, when a retail customer saw that a product was = missing from=20 the shelf, the retailer would check his back-office inventory and = the=20 distribution center. If necessary, he would then place an order = with=20 P&G, where someone would look at inventory levels to see how = quickly=20 she could get a shipment of Tide to the retailer's distribution = center.=20 Then, based on the historical sales data, P&G would contact = suppliers=20 for needed ingredients and packaging materials to avoid a repeat=20 out-of-stock experience.

Now, for an increasing number of products it sells, P&G = aggregates=20 the POS information from the store and provides its suppliers with = this=20 information through a supplier portal linked to P&G's = proprietary SAP=20 system and a customer connect portal. "Everyone in the network = works from=20 the same data," says Arlequeeuw. The result is that P&G's = average=20 out-of-stock rates have fallen from 20 percent of brand categories = with a=20 10 percent out-of-stock rate, to just 7 percent of categories = experiencing=20 that rate. Over the same period, says Arlequeeuw, the percentage = of=20 categories that are achieving an out-of-stock rate of less than 5 = percent=20 has increased from 43 percent to 60 percent.

The problem with P&G's old supply chain model was that=20 replenishment of empty shelves could take several weeks, or even = months at=20 times. "Now, because we provide information to our suppliers on a = daily=20 basis, they understand what is happening and can replenish shelves = right=20 away," Arlequeeuw says.

P&G's demand forecast, while still not 100 percent perfect, = comes=20 closer to delivering accurate orders because it contains = information about=20 what is happening on store shelves on a daily basis=97information = that is=20 ultimately transferred to suppliers. The goal, says Arlequeeuw, is = to have=20 enough flexibility in the supply chain so that plants can produce = for=20 tomorrow what was sold the week before.

This approach should give P&G and other companies a better = chance=20 at nailing accurate customer demand. And companies that have = better demand=20 forecast accuracy will have less inventory, stronger order = fulfillment and=20 higher profit margins in the end. Hofman says P&G is moving = toward=20 having its entire supply chain capability driven by demand. = P&G is=20 aggregating the POS data and sending it to their production = plants. "This=20 is not yet widely done," she adds.

It was at a companywide strategy session in August of 2004 that = Qualcomm executives=97still smarting from the surprise jump in = chip=20 demand=97decided it was time to shake up the company's supply = chain. To get=20 a better handle on supply and demand, the company decided to merge = its=20 supply-planning group with its demand-planning group to create one = integrated supply chain organization. Where in the past the = separate=20 planning groups worked on their reports in relative isolation, = each region=20 now collects forecasts from customers and reviews them with = Qualcomm's=20 marketing forecast.

Qualcomm's top management, including its CIO, recognized that = if the=20 company wanted to boost its order-fulfillment rates, it needed a=20 longer-term demand forecast that took into account suppliers' = capacity=20 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=20 frequently updated demand plan to serve as a road map for the = entire=20 company. First, the company had to beef up its sales and = operations=20 planning (SOP), a process that requires supply chain, finance, = product=20 marketing and sales executives to work together to devise a more = accurate=20 demand plan. That involves plugging all forecasting and demand = data into=20 Oracle demand-planning software, which has reduced errors and now = allows=20 for more analysis of the forecasts than the previous Excel-based = process.=20 "Ultimately, a company needs one system that represents the = truth," says=20 Mitchell of The Hackett Group. "Through sales and operation = planning, the=20 company can take its forecasts and turn them into a demand plan = that=20 everyone in the company will march to."

Bringing Suppliers into the Loop

At Qualcomm, supply chain executives meet on a weekly basis = with sales=20 and marketing to review the forecasts and prepare for a larger, = monthly=20 gathering. The monthly planning meeting brings together the = company's top=20 management with finance, sales, marketing and supply chain to = discuss and=20 analyze an overall demand forecast. "The end goal is to get a = longer view=20 of capacity requirements," says Vinay Asgekar, Qualcomm's senior = director=20 of supply chain management. Through this change in process, = Qualcomm now=20 creates 12-month SOP forecasts, and plans to extend that to 18 = months in=20 the near future. "The mind-set has changed completely when it = comes to=20 supply chain," says Asgekar. "Now we know we have to get a much = longer=20 view of demand in order to make these perfect orders."

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

"Sales, logistics and general managers need to work together to = get an=20 aligned picture of demand," says Arlequeeuw. In general, key = leaders=20 within each product category at P&G meet at least once a month = to go=20 over the demand plan. But some units, especially those facing = pressure=20 from consumers to frequently offer new and innovative products, = meet more=20 often. For example, the cosmetics division, under consumer = pressure to=20 produce new items on a constant basis, gets together on Mondays to = exchange demand data.

In addition to improving collaboration within the company,=20 organizations seeking higher perfect order rates need to share = information=20 on promotions and demand with suppliers. And that goes for more = than just=20 manufacturers. At West Marine, the largest boating supply retail = chain in=20 the United States, company executives learned this lesson the hard = way.=20 Trouble at the California boating giant's supply chain started as = early as=20 1996, after the company acquired a competitor, E&B Marine. New = distribution centers were poorly connected, and out-of-stock = levels during=20 peak season in 1996 climbed to more than 12 percent. At the same = time,=20 sales dropped by almost 8 percent. By 1998, with earnings sagging, = the=20 company's board of directors brought on a new CEO who quickly = recognized=20 that the supply chain was broken and moved to turn the boating = company=20 around by putting together a team to fix it.

Larry Smith, West Marine's senior vice president of planning = and=20 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=20 orders in the same way that Qualcomm and other manufacturers = might, he=20 says that efforts to link sales data to suppliers have = dramatically=20 increased on-time replenishment rates. Over a period of three = years, the=20 boating supply company integrated its distribution center with = store-level=20 replenishment systems, linked to suppliers with EDI, and invested = in a=20 range of vendor and customer-forecasting and replenishment systems = that=20 connect stores to distribution centers and suppliers. Smith says = West=20 Marine is now collaborating with 200 suppliers, 70 of which are = loading=20 its forecasts into their ERP systems. As a result, the retailer = has been=20 maintaining peak-season in-stock levels at its stores at 96 = percent or=20 better.

Five years ago, the company's on-time fill for vendor orders at = its=20 distribution centers had sunk to between 30 percent and 40 = percent. Now,=20 they are at 80 percent, and Smith attributes the increase to the = company's=20 ability to quickly share sales information with suppliers. Every = night,=20 the company electronically polls all of its 390 stores for sales, = updates=20 the in-store replenishment systems and, with that data, projects = sales and=20 orders. West Marine sends the aggregated forecast data to its = vendors via=20 automated e-mail. Every Monday, the company sends in-stock reports = to 200=20 suppliers. Then, with a year's worth of data, it creates an annual = forecast, runs order calculations for distribution centers and = sends its=20 order forecast to suppliers. On a quarterly basis, company = officials=20 measure the accuracy of vendor orders.

According to Stanford's Hau Lee, West Marine's internal = aggregation of=20 the data helps suppliers understand demand according to specific = regions=20 and seasons. For example, boating supply sales in Boston in the = summer=20 will go up, whereas demand might be spread across the year in = Florida.=20 "They are helping their suppliers make sense of their POS data, = and their=20 on-time delivery performance has risen because of that," Lee says. =

Qualcomm is also working to improve the way it shares = information along=20 the supply chain in its effort to boost its perfect order rate. = Right now,=20 Qualcomm shares information with suppliers via Web connections, or = by=20 sending them downloaded files. Over the coming year, the company = plans to=20 build an "e-hub" to connect to its growing stable of suppliers, = although=20 they have not yet decided whether to go with an EDI-type model, = build=20 their own system or use some sort of a mix. Fjeldheim and Asgekar = say that=20 while they are better prepared today to react to a sudden spike in = demand=20 such as the one that shook the company in 2004, Qualcomm is "not = fully=20 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=20 losses=97such as extra inventory and wrong quantities = shipped=97out of the=20 system," says P&G's Arlequeeuw. "What we're seeing is that = perfect=20 order can lower your costs if you do it right."

next=20 story

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