Managing Demand Uncertainty
Picture source: www.ayersintl.com
BY ROB WILKINS, BUBLU THAKUR-WEIGOLD AND STEPHAN M. WAGNER
INDUSTRIAL ENGINEER – AUGUST 2012; VOLUME 44; NUMBER 8
People, processes, and leadership revolutionize HP media’s supply chain
Evolving technology and unpredictable markets create challenges for any operation team, also present opportunity. HP’s media business grew quickly and realized that it needed a more efficient supply chain.
HP media’s operations team works under continuous cyclical time pressure. HP managers pay significant attention to their quarterly business metrics. HP media operation teams meet weekly to review actual shipment updates and performance indicators like forecast accuracy, manufacturing capacity, inventory and product availability.
Time pressures complicate the task, as operations teams must balance the needs of customers, shareholders and internal stakeholders against timing challenges. On-shelf availability is critical in the supplies business, low availability means lost customers. The asymptotic trade-off is a function of the uncertainty that the supply chain must digest. HP media set optimal inventory levels to achieve 95 percent service levels in each region, the business tolerates up to 5 percent of products in a short-term backlog at the end of the quarter.
HP media has a global supply chain with manufacturing nodes primarily in Europe, though a significant portion of its customer base is in North America. HP operations system must enable revenue in a retail business driven by deals and promotions without exceeding strict quarterly inventory limits. Simultaneously, they must deliver on plans to increase revenue significantly over the next two years.
Working with a key supplier in Europe, HP media implemented the demand pull program, which aims to convert supply chain planning from forecasts to actual consumption, effectively switching replenishment strategy from push to pull. Demand-pull essentially uses reorder point logic in its planning processes to trigger purchase orders when a minimum tolerable quantity of inventory on hand is reached.
HP’s media business wants to reduce factory output without endangering revenue, they categorize products by revenue and gross margin. Key products are protected by supplementing the forecast quantity with some upside potential. For all other products, this flexibility is reduced to a minimum. Close collaboration between marketing and supply chain teams has been a key to improving business results.
HP media team makes informed judgments on major product categories based on actual shipment performance compared to a original forecast quantities. If some categories are selling more strongly than forecast, the operations team protects it by adding a discretional level of buffer.
Factory build quantities are based on consumption in the channel, starting and stopping manufacturing at various, predetermined stages if customer demand diverges from expectations. This form of real-time decision making ensures that HP media does not overproduce.
Supply chain responsiveness could not improve without lead-time reduction. Inefficiency can develop insidiously, over time, when teams rely on legacy structures and outdated logic while their supply chain continue to evolve.
In the past four years, HP’s media business has reduced DO I by 48 percent and reduced inventory cost by 55 percent. In addition, aggressive portfolio management has resulted in a 20 percent reduction in the number of products offered, while simultaneously growing revenue. Operationally, the business is much more efficient.
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