Good forecasting tools point the way to lower inventories

For much of its existence, the Americas Beverage business unit of Cadbury Schweppes employed the common manufacturing industry practice of holding a certain amount of “safety stock” to avoid being unable to fill unexpected orders. Then the corporate office issued a directive that all business units would have to do a better job of managing cash flow.

By Jean Thilmany, contributing editor September 1, 2007

For much of its existence, the Americas Beverage business unit of Cadbury Schweppes employed the common manufacturing industry practice of holding a certain amount of “safety stock” to avoid being unable to fill unexpected orders. Then the corporate office issued a directive that all business units would have to do a better job of managing cash flow.

To comply with that order, the Plano, Texas-based Americas Beverage unit would first have to do a better job of gauging demand for Dr. Pepper, Snapple, Squirt, and the other soft drinks it makes.

Two years later, the unit’s safety stock levels have dropped significantly while its order fill rate is above 99 percent. Andrew Dennis, regional supply chain process director for Cadbury Schweppes, gives much of the credit for this change to the company’s adoption of new inventory optimization software.

This software, developed by a company called ToolsGroup , allows Cadbury Schweppes to take a more granular approach to forecasting demand. For instance, it allows for forecasting at the stock keeping unit (SKU) level, as well for gauging how much of each SKU should be held at specific warehouses or distribution centers—areas that industry analysts say most manufacturers don’t give enough attention.

“From a business perspective, it’s critical to forecast not only at the SKU level, but for individual distribution centers as well,” says Julie Fraser, principal analyst with Cummaquid, Mass.-based Industry Directions . ( See page 38 to learn about an Industry Directions study on forecasting .)

These needs have become more pronounced—and more difficult to meet—as supply chains have become more geographically dispersed, but Fraser says companies must step up to the challenge if they hope to maintain both high customer satisfaction levels and profit margins.

“It’s always a trade-off,” she says, “between an ideal fill rate on the one hand and inventory levels that maximize profitability. You may want to service Wal-Mart, for example, at a 99 percent fill rate, while a smaller customer is satisfied with 95 percent.”

A layered approach

The magnitude of the problem caused Cadbury Schweppes to tackle it in stages, starting in its concentrated syrup division. This part of the business delivers syrup to restaurants, bars, and other commercial establishments that mix the syrup with soda water to make the fountain variety of various soft drinks.

Before implementing the ToolsGroup software, Cadbury Schweppes used spreadsheets to calculate safety stock levels, which generally were based on historical sales figures. Those forecasts were almost always inaccurate, however, because they didn’t account for variables such as a sudden heat wave that might cause a spike in demand for soft drinks, or even Cadbury Schweppes’ own sales promotions.

Dennis says that’s changed with the new ToolsGroup software. The package holds the “Powered by SAP NetWeaver” designation, meaning it is tailored for easy integration with the SAP ERP suite.

At Cadbury Schweppes, the ToolsGroup application retrieves data on sales forecasts and customer orders from the APO (advanced planning and optimization) module of the SAP suite.

Running that information through its own algorithms, the ToolsGroup package designates safety stock levels for every SKU in the Cadbury Schweppes product line. It also determines the best locations for holding those items to satisfy the twin goals of meeting customer demand and minimizing operating costs.

These forecasts are updated weekly, taking into account the relevant variables that could not be plugged into the spreadsheets the company previously used for forecasting.

This new process has proved so successful that Cadbury Schweppes recently extended it to its finished goods division, which makes the bottled and canned versions of its soft drinks. That move netted a 12-percent inventory reduction—which translates to $7 million in savings—in the first three months. As important, says Dennis, “We are consistently meeting our customer service targets, with less manual intervention and extra effort than before.”

End the guessing game

A similar situation has unfolded at XRP , a South Gate, Calif.-based manufacturer of fuel-line parts for racing car and boat engines. XRP makes 5,000 types of parts, and fills an average of 300 orders per month from parts dealers around the world.

For years, XRP used a stand-alone database package to track customer orders and company finances. But XRP didn’t have an inventory management system, so it could only guess about proper safety stock levels. Periodically, supply chain managers would manually comb through past sales data. By documenting which part numbers were the biggest sellers, they at least got an idea about which items it made sense to replenish. That information was then used to plan production.

When XRP decided to migrate to an ERP system, it chose a package from SYSPRO , a vendor that caters to midsize manufacturers. And when SYSPRO introduced a forecasting module, XRP was an early adopter.

The SYSPRO forecasting module allows companies to forecast at both the item and warehouse levels. Jarrod Barker, XRP’s IT manager, says the ability to do item-level forecasting is exactly what XRP needed.

“With our former software package, our inventory [of certain items] often would go negative,” Barker says. “Now we use the forecasting software to tell us exactly what we need to have on hand.”

SYSPRO’s forecasting package also examines past sales by part number, but it is better equipped to use that information as the basis for an accurate determination of safety stock levels. That’s because the system can plug in intelligence—such as a particular customer’s short-term buying plans—or other variables that a manual forecasting process can’t consider.

Barker says XRP hasn’t been using the forecasting module long enough for any hard numbers related to its impact on the business. Still, he says, “I know it works. It significantly improved our inventory management.”

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Best Buy eliminates service parts inventory through good order management

When Richfield, Minn.-based Best Buy turned its inventory parts management over to a third-party logistics (3PL) provider, that move alone didn’t allow the electronics retailer to do away with parts warehouses.

But the 3PL—Wauconda, Ill.-based Fidelitone—created a subsidiary company specially to manage the Best Buy account, a logical decision given the size of Best Buy’s parts distribution network.

“Acquiring the massive number and variety of repair parts required for Best Buy’s repairs is a major challenge,” says Dave Telschow, director of repair service. “We order all the parts for the computer, home appliance, and home electronics industries, including Geek Squad [Best Buy’s computer and electronics installation and service unit]. There are millions of SKUs in those three industries.”

Telschow says Best Buy initially decided to outsource parts management to Fidelitone—and subsequently the subsidiary known as National Parts—simply to take the burden of ordering parts off its employees’ shoulders.

“Different suppliers have different processes, which made what should have been a simple task—ordering parts—pretty complicated from an employee perspective,” Telschow explains. And because no single supplier could handle all Best Buy’s needs, “The only way to go was to put together a standardized process for order tracking and fulfillment,” he adds.

National Parts developed just such a process, which allows parts for Best Buy’s entire service and repair operation to be ordered from a single location. Vendors also deliver parts directly to the repair center that requests them—most arriving just hours before they are to be used. The entire operation is handled by an order management system that National Parts built to accommodate Best Buy’s business rules.

“We put together a relationship with 40 suppliers,” says Tom Giovingo, a National Parts executive VP. “We automatically shop the suppliers to identify price and availability and location of the part. Based on matching criteria, we award a purchase order.”

Parts are shipped overnight to repair facilities, while National Parts tracks shipping status. That information is automatically fed to Best Buy’s accounting system, from which payment is generated. From order to invoice, the entire process can take just minutes.

Telschow says the system yields tremendous savings. “We removed a lot of costly activity out this operation, and improved customer service. It’s a great scenario.”

This relationship also enables Best Buy to account and receive credit for defective parts, with National Parts serving as the clearinghouse. Best Buy service technicians send defective items to National Parts, which in turn ships them to the appropriate supplier. The supplier then issues a credit to National Parts, which passes it on to Best Buy’s accounting system. This centralized process led to a 90-percent match-up rate on return parts, meaning 90 percent of parts are being returned to the correct vendor, and Best Buy is receiving the proper credit.

“A very high match-up rate means we don’t have to put horsepower into chasing credit,” says Telschow.

It also puts an end to warehousing too many service parts because after all, a fully stocked warehouse no longer signifies a well-run business.