Corning now employs the same processes used to diagnose its customers' financial health to diagnose its suppliers' financial health. "The underwriting rigor we use on the accounts-receivables side has been ported over to the accounts-payables side," Rogus says. "We're analyzing key financial metrics like ratios for working capital, investment performance, return on invested capital, return on equity, and others on a historical basis, and then doing our own projections of what the future might hold using market-driven data. We also try to find information on a supplier's access to available capital, determining whether they are borrowing from banks or have committed credit facilities, and the terms thereof, including the credit spreads on existing debt."
If Corning can't get this information from public sources, someone picks up the phone to contact the supplier. "Once we have what we need, we make short-term projections of the supplier's financial health, since our typical supply contracts extend out only 12 months," Rogus says. Armed with this data, Corning's procurement organization prioritizes the suppliers based on their financial condition and other key performance indicators, like product and raw-material quality, data transparency, and reliability of supply. It then compares the supplier's financial condition with Corning's exposure. "The more we spend with a supplier the higher the potential risk, particularly if it's a sole-source supplier," Rogus says. "This is all about business continuity."
Continuity, of course, may require a mix of ruthlessness and flexibility. Kellwood has also engineered relationships with domestic suppliers in case demand suddenly perks up.
"We often source the initial orders in China to take advantage of the low-cost labor," explains Michael Saunders, Kellwood's chief operating officer. "When we saw where the economy was going we got nervous and reduced the inventory, but that created the risk that we wouldn't be able to meet an upsurge in demand. So we've struck deals with domestic suppliers to replenish inventory at the last minute. It costs us 10% to 20% more, but it's a solid backup if and when demand spikes."
"If" and "when," of course, remain the two big questions that will shape supply-chain operations for some time to come.
Russ Banham is a contributing editor of CFO.
Sensing: An Opportunity?
As companies grapple with substantial uncertainty regarding consumer demand, some are turning to "demand sensing" technologies to gain insights. One goal is to avoid the high costs of carrying too much inventory, which, as Doug Sloan, director of supply-chain operations at Unilever USA, says, "leads to business waste because we may need to move the product at a lower price or potentially write it off." His company has implemented demand-sensing software from Terra Technology to "quickly see the shifts in consumer preferences so we can fine-tune what to produce and how much supply we need to meet the demand." The pilot stage of the implementation indicated a 25% improvement in forecast accuracy, Sloan says.
Older forecasting tools tended to leverage historical data, like last year's sales, to predict next year's. That doesn't fly in today's topsy-turvy economic climate. "Our software squeezes information out of current customer data to effect better sales predictions," says Robert Byrne, CEO and president of Terra Technology. Powering this squeeze is pattern-recognition mathematics that deciphers daily streams of data to predict demand. "We'll look at the company's existing forecast to see if its predicted sales and orders are jibing with what is happening in the business right now," Byrne adds.
SKF USA Inc., a manufacturer of bearings, actuators, and seals used in power transmission equipment and automobiles, is using software sold by Demand Management Inc., called Demand Solutions, to match anticipated demand to a more precise volume of materials and equipment. "If we're better at forecasting how many bearings we'll need in a particular geography, then procurement can be better at buying what we'll need to make them," says Jeff Carlisle, director of forecasting and market research at SKF. "You don't want to overstock inventory and simply hope the customer wants it."
Demand Solutions analyzes both historic sales data stored in the enterprise-resource-planning system and current sales data from the field, says president Bill Harrison. "Our software can run on laptops and smart phones, so that data from a salesperson who strikes a deal in China or South America or Cleveland goes through a series of statistical analyses and statistical models immediately, which results in a more accurate forecast of needed supplies."
Companies are realistic about just what demand-sensing technologies can do. "Accuracy is a relative word," Carlisle says. "You try to do better than natural variations in demand based on historical data. The tool gets us close to 25% plus or minus, which is actually quite good for a forecast." — R.B.
How Finance Can Help
A Supply-Chain Action Plan for CFOs
Speaking to a finance audience at CFO's Core Concerns conference this past June, Sara Lee Corp. chief supply-chain officer George Chappelle offered some detailed advice on just how the finance function can help propel supply-chain activities to new levels of efficiency and profitability. Among his recommendations:
Reader CommentsDisplaying 1 of 1
Marcelle Green
Sep 15, 2009 1:51 PM ET
Good Advice
Russ, Thank you for sharing this insight. A lot of businesses have been having a hard time forecasting and projecting … more
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