VideoKeith Pratt, CFO of Advanced Fibre Communications, would agree. In 2001, he put pen to paper and wrote off $30 million in excess inventory and overbooked purchase commitments to a variety of its suppliers. For a company like AFC, a designer and manufacturer of broadband access solutions with 2002 revenues of $344 million, $30 million was a tough nut to swallow, especially for something as seemingly controllable as inventory.
AFC certainly wasn't alone in suffering the boom-bust supply-demand cycle that suddenly manifested itself in 2001. Other companies servicing the telecommunications industry, notably Cisco Systems, also made substantial purchase commitments to suppliers in 2000 based on strong customer demand and constrictions in their suppliers' capacity to meet the demand.
When demand fell and sales plummeted, many firms were left holding the bag, which in AFC's case amounted to a hefty $18 million in excess inventory and another $12 million in commitments to suppliers to buy more components. "We were unable to respond to demand changes in time to prevent being overloaded with inventory," says Pratt. "We needed a way to respond quickly to changes in demand and have it percolate through our supply chain."
As part of the solution, AFC turned to BI software company Valdero, hoping to open a window into its suppliers' supply chains. It now has visibility into the purchase commitments made by its four top-tier suppliers with their respective second-tier suppliers, dollar commitments that AFC ultimately is liable for. If demand falls as it did in 2001, AFC is ready with an updated forecast and assurances that tier-one suppliers are taking appropriate actions.
Thanks to the BI tool, AFC's materials planning more accurately reflects demand. "We've improved inventory turns from three a year to seven a year, meaning what used to be on our books for four months now is on our books for less than two months," the CFO says.
A Fine Mesh
But there is a spate of activity as traditional BI vendors begin to offer features that analyze the supply chain, traditional supply-chain integration vendors begin to add BI features, and ERP vendors look to do some of both. Each has its own take on how to pull and push data from front-end demand forecasting to back-end execution — not to mention all the back-end integration required, plus the connections to financial metrics so that glitches in the supply chain can be cast in a context users of the software can appreciate.
There is a compelling financial reason for using BI tools to gain visibility into the supply chain: "You want to mesh your anticipated demand with your ability to meet that demand accurately and quickly, without getting stuck with too much inventory or not enough," says David Folger, vice president in the enterprise analytics strategies service of Stamford, Connecticut-based research firm Meta Group.
And, Folger adds, users of BI tools that tackle the supply chain also want to be able to "glean exogenous events that may prevent a supplier from meeting your needs and pull all this data together across the enterprise, so that it's updated and monitored to alert you when things are out of synch."
Those are lofty goals, most of which have yet to be met. Companies deploying BI software that addresses the supply chain are often constrained by their own legacy systems, disparate systems used by suppliers, and the fact that vendors possess different areas of expertise.
Data integrity (customers and salespeople often offer bloated projections) and supplier resistance ("Whaddya mean you want to open a window into my supply-chain system?") also pose challenges. For now, companies must settle for tactical solutions provided by the disparate vendors, pieced together to offer a semblance of integration. "The Holy Grail is real-time, accurate visibility and predictability, where a demand forecast feeds into orders for supplies, and supplies are monitored to ensure they meet this demand," says Amir Hartman, managing director and co-founder of consulting firm Mainstay Partners and a senior fellow at Harvard Business School. "But we're not there yet."
Even North Face, with all its success, does not have a true end-to-end integrated supply chain. For example, unlike AFC, North Face lacks an automated window into its suppliers' supply chains. "We haven't decided how we would go about that yet," says Templin, "or which vendor would provide it. But integration across the supply chain is a strategic goal and part of our philosophy."
Tight Fit
AFC says that it, too, is missing certain pieces. "What we're trying to do now is get better forecasting and planning tools that we can hook up to the back-end systems," says Jeff Rosen, who heads AFC's IT organization as vice president of operations. "We want to make sure suppliers at the back end meet the forecasted demand accurately and that inventory levels are appropriate. That's the burning issue."
Progress Rail Services, on the other hand, tackled the front end first. The Albertville, Alabama-based company, which makes signal-crossing and track switches, repairs locomotives, and offers maintenance services, faced an internal train wreck: as a result of 20 to 25 acquisitions in a three-to-five-year span, it found itself using multiple financial systems, which made analysis a very long haul. "I desperately needed transparency across these various systems to manage our assets and supply-chain information," says CFO David Klementz, "as well as confidence in the integrity of data, given all these systems and spreadsheets."
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