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What Can Manufacturers Do in a Tough Economy? - Part I

Written By: Predrag Jakovljevic
Published On: December 12 2008

According to the proverb “calamity is the touchstone of a brave mind,” in these tough times some supply chain management (SCM) vendors have been trying to take stock (no pun intended) of their offerings and how best to offer these to customers, to mutual benefit. In fact, I have recently seen some intriguing (if not bizarre) press releases (PRs), which read like some type of whitepapers or presentation transcripts.

They were certainly different (and therefore refreshing) from the customary dry and fluffy PRs that most communications folks use (especially during ordinary times). One such “educational” PR came this past summer from the spend management vendor Emptoris, and was analyzed in my blog post on five procurement commandments in a down economy.

A more recent similar PR came from JDA Software Group Inc., a provider of integrated merchandising and supply chain and revenue management planning, execution, and optimization solutions for the consumer-driven supply chain and services industries.  The PR came on the heels of the worldwide economy continuing to struggle and going into a tailspin, whereby new orders in the manufacturing sector are falling at record rates.



Namely, Markit, a financial information company, reported in its “Eurozone Services Purchasing Managers Index” from October 1, 2008 that manufacturing output in Great Britain hit an astounding 17-year low. For its part, in the “Manufacturers’ Shipments, Inventories, and Orders” report from October 2, 2008, the US Census Bureau also announced the troubling news that orders for durable goods decreased by 4.5 percent in the month of August 2008. The heightened financial sector turmoil and tighter credit conditions are significantly raising the danger of prolonging the downturn.

The JDA PR asserted that “this kind of news can rock the nerves of even the toughest chief executive officers (CEOs) and chief financial officers (CFOs) who are responsible for managing some of the largest manufacturers in the world. Besides developing deep circles under the eyes from sleepless nights, what can manufacturers do to win in such a tough and volatile economy?”

To that end, David Johnston, JDA Software’s senior vice president (SVP) of manufacturing and wholesale distribution, outlined some of the winning strategies that manufacturers can immediately deploy to drive up margins and protect shareholder value in the current economic climate. I also took the liberty of mapping, with the help of some current and/or former employees of JDA and former Manugistics  (now part of JDA), the appropriate current JDA solutions for each suggested strategy.

JDA’s Advice (And My Analysis Thereof)

Advice #1 "Immediately Analyze Demand to Identify the Shifts in Customer Buying Behavior – The buying habits and preferences of consumers and businesses inevitably have, and will continue, to change in response to the slowing economy. Manufacturers should quickly dedicate the time and effort to apply an additional level of scrutiny to analyze demand to identify the products with significant upward or downward trends. The forecast of these items should be aggressively adjusted to reflect the shifts in product preference as consumers make trade-offs in price, package size quantities and value versus premium offerings. By quickly aligning forecasts to reflect the current economic conditions, manufacturers will establish the foundation for making strategic, profitable changes to inventory policies, product mix, production plans and procurement plans. Every manufacturer is forecasting demand to some degree of accuracy today. The question has become: is your demand signal visibility sufficiently accurate, dynamic and comprehensive enough to manage every echelon in your extended supply chain?”

My guess is that JDA is positioning here around Manugistics' demand management applications (formerly grouped under the NetWORKS Demand name). One of the areas former Manugistics worked on prior to the merger was a short-term forecasting (demand sensing) algorithm to match the likes of Terra Technology. That seems to have been released by JDA since the merger.

Former Manugistics’ offering was not able to react and change the forecast to match daily demand shifts. If that capability is available now and tied to some type of store-level data from JDA, those capabilities could be powerful. In fact, the offered products by JDA in this regard are:

  • JDA Demand, powered by Manugistics;

  • JDA Demand Decomposition, powered by Manugistics (formerly called NetWORKS Demand Classification); and

  • JDA Seasonal Profiling, which is an original JDA product, and that accounts for the store-level visibility that Manugistics’ products could not provide.


More information on these products can be found here. Also, to conduct a "what if" scenario of the once-impending merger of JDA with i2 Technologies (which was just called off following on the recent haggling over the final i2 price), I am not aware of any notable product that i2 could have contributed with here, since its heritage was not really in the fast moving consumer good (FMCG) sector, as was the case with Manugistics.

At the end of the day, not many innovative things will come out of this strategic advice unless JDA really can propagate the demand signal back into the forecast and re-forecast/allocate product accordingly.

Advice #2 "Quickly Make Adjustments to Inventory Policies to Align Them with Shifting Demand Patterns – Manufacturers should adjust their safety-stock level policies to place a greater emphasis on those products that are trending upward, and less emphasis on those that have a significant downward trend. This is an easy way to quickly align working capital investments with the changes in product mix driven by trade-offs made by consumers in response to the economic downturn. Another quick-win strategy is to slightly raise the safety stock levels of those products that have remained fairly stable and that reflect significant volume and reasonable margins. This strategy will squeeze out additional margin dollars through recovery of some lost sales with a minimum incremental working capital investment.”

The offered products by JDA in this regard are:

  • JDA Inventory Policy Optimization, powered by Manugistics (former Inventory Policy Optimization product that never had the NetWORKS branding, I believe, and which must have been improved to be a better fit for the consumer goods manufacturers and retailers); and

  • JDA Strategy, powered by Manugistics (former NetWORKS Strategy).


More information on these products can be found here. However, I would imagine that over time JDA would have used i2’s superior inventory optimization (IO) product here (again, if the merger had not been called off). Namely, Manugistics’ product was much more focused on service parts in the defense sector, where demand would be very sporadic. Former Manugistics Inventory Policy Optimization product had a ways to go before it could become a full-fledged consumer packaged goods (CPG) solution.

Also, while most of the ideas in the PR make sense, some don’t. For example, it says above “Another quick-win strategy is to slightly raise the safety stock levels of those products that have remained fairly stable and that reflect significant volume and reasonable margins.”

This idea suggests those safety stocks were too tight to begin with, and there is not much reason to believe that. The quality of safety stock targets tends to degenerate over time, but in both directions. If anything, they tend to degrade upward, since there is little incentive for keeping safety stocks too tight, but lots of incentive for keeping extra inventory around “just in case” if there is a demand fluctuation problem. So, the safety stocks could already be too high to begin with. Raising them further would involve throwing away cash, just as cash is getting tight.

Additionally, since safety stocks are a buffer against demand variability and uncertainty, raising safety stocks on items that remain “fairly stable” is completely counter productive. The conventional wisdom is that items that are fairly stable need less safety stock, not more.

An alternative “quick win” would be an “Inventory Assessment” which in less than 30 days would allow a company to tune its safety stocks and inventory mix, picking up extra margin on underserved items and extra cash on overstocked items. Freeing up working capital and cash by optimizing the inventory mix is important for companies facing declining profitability and especially important for leveraged companies who depend on debt, which has recently become scarcer and more expensive.

Advice #3 "Change the Product Mix Strategy to Place Additional Emphasis on Value-Based Products -- As both consumers and businesses reign in spending, they will re-evaluate their budgets and suspend buying premium products that are non-essential and trade-off to buy more value-based products. Manufacturers should adjust production plans to allocate more capacity to value-based product lines and position themselves to grab market share from competitors by appealing to the more cost-conscious buyers. At the same time, manufacturers should examine the raw materials used to produce products for potential upstream savings to garner additional margins. As consumers trade down, there is also the opportunity to garner additional margins from value lines by executing well-timed pricing actions.”

This issue seem to revolve around the classic ABC analysis and Pareto principle:  80 percent of our revenue and profit should come from 20 percent of our items. However, these product mix decisions would probably be inputs into the software rather than outcomes, which would make more sense.

The offered products by JDA in this regard come from the former Manugistics Manufacturing suite as follows:

  • JDA Master Planning (formerly NetWORKS Master Planning);

  • JDA Supply (formerly NetWORKS Supply); and

  • JDA Sequencing (formerly NetWORKS Sequencing).


More information on these products can be found here. I might have some concern about some of these products’ fit for consumer goods. Namely, NetWORKS Supply was a great product, but mostly a good fit for deep, multi-level bills of material (BOM) in discrete manufacturing. It might be a stretch to apply it to CPG manufacturers, given that these goods require much simpler ("flatter") BOMs. Also, NetWORKS Sequencing was another Manugistics product geared more to discrete manufacturing like sequencing cars (with all the final options in terms of color, fabric, electronics, etc.) on a General Motors (GM) final assembly line.

Part II of this blog series will continue with the remaining three pieces of advice from JDA, and with my analysis. In the meantime, what are your views, comments, opinions, etc. about the current economic climate in your region/industry and about the above-mentioned experts’ recommendations? What are your best SCM practices as well as experiences with particular abovementioned applications?
 
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