Faced with evidence of lost sales, rising inventories and lowerthan- desired order fill rates, the UK-based manufacturer Electrocomponents, supplier of high-tech electronic and maintenance products, knew that something had to be done to improve its bottom line and make its supply chain more efficient. And the path that it eventually took is one that could be beneficial to tier suppliers and manufacturers both big and small that are looking to improve their forecasting capabilities in the highly competitive global automotive service parts and aftermarket sector.
The company serves more than 1.6m customers in 32 countries from 17 warehouses, and distributes around 550,000 products through its RS Components and Allied Electronics brands, with revenues of around £1.2 billion ($1.9 billion).
But shipping 40,000 orders on the same day that they are received, and with an average value of £104 per order, it is also a very genuine ‘long tail’ demand business.
Indeed, said Andrew Lewis, Electrocomponents’ head of global supply chain planning, the company’s existing Manugistics forecasting system was calculating demand as zero for no fewer than 30% of the company’s 550,000 products.
The result of that forecasting was one of lost sales, Lewis believed. For as Electrocomponents was faced with limited and hard-to-predict demand, the company’s stocking and inventory policies called for lean approaches and held only the bare minimum of stock.
“We had a thin layer of stock–a ‘veneer’, if you will,” he explained. “It was impressive in its width, but not its depth. We might have five or ten [units] of an item and be able to meet demand for only a handful or so, but if a customer wanted 50 or a 100, they’d go elsewhere.”
Yet ironically, he adds, when experiments were undertaken to see if extra stock-holding would produce additional sales, the answer appeared invariably to be ‘yes’.
At the other end of the ‘tail’, according to Lewis, over-stocking was rampant. Unwilling to ever go out of stock on best-selling items, inventory controllers would apply overly generous service-level targets, which they then bolstered with additional safety stock levels and ample buffers throughout the supply chain.
The eventual solution? A replacement forecasting system from the Netherlands–based ToolsGroup, in the shape of its SO99+ forecasting package–a solution that was actually already in place in the automotive aftermarket parts operations of carmakers and tier suppliers such as Ferrari, Delphi, Aston Martin and Piaggio.
Over a 14-month period, Lewis worked with a consultant to, firstly, formulate a brief for a forecasting solution appropriate to Electrocomponents’ needs. He then carried out a detailed review of seven-out-of-ten vendors that responded to the brief. Finally, the evaluation finished with a forecasting simulation, asking the short listed vendors to forecast demand and propose safety stocks from actual historical data.
Electrocomponents duly implemented the ToolsGroup solution alongside an improved sales and operations planning approach that generated mathematical forecasts that were then handed over to a team of Lewis’s staff charged explicitly with ‘enriching’ it with knowledge of real-world and operational events and trends. In doing so, the system has quickly identified around £9m of inventory savings.
Around £2m of those savings, Lewis told Automotive Logistics, have been returned to the business by means of deferring or cancelling outstanding purchase orders. And in the medium term, a further £3m of such savings have emerged, although not all have yet been realised.
But £4m of identified–and achieved–savings have been reinvested in the business in the shape of carrying more inventory, Lewis explains. The goal is to have a deeper, more complete stockholding of thinlystocked items with the objective of winning more sales; and to improve service levels on items of lower demand, but greater demand variability.
In short, the new tool has paid for itself within two months, said Lewis. And at the same time, the company measured its highest ever customer satisfaction ratings–despite still suffering from the worst trading conditions since the 1980s.