Larry Leveille witnessed the effects of bad forecasting first-hand. As a business unit director at Jabil Circuits, a $6 billion global EMS firm, Leveille recalls the go-go years prior to the 2001 crash as a euphoric period in which OEMs ignored the dangerous inventory build-up because demand seemed limitless. During the dot-com craze they didn't want to leave any sales on the table, recalls Leveille. OEMs cared only about sales; if you didn't deliver according to their schedule, price and quality, they would go elsewhere. They dropped their forecasts to the CM in [electronic data interchange (EDI)], and you filled the order, end of story.
As long as companies continue to build to forecast using MRP II push-production methods, another inventory disaster is just a matter of time, says Cortes. Most companies are doing a better job keeping inventory in check right now because they were burned last time and senior management is paranoid. But it's not systematic. At some point another bubble will emerge, experienced senior managers will forget or be replaced, and disaster will strike again. It's only a matter of time.
The First Steps...But Are They Working?
Of course, some OEMs learned from the last debacle that build-to-forecast production is dangerous, particularly in an extended supply chain involving hundreds or even thousands of suppliers. After all, the OEMs that insisted that contract manufacturers and suppliers build to their forecast ended up owning the unsold inventory. Now some of these companies are applying Lean Manufacturing practices to internal and external business processes.
While many CMs have Lean initiatives underway, nearly all of them are focused on internal production issues such as line-design, set-up and staffing.
It is almost impossible to do Lean throughout the supply chain without the OEM leading the initiative, comments Leveille. The reason? OEMs have built large planning, forecasting and contract management organizations with which to control the outsourced supply chain. In the 1980s, OEMs would tell their CMs to build a certain number of printed circuit boards. The CM would get quotes from component suppliers and give a bill-of-materials (BOMs) cost to the OEM who would approve it or not, he says.
But that changed once the OEMs began outsourcing the manufacture of complete systems. In order to mitigate risks and keep costs low, OEMs sourced finished products from multiple contract manufacturers. In addition, they insisted on controlling supplier selection as well as negotiating key terms and conditions of the contract with suppliers that govern pricing, volume, liability and so on.
With so little flexibility, the CMs and their suppliers had no choice but to respond to OEM forecasts as if they were gospel. OEMs may have outsourced manufacturing, but they were managing the supply chain with old-fashioned MRP tools designed for vertically integrated enterprises and command-and-control economies.
Of course, OEMs pay a heavy price for insisting on complete control. When the economy goes bust and their forecasts prove wildly inaccurate, they own the results, including all of the material flowing into the supply chain, the work in process, the finished goods inventory, the whole nut. That is why they ended up taking the lion's share of the $13 billion write-down. And it's also why some OEMs are beginning to change their tune and turn to Lean.
Certainly, they will find many willing partners among the forward-looking contract manufacturers and component makers in their supply chains who realize that in the long term Lean is important to their very survival. During the past decade, even well-managed firms that understood and tried to run Lean inside the four walls of their factories had trouble because the most influential members of their supply chains insisted on meeting pre-determined production schedules tied to unrealistic forecasts, irrespective of true demand.
How do you tell suppliers to only ship product based on actual demand (a key element of Lean known as kanban) when the OEM, and other key supply chain partners are responding to an inaccurate forecast? Furthermore, in many cases, sourcing contracts that are set up between the OEM and suppliers permit the supplier to ship components to the contract manufacturer even when they are not needed.
A New Way of Thinking
In today's globally outsourced economy, competition is no longer company against company, but supply chain vs. supply chain. Companies that want to run Lean must learn to do it collaboratively, in groups. In a Lean supply chain, traditional forecasting and MRP production scheduling techniques are used only for planning to run what-if scenarios and communicate trend analysis back to suppliers. But they are not used to order material or produce products. Only kanban signaling is allowed for that.