Case Studies

Challenges in Forecasting and
Inventory Management

Shiriro Singapore

 

In Jun 2010, the company experienced an overstock situation for 38% of the Lindt Chocolate SKUs running close to 3.5 weeks of stocks that are 6 weeks left to product expiry and thus no longer accepted by most retailers. The only way to dispose these SKUs is to do a price mark-down by 70% via the distributor channel resulting in huge erosion of profit margins. In the end, 10% of the SKUs were not accepted by the distributor channel due to historical poor demand and had to distributed free to internal staff or disposed off.

 

A root cause analysis was conducted on the situation and the findings pointed to 3 key gaps. Firstly, the product line has been suffering from a consistently positive forecast bias averaging around 20% for the past 5 months, resulting in excess stocks on top of the 2 weeks of built-in safety stocks during purchasing. Secondly, the Account Manager receives approval of the promotions confirmation from retailers at timings that do not coincide with the ordering schedule. This resulted in urgent and ad-hoc ordering which comes with the risk of products not arriving in time for the promotions by compressing the lead time, not to mention the additional shipping costs incurred without consolidating orders.

 

Finally, the verbal and informal communication between the Account Manager and the Order Management team resulted in errors and delays in purchasing which not only aggravated the situation of excess stock situation when goods do not make it in time for the promotional activities, but also makes the company lose credibility and risks being deprioritized by retailers from taking part in the next big promotions.

 

This is a typical situation which calls for an end-to-end review of the supply chain processes. This involves a 4-phase approach. The first phase requires understanding the roles and responsibilities, cadence and tasks, and the KPIs of each function. Second phase is to identify the process and information gaps. The third phase is to introduce feasible solutions such as process change and new tools or systems to close the gaps identified in phase 2. The final phase involves setting up metrics and a reporting structure to make sure the process is sustainable.

 

To address the high forecast bias, a bi-weekly Sales and Operating Planning (S&OP) cadence is put in place where the Account Manager, together with Marketing, Supply Chain and Retailer Account Managers will gather to discuss from their perspective the upcoming marketing promotions and campaigns, provide market insights and finally commit to a forecast for execution as a team. The cadence also instil a review of the forecast bias and mix errors, triggering discussions that work towards improving the overall forecast accuracy.

 

To address the issue of urgent ordering and miscommunication between Sales and Operation. An weekly ordering schedule is enforced together with the implementation of an Order Management System where it allows a simple simple entry or upload of purchase order based on the outcome from the bi-weekly S&OP session by the Account Manager and approved by the Supply Chain for further execution by the Order Management team.

 

The series of proactive implementation of corrective actions yielded a positive outcome and resulted in an improvement of forecast bias up from 20% to 8%, and inventory turnover also improved by 23% over a 6-month period.