A hard problem – What’s the demand?
Pinpointing what is the real demand that a product company has to build to – this is clearly one of the hardest Operating problems in the Hi-tech branded products industry. Let’s try to uncover why? Why focused energies need to be expended at the senior-leadership level to ensure that the right approach and yes tools are applied to solve this problem.
Different Roles, Different lenses
Experienced industry practitioners well know “Demand” for a company’s products may mean different things to different functions.
For the CEO this starts with the current and next year’s target, crystallized out of a periodic business planning cycle (Annual, Quarterly) into target Financial numbers (Dollar forecast) – often a range. In the best cases, this is arrived at collaboratively with inputs from Finance, Sales, Marketing, Product Engineering and Operations. Although, we have some data-points to believe that Operations maybe involved sub-optimally to the detriment of the company’s execution to its business plan.
For the Sales leader this means current Quarter’s & next quarter’s Sales forecast.
For Marketing, this is looking at Product Mix and plan based on product launches, transitions, events.
Engineering cares most about baking feedback from recent launches and providing reliable launch time-frames.
For the Operations leader and team this means determining – what is the net demand that has to be built and shipped in the current & next cycle (monthly, quarterly) and prepare in case demand flexes. In essence answer –
What is the net Demand that Operations needs to build or buy for?
As plan adjustments are made based on how Sales is tracking to their numbers and other factors impacting demand, Ops needs to answer – What to plan, source, procure, build, ship, deliver & manage the myriad changes to – so that quarterly financial numbers are met or exceeded.
Often, this is made harder by the fact that Operations are downstream recipients of the company’s Annual or Quarterly Plan, sometimes not pro-actively involved at the get-go in the business planning process.
Degrees of difficulty
What is the demand that Operations should execute to, becomes harder to answer due to many factors. Let’s consider these –
- Young companies in a growth mode go through many changes rapidly – growing the number of products, establishing the number of Channels they sell through, the number of customers and countries they deliver to. This means that the structural value networks themselves are changing, sometimes quite frequently.
- In addition, the demand from these different Sales channels and direct customers is fluctuating. By Sales Channels we mean all the indirect channels through which a company sells. This includes Resellers, VARs (Value Added Resellers), Distributors and VADs (Value Added Distributors).
- A system to support Operations do this is very often the Achilles heel. Experienced Operations leaders know ERP provides valuable Supply data & some input data to determine demand, however they cannot depend on their ERP systems alone for fast and accurate planning and re-planning for Demand.
Demands thinking out of the box
ERP is not a panacea or cure-all. Most experienced Operations leaders know they have to think and act out of the ‘ERP box’ if they want to get to their demand picture quickly and accurately, in an environment where change is a constant.
Operations leaders know they have to think and act out of the ‘ERP box’ .. to get their demand picture quickly and accurately
To make this happen, experienced Operations leaders direct their teams to extract data from ERP, merge it with other data and intelligence from outside such as emails, in their own offline spreadsheets and then determine demand. However, they dread this and know fully well they can only go so far in managing their demand with spreadsheets.
Spreadsheets are errors prone and cannot be relied on for collaboration.
When any of the inputs change (say, inbound P.O.s), inputs that are needed to determine real customer Demand to be fulfilled – the spreadsheet(s) go through a domino effect and all numbers become incorrect instantly. The process to change the data in spreadsheets to re-compute demand is painstaking and does not meet the cycle-time or accuracy needs of growing enterprises in competitive markets where collaboration is a pre-requisite.
Operations teams need a specialized system. A system that can rapidly reflect all upstream changes (such as Sales execution, Marketing actions) impacting demand.
Operations teams need a specialized system.. added on top of ERP. .. cannot be done in your ERP system
As we head deep into Q4, the ability to rapidly generate “Demand for Build” reflecting changes and shifts is a critical one – and these capabilities need be added on top of your enterprise systems like ERP. It cannot be done in your ERP system.
Dynamic companies such as Ruckus Wireless, Aerohive Networks have done just that and reaped significant benefits. Implemented right, such a system can be a key factor in scaling operations, while facing changes that impact growing demand. How do we know this? We have provided the system for their Operations teams. Please pen down your thoughts below or reach out to us at Zyom. We would love to share more.
p.s. This blog post is dedicated to the memory of Doyle Westley of Aerohive Networks, a respected collaborator
The Sales kick-off went quite well. Now is the time to take one more look at what 2014 looks like from the vantage point of forecasting before real constraints set in.
Economic forecasters have long utilized ‘leading’ and other “indicators” as a barometer to predict where the economy will be headed in the future. Inspired, we have pulled together the following ‘early’ indicators that can provide useful ingredients in influencing if not generating a Company’s forecast. While all forecasts are off, early indicators can be used to understand the ‘trajectory’ and a portion of the variance in the forecasts that is otherwise hard to estimate.
Here are some early indictors and macro-data[i] as you craft your forecast for 2014.
Early indicators – the Macro
Weather events & the US – Climate .. or at least the weather took center stage early in January as temperatures plunged in vast swaths of the US disrupting life and business. The near term effects have been significant but not severe. The initial price tag of the big chill is placed at $5Billion (as of early January 2014). Doesn’t appear devastating given nearly 200 Million people were affected. However, long-term effects should be lesser to none.
The good news – the US economy turned in a fair 2013 (3.2% GDP growth in Q4, 2013 versus 1.9% for the year) and early indicators suggest 3% for 2014. In the near-term the US certainly seems to be back on track, and maybe at the wheel in terms of driving the global recovery.
Estimated Impact – Of storm – Near-term only (3 weeks to 2 months); US Growth – stable for 9-12 months[ii]
Emerging markets – Short-term growth prospects have been hurt. Turkey made headlines with an egregious interest rate hike in January. However, emerging market countries as far-flung and diverse as Argentina, South Africa, Indonesia and India seem to be facing stiff economic headwinds too. Brazil seems drawn into a stagflation, just months from the big kick-off!
Estimated Impact – Near to Mid-term (9 to 18 months depending on markets)
China’s growth phenomenon – China’s slowdown has arrived per data and economists – 7.7% GDP growth in 2013 Year-over-Year, versus 7.8% growth the year before. While debate is split about future direction of this important market, all data points to a gradual deceleration and not an absence of growth. Structurally, data regarding the supply-side limits are cause for bigger concern (China’s working age population fell by 2.44 Million in 2013 after falling the year before – The Economist Jan 25th 2014).
Estimated Impact – Near to mid-term slower growth (10 to 12 months); Longer-term growth could be adversely impacted.
Japan and EU – These key developed markets still seem to be stuck in neutral with dangers of deflation not gone.
Estimated Impact – Tepid growth. Foggy at best for the next 6-9 months
Housing starts – A key “leading” indicator of future economic activity is in positive territory in the US, Germany and England (Jan 2014 compared to a year ago).
Estimated Impact – Could imply some progress for Construction and related businesses (home products, home solar products, other home/consumer products).
Early indicators – the Micro
New orders and new customers – Both are good early indicators
Orders for new products –are valuable early indicator, especially for industries such as the Hi-Tech electronics industry that rely heavily on new products for significant portions of their revenue stream. For example, for the Wireless networking industry, how are the orders coming in for the 11ac products (based on new networking standard) and how are the prices trending.
Inventory (especially Channel Inventory) & lead-times – are key early indicators. While channel inventories are typically co-managed, tracking this can provide valuable clues.
Backlog – A very good gauge in the near-term to establish revenue trend. However, this needs to be taken with a pinch or heaps of salt. Why? This depends on how effective are your supply chain fulfillment operations.
And that’s where the rub is – since some of these indicators depend on a ‘healthy forecast’ so we are back to the ‘chicken and egg’ problem.
These are a few of the key ingredients to consider as ‘early indicators’ in updating or building your forecast – at least for the mid-term: 0 to 6 months.
Overcast or Sunny? For those who dare to Forecast
Even with the best processes and systems the age-old truth holds – All Forecasts are incorrect, especially at the get-go. However companies can disproportionately benefit if they:
i) Include ‘early indicators’ in the forecasting process in a simple way
ii) Make Forecasting (the process) one of the book-ends of the Demand Planning process, which flows seamlessly as a part of the overall Sales & Ops Planning and execution process
And yes, lets plan to loop back after the proverbial dust has settled on the quarter (or, quarters) to figure out how far off was the Forecasted Demand. And while we are at it.. why not find out why, and how the indicators have changed. As the adage goes..
“Forecasting is the art of saying what will happen, and then explaining why it didn’t! ”
[i] Several secondary sources used – The Economist from Jan 25th 2014 to Feb 21st; Conference Board at:
[ii] All ‘estimated impact’ notes are wild guesses based on secondary sources research
As we prepare for another spin around the sun, we found it fitting to reflect back on 2013 learnings, and take a glimpse at our crystal ball for the journey ahead in 2014
Takeaways – 2 short stories
Thanks to interactions with our customers, partners and other practitioners, the year was chock-a-block full of learnings. 2 highlights:
1) How does a young company know when they have entered the Operating or ‘O’-Zone? Over the last 4+ years we had the privilege of watching a company (Ruckus Wireless www.ruckuswireless.com) blossom into a significant player in a newer segment of the networking industry. As a solution provider, we have worked and thought hard about the development lifecycles of high growth, high change industries for over a decade, wondering how & when a company knows that they have come of age, or entered the critical ‘O’-Zone, as we define it. O for Operating. As defined in a previous blog (http://bit.ly/MemoToChiefExec ) young Product companies that enter the O-Zone see big changes- from shipping 10s or 100s of units a month of a handful of products, they are quickly thrust into a bigger, rapidly growing Operation – 1000s, potentially tens of 1000s of units being shipped, and this transition can be a mean one. Managing this transition requires the ambidextrous qualities of careful orchestration as well as rapid, intuitive decision-making and execution.
This year we got some great data-points. Those at the forefront of Supply and Sales Operations functions– Order Fulfillment, Supply Chain, Channel Sales managers – enjoy a key vantage point to see this transition as it unfolds. This valuable insight (that a young Product company has entered the O-Zone) if utilized in a timely manner can be harnessed for a greater Operating advantage that can be sustainable over several years.
2) Where do the Highest Impact Collaboration initiatives spring from? How? – As young companies enter the Operating Zone of their development cycle, processes and systems related to collaboration cannot be left to chance or management directives. Systematic Collaboration becomes especially critical between functions that may appear to have conflicting objectives and metrics in the near-term – for example, Sales focus on Revenue Growth and Ops on Cost Control. However, collaboration cannot be regimented through management directives. The genesis of high impact collaboration initiatives happens usually in the trenches, and its success rests exclusively on the efforts of those that get the work done. Take the case of ProductCo – a Product Company (all names changed for anonymity).
As volumes have grown quickly at ProductCo, fulfilling orders in a timely manner has become challenging for Operations. Shelley in Supply Chain Ops figures out that she ships a portion of products every week to the same Distribution partners and her colleague on the Channel Sales side – Julia – needs support. Support, so she can systematically compile sales data, interact with her Distribution partners effectively to understand downstream demand and provide quick signals back to Shelley in Ops, with all the data literally at her fingertips. Shelley (Supply Chain) runs this need by her manager, who points them to a systems vendor for brainstorming. Out of Julia (Sales) interactions with the vendor springs a collaborative system which will yield data and demand insights for the ProductCo in the near-term and on an ongoing basis. No major hullabaloo over the choice of systems, just a single-minded focus on working jointly with the vendor, across functions to improve the customer experience – through faster and accurate collaboration utilizing fresh data. All this happened because the initial thought to change came from within, was nurtured by a progressive management and collaboration culture, and effectively implemented working with a solution vendor as a partner.
Leaping forward in 2014.. and beyond
a) Collaborating systematically across functions and partners will gain traction going beyond cookie-cutter approaches : 2014 will see the onset of specialization in a critical collaboration area- Sales & Operations Planning and Execution. Dynamic companies will demand more than the cookie cutter approaches that have been offered to date. Industry specialization, smarter demand management methods, more tailored data and workflow linkages which will result in a faster and smarter collaboration between Sales, Supply Chain and their partners.
b) Leading companies and younger aspirants will refocus on profitability and away from a singular focus on Revenue growth only– Whether motivated by competition, financial valuations, cost of capital or more mundane business prudence, leading Product companies will focus back to product and operational profitability, and will be rewarded richly (http://reut.rs/1hagYpN ). Those that fall short will start seeing their valuations drop, resulting in erosion in market standing over time. Profitable Revenue growth will become the mantra of those who are at the head of the pack and intend to stay there.
c) System Implementation will capture center stage as a core success factor : As the botched rollout of the Affordable Care Act (ACA) website revealed (http://bit.ly/ObamacareIssues), bringing a website “up” is no guarantee of its success. Systems implementation requires a rich, complex set of interconnected activities to be completed in a timely and cost effective manner. This fate has also befallen many a system implementations in the private sector too. Since private companies can afford to throw a blanket of secrecy over such bungling, we hear only of the spectacular failures (http://ubm.io/JpGedn). 2014 and beyond will bring renewed focus to the arts and sciences of effective systems implementation.
Wishing you a Leap forward in 2014!!
Memo to the Chief Executive – Have you looked at this Critical Collaboration as you prepare for growth?
To The Chief Executive, Dynamic Startup,
The tide is turning. Channel partners and key customers are moving fast to your products..
Just as you were preparing to hear the beautiful humming sound of a well-oiled Operating machine shipping products out – you hear some ugly, jarring noises –
‘Hot-selling product has gone on allocation’
‘Big Channel partners are getting frustrated, as lead times start creeping up’
What happened? The Critical ‘O’-Zone
First, the good news – You have reached a major inflection point in your development cycle. You are no longer a small, obscure supplier waiting for the next large order. Orders are now waiting for you. Congratulations!
The not-so-good news – these orders will not wait long before they jump ship to a competitor.. Channel partners may divert attention to these competitors too.. So, what happened?
You just entered what we call the ‘O’ Zone (the “Operating” Zone). This is that part of your lifecycle (“zone”) when customers want to see you Operate like clockwork– shipping out 10x, 100x or more volume than before, yet meeting delivery dates globally, at attractive price points.
What happens in this vital phase of your Company’s development cycle is going to be determined in a big way by a critical collaboration – Near Real-time Collaboration between your Sales and Manufacturing/ Supply Chain Operations (Ops) team.
What’s causing these pains? No ‘growing pains’ is not a good label. Here is a critical one–
Divergent metrics & its impact on Sales & Operations
Your Sales team is focused on hyper-growth – signing up new Channel partners, winning new deals with end customers despite tough competition.
They are totally focused on order volume (Revenue) metrics, and compensated appropriately. So, they make sure they open up the gates and get more customers, more partners and more orders in. But hold on!
Do they have enough time to pivot to their Ops partners – give them a heads up about new customers, what product forecasts will be like?
Your Ops team, on the other hand, has an increasingly complex balancing act as demand takes off. They can grow their Supply Networks – to an extent (signing up new sources – new CM/ ODMs, new suppliers, etc.) to gain extra capacity, but then they hit the brick wall – of ‘Cost’ centered metrics.
The strains start to show in interactions between Sales & Ops.
The offshoot of all this is not pretty – As orders increase, Ops fulfillment can be in lock step only for a little while, after which demand and supply diverge. For Ops, it becomes a guessing game –
Q. What will Sales sell? How much buffer stock should we keep?
For Sales it becomes a hand-wringing exercise, as they field questions from customers –
Q. When will our orders ship? Why can’t you deliver it sooner?
With ‘Keep cost down’ as the guiding principle for Ops, it becomes a crazy dash to expedite when demand swings up with little notice, flying goods over instead of the more inexpensive modes (sea, rail or road) – depleting margins.
The human costs are bigger – anxieties mount as Sales & Ops try to play a game which looks somewhat like – catch the ball ‘blindfolded’.
Key to growth – A Vital, Systematic collaboration
In the O-Zone (operating zone) we need to play carefully – Pay special heed to the needs of this collaboration which is vital for growth –
Between Sales & Supply Chain Operations
To start off – Metrics need to be aligned.
How about rallying both Sales & Ops around ‘Profitable Growth’ metrics?
Let’s discuss it as a team at the leadership levels first. At a minimum – Sales, Supply Chain Operations, Operational Finance and you, should participate. The dividends of playing smart in the O-Zone are huge – Growth with Profitability – A distinct Operating Advantage. We, at Zyom, will be glad to help and explain further.
Collaboration is powerful! Dan Tapscott, in his TED talk, explains how starlings, small birds, can take on larger predators when they fly in formation with hundreds or thousands of other starlings.
To date, the word ‘collaboration’ has been used profusely in business text and talk. However, we have barely moved the needle in product innovation, production and distribution that smart collaboration can result in. This is surprising given the transformation that has taken place in the technology world – from a ‘desktop centered’ to an ‘internet-enabled’ consumption, creation and distribution of information –that is fairly ubiquitous world-wide.
Poor responsiveness of far-flung supply-chains
A recent Economist Special Report highlights how poor responsiveness becomes a big Achilles heel in extended supply chains with offshored or outsourced manufacturing. It points out how GE home appliances and Chesapeake Bay Candle have decided to ‘reshore’ manufacturing operations back to the US (from manufacturing sites in China and Mexico), to become “more responsive”.
In 1999, I had the opportunity of designing supply chain collaboration software for companies such as HP and Dell. However, the promise remained unfulfilled, due, in big part to the relative immaturity of internet technologies. That has completely changed in the last 8-10 years. As a part of a startup – Zyom – we have been hard at work trying to realize this dream of internet enabled smart collaboration.
At a recent webinar hosted by Zyom, Fred Harried, VP of Operations at Ruckus Wireless, explained – how collaboration was one of the key factors that enabled him to scale his Operations several X in the last 4 years, and how Zyom’s MozartCC system was a key collaboration enabler. Attached is a brief 6 minutes overview of some of the Q&A highlights from the webinar.
This example highlights how a small step – the innovative use of internet for collaboration across partners provided a boost to a startup in handling changes much faster, ensuring low inventory exposure for all supply network partners – a true Win-Win.
We are at the very early stages of utilizing the huge untapped potential of the internet for connected enterprises, their value chains and beyond – Collaboration may indeed be a disruptive advantage for Operations… more on that in the next blog.
Drop a line – Do you think collaboration could provide a competitive advantage? Fuel growth? Be a Disruptor? Or, none of the above.
 Don Tapscott: Four principles for the open world; POSTED JUN 2012; TEDGlobal 2012
 The Economist, Special Report – Outsourcing & Offshoring, Jan 19th, 2013
It’s that time again when the best and brightest roll up their sleeves and dive into ‘reading the tea leaves’ – some even compulsively. No, I am not talking about the November 6th Elections. I am talking about the longer-term (12 to 18 month) business planning cycle.
Dynamic companies all over the world have started, or are well into their 2013 Planning process. Irrespective of their fiscal planning cycles, this is a critical time to pause and invest energies in making projections for the year ahead. Among the many transitions, have you considered this?
Plan carefully and deliberately for Product Transitions – Product transitions (major or minor changes in Products) are a critical time for technology-intensive companies. To stay focused, I will discuss those changes to products caused by “sustaining”  improvements in product technologies. For a computing tablet maker (such as Apple’s iPad) this could be a better display (e.g., ‘Retina’ display), more memory, etc. While many of the critical ingredients needed to run Operations during such Product Transitions are well understood by Product Companies, several key variables remain elusive:
- How will the new product (or new revision) ramp-up in volume? Will it meet targets?
- How will it impact the demand for existing products?
- How to manage the upside and downside risk?
These are just a few of the critical questions that cross-functional Product and Operations teams have to answer. Done right, Product Transitions can generate the next new source of Revenue and Growth. Any slip-ups, on the other hand, can deal a rough hand to the company– millions of dollars of unplanned inventory write-offs, or open the doors for competitors to sneak into a nascent market.
Interacting with cross-functional Operations and Product teams at companies such as HP and Samsung, I got some rare insights. The single biggest one –
Processes & Planning for Product Transitions have unique needs and need to be given focused attention and resources.
So, as you go through your planning cycle, set aside some bandwidth to carefully account for this process. If you have comments or need some thought starters, please drop me a line.
 Clayton Christensen ‘The Innovator’s Dilemma’
The most serious Risk that Companies with extended supply chains face is – the Shortage Risk. In the wake of the Japanese earthquake and tsunami[i], the floods in Thailand and a fire that took significant capacity of a critical automotive industry resin offline[ii] – ‘major supply shocks’ have taken center stage. But these are only a small subset of the Shortage risks that Companies and their Supply Chains face.
Often, the more mundane, ‘garden variety’ shortages that Companies face on a daily basis, can pack a vicious punch – making a serious dent in a company’s competitiveness, if not pushing it off the cliff!
Let’s understand why Shortages are the biggest risk now and examine potential warning signs that shortages maybe just around the corner.
The Destructive Impact of Shortages: For the want of a nail..
Shortages impact all companies downstream of the manufacturer facing shortages – to varying degrees. Sometimes, shortages can cut across industries.
For example, if Amazon buys up significant capacity of TFT glass (a specialized LCD used in different products) for its next new Kindle launch, that can cause shortages in unrelated industries – such as at video-game makers or electronic-toy makers. Even, the most agile Operations executives can get blindsided in such cases.
The impact of shortages can be severe. Dynamic young companies trying to ship products, stand to lose a lot. But even larger companies are not immune (Smartphone Biz Hurt by Own Success as Chip Supply Shrinks [iii]). Beyond the obvious Revenue impact, shortages can:
– turn away new customers (revenue hit),
– put-off existing customers (satisfaction erodes, loyalty and customer lifecycle value diminishes),
– cause unintended consequences (long lead-time for large companies downstream or an entire industry[iv])
– worse (perception of poor management controls, even if incorrect, adverse competitive impact[v])
Any one of these is bad enough. Their compounding effect can be devastating.
Avoid getting Blindsided – Warning Signs
At a time of such a tepid recovery, leadership across companies of all sizes should take note of this threat and ask – What are the warning signs that we are exposed? Here are a few critical ones we have found helpful:
1) Frequent over-forecasting by Channel partners and Field Sales – Manufacturing Operations team frequently asked to jump through hoops to increase shipment quantities at short notice, often to find later that forecasts were lowered.
2) Dependence on very few suppliers – OEMs totally dependent on few Contract Manufacturers (in the Hi-tech electronics industry) or Tier1 suppliers (in the Auto industry) who are also major suppliers for other competitors. BOMs with a high percentage of single-sourced items should also throw up red flags.
3) Visibility limited to key suppliers in the first tier of supply only– For an OEM this means having the ability to manage and monitor the performance of direct suppliers only, in the best case (CM/ODMs or Tier1 Suppliers [vii]), and no visibility beyond that[vi].
4) Frequent Allocations sometimes even on ‘run rate’ products – For products that start approaching stable sales patterns, alarms should go off if shortages occur, before these products go on hard ‘allocation’.
5) Quarterly Business Reviews (QBR) with suppliers showing ‘strain’ or going ‘too smoothly’– If QBRs with Supply Chain partners start showing strains due to unplanned costs,etc.– that’s an early warning. Dangers may also be lurking, if no disagreements arise.
6) Total time to respond to demand changes is unknown or too long – When it takes too long to answer – “How long will it take to ship a 10% upside?” or the range is too wide (“a few hours to a few days”) – that’s a red flag.
There are exceptions to the above. However, time and again, across different companies and industries we have found the above provide a good check-list to harden Supply Chain processes and systems against shortages.
Have you been part of a recent ‘shortage event? Did you see any other warning signs? Other Supply Chain risks that are bigger?
[i] Japan and the global supply chain: Broken links; The Economist; March 31st, 2011
[iii] Smartphone Biz Hurt by Own Success as Chip Supply Shrinks; King, Satariano and Culpan – May 14, 2012
[v] Report: UMC benefits from TSMC 28-nm supply shortage; May 17, 2012
[vi] Don’t let your Supply Chain Control Your Business; Choi & Linton; HBR, Dec. 2011