Meeting the Challenge: Electronics Parts Forecasting

8/14/2019 Meeting the Challenge: Electronics Parts Forecasting

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Emcien WhitepaperThe Product Mix challenges of the Electronics Industry -

Option and Parts Forecasting

Chris Shaw is Director of Opera-

tions for a Fortune 1000 electronics

manufacturer. His company manufactur-

ers computer hard-

ware, including PCs,

laptops, servers, and

a whole lineup of

peripherals. The

company delivers its

products with a mix

of build-to-order

and build-to-stock.

Electronics manu-

facturing is very fast

paced industry, and

the shift towards

build-to-order is

growing at Chrisscompany. For

Chris, the job pres-

sure has been build-

ing up over the years, as customers have

been conditioned to expect highly

customized products for

delivery within a few days

of the order. This industry

moves at warp speed, to

deliver goods and meet

customer order fulfillment.

My biggest challenge

is meeting demand for

computers with features

that customers want, while

maintaining low inventory

levels. Our current ERP

and forecasting systems

do not solve that.. Chris

goes on to explain what this means.

The issue is having the right parts mix in

inventory. For the BTO model, we dont

know what parts mix we need to carry in

inventory. We know

the basic parts,

and the high

runners. But we

dont know what

kind of drive, what

kind of RAM,

what kind of CPU.

For example, we

have 37 options on

one model. We

end up having a

large inventory of

parts, because we

dont know what isneeded. We need

to keep tight cycle

times to be com-

petitive, and the inventory it takes to run

the business kills us.

Chriss challenges are

evident in the electron-

ics manufacturing and

distribution industry

today, which is saddled

with all time high in-ventory levels and costs.

The pain is great con-

sidering that in this

industry profitability is

very closely tied to

rapid movement of

inventory.

EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES

EMCIENWHITEPAPER SERIES: EFORECAST www.emcien.com

OVERVIEW

1

OVERVIEWTodays demanding customer base

and marketing initiatives have

driven a wide variety of features

and options on every product.

2HOW BUSINESS IS DONETODAYWe now live in a world that is

challenged with the impact and

cost of product variety at every

step of the supply network.

3THE DEVILS IN THE OP-TIONSThe problem isnt determining

how many of each model, but also

the individual attachment level.

4EMCIENS SOLUTIONEmcien eForecast uses option

interplay and higher order attach

rates to predict the option usage

much more accurately than tradi-

tional statistical forecasting.

My biggest challenge is

meeting demand for com-

puters with features that

customers want, while

maintaining low inventory

levels. Our current ERP

and forecasting systems

do not solve that.


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How business is done

Today As the director of Operations, Chriss major focus is the

inventory levels and material flow. The shift towards BTO is

expensive for the supply chain. BTO does not reduce inventory, it

translates the finished goods inventory to parts inventory.

The inventory never really goes away, says Chris. For

BTO orders, we have to carry parts inventory, or the supplier has

to carry it. We have negotiated some deals where the suppliers

carry the parts inventory. In this case, we have to provide them

with a detailed forecast of parts requirements, and short and long-

term commitments to draw on the inventory that they are storing

for us. At the end of the period, if we cannot use the parts that

we committed to, the inventory moves onto our books. We have a

warehouse full of obsolete parts to prove this. Even the best

BTO model in the industry suffers

from these challenges.

There is a false sense that

BTO automatically captures cus-

tomer demand into smooth mate-

rial flow and inventory efficiency.

That is very far from the truth,

admits Chris.

With hundreds of options and

peripherals across their product

lines, BTO poses a serious chal-

lenge for forecasting the right

parts. We carry in case inventory,

just to have the right parts, but my

management frowns on it.

We forecast parts with stan-

dard statistical methods that are

embedded in most forecasting systems today, says Chris. The

drawback is that the ERP and MRP applications are entirely

divorced from the customer view of our product, the features and

options, and how customers order our products. ERP and

MRP systems are based on traditional methodologies, born out of

the mass production days, when planning and forecasting was

done with a BoM view of the product. These systems forecast

parts requirements for a push manufacturing system. This does

not allow us to capture the changing customer demand at the

feature level, and respond to it. We have coped with this serious

shortcoming by overcompensating on inventory costing the

industry millions of dollars.

The Devils in

The Options With the large number of options and peripherals, Chriss

challenge is What parts mix do we need to carry to satisfy the

order configurations? The devil is in forecasting the parts mix,

guided by the usage in the configuration mix of the orders.

Our product lines have thousands of configurations. But

the order configurations are definitely not random. The options

and peripherals have an attach rate, which we track fairly closely.

For example, what percentage of orders has 512 Megabytes versus

1 Gigabyte? 17 monitor, 19 monitor? Flat panel?

Attach rates (also referred to as Penetration or Take Rates)

are the percentage of orders with a certain option. We track that.

But that is not enough, and in fact, it can be quite wrong and lead

to poor inventory mix levels. (See

side bar on the next page for a detailedexample).

The options and peripherals are

also connected in how customers

typically combine them into an

order. For example, orders for a

certain model, tend to have certain

kind of monitors, with specific

peripherals, etc. There are definite

patterns in how the customers

combine the options into orders.

Adding to this, the products have

rules that guide how the options

and peripherals can be combined,

to makeup an order. For example

some models might only support

registered memory vs. standard

RAM (due to engineering restrictions), or a certain motherboard

can only support specific Hard drives because of the cable types.

These rules need to be taken into account for parts forecasting to

get the right mix. While a PC may have millions of customer

order-able configurations, the relationships between the options

and peripherals guide the order configurations and hence the

parts usage. Our ERP and parts forecasting systems do not un-

derstand how our customers order configurations and the rela-

tionship between the options, that guide the configuration of the

orders, says Chris. Current forecasting systems operate on the

assumption that parts are independent, and hence they forecast

them as such.



INVENTORYIT NEVER REALLY GOES AWAY

The inventory never really goes away, for

BTO orders, we have to carry parts inven-

tory, or the supplier has to carry it. We have

negotiated some deals where the suppliers

carry the parts inventory.... At the end of the

period, if we cannot use the parts that we

committed to, the inventory moves onto ourbooks.

Chris Shaw, Director of Operations


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Chriss team stores the option

attach rates and mix-and-match

rules on Excel spreadsheets. It is

just too complex to manage manu-

ally, says Chris. Our components

have very short life-cycles. By the

time my guys get one iteration on

an Excel spreadsheet, the parts are

obsolete. We are always trying to

catch up.

There is an urgent need for a

parts forecasting solution that un-

derstands how our customers order

configurations, how the options are

put together, and how this relates to

the parts mix required in inven-

tory, adds Chris. The value of

this is millions of dollars in partsinventory and obsolescence cost.

Break-thru with

Emciens Adaptive

ForecastingEmciens eForecastTM is a Web-based

solution to help Operations man-

agers to plan and manage their

parts inventory, to maximize order

fill rates with the most lean inven-

tory levels.

1. Emciens eForecasting has

automated the detailed extraction

and analysis of attach rates for all

the options/peripherals. We now

know which options go together,

and what promotions to push if we

want to move some inventory.

Emciens eForecasting uses live

data feeds for inventory, orders and

order history, at the configuration

level.

The detailed attach rates for all

options/peripherals are extracted

from the order history.

The higher order attach rates

allows Emciens eForecasting to

forecast parts requirements, while

taking into account the complex



eForecast TechnologyVALUE OF INCORPORATING OPTION INTERPLAY ANDHIGHER ORDER ATTACH RATES

A SIMPLE QUANTITATIVE EXAMPLEProduct Line Capricorn Desktop Computers

Prior to eForecasting, Chris ended each month with too many FAST processors

(CPUs) in inventory. Based on the data of how orders came in, this didnt make

sense.

Typical forecasting is based on 1st order attach rates, defined as the percentage of

orders with that option/peripheral. Lets consider this simple example of Capri-

corns two options processors and monitors.

Processor(CPU)

1st OrderAttach Rate

Monitor 1st OrderAttach Rate

SLOW 70% CRT 60%

FAST 30% Flat Panel 40%

Based on the 1st order attach rates, if the processor and the monitor were inde-

pendent choices, then we would expect 12% (40% x 30% = 12%) of the orders with

the FAST processor to have a flat panel monitor. As it turns out, the processor and

monitor were NOT independent choices as revealed by the extracted 2nd (and

higher) Order attach rates.

2nd Order Attach Rates -

Monitor

Processor CRT Flat Panel

SLOW 52% 18%

FAST 8% 22%

Chris forecasted the processor and monitor attach rates for next month with his

existing MRP system and got 35% for the fast processor and 45% for the flat panel.

eForecast used the relationships between processor and monitor to revise this to

32% for the fast processor and 45% for the flat panel. This means he ordered 3%

fewer fast processors than he would have with his old system. At 80,000 units a

month, it turned out to be 2,400 processors. By forecasting more accurately using

the product rules and high-order attach rates Chris ensured he had the right parts

for the orders that came in.

Using 1st order attach rates can lead to wrong parts inventory levels. This causes

lost orders, poor lead-time, overstocking to compensate, obsolete inventory due to

over stocking, etc. Emciens eForecasting incorporates these higher order rela-

tionships into parts forecasting, improving the accuracy.


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inter-relationship between options, as extracted from the

sales history.

2. Parts forecasting is not independent of product

structure and option rules, says Chris. Emciens eForecast-

ing has all the rules that guide how the options are put to-

gether. This is used for our parts forecasting, delivering tre-

mendous savings due to improved accuracy. We now dont

run out of parts when we are filling orders.

Emciens eForecasting models the product line with

the rules that guide how options can be ordered to-

gether.

These rules drive the parts requirements, with

added accuracy. If a certain option has engineering

constraints or marketing rules that relate it to another

option, this is automatically taken into account, during

the parts forecasting.

3. Our inventory is linked to demand, at the option

level, says Chris. This is very important in the electronics

industry, where the attach rates of the options can change

very fast, driving demand from very high levels to obsolete

overnight.

Automated extraction of attach rates based on

option life-cycle, incoming orders and order history

delivers a very adaptive forecasting system.

Allows reduced inventory build-up and obsoles-cence cost.

4. Our material flow from parts sourcing to promotions is

based on a complete understanding of the order configura-

tion. If this is missing, you end up with too much of one

part, and not enough of the other. Emciens solution has

completely addressed that issue for us.

Emciens eForecasting forecasts complete configu-

rations, based on multiple factors including higher

order attach rates and the rules that guide the options.

This detailed product model, along with the con-

tinuous update based on order configurations, allows an

adaptive forecasting application to model demand at the

configuration level, and the parts required to fill the

order configurations.

We dont have disparate Excel spreadsheets with option

related sales data, and my folks are very happy not having to

track it manually. In terms of value - we dont lose our shirt

on parts hedging, says Chris.

Getting to the

Bottom LineEmciens eForecasting was successfully implemented as a

result of Chriss mission to address the parts forecasting issue for

his company. The system has been in production for over 12

months. Chris now has lean inventory, and the right parts mix to

meet customer demand at the option level. We can now keep up

with the customer demand for options, tailoring our inventory to

the configuration mix in the order.

With Emciens eForecasting, Chriss company has reduced

inventory by 25%. More importantly, the accuracy of the parts

mix has driven product availability up by 50%, while reducing

lead times. Now we dont have incomplete units, because of

missing parts, or delayed orders due to parts shortages, says the

VP of Manufacturing, Ken Balcom. Ken has been with the com-pany for over 9 years, And with Emciens solution we have been

able to update the inventory mix as the option demand changes.

The frequency of these updates will increase, greatly impacting

our ability to track demand at the option level. The parts fore-

casting based on configuration level demand has also reduced our

obsolete inventory very dramatically.

The revenue side has seen a turn due to improved product

availability, almost NO out of stock and incomplete units.

Economic ValueCategory Value

Inventory Reduction 33% from original

value

One time cash gain due to inven-

tory reduction, for one product

line

$6.6 million

Cash flow improvement for one

product line

$3 million/year

Parts Obsolescence cost reduction $2 million/year




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About EmcienEmcien, the pioneer in Product Variant Optimization, en-

ables companies to integrate product variety into manufacturing

planning and execution. Emcien software helps companies ad-

dress issues surrounding product variants, positively impacting

product cost, inventory levels and turns, and customer lead-time.

Emciens suite of applications include:

eCoordinate - Automates management of finished

goods pipeline from Optimized Orders to Inventory matching,

Inventory Replenishment and Key Performance Indicator meas-

urement.

eComponent - Optimizes the number of components

and content within each to reduce overall cost while capturing

maximum demand

. eForecast - Automatic configuration-level forecast that

predicts build and/or reconfiguration options on a daily, weekly or

monthly process.

eProduct - Computes the optimal number of end-items

as well as their option level make-up to capture the maximum

demand at the highest profit. Also determines monthly inventorymix levels.

Emciens solutions are built on patent-pendingKaleidoscopeTM

product description and optimization technology based on more

than 12 years of research started by Roy Marsten, Ph.D, while he

was a professor at Georgia Tech and developed through industry

partnerships. Emcien is a privately held company headquartered

in Atlanta, GA, and an Advanced Technology Development

Center (ATDC) member company. Learn more at

www.emcien.com.




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Q&A Emcien answers common questionsIs Emcien eForecast offered as a soft-

ware solution or a service?

Emcien offers eForecast as an enterprise software solution that runs on your com-

panys network. It is 100% web-based so users only need a browser to access it.

How difficult is it to integrate into my

ERP data if Im using SAP or I2? What

are the data requirements?

Emcien provides a loosely coupled integration solution that can easily be inte-

grated into SAP, Oracle, I2, JDEdwards and many other systems. We can provide a

short document that covers the few fields needed as well as a sample feed to give you a

good idea of whats needed.

We have people at distributed locations

and at the corporate offices that want

to use the capabilities of the system.

How many users does the system sup-

port?

eForecast is web-based for the key reason of deployment. We understand that

there are many people that have a vested interest in sharing the information from a

forecasting system. eForecast can support multiple user, in distributed locations, pro-

viding a platform that can be easily adopted and standardized with your current sys-

tems.

What is the Payback period? Payback is less than a year. In many cases its substantially shorter than even that.



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Meeting the Challenge: Electronics Parts Forecasting