Digging In

With the economy in the pits, companies are leaving no stone unturned in their efforts to cut supply-chain costs.

A Closer Look at Customer Demand

Dow Chemical Co., the $54 billion producer of plastics, chemicals, hydrocarbons, and agrochemicals, is renowned for its financial-management prowess. But even finely tuned enterprises like Dow can be roughed up by turbulent markets. The Midland, Michigan-based company reported a 23 percent year-over-year gain in sales in the second quarter, but saw net income slip 24 percent compared with the same quarter last year as it wrestled with a $2.4 billion increase in feedstock and energy costs. One response has been to put even more effort into what is already a sophisticated forecasting operation in an attempt to better match inventories with customer demand.

“We’ve bought into a concept called demand-driven business operations,” says Darrell Zavitz, “which is about having good dialogue with the market and your customers and what’s going to be needed, and producing the right products and getting them to [your customers] efficiently.” As vice president of market-facing shared services, Zavitz is heavily involved in supply-chain and procurement activities. “It is about dialogue, and also respect for the urgency of certain messages,” he says. “We are getting more face time with our customers, we are on the phone with them more quickly, and we are making sure we maintain a solid line of communication between them, our suppliers, and ourselves.”

Internally, senior Dow executives are stepping up their oversight of sales and operations planning, too. “In the past we may have had routine reviews on a quarterly or a monthly basis,” Zavitz explains. “We’re increasing that frequency. For example, in some businesses we’re bringing teams together weekly to determine whether or not we have the right supply/demand balance. I’m talking about a fairly senior group of people responsible for big assets or markets.”

Arrow Electronics is following a similar strategy by sharing more inventory information among its various locations around the world. “If we don’t have enough inventory in one region,” says CFO Paul Reilly, “it may be more prudent to buy it from ourselves rather than our supplier.” The company also is making an extra effort to get aged inventory out of its distribution centers by reviewing return rights with suppliers and checking with customers to ensure they take delivery according to the delivery date.

Many companies, in fact, are finding that better forecasting requires precisely this kind of boots-on-the-ground effort. Simtek Corp., a $33 million specialty semiconductor company that farms out chip production to third-party manufacturers, is a classic build-to-forecast business; its manufacturing partners have production cycles ranging from 60 to 90 days, while its customers typically order with no more than a 30-day lead time.

Over the past few years, says Simtek CFO Brian Alleman (who is also a partner with executive services and consulting firm Tatum LLC), the Colorado Springs, Colorado-based company has been able to reduce cycle times by about two weeks by sharing more of its internal forecasting with its suppliers. Eager to shorten them even further, Simtek is driving its sales force to pry more information from customers about their 60-to-90-day outlook. “We have a new ERP system that gives us better ability to plan production,” Alleman says, “but before you can use software to improve forecasting, you have to understand demand.”

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