July 2006 | Case Studies | I.T. Toolkit

Demand Planning Changes Minds

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A mission to improve demand planning and customer service led European manufacturer Tenaris to embrace new technology and a new mindset.

Implementing new software can be an important step toward improving a company's supply chain. "But you also need a change of mentality," says Stefano Lanzani, inventory manager, supply chain, Europe, for Tenaris, a global supplier of seamless steel pipe products.

One change in the mindset at Tenaris is a stronger focus on service levels. The software that supports this change is Distribution Planning Module (DPM), an inventory optimization solution from ToolsGroup, Cambridge, Mass.

Organized in Luxembourg in 2002 after the successive mergers of several manufacturers, Tenaris provides steel pipe products and services to oil, gas, and energy production companies and customers in various manufacturing sectors. It has production plants in Italy, Romania, Canada, Mexico, Venezuela, Argentina, and Japan, and customer service centers in more than 20 countries.

In 2000, management at one of Tenaris' major predecessor companies decided to merge several of its distribution subsidiaries with its manufacturing operations. This move posed a challenge for inventory management.

Each formerly separate company had its own inventory software, and none of those solutions was sophisticated enough to meet the merged company's goals for service improvements and inventory optimization. The solutions all lacked the ability to forecast customer demand.

Predict and Plan

After surveying the market, Tenaris decided to implement DPM, which is designed to predict demand and plan finished goods inventory levels in detail.

"Enterprise resource planning (ERP) and supply chain systems do a good job of demand planning and forecasting. But they don't have a way to model inventory to translate expected demand into exactly how much inventory companies should hold in the supply chain, and where to hold it," says Jeffrey Bodenstab, vice president of marketing at ToolsGroup.

If a company makes orange juice, for example, it may know how much juice it will sell in the Northeast in July. "But the company probably doesn't know how many six-ounce frozen containers it will sell at the Framingham Wal-Mart during that time," Bodenstab says.

Nor can most companies break down total demand—say, 20 units per month—to determine whether they will sell all 20 units at once, sell one unit each to 20 customers, or something in between.

"Also, most companies don't have a good handle on demand variability," he says.

Data Exchange

Running on a Microsoft platform, DPM periodically receives data on inventory, orders, and demand forecasts from a company's ERP or other management system. In Tenaris' case, DPM receives data on current inventory levels, orders received from customers, orders sent to suppliers, item descriptions, and past activity from a proprietary information system.

DPM analyzes the current and historical data to generate a suggested amount of inventory to hold for each SKU. Depending on the implementation, it will also recommend replenishment order size and frequency.

"With the data from DPM, I can select optimal service levels and order the right quantities for my warehouses," Lanzani says.

The software also allows Tenaris to fine-tune its service levels by service class—setting a 99-percent service level for some product groups, and lower levels for others.

DPM can also adjust inventory mix to achieve different service levels for different SKUs while meeting a customer's overall requirement.

"If a product group demands a 98-percent service level, we can mix the inventory—set some of it at 99 percent, some at 95 percent. This helps Tenaris achieve a 98-percent service level overall, with 20 percent or 30 percent less inventory," Bodenstab explains.

The software chooses each product's service level based on factors such as the item's carrying cost, how much room it takes to store, or, for a perishable product, its shelf life.

That function, called Inventory Mix Optimization, is one of four major capabilities DPM offers.

Another is Demand Modeling—the aforementioned analysis of current and historical activity data to create a detailed demand model.

A third is Responsive Replenishment, which considers constraints on replenishment, such as the ability to manufacture and transport goods, when setting inventory levels.

Demand Sensing is ToolsGroups' newest function. Offered with data from third-party partners, this optional module is aimed at companies that sell to major retailers. Companies using Demand Sensing receive real-time sales information from a retailer's point-of-sale system, reconfigure the data, and harmonize it with their other data sources. The information then goes to DPM to be analyzed along with historical data.

Through Demand Sensing, "companies get retailers' most up-to-date information—including trends, activity, and inventory data—which is more accurate than historical data," Bodenstab says.

The Bullwhip Effect

One important benefit of precise inventory optimization is reducing the supply chain oscillation that occurs when a company overreacts to a temporary stock shortage.

"When companies fall behind on inventory for a certain product, the planners, who face pressure to meet customer demand, often expedite as much inventory as they can through the supply chain," explains Bodenstab.

This can cause inventory levels to rise and fall at a greater rate than natural market fluctuations. Supply chain managers call this the bullwhip effect.

Such oscillation pushes up costs by causing companies to add extra production shifts, make additional shipments, and expedite deliveries. It also forces businesses to siphon resources away from other products. Tuning inventory levels precisely dampens the impact of temporary fluctuations.

"The ability to eliminate disruptions and manual interventions in the supply chain by having appropriate inventory levels to buffer the impact of demand and supply variability is key," says Bodenstab.

Taking a Snapshot

When a company decides to implement DPM, ToolsGroup employees meet with members of the new user's management team to perform an inventory assessment. ToolsGroup feeds live data from the customer's information system into DPM to get a snapshot of its inventory, including current stock and service levels, and whether the company is holding too much or too little inventory of certain items.

It then projects how much the customer stands to gain with an optimized inventory portfolio.

"ToolsGroup performs a gap analysis and an ROI analysis at the same time, using live data," Bodenstab says. This gives the user a realistic picture of the software's benefits and how long it will take to realize them.

Once Tenaris decided to implement DPM, it took three months to get the system up and running. "It is easy to use," Lanzani says.

Positive Changes

Since implementing DPM, Tenaris has achieved high service levels in its fulfillment operations.

"Our warehouses are always stocked with the right material. We improved service levels by 40 percent, and at the same time, reduced stock levels by 30 percent," Lanzani reports.

DPM has helped Tenaris effectively focus on service levels because its uses that factor as its main parameter, Lanzani explains. As a result, he can speak with other departments using the same "language."

"The most important thing for front-end employees—the sales team, for example—is always having products available," Lanzani says. "It's not important if 100 tons or 1,000 tons sits in the warehouse. It's the service level that counts."

Scheduling frequent meetings between the inventory management team and other departments, where everyone speaks the same language, is all part of the effort at Tenaris to "change the mentality," Lanzani says.

"The DPM solution helped us do just that," he concludes.

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