The prune business isn't easy. Sure, once you get the plums dried down to the optimum moisture level, they have a shelf life of three years or more — much longer than many food products. But success hinges on the annual harvest. Everything from volume, size of fruit, and sugar level can affect how well you do, and the profit margin is perilously thin. This market segment is fraught with risk.
"If the yield falls short, we can't just go out and buy more prunes since they've all been spoken for already. If it's a bumper crop, we have to manage that, too," says Harold Upton, vice president of strategic business processes for Sunsweet Growers Inc. "We don't have the luxury of pulling the product off the shelves one year and doubling it the next according to our volume." A grower cooperative, Sunsweet is the world's largest producer of dried fruit, processing more than 50,000 tons of prunes every year, along with apricots and cranberries.
Sunsweet faced two years of disastrously low yields, in 2004 and 2005, immediately following on the heels of the highest-ever surplus in 2003. Management had already decided in 2000 to invest in Supply Chain Consultants' Zemeter supply chain planning suite, which included a sales and operations planning (S&OP) tool. Zemeter allows Upton to model a variety of "what-if" scenarios and plan accordingly. The ability to quantify and mitigate the risk associated with crop yield has helped Sunsweet weather the back-to-back years of low harvests. "We can quickly see the impact as we gain market and crop intelligence, and we can quickly decide what to do," Upton says.
The Zemeter S&OP tool is one type of supply chain risk management (SCRM) software package, according to Kevin O'Marah of AMR Research, which sponsored a conference on global risk management this summer. Other types of SCRM software include supply network modeling and business intelligence tools. SCRM has been getting more attention of late for a variety of reasons, he says.
The proliferation of global sourcing and manufacturing has heightened the risk level for every party in the supply chain. Previously, the chief risk was supplier interruption. Now, whole new classes of risk have sprung up, seemingly overnight: geopolitical, regulatory, logistical, currency-related, natural disaster, as well as the most basic risk: not having the right product in the right place at the right time.
"The old manufacturing world was about big factories in American cities putting out goods. Then the amount of risk was very visible, but limited," O'Marah says. "The geopolitical risks we face today are very different. The risk level is dramatically higher. It's a matter of the much wider dependencies that are outside your immediate control." Also, lean initiatives have reduced the size of the buffer stock that manufacturers hold, ever narrowing the margin for error.
Manufacturers are turning to a variety of software products to insulate themselves from the new risks. That is the only hope manufacturers have of keeping all the variables straight and adjusting their plans accordingly, O'Marah says.
Not surprisingly, no one vendor covers all of SCRM, though the large enterprise vendors, such as SAP AG and Oracle, are moving closer to being able to make that claim.
For the most part, only the larger manufacturers will be able to justify investment in those high-end SCRM tools, as implementations can easily run into seven figures.
"Smaller companies don't have enough complexity to justify a project like this," O'Marah says.
Risk to Revenue
For $1.5 billion ON Semiconductor Corp., risk to revenue is the most compelling of all risks. "Semiconductor lifecycles are shorter, and getting shorter," says Ravi Vancheeswaran, director of strategy and continuous improvement for the global supply chain for ON Semi. "There are risks around supply, but for us, the biggest risk is around demand."
The high-tech supply chain is particularly fragmented, with a host of new players, so demand comes through multiple channels.
To better understand incoming forecasts, ON Semi asks its suppliers to "triangulate" the expected demand by giving numbers for the most likely scenario, the best-case scenario, and the worst-case scenario, so it can plan for different outcomes. The company also leverages forecast data from as many sources as possible to get the most complete view of demand. ON Semi has been using i2 Technologies Inc.'s scenario planner and demand planner for about a year, Vancheeswaran says.
ON Semi spent years developing robust demand management processes before it implemented the tool, analyzing the demand-supply match, identifying the right levels of inventory for the supply chain, and maintaining flexible capacity. Although i2 has helped ON Semi hedge its bets relating to demand, Vancheeswaran cautions that does not mean the company will never again fall victim to the oversupply that plagued the industry after the dot-com bust. "We will get fooled again. Planning is not a science; it is an art. But by putting these processes in place, we understand the true dynamics of demand," he says.
Supply chain visibility boils down to having the flexibility to react quickly to rectify issues so that small problems don't turn into huge disasters, says Michael Levi, director of solution strategy for i2. "It's a balancing of lean vs. reality. Take the lean principle of keeping the waste thin, but if there are disruptions, [having visibility lets] you do what needs to be done easily without adding buffer and without sacrificing customer service or quality," he says.
Beyond Planning
Visibility is good, but knowing how best to respond to demand volatility is better, says John Sicard, vice president of development for Kinaxis Inc. When demand suddenly far outstrips what was expected, for example, executives need answers to a series of questions, including the following: Can we meet the increased demand, who can help, and what other customers will be affected if we fill this order?
Kinaxis RapidResponse helps companies determine the impact of unexpected events. It goes far beyond planning, Sicard says. "Most people are executing to plan, [but] they can't plan their way out of the messes that occur." RapidResponse interfaces with the ERP system, sitting at what Sicard calls the "gap between planning and execution."
Contract manufacturing was the "birthplace" of response management software, according to Sicard. "Volatile demand is a fact of life every minute of every day in that industry," he says.
Solectron Corp., a $10.56 billion contract manufacturer, has been using Kinaxis RapidResponse for about three years and currently uses it at 17 sites worldwide. "RapidResponse helps us optimize the way we commit service levels back to our customers," says Chris Cookson, VP of global supply chain solutions for Solectron.
Cookson views the tool as a way for Solectron and its customers to protect against lost sales. "We have helped our customers respond to actual demand signals rather than being dependent on the forecast," he says. Solectron is rolling out RapidResponse across all of its factories and will train virtually all of its personnel to use it. Along with its proprietary processes and methodologies, the tool is a competitive differentiator for Solectron and its customers.
Meanwhile, back in the prune industry, Upton recalls how Sunsweet rode out the "perfect storm" of factors that devastated crop yields in 2004 and 2005. The cooperative is diversified in California to hedge its bets against occurrences affecting the area. During 2004, the southern-most region was hit by a ruinous frost during the budding season. Up north, there was so much heat during blossoming time that the trees failed to produce fruit. Meanwhile, in the middle zone, there was so much wind that the bees couldn't fly and were unable to pollinate the trees. "It was a perfect disaster for us. All three regions had the worst possible scenario," Upton says.
There was no way to have predicted that would occur. But thanks to the Zemeter S&OP tool, "we have ridden the perfect storm very well. Our president just congratulated the company on achieving the highest profit margin in 10 years. We did that in a market that otherwise would have been a disaster," Upton says.
Sunsweet was able to mitigate the risks in part by relying more heavily on its Chile-based growers, where the harvest is in February rather than August. "We had the insight early on, thanks to this tool. We were able to run the different models to find out the best way to address it," he says.