EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES

E m c i en Wh ite paper
The Product Mix challenges of the Electronics Industry -
Option and Parts Forecasting

OVERVIEW
1
OVERVIEW
Today’s demanding customer base
and marketing initiatives have
driven a wide variety of features
and options on every product.
Chris Shaw is Director of Opera- “The issue is having the right parts mix in
tions for a Fortune 1000 electronics inventory. For the BTO model, we don’t
manufacturer. His company manufactur- know what parts mix we need to carry in
ers computer hard- inventory. We know
ware, including PCs, the basic parts,
laptops, servers, and and the high
a whole lineup of runners. But we
peripherals. The
“ My biggest challenge is don’t know what
company delivers its meeting demand for com- kind of drive, what
products with a mix kind of RAM,
puters with features that
of build-to-order what kind of CPU.

2 and build-to-stock. customers want, while For example, we

HOW BUSINESS IS DONE
TODAY
We now live in a world that is
challenged with the impact and
cost of product variety at every
step of the supply network.
3 Chris, the job pres-
THE DEVIL’S IN THE OP-
TIONS
The problem isn’t determining
how many of each model, but also
the individual attachment level.
4 moves at warp speed, to
EMCIEN’S SOLUTION
Emcien eForecast uses option
interplay and higher order attach
rates to predict the option usage
much more accurately than tradi-
tional statistical forecasting.
Electronics manu-
maintaining low inventory have 37 options on
facturing is very fast one model. We
paced industry, and levels. Our current ERP end up having a
the shift towards and forecasting systems large inventory of
build-to-order is parts, because we
growing at Chris’s do not solve that.” don’t know what is
company. For needed. We need
to keep tight cycle
sure has been build- times to be com-
ing up over the years, as customers have petitive, and the inventory it takes to run
been conditioned to expect highly the business kills us”.
customized products for
delivery within a few days Chris’s challenges are
of the order. This industry evident in the electron-
ics manufacturing and
deliver goods and meet distribution industry
customer order fulfillment. today, which is saddled
with all time high in-
“My biggest challenge ventory levels and costs.
is meeting demand for The pain is great con-
computers with features sidering that in this
that customers want, while industry profitability is
maintaining low inventory very closely tied to
levels. Our current ERP rapid movement of
and forecasting systems inventory.
do not solve that.”. Chris
goes on to explain what this means.

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 EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES

How business is done The Devil’s in

Today
As the director of Operations, Chris’s 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 Options
With the large number of options and peripherals, Chris’s
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.

“The inventory never really goes away,” says Chris. “For “Our product lines have thousands of configurations. But
BTO orders, we have to carry parts inventory, or the supplier has the order configurations are definitely not random. The options
to carry it. We have negotiated some deals where the suppliers and peripherals have an attach rate, which we track fairly closely.
carry the parts inventory. In this case, we have to provide them For example, what percentage of orders has 512 Megabytes versus
with a detailed forecast of parts requirements, and short and long- 1 Gigabyte? 17” monitor, 19” monitor? Flat panel?”
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 Attach rates (also referred to as Penetration or Take Rates)
we committed to, the inventory moves onto our books. We have a are the percentage of orders with a certain option. “We track that.
warehouse full of obsolete parts to prove this. ” Even the best But that is not enough, and in fact, it can be quite wrong and lead
BTO model in the industry suffers to poor inventory mix levels”. (See
from these challenges. side bar on the next page for a detailed
example).
There is a false sense that
INVENTORY
BTO automatically captures cus- “The options and peripherals are
IT NEVER REALLY GOES AWAY
tomer demand into smooth mate- also connected in how customers
rial flow and inventory efficiency.
“ The inventory never really goes away, for typically combine them into an
“That is very far from the truth”, BTO orders, we have to carry parts inven- order. For example, orders for a
admits Chris. tory, or the supplier has to carry it. We have certain model, tend to have certain
negotiated some deals where the suppliers kind of monitors, with specific
With hundreds of options and peripherals, etc. There are definite
carry the parts inventory.... At the end of the
peripherals across their product patterns in how the customers
lines, BTO poses a serious chal-
period, if we cannot use the parts that we combine the options into orders.”
lenge for forecasting the right committed to, the inventory moves onto our
parts. We carry ‘in case’ inventory, books.” Adding to this, the products have
just to have the right parts, but my rules that guide how the options
management frowns on it. Chris Shaw, Director of Operations and peripherals can be combined,
to makeup an order. For example
“We forecast parts with stan- – some models might only support
dard statistical methods that are registered memory vs. standard
embedded in most forecasting systems today”, says Chris. “The RAM (due to engineering restrictions), or a certain motherboard
drawback is that the ERP and MRP applications are entirely can only support specific Hard drives because of the cable types.
divorced from the customer view of our product, the features and These rules need to be taken into account for parts forecasting to
options, and how customers order our products. ” ERP and get the right mix. While a PC may have millions of customer
MRP systems are based on traditional methodologies, born out of order-able configurations, the relationships between the options
the mass production days, when planning and forecasting was and peripherals guide the order configurations and hence the
done with a BoM view of the product. These systems forecast parts usage. “Our ERP and parts forecasting systems do not un-
parts requirements for a push manufacturing system. “This does derstand how our customers order configurations and the rela-
not allow us to capture the changing customer demand at the tionship between the options, that guide the configuration of the
feature level, and respond to it. We have coped with this serious orders,” says Chris. Current forecasting systems operate on the
shortcoming by overcompensating on inventory – costing the assumption that parts are independent, and hence they forecast
industry millions of dollars.” them as such.

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 EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES

Chris’s team stores the option

eForecast Technology attach rates and mix-and-match
VALUE OF INCORPORATING OPTION INTERPLAY AND rules on Excel spreadsheets. “It is
HIGHER ORDER ATTACH RATES just too complex to manage manu-
A SIMPLE QUANTITATIVE EXAMPLE ally,” says Chris. “Our components
Product Line – Capricorn Desktop Computers have very short life-cycles. By the
time my guys get one iteration on
Prior to eForecasting, Chris ended each month with too many FAST processors an Excel spreadsheet, the parts are
(CPUs) in inventory. Based on the data of how orders came in, this didn’t make obsolete. We are always trying to
sense. catch up”.

“There is an urgent need for a

Typical forecasting is based on 1st order attach rates, defined as the percentage of
parts forecasting solution that un-
orders with that option/peripheral. Let’s consider this simple example of Capri-
derstands how our customers order
corn’s two options – processors and monitors.
configurations, how the options are
put together, and how this relates to
Processor 1st Order Monitor 1st Order the parts mix required in inven-
(CPU) Attach Rate Attach Rate tory”, adds Chris. “The value of
SLOW 70% CRT 60% this is millions of dollars in parts
inventory and obsolescence cost”.
FAST 30% Flat Panel 40%

Break-thru with
Based on the 1st order attach rates, if the processor and the monitor were inde- Emcien’s Adaptive
pendent choices, then we would expect 12% (40% x 30% = 12%) of the orders with Forecasting
the FAST processor to have a flat panel monitor. As it turns out, the processor and Emcien’s eForecastTM is a Web-based
monitor were NOT independent choices as revealed by the extracted 2nd (and solution to help Operations man-
higher) Order attach rates. agers to plan and manage their
parts inventory, to maximize order
fill rates with the most lean inven-
2nd Order Attach Rates -
tory levels.
Monitor
1. Emcien’s eForecasting has
Processor CRT Flat Panel
automated the detailed extraction
SLOW 52% 18% and analysis of attach rates for all
the options/peripherals. We now
FAST 8% 22%
know which options go together,
and what promotions to push if we
Chris forecasted the processor and monitor attach rates for next month with his want to move some inventory”.
existing MRP system and got 35% for the fast processor and 45% for the flat panel.
Emcien’s eForecasting uses live
eForecast used the relationships between processor and monitor to revise this to data feeds for inventory, orders and
32% for the fast processor and 45% for the flat panel. This means he ordered 3% order history, at the configuration
fewer fast processors than he would have with his old system. At 80,000 units a level.
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 The detailed attach rates for all
for the orders that came in. options/peripherals are extracted
from the order history.
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 The higher order attach rates
over stocking, etc. Emcien’s eForecasting incorporates these higher order rela- allows Emcien’s eForecasting to
tionships into parts forecasting, improving the accuracy. forecast parts requirements, while
taking into account the complex

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 EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES
inter-relationship between options, as extracted from the
sales history.
2. “Parts forecasting is not independent of product
structure and option rules”, says Chris. “Emcien’s 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 don’t
run out of parts when we are filling orders”.
Emcien’s 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. Emcien’s solution has
completely addressed that issue for us”.
Emcien’s 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 don’t have disparate Excel spreadsheets with option
related sales data, and my folks are very happy not having to
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track it manually. In terms of value - we don’t lose our shirt
on parts hedging”, says Chris.
Getting to the
Bottom Line
Emcien’s eForecasting was successfully implemented as a
result of Chris’s 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 Emcien’s eForecasting, Chris’s 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 don’t 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 Emcien’s 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 Value Value
Category
Inventory Reduction 33% from original
value
One time cash gain due to inven- $6.6 million
tory reduction, for one product
line
Cash flow improvement for one $3 million/year
product line
Parts Obsolescence cost reduction $2 million/year
 EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES
About Emcien
Emcien, 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.
Emcien’s 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
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. 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 inventory
mix levels.
Emcien’s solutions are built on patent-pending KaleidoscopeTM
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.
 EMCIEN WHITEPAPER SERIES - PRODUCT VARIETY CHALLENGES

Q&A Emcien answers common questions

Is Emcien eForecast offered as a soft- Emcien offers eForecast as an enterprise software solution that runs on your com-
ware solution or a service? pany’s network. It is 100% web-based so users only need a browser to access it.

How difficult is it to integrate into my Emcien provides a loosely coupled integration solution that can easily be inte-
ERP data if I’m using SAP or I2? What grated into SAP, Oracle, I2, JDEdwards and many other systems. We can provide a
are the data requirements? short document that covers the few fields needed as well as a sample feed to give you a
good idea of what’s needed.

We have people at distributed locations eForecast is web-based for the key reason of deployment. We understand that
and at the corporate offices that want there are many people that have a vested interest in sharing the information from a
to use the capabilities of the system. forecasting system. eForecast can support multiple user, in distributed locations, pro-
How many users does the system sup- viding a platform that can be easily adopted and standardized with your current sys-
port? tems.

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

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