IKEA’s customers may struggle with its flat pack furniture but the company itself has been getting to grips with a bit of IT planning home improvement recently.
Over the past seven years IKEA has spent heavily on IT systems and on overhauling company processes to improve the effectiveness of its forecasting and supply chain planning.
Back in the late nineties IKEA began a project known somewhat grandly as the New Planning Concept which set the ambitious target of achieving 80 per cent accuracy in company forecasts. Overhauling the company’s planning systems has been a big task – IKEA has 225 stores in 44 countries. Each store holds some 10,000 product lines.
‘We see planning starting with sales, forecasting what we expect to see,’ explains Tommy Stjernfeldt, project manager for implementation. ‘Then we take account of the restraints and refine our plan to use it for short-term decision-making. Over the longer term we use it for planning our capacity in terms of our transport, supplier and warehouse requirements.’
The process of getting a fix on IKEA’s orders and inventory has been complicated by the company’s distributed structure which saw operations in North America, Europe and the Far East going their own way on systems. A decision to adopt a supply chain strategy of using fewer suppliers located in lower cost manufacturing countries, did not help matters either. The company’s stock is culled from 1,600 suppliers, many of whom are now on the other side of the globe from Sweden. The longer lead times involved call for more careful and accurate planning.
But IKEA has made strides towards improving its ability to predict both short-term replenishment needs and longer term capacity requirements. Developers of supply chain management systems have expended much time and effort raising the performance of their planning systems.
Forecast accuracy has been improved by between 25 per cent and 80 per cent by using a single database, a single plan and making sure all the departments whose work affects the process are linked in to the planning system, say IT experts. Portals that enable participants to see and change planning assumptions are vital to the process.
One of the key decisions IKEA took was to standardise its IT systems worldwide and to centralise company data on systems at its Älmhult headquarters where IKEA holds information on four million stock keeping units. The company also began developing a sales planning methodology and tools to achieve more realistic forecasts to help determine supply chain capacities.
By 2001, IKEA had installed planning software from supply chain management supplier Manugistics. The IT firm’s On Demand management package was supplemented with a new capacity planning methodology to allow IKEA to benefit from long-term contracts with suppliers while responding flexibly to customer demand.
IKEA now runs Manugistics’ Networks Demand on all products globally, while Networks Fulfilment is being rolled out for the replenishment of distribution centres and for direct replenishment of stores by suppliers.
By this summer, all distribution centres will be using the new fulfilment system. This means that 70 per cent of IKEA’s inbound replenishment by volume is now managed by the Manugistics system. The remaining 30 per cent, accounted for by direct deliveries, will come onstream this autumn.
These systems are being integrated with existing store IT and ordering systems. Local companies collect data and send it for processing overnight in Sweden. Andalthough new plans could be available each day, in practice planners work on weekly snapshots of the company’s position.
Looking further ahead, systems to enable IKEA to look at its transport requirements and to improve the quality of market input and operational data are also on the cards.
‘A major objective for us is to try and get the organisation to work more proactively and not just solve yesterday’s problems,’ says Stjernfeldt. ‘We let the system work out whether there are problems in replenishment or capacity. This allows the planners to focus on exceptions. It has taken a change in mindset to achieve this.’
IKEA has achieved three main benefits so far – the company holds less stock, enjoys better visibility and its planners are more productive.
‘We have reduced the stock in our central distribution centres,’ says Stjernfeldr. ‘We have also improved visibility in the supply chain so we are working together more. That has been achieved just by sharing the information we have in the company.Previously, potential problems such as imbalances between demand and capacity were not known by all the company’s trading organisations.
‘Finally we have been able to reduce the workload on our planners by up to 20 per cent. Around 1,000 people have access to our system – 700 planners and 300 other people have an interest in the results.’
Improvement in forecasts is slow, Stjernfeldt acknowledges, and the New Planning Concept will probably be a neverending project, but IKEA is getting there. ‘It’s expensive, but so far we have had more benefits than costs,’ he says.
Alliance UniChem, a pan-European wholesale distributor of pharmaceutical and healthcare products, is currently in the throes of developing a sales order system that it will deploy in its subsidiaries across Europe.
Unusually, the company has opted for custom-built software because of the amount of tailoring it had to do to its previous ERP system. Alliance UniChem runs highly automated warehouses and needs everything as close to its pick points as possible.
But forecasting and planning is one of the few areas where Alliance UniChem has opted to go for a package deal. Last October the company completed the introduction of Manhattan Associates’ Replenishment Solution which will form part of the new inhouse system.
‘We chose Evant [the supply chain planning software supplier taken over by Manhattan Associates last year]because it would be extremely time-consuming to try and do something like this ourselves,’ explains Ian Whitby, forecast manager at Alliance UniChem.
Planning for the system began in 2004 and the first applications come onstream in June last year, followed by a complete roll-out four months later. Whitby is pleased with the way the application went and with the fact that Manhattan Associates still has an experienced pharmaceuticals buyer acting as a consultant onsite.
In a volatile market that was last year troubled by shortages of raw materials, licensing disputes and health scares such as the bird flu panic, it was important that Alliance UniChem had its planning buttoned down. Pharmaceutical distribution is faster paced than most areas of retailing, with customer deliveries twice a day and some supplies that need special handling.
The company, with its headquarters just outside London, has a team of 15 planners responsible for various product categories such as medical, counter products (nonpharmaceutical lines) and generic drugs.
Goods are supplied to retail chemists, pharmacies and hospitals in the UK from 11 depots or branches including a central facility that distributes non-pharmaceutical items. Alliance Unichem also sells some own brand items.
Most goods are supplied by big-name pharmaceutical companies operating inside the UK even if the drugs are manufactured outside Europe. UniChem is a full line wholesaler which means it stocks every pharmaceutical available via the UK’s National Health Service plus others that can be bought privately.
The planners maintain the parameters of the system and the assumptions on which it works. Each weekend they recalculate the forecasts for each of Alliance UniChem’s 300,000 SKUs, representing 30,000 products. Planners deal with exceptions that call for further scrutiny. On average there are 1,500 exceptions that fall outside expected variations.
Although demand in some areas can be difficult to gauge, many courses of treatments are predictable. Seasonal factors tend to play a part with demand rising and falling during
the year. ‘If there’s a prescription we know sales will be stable,’ says Whitby. Planners are able to freeze forecasts and look at the affect on replenishment.
Decisions about replenishing stocks are made from forecasts of historical sales, demand estimates and the likely effect of promotions. The Replenishment Solution carries out the forecasts and suggests order quantities.
‘We went live in October last year and since then we have seen a significant improvement in service levels in certain categories and a fall in stockholding,’ says Whitby.
Quicker and more accurate forecasting has already had an impact. ‘We have managed to reduce stock-outs and we have saved a day’s worth of stock.’ Alliance UniChem previously held some 14 days’ inventory at a time, so this represents a considerable saving.
‘There are also things we can do now that we couldn’t do before, especially in promotions,’ Whitby continues. ‘For example, we can split orders and automatically do deals. We can also interface lots of data without having to type in individual items.’
Whitby says that planners are pleased with the more directed user interface on the Replenishment Solution. The software is also good for producing reports with planners able to use filters to look at data and also to run ad hoc spreadsheet reports.
So how important is IT to making good forecasts? ‘In most cases it’s just a matter of running the program,’ replies Whitby. ‘But it’s only a tool and as such is only as good as the planner who is using it – 80 per cent of the time the tool works fine on its own but 20 per cent of the time a successful outcome depends on the planner.’
Fit for purpose
Until January this year forecasters and inventory planners at sportswear company The Russell Corporation relied on Excel spreadsheets to work out orders for the company’s European distribution centre in Livingston, Scotland..
With 4,500 stock keeping units (SKUs) arriving in Scotland by sea from some 19 Asian suppliers and then out again to customers in 27 European countries, not to mention the third of orders that go direct to customers, the company’s number crunchers have their work cut out.
The problem was that their tools were not up to the job – decision-making was slow, resulting in long supply chain lead times and inventory levels that were higher than the company liked. ‘We needed to improve our forecast accuracy and get inventory levels down,’ says Stewart Wilson, Russell’s IT Director.
‘The length of the supply chain and the amount of time people spent managing the supply chain data ate into the time they had to analyse the results. The teams spent 70 per cent of their work managing the data and only 30 per cent analysing it,’ he points out.
The number of SKUs that Russell’s European planners have to deal with has been growing at an annual rate of between 800 and 1,000 in recent years. Not only has this added to planning work but it has also stretched the ability of the company’s European distributors to handle Russell’s lines. It was imperative to tighten up on ordering.
So, for much of last year Wilson oversaw the introduction of demand forecasting software from Italian supplier TXT e-Solutions. The software uses statistical algorithms to produce optimum inventories based on a product’s sales history and customer profile. According to Wilson it required a fair amount of customising to meet the company’s requirements.
Russell, hoped the investment would drastically improve its performance. It was a big decision, not least because the final bill for the IT work represented five times the expenditure of any other IT development in Russell’s European division, last year.
And it wasn’t just a technical fix. The introduction of the software allowed Russell to combine two previously separate groups – two people who spent their time forecasting and five involved in inventory planning. ‘The forecasting and inventory planning teams were managed separately before this project,’ explains Wilson. ‘With TXT we could shift people about and do more with fewer people.’
‘With the task of sourcing textiles mainly from Asia, lead times can typically be four to five months, so we need a good deal of foresight when ordering,’ said Richard Oliver, managing director of Russell Europe. ‘Demand forecasting software gives us greater visibility and allows us to be more responsive to local market needs.’
According to Wilson, the successful deployment of the software in Europe means that similar production planning and demand planning systems are being installed in the company’s US operation.
‘Fashion retailers are notorious for either over-forecasting and having to discount or sell through channels at zero margin, or under-forecasting and losing out on sales. A lot of money can be saved by using software to get the balance right,’ claims Richard Nicholas, TXT e-Solutions’ sales director.