The Impact of Forecasting Improvement on Return on Shareholder Value
John T. Mentzer; Journal of Business Forecasting

Improving Salesforce Forecasting
Mark A. Moon and John T. Mentzer; Journal of Business Forecasting

Benchmarking Sales Forecasting Management
John T. Mentzer, Carol C. Bienstock, and Kenneth B. Kahn; Business Horizons

Using S&OP to Reduce Complexity and Create Value
July 29, 2005, 1pm Eastern, 10am Pacific
Principal Speaker -
Seema Phull, Director, Process and Technology, Enterasys Networks


Sales and Forecasting Management Forum Executive Roundtable,
September 7-9, 2005

How Enterasys Uses Enterprise Planning and Performance Management

By Seema Phull, Director, Process and Technology, Enterasys Networks

Enterasys is a $360 million builder of secure enterprise networks, serving 25,000 customers globally in financial services , manufacturing, healthcare, education and government. When the economy turned south in 2000, Enterasys was affected like other technology companies before staging a comeback during FY2004 with a new Secure Networks Strategy and a totally updated product portfolio. Along with the new strategy and refresh of the product portfolio, the company also recognized the need for aligning business processes and information technology components that would help deliver cost control solutions necessary for achieving the goal of profitability. Under the guidance of a new president and now CEO, Mark Aslett, the company recruited a team of experts that brought thought leadership and experience in streamlining business processes and achieving operational excellence.

Executive Summary

Running a diagnostic on a supply chain is not a simple task, especially, when some of the most critical and complex components of the operation are outsourced to a third party provider. However, it was the natural first step for the Enterasys team. By using Supply Chain Council's SCOR Level 1 metrics for benchmarking its supply chain reliability, responsiveness, flexibility, and cost impacts, the team was able to get a quick but accurate pulse of its operational health.

The diagnostic revealed that there were significant opportunities for improvement and they spanned various functional departments. Some common themes were observed:

• Existing processes created disconnects between departments. Hence there was no company-wide discipline or structure to demand and supply planning
• Common mode of operation was short-tem, tactical and reactive, with continuous fire-fighting. Islands of analysis existed everywhere and they were driven manually.
• Forecasting discussions were too focused on product supply with little to no concern about root causes or consequences.

The remedy for these issues was a three step approach that would lead to alignment and eventually control and optimization of the company's operations.

• Step 1: Reduce demand uncertainty via Collaborative Forecasting and Demand Planning (CFDP) and Sales and Operations Planning (SOP) processes.
• Step 2: Reduce supply uncertainty via Collaborative Procurement Planning Process (CPPP).
• Step 3: Integrate and align demand & supply elements to ensure collaboration and control across the entire 'eco-system' by replicating the SOP process structure and discipline within the company as well as to the extended supply chain.

Reducing Complexity and Creating Value via S&OP at Enterasys

In 2003, the Enterasys planning process was not company-wide in either structure or discipline. The process was biased to the supply side and key stakeholders such as finance, marketing, and sales departments often did not show up for quarterly meetings. The focus was on short-term tactics and fire-fighting, not strategic initiatives, and there was no penalty for not meeting the forecast. This situation is not atypical for companies the size of Enterasys, but such a process limits growth and success.

Enterasys needed to review its planning process, renew its goals and metrics, revise its execution process, and reorganize roles and responsibilities. The result of this analysis was the creation of a monthly Collaborative Forecasting and Demand Planning (CFDP) process which focuses on minimizing demand uncertainty. Alongside CFDP is the Collaborative Procurement Planning Project (CPPP) which seeks to minimize supply uncertainty.

Together, these two processes culminate in the S&OP process (Fig 1), which strategically aligns supply and demand with the net result of improving customer service *while reducing costs.

To improve demand management, Enterasys created an enterprise-wide, closed-loop process to replace the disconnected manual process of the past. The new Sales and Operations (SOP) process focuses on performance management with shared processes, assumptions and ownership across the enterprise. The company set up an audit trail and measured results on a monthly basis. Accountability improved through the creation of a CFDP champion and "SOP Captain" who reports to the supply chain. By creating a position responsible for the entire SOP process, Enterasys drove accountability and coordination across the organization.

Enterasys out-sources most manufacturing to two companies that procure material and provide comprehensive manufacturing services, including assembly, test, control and

shipment to Enterasys customers. Enterasys also has a two-tier distribution process, selling its products through 10 major distributors as well as through a direct sales force. Outsourcing manufacturing and two-tier distribution add complexity to the SOP process, putting communication and timely planning with partners at a premium. As a result, Enterasys is focusing on collaborative forecasting, demand planning and collaborative procurement as strategic weapons.

The CFDP and CPPP collaboration projects enable flow of clean information with a planning horizon that is further than just the current quarter while shrinking down the response time from the supplier. In doing so, Enterasys continues to improve the flexibility and responsiveness of this supply chain which is greatly dependant on the contract manufacturers.

The company uses a forward-looking forecast of anticipated product orders which incorporates collaborative feedback and data feeds from the company's CRM , Product Lifecycle Planning, and ERP systems to create a baseline forecast. Lead times for materials and components vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. For example, some application-specific integrated circuits have lead times of up to six months. Overestimating requirements may result in costly excess inventory. Underestimating could mean delays in delivery to customers and recognition of revenue.

Additionally, because contract manufacturers produce Enterasys products based on forward-looking demand projections, Enterasys needs to respond quickly to sudden increases in demand to maximize revenue opportunities and customer relationships, or to sudden decreases in demand to prevent excess inventories, and higher manufacturing costs.

CFDP Scorecard

As the company embarked on this change, it worked with Dr. Kenneth Kahn of University of Tennessee to develop detailed policies and processes that would drive the overall CFDP and S&OP process. The company also adopted the university's model for tracking the various dimensions of change to be addressed in the project. Enterasys' progress along these dimensions is illustrated in figure 2 below..

Functional integration defines how various departments work together to drive a consensus forecast. At the onset of this project, Enterasys benchmarked its functional integration capability at stage 1 which denotes 'poor' practices. The team set a 6 month goal of establishing firm hold in stage 2 which denotes 'better' practices and approaching stage 3 which denotes 'good' practices. In January of 2005, about 6 months after 'go live' of CFDP, the team reported that it had established a grasp into 'stage 3' by establishing communication and coordination between departments, driving a true consensus forecasting process through the successful creation and adoption of a SOP champion. The team was able to take the 'operations oriented' process and turn it into a true cross functional process that enables enterprise perspective and analysis.

The model's second dimension falls in the category of Approach which is defined as the organizations' perspective on the importance of forecasting and its usage of various standard practices. Prior to CFDP, Enterasys forecasting practices were very rudimentary in nature. Most of the data was manually collected and manipulated and lacked the usage of statistical modeling capabilities offered by most advanced software packages. Therefore, a key enabler of the new SOP process has been the implementation of Steelwedge Software, an enterprise planning and performance measurement (EPPM) solution that connects and leverages the company's investments in EDI, SAP , Agile, Salesforce.com, and Cognos. The use of statistical modeling and collaborative planning via Steelwedge has allowed the company to move from stage one to stage 3 and 4 on the Approach and Systems dimensions respectively.

Final and perhaps the most critical aspect of the change that is being driven by CFDP is the category of performance measurement. By measuring the impact of each stakeholder into the CFDP process, Enterasys is able to effectively identify bottlenecks. This capability is also used to manage and steer the process to ensure maximum revenue shipment. By enabling metrics such as consumption rate, percent inventory exposure to excess and obsolete, etc, the company is able to control the risk associated with outsourced manufacturing. Performance measurement dimension acts as a catalyst for change up and down the extended supply chain and is responsible for the leap from stage 1 to 3 in this category.

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Side Bar Story-Sequence defines success

Every business entity lives by its people, processes, systems, and information methodologies. But, it's the sequence of the steps that defines success. For Enterasys, spending 4 months on defining the process and making sure that it was consistent and well understood was an important investment. The author drove the adoption of the process by engaging the various stakeholders upfront so that they were active participants in the definition of their roles and responsibilities within the overall process.

Perhaps one of the most critical aspects of the methodology is the element surrounding business intelligence or information. In a cross-functional process, tremendous amounts of information are created and distributed throughout various functional areas. Therefore, it is imperative that every entity understand the relevance and impact of various reports and analytics. Defining common nomenclature as well as integrating the information flow throughout the organization is very important to ensure that critical data.

Last, but certainly not the least, technology tools form the backbone that enables the business process as well as business intelligence, but technology needs to be adapted to fit the business process. Too often, organizations build a business process to fit a technology solution. Enterasys chose to select the technology solution based on the needs of the business process as designed for today's purposes and ensured that it was scalable enough for future needs.

•  Business Process: Ensure they are consistent, collaborative, and drive Accountability

•  Resources: Understand roles and responsibilities of all players

•  Business Intelligence: Create and share critical and timely information

•  Technology Tools: Technology should follow process to ensure success

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Enterasys S&OP in a nutshell

Enterasys set an overall objective for its S&OP process -- to manifest and sustain an enterprise process for developing, approving, and disseminating meaningful demand forecasts that facilitate Enterasys decision-making--and five specific goals:

•  Increase demand predictability and translate it into supplier flexibility

•  Reduce costs related to safety stock, E&O inventory, and order expediting

•  Administrative and mfg. costs

•  Expediting freight costs

•  Improve customer service via better on-time delivery and higher line and order fill rates

•  Enable coordinated and streamlined execution of a consensus sales and operations plan

•  Achieve preferred vendor status

Working with Dr Kahn, the Enterasys Process and Technology team redefined its S&OP process so that each stakeholder had very clear and concise roles and responsibilities:

Demand Planning

•  Oversee the CFDP Process

•  Generate baseline forecasts

•  Report forecast performance

Supply Management

•  Assess the demand forecast with regards to supply chain implications

•  Actively participate in Post-Mortem, Pre-SOP, and SOP meetings

Sales Operations and Product Management

•  Make adjustments to the baseline forecast

•  Actively participate in Post-Mortem, Pre-SOP, and SOP meetings

Finance

•  Compare the demand forecast with the financial forecast; identify potential issues

•  Actively participate in Post-Mortem, Pre-SOP, and SOP meetings

By contributing to the overall CFDP and SOP process, each stakeholder participates in the enterprise planning process and enables 'one number' focus. In doing so, Enterasys has observed the following benefits

Analysts, Planners, and Managers are spending more time analyzing information and learning from the past rather than chasing data. By anticipating the supplier capacity issues during its S&OP planning process, Enterasys' planners and managers are able to drive inventory and sales more effectively which mitigates the risk of missed revenue as well as inventory accumulation.

Management Team is able to access and analyze actionable business information such Gross Margins, Inventory Exposure, and Revenue Tracking on demand. This not only facilitates faster decisions but it also enables complete evaluation of alternatives when aligning demand and supply.

S&OP Champion is steering demand in response to market and sales conditions thus enabling a proactive approach to revenue management.

Conclusion

Enterasys now has a closed loop process incorporating performance feedback that connects Demand with Supply and monitors margin impacts. As an integral part of the re-engineering effort, Enterasys Steelwedge Software EPPM, an enterprise planning platform as the technology solution that supports the current and future versions of the CFDP and CPPP processes. Instead of focusing on a point solution, Enterasys has formed a 'collaboration gateway' which enables various nodes of the supply network to contribute data and intelligence relating to various business processes. It drives the collaborative processes, provides performance metrics, and ensures that quantitative and qualitative planning assumptions based on organizational feedback as well as EDI, SAP , Agile, Salesforce.com and Cognos data are managed in a single place.

S&OP within the Enterasys four walls is only the first step to overall operational streamlining effort. By enabling structure and discipline within its demand and supply chain, the company has built the foundation for optimizing the extended supply chain.

While significant progress was made during FY04 in implementing the new S&OP process the company continues to develop and refine its processes and technology solutions so that it can benefit from strategic business management alternatives such as vendor managed inventory, postponement, etc.

The team will consider its re-engineering roadmap complete once its reached the final stage where the entire demand and supply network has been illuminated with complete and real time visibility of inventory and relevant transactions are triggered automatically based on operational need and defined business conditions. At this stage, Enterasys will operate like a true OEM where its sole responsibility is planning and execution while all non value-added tasks have been outsourced. In other words, it will be at a stage of 'Nirvana' where the company is responsible for monitoring, measuring, and controlling rather than diving and catching.

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Sidebar: Enterasys Goal for S&OP-FAST

Both CFDP and CPPP are transforming the Enterasys operations from a linear chain to an intelligent network of partners that add value at every node. It is the team's mission to deliver the new supply chain that will be FAST.

Flexible

•  Demand driven supply network that supports product development, supply sourcing, manufacturing, and logistics flexibility

•  Makes promises in real time and redeploys resources automatically and accordingly

Agile

•  Responds to changes in customer demand very quickly and notifies business partners as close to real time as possible

Streamlined

•  Structure supply chain organization and supply chain processes to shorten lead times

•  Improved employee productivity

Transformed

•  Automate where possible

•  Endorse and practice 'Management by exception' theme

And, team members agree to a dynamic work culture--Seven Steps to FAST :

•  Substitute information for inventory

•  Work smarter, not harder (eliminate or reduce non-value adding activities)

•  Partner with suppliers to reduce in-bound lead-times

•  Seek to reduce complexity

•  Postpone inventory closer to customer demand

•  Manage processes not just functions

•  Utilize appropriate performance metrics, e.g. end-to-end pipeline time

As Director of Process and Technology at Enterasys Networks, Seema Phull is driving change by leveraging her extensive domain expertise and thought leadership to create a sustainable Supply Chain Management strategy that aligns Demand and Supply. With more than ten years of experience in applying best practices, Ms. Phull has served as both a practitioner and a consultant for Fortune 1000 companies.

Prior to joining Enterasys, Ms. Phull was Director of Supply Chain Solutions at Tilion, a leading edge Supply Chain Event Management (SCEM) software provider. Before Tilion, she held various sales and operations positions at Black and Decker working with industry leaders including Wal-Mart, and Home Depot.

Ms. Phull holds a MS in Information and Telecommunication Systems from Johns Hopkins University and a BS in Supply Chain Management and Marketing from University of Maryland at College Park .