Manufacturer's Service Levels and Customer Satisfaction Improve with Smart Intermittent Demand Forecasting

Industrial Tools Division's service levels jump by close to 20 percentage points

This Industrial Tools Division (ITD) of a $2.3 billion company produces industrial cutting tools, such as drills, reamers, and counter bores. Many are high performance "special" products that perform multiple operations. The ITD sells its goods to the automotive, aerospace, earth-moving, semiconductor, and oil industries.

The Challenge
The business is not high volume, and a customer may go a year between orders. So, ITD wants to be sure it has product in stock when a customer calls. Sixty percent of ITD's inventory was special orders and the division was struggling to maintain appropriate inventory levels. A large percentage of ITD's inventory displayed what is known as intermittent, or slow-moving, demand. This is a situation where there are few identifiable patterns, if any, in the demand history, and the demand data normally contain a large percentage of zero values.

ITD's situation was—and is—not unique. Intermittent demand causes problems for demand planners in many industries, most notably capital goods and equipment manufacturing and spare parts inventory operations in a variety of industry sectors. Until recently, however, accurate forecasting of products with intermittent demand using traditional methods has been impossible. In 2000, Smart Software incorporated a new intermittent demand forecasting technology to solve the problem into its SmartForecasts Enterprise demand planning and forecasting software. It received a U.S. patent for the new technology in 2001.

Before getting SmartForecasts, the company's forecasting was completely judgmental. A person would go through the warehouse and eyeball the inventory to try to figure out safety stocks. This method worked somewhat for high volume standard products, but it wasn't successful for thousands of special-order and intermittently demanded products.

"When your service levels are running in the mid to low seventies, you can't be competitive," says the general manager of this large Midwestern manufacturer of industrial tools. "My biggest worry is being out-of-stock. When you don't have what a customer needs, you can assume it's lost business."

The Solution
One evening, while reading an article in a manufacturing trade publication, the general manager recognized a problem that was similar to his own. It was about an automobile parts manufacturer using Smart Software's SmartForecasts Enterprise to successfully manage its slow-moving, specialized inventory.

ITD installed SmartForecasts to help manage its intermittently demanded inventory and improve service levels. The general manager set a 95 percent service level target, i.e., he wanted to be able to fill an order for any product out of available inventory 95 percent of the time.

With SmartForecasts, ITD began forecasting about 2,300 standard products and almost 1,000 components that go into the tools, called "inserts" and "blanks".

The Results
"The [SmartForecasts] system is tremendously better than our former process," the general manager claims. "It's a lot easier to do the job, and it's a lot more reliable." He even recalls one time when his associates didn't follow the Smart forecast. They were caught 20 items short on an important order. "We don't question the forecast any more," he says.

In fact, service levels have shot up to 90 percent. "It's not SmartForecasts' fault that we haven't hit 95 percent yet," the general manager explains. "It's often due to the nature of our business, and we're still working hard to achieve that 95 percent target."

Still there's a lot to crow about. According to the general manager, the almost 20 percentage point improvement in service levels accounts for much of the increased customer satisfaction the company has seen. Additionally, ITD has been able to cull its inventory of items it doesn't need, while having more of the "right" inventory on the shelf.

Has ITD been able to cut its inventory costs? The company believes so, but it isn't sure yet because it hasn't done a detailed analysis. However, the savings show up in other places—places that make ITD more competitive.

"Lost business is a hidden cost you don't hear about," the general manager says. "If you can't fill a customer's order—the entire order—they go to someone who can. And they don't call back!"

With SmartForecasts Enterprise helping ITD maintain high service levels, a lot fewer customers are calling the competition.

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