Working to improve the inventory situation
David Hannon -- Purchasing, 9/2/2004 2:00:00 AM
Enterasys Networks was not unlike a lot of other telecommunications firms a couple years ago. After some very strong demand for its products, the company was caught off guard by a massive drop in demand and lacked the responsiveness and visibility to react to the high-tech downturn.
Enterasys had already been through its share of changes before the downturn hit. Originally established as part of the storied Cabletron Systems in New Hampshire in 1986, the company was spun out from Cabletron in 1999. And when the downturn hit in 2002, the company was left with huge piles of inventory. A new executive team came in two years ago with the goal of turning the company around.
"At that point, we took a step back and asked what our problems were," says Don Toohey, director of worldwide strategic sourcing and procurement, one of the new executives brought in. "Our supply chain was somewhat archaic after the divestiture and the state of the telecommunications market in that period. We had outsourced all of our manufacturing to contract manufacturers during the divestiture, but our organization was still set up like a manufacturing organization. We needed to restructure based on the workload after the divestiture as well as based on what expertise there is in-house. We've since completed a robust hiring program to bring in experienced personnel who have worked in an outsourced manufacturing model."
But personnel was not the only problem. Like many telecom companies in 2002, Enterasys vowed to get better control and visibility of its inventory, after writing off up to 50% of inventory in 2002. In the 100% outsourced manufacturing model, they were relying on contract manufacturers to provide inventory visibility, which mostly came through clumsy spreadsheets. There was no automated tool to give the company visibility of its on-book and off-book liability.
One of the first initiatives that the new team at Enterasys began was the standardization of one ERP system across the entire company. SAP was selected because it was already the standard in the North American operations, but not the international locations.
Another issue of contention was the outsourcing of commodity management. Toohey says the company was planning on outsourcing most of its commodity management to the contract manufacturers as well, but he quickly fought that idea and has kept about 70% of the commodity spend in-house.
"For example, a lot of our ASICs are customized for us, so it did not make sense to leverage those much," Toohey says. "You don't get a lot of visibility into the costs when the CMs are doing the commodity management. So we shifted away from the outsourcing model in this area and since I've been here we've nearly doubled our commodity group. Plus, the contract manufacturers make profit off the material procurement process. We're now looking at a third-party to handle that for us at a cheaper rate than the CMs do."
With the ERP situation under control, Enterasys began looking for a more specific tool to help gain inventory visibility and leverage the power of the information coming in from the single ERP source. Toohey says the goal was to have one tool on the desktop that would give a complete understanding of the company's inventory at the commodity or component level corporatewide, regardless of which CM had the parts.
Enterasys zeroed in on a tool from Valdero, that could gather information from contract manufacturers easily without diving into the contract manufacturers' ERP systems. Additionally, Toohey says the Valdero staff impressed Enterasys with its supply chain expertise and focused less on the software bells and whistles.
From there, Toohey and his team planned the rollout. Instead of immediately asking all CMs to get on the tool, it was first introduced to the top-tier CMs that represented 80% of the company's spend to pursue the biggest "bang for the buck."
"We realized we needed to renegotiate all of our contracts, so we built it into those contracts that it was a requirement of doing business with Enterasys was to let us extract data off their ERP systems into the Valdero tool," says Toohey.
The results of a cost-avoidance strategy like this one are difficult to measure, but Enterasys has reduced its overall inventory by about 50% since using the Valdero tool and improved its inventory turns by about 35%. And the results impacted the bottom line, as its product margins improved 4.5% in the first two quarters of using the tool.
To further improve the process, Enterasys has focused recently on improving its forecasting data to plan inventory levels strategically. To get that forecast accuracy, a new tool called Steelwedge had been implemented and tied directly to its sales tool.
"The real benefit of this combination of tools is that it allows us to defer procurement when we see changes in the demand plan and to take advantage of some discounting based on predetermined buy levels as well," says Toohey.
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