Planning and Forecasting - Part 2 - A Bias Against Smart Planning

Cisco's supply chain planning suffered from a common malady that afflicts many companies—bias. It's a pattern of behavior within a company where different departments focus on their own individual priorities, often disregarding the overall health of the company in favor of propping up their own fiefdoms. A good supply chain plan will fail every time, for instance, if employees are being given incentives to avoid stock-outs, and as a result keep building up the safety stock. Because employees are not being penalized for making too much—in some companies, the only unpardonable sin is to be caught short—the importance of the overall supply chain plan ends up taking a backseat to the size of one's weekly paycheck. When it comes to protecting and keeping their jobs, employees learned long ago that management will rarely punish those who tell them what they want to hear.

In Cisco's case, forecasting growth had been the right answer for more than 10 years, so it seemed the most natural thing in the world to keep going forward, even when it started to look like the boom days were over.

"There's a growth bias built into the business of forecasting," explains Ajay Shah, a former director of Solectron Corp., one of Cisco's major suppliers and one of the companies that got caught up in the undertow when too many unwanted electronics products started to flood the marketplace. "People see a shortage and intuitively they forecast higher." That kind of growth bias leads to the unwritten rule of forecasting demand that says, "Err on the side of needing more, not less."

Forecasts need to make sense, adds Si Gutierrez, vice president of central planning and production control with chipmaker National Semiconductor Corp. A big part of forecasting at National involves an analysis of general economic conditions. He uses the cell phone industry as an example: "If the forecast says we'll need 20 percent more chips, we ask, 'Does that make sense, given current market conditions?' Everyone can agree that's a reasonable expectation for total market growth. The challenge comes in meeting with major players in the industry. Everyone wants to win and everyone's planning for success, so they add 30 percent. But not everyone wins. If you add up all the players in the industry, you might double a realistic forecast," he explains.

Ultimately, in the wake of the economic downturn in 2001, Cisco ended up with far more products than it could ever sell. How much more? The company wrote off $2.2 billion worth of unsaleable, unusable inventory and reported a $2.6 billion quarterly loss. Although Cisco had gained the reputation of being the supply chain poster child for the New Economy, it reacted to the supply chain glitch in a typically Old Economy fashion: The company laid off 8,500 employees.

More to come tomorrow...