Vicor Corporation, a publicly traded, $200 million company with headquarters in Andover, Massachusetts, is a build-to-order manufacturer of power conversion products for the electronics OEM market. Vicor produces 30,000 product items grouped into fifteen product families. The items are made from 10-15,000 components. As a build-to-order manufacturer, Vicor does both assembly and fabrication. It also tries to run a lean operation, keeping a very low backlog of finished good items and only ordering component parts on an as-needed basis. This strategy tends to lower inventory costs but also heightens the company’s risk of stocking out of key items.
The Challenge
While a few hundred of Vicor’s products are sold on a regular basis, some are ordered as little as every two years-a factor that makes demand forecasting and inventory planning more difficult. Yet Vicor’s business success depends critically on having the right component in stock when it’s needed to make a product item. So, having an accurate forecasting process in place is a major contributor to the company’s smooth operations.
As CIO of Vicor Corporation, Doug Richardson was charged with helping the company achieve two strategic objectives: improve on-time delivery of the company’s products and reduce inventory levels.
The Solution
Starting in 1999, Richardson led a team that replaced Vicor’s old manufacturing systems and a homegrown forecasting system with the PeopleSoft ERP system and SmartForecasts Enterprise. In May 2002, Vicor completed a tight integration of SmartForecasts with PeopleSoft’s Production Planning module, and by July 2002, the company started seeing positive results. Mark Vernaglia, senior operations planner at Vicor, makes the point that the ability to interactively adjust the statistical forecast results and understand seasonality were two big selling points in SmartForecasts’ favor.
Vicor has a two-phase demand forecasting process that combines both sales force and statistical forecasting techniques. In the first phase, the sales force obtains judgmental predictions directly from Vicor’s largest customers regarding their demand for each of the company’s product items. These customers account for about 40 to 50 percent of Vicor’s shipment volume. In the second phase, the shipment history for these customers is excluded, and SmartForecasts’ Automatic Forecasting capabilities are used to forecast statistically the product demand expected from all of the other customers. By summing these two sets of results, Vicor generates the total production forecast for each product item.
Because Vicor needs to assign future revenue goals for its product families as part of its sales and operations planning (S&OP), the company also makes use of SmartForecasts’ top-down modeling capabilities. It uses SmartForecasts to impose the build plan for each family and to intelligently distribute that goal among the items in the family.
The Results
In less than a year following integration with the PeopleSoft system, SmartForecasts uncovered a critical upward trend in Vicor’s business. “At first we thought something was wrong,” stated Richardson. So Vicor did the forecast again with more demand history as input. Sure enough, SmartForecasts had spotted a trend that began in late 2001.
“The SmartForecasts results provided evidence that the post-9/11 business downturn had hit bottom,” Richardson continued. “If SmartForecasts hadn’t uncovered the upward trend, we wouldn’t have had enough inventory on hand to meet demand.”
The system has continued to deliver substantial results that put the company well on the road to achieving its strategic objectives. According to Richardson, on-time delivery performance (customer service level) has increased by 10 percentage points and, at the same time, inventories are down by 20 percent. The improvements are the results of hard work by a team focused on improving order fulfillment, a key element of which is the company’s ability to better forecast inventory needs and understand demand patterns with SmartForecasts Enterprise.
The forecasting process has been greatly enhanced since the integration of SmartForecasts Enterprise with Vicor’s PeopleSoft system. Before the implementation, Vicor only forecasted about twenty percent of its products, in part because the old homegrown forecasting system was cumbersome to use and didn’t have the necessary horsepower or data capacity. Because of the speed of SmartForecasts and its ease of use, the company can now forecast more than eighty percent of its items. The ability to forecast more products has been a big factor in reducing Vicor’s inventory requirements and improving service levels.
Mark Vernaglia feels very comfortable using SmartForecasts and claims that he was able to be proficient with little training. “We’re getting great results,” stated Vernaglia, “and I haven’t even started taxing the software’s capabilities.”
The results have made Vernaglia more confident in his job. “With SmartForecasts we’ve been able to be much more aggressive with our inventory planning,” he continued. “You’ve got to have confidence in your forecast, and we now have the confidence to stock certain component parts that we didn’t have before.”
In the future, Vernaglia plans to expand the forecasting process to the component level and to start using SmartForecasts’ patented intermittent demand forecasting capabilities. He’s confident that these unique capabilities will help Vicor improve its ability to set stocking levels appropriately for slow-moving items.
Vicor looks forward to continuing improvements. “I’m willing to bet that our numbers will continue to go in opposite directions-inventory down and service levels up,” wagered Vernaglia. These are the kinds of changes that continue to help Vicor’s management achieve its strategic goals.
