Auto Aftermarket Leader Saves Millions of Dollars While Achieving 95% Service Levels with SmartForecasts

SKF Vehicle Service Market (SKF-VSM), formerly Chicago Rawhide, is the aftermarket arm of SKF for North America. SKF is a $6.3 billion, publicly traded, multi-national company headquartered in Gothenburg, Sweden. The SKF-VSM division is based in Elgin, Illinois with its worldwide distribution center located in Hebron, Kentucky, where it packages and distributes seals, bearings, U-joints, and other related parts for the automotive, industrial and truck aftermarket. The facility receives parts from manufacturing facilities located around the world, where supplier lead times can be as long as twenty-six weeks for certain product lines.

The division maintains six (6) remote distribution centers in North America and stocks approximately 60,000 unique parts that it sells through distributors and retailers. About 70 percent of the items exhibit intermittent, or “slow-moving”, demand.

The competitive automotive aftermarket is extremely sensitive to on-time delivery. Stock-outs frequently lead to lost sales. And if the product doesn’t arrive on time it is often returned. The industry, as a whole, suffers from a very high 27% return rate.

The Challenge
SKF Vehicle Service Market needed a more robust planning solution to do its forecasting. Its old system was incapable of generating forecasts of product demand and safety stock requirements that could accurately reflect seasonal demand variations and the irregular nature of intermittent demand. Demand planners at SKF-VSM spent a lot of time manually adjusting results. And, it was impossible to do this for all 60,000 SKUs on a monthly basis, leaving the majority of items incorrectly forecasted.

SKF-VSM historically experienced demand spikes in spring with slower periods during the winter months. The old process was unable to adapt to these fluctuations, which led to cyclical swings in manufacturing and distribution. Packaging operations that were idle during the slow winter months had to scramble through the summer to meet the demand and fill the backorders. As a result, SKF-VSM was confronted with unbalanced inventory, unsatisfactory customer service levels, backorders, and excessive shipping costs.

To solve its problems, SKF-VSM searched for a demand planning and forecasting system that was more robust and faster, could handle seasonality, and produce accurate safety stock estimates.

The Solution
After reviewing a number of options, SKF-VSM purchased SmartForecasts Enterprise in 2003. SmartForecasts met virtually all of the company’s most important requirements, including the ability to accurately forecast items with intermittent demand.

“One of the nice things about SmartForecasts was that it was installed and up and running in just two weeks,” according to Matthew Schiele, C.P.M., A.P.P., CPIM, Manager of Aftermarket Planning at SKF-VSM. After installation, the company integrated SmartForecasts with its other planning systems, and then spent eight weeks testing the combined solution.

Now in less than one hour each month, SKF-VSM accurately forecasts the demand for all 60,000 parts at each of its six distribution centers including its main DC in Hebron, Kentucky. In addition, forecasts with large expected errors are automatically flagged by SmartForecasts’ exception reporting facility. Then, utilizing the system’s judgmental adjustment tools, planners can adjust these “exception” forecasts based on input from sales representatives and customers. The results drive the company’s DRP system and are used to keep all warehouses properly stocked.

The Results
During the first six months, SKF-VSM started to see some improvements from its use of SmartForecasts. Based on the experience with the previous forecasting system, the planning group was skeptical at first. However, according to Schiele, after several months of accurate results “they became believers.”

In the first six months, SKF-VSM was also able to lower its inventory levels significantly. The division reduced the net value of its inventory by over a million dollars even while adding 600 new part numbers, many of which were quite expensive. The full benefit was seen in 2005 when SKF-VSM was able to reduce its inventory holdings by an impressive 16% while still maintaining desired customer service levels.

“There’s been a big change in warehouse operations too,” said Schiele. “We’re not playing catch-up anymore.” At the distribution center in Hebron, which receives parts and packages them, improvements in the forecasts have streamlined the workflow and led to more efficient deployment of warehousing assets. The cycle swings that SKF-VSM used to experience have disappeared, and the company now consistently achieves targeted 95 percent service levels, even as sales have grown.

“In the past, we were never ready for the spring rush,” said Lynn Brothers, SKF-VSM’s warehouse director and an eleven-year company veteran. “This year has been the easiest since I’ve been with the company. Last year we were 200,000 units behind sales in our packaging operations. This year, at the same time, we’re 200,000 units ahead.”

SmartForecasts also helped the planning group predict a recent upturn in business activity, enabling SKF-VSM to quickly respond by increasing parts orders and minimizing lost sales. The company has made more parts available at the local level and improved response times to customers. In addition, the division has been able to reduce its shipping costs.

Recently the planning department at SKF-VSM surveyed its sales force regarding its new forecasting capabilities and received nothing but positive comments. “SmartForecasts drives our relationship with suppliers,” says Schiele. “We have a much better understanding of what our future demand will be, and that reduces a lot of the costly expediting that we had to do in the past.”

Read the cover story on SKF Vehicle Service Market written by Malcolm Wheatley in Manufacturing Business Technology magazine. The title of the story is "Suddenly Spin Control: Mastering demand management in the supply chain can require sophisticated forecasting, inventory tools."

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