High accuracy forecasting for configurable

products, and products with variants

 Most products today fit into one of two categories: configurable products or products with
a fixed bill of materials (BOM). Both can cause daunting product complexity challenges.

Fixed BOM vs. configurable products

With configurable products, customers mix and match features to customize the product
they want to buy. This results in a very large number of configurations that can change year
over year – as many as 30% to 50% of the configurations produced in a year may never
have been ordered before.

Fixed BOM products have an established number of configurations (SKUs) from which
customers can select. With fixed BOMs, growing demand for feature choices inevitably
leads to model and product proliferation (more SKUs).

Customers don’t Customers don’t configure a fixed BOM product, but in trying to stimulate customer
demand manufacturers offer so many configurations that the product behaves like a
configure a fixed configurable product. It is not uncommon for a fixed BOM product to have thousands
BOM product, but in of SKUs, including many low-volume configurations taking up the lion’s share of a
trying to stimulate product portfolio.
customer demand Cell phones are a good example of this phenomenon. While cell phones aren’t
manufacturers offer so configurable, phone manufacturers produce and offer a huge selection of models and
many configurations features. Customers choose whichever model offers the features they want. The number
that the product of features and services has grown so much that cell phones now have more product
complexity than computers! Motorola and many others have had to wage numerous wars
behaves like a on complexity due to product and parts proliferation and sourcing challenges1.
configurable product.

1The Incredible Payback, Dave Nelson, Patricia E. Moody, Jonathan Stegner, pp. 66-67.
 Limitations of current forecasting tools
Current forecasting tools are designed for products with a fixed BOM (or SKU)
with a limited set of configurations; each SKU is considered a unique entity. When
the number of SKUs is limited, this forecasting method works. However, as the
number of configurations grows, forecasting accuracy drops dramatically. This is
because core assumptions made by these forecasting tools are violated.

1 The “no demand migration between SKUs” assumption

Demand migrates
between SKUs based on
feature sets; the old
assumption that a single
SKU has captive demand
is not true anymore. 2 The phantom configuration assumption
As the number of configurations grows, customers pick and choose
among them based on the features that match their needs. Now a fixed
BOM product is acting like a configurable product. Demand migrates
between SKUs based on feature sets; the old assumption that a single SKU
has captive demand is not true any more. Under this assumption,
forecasting tools can’t forecast demand for new SKUs or for customer
migration between SKUs with similar feature sets. The result is high-error
forecasting. One lighting manufacturer that offers thousands of SKUs
gave up forecasting because each year new SKUs made up at least 40% of
the total product offering. The company’s forecasting tools didn’t work in
this situation.
Since current forecasting tools were designed for fixed BOM products, a
common workaround for configurable products is to create “phantom”
configurations that mimic a fixed BOM product. For example, a truck
manufacturer may choose 15 or 20 phantom configurations for planning
and forecasting, but this tactic is doomed – manmade assumptions can’t
closely approximate the thousands of configurations that are typically
ordered and built. The rate of forecasting error is very high, and suppliers
and other business partners who rely on planning results to manage
inventory pay a very heavy price in added costs and reduced efficiency.

3 The feature choice independence assumption

Current forecasting tools also assume that customers select one feature at a
time and that selections are unrelated to previous decisions. This overly
simplified calculation assumes that if 10% of customers bought a DVD
player and 30% bought a GPS with a particular car model, then 3% of
customers will order both.

However, feature selection is not independent. Customers select groups of

features together based on their needs and price point. This creates
dependencies between features that should be leveraged to improve the
product offering and forecasting. Feature dependencies are dynamic,
changing as the product changes – as new features are introduced and as
prices fluctuate. Straight-line forecasting systems fail to account for these
patterns. The result: a poor product mix and erroneous forecasts.
 Complexity increases as customization and the number of configurations increase.
How well does your forecasting tool fit your products?

Where EmcienMix succeeds

EmcienMix’s unparalleled ability to model configurable products overcomes the limitations
of traditional planning tools, which can’t represent thousands or millions of customer-
orderable combinations.

Configurable products need to be modeled as a large number of dynamic configurations

because customers buy features and feature groups, not SKUs.

The fabled long tail is in fact made up of configurations that share many common features.
These common features represent what customers value in a product and can be leveraged
to improve forecasting and the product offering. Feature sets that customers value are like
building blocks that make up configurations. True demand management requires the ability
to auto-detect these feature building blocks for forecasting and product mix planning.
Buyers in niche markets
show distinct feature
choices that can be
leveraged to serve them
better. EmcienMix™
automatically computes
The long tail is made up of configurations that share many common features.
and applies these logical
feature clusters.
EmcienMix forecasts configurable products and products with many SKUs based on the
principle that customers seek and buy combinations of features that meet their needs. So
while the configurations are dynamic, customers configure products in distinct patterns,
e.g., small-business customers buy desktop computers with Microsoft Office, Quick
Books, a low-end graphics card and a backup drive. Buyers in niche markets show distinct
feature choices that can be leveraged to serve them better.

EmcienMix automatically detects the feature clusters and applies these dependencies to
forecasting. The clusters are groups of features, which may sometimes be as large as 30
features in a highly configurable product. The clusters convey that these features are
bought together. When the clusters are exploded into parts, it conveys the correct mix of
parts for high service level and product availability.
 EmcienMix’s forecasting engine leverages the clusters to forecast full configurations. The
full configurations are dissolved into features/options, and then into parts requirements.
The full configuration forecast ensures that the forecast maintains the cluster integrity
observed in the demand. This forecast delivers a highly accurate parts mix, to ensure
that your supply chain is stocked with the right parts, in the right ratios, so that you can
The significant financial build and deliver the orders in a timely manner.
and operations impact is
driving an urgent need If you offer a configurable product and you do not utilize a forecasting method that
for improved forecasting leverages feature dependencies, the supply chain will often have the wrong mix of parts.
for configurable The symptom of this is having too much parts inventory, and running into parts
shortages. The financial impact of having the wrong mix of parts is increased
products. inventory cost, increased freighting cost and reduced product availability. The
significant financial and operations impact is driving an urgent need for improved
forecasting for configurable products.

Emcien forecasting tools for configurable products offers the dynamic ability to:
• Auto-detect and leverage feature dependencies to improve mix and forecasting
• Keep up with ever-changing configurations and improve product mix planning
• Produce high-accuracy full configuration forecasts that improve product mix
visibility and customer service

Conclusion
Product complexity continues to grow as customers demand more feature choices in
more market segments at lower cost with higher service level. A company’s survival in
this competitive environment depends on the ability of the supply chain to forecast the
product mix to ensure the highest level of service in the most efficient manner.

Visibility is dramatically improved with EmcienMix, enabling companies to align their

resources to meet demand most efficiently. The effects are systemic and continuous,
adding value and clearing out costly inefficiency throughout the enterprise.

About Emcien, Inc.

Emcien is an Atlanta, GA-based software firm that solves complexity problems for discrete manufacturing
companies. EmcienMix is a unique software solution that optimizes product mix to maximize profits, all while
aligning closely with customer demand. Customers include Fortune 500 companies and manufacturers in the
electronics, automotive and industrial sectors. Emcien was named a 2008 Cool Vendor in SCM and ERP 2008
by Gartner, Inc. To learn more, call 404-961-6360 or visit www.emcien.com.