Supply Chain Planning for High Growth and Financial Accuracy

Hello, and welcome to my presentation on Supply Chain Planning for High Growth and Financial Accuracy. My name is Jonathan Morgan, and I’m the Senior Director of Demand, Inventory, and Spares planning for Palo Alto Networks.

I’ll start with a real quick agenda. I’ll go through a little bit more detail introduction on myself. I’ll run through some planning periods with the company from 2012 to 2014, 2015 through 2018, and then what we’ve been doing since 2019. I’ve been with Palo Alto Networks for a little bit over eight years now. I started off as the Loan Planner in Supply Chain organization, and have since built out functional expertise and groups in spares, parts planning, inventory management, supply planning and demand planning, and analytics. Prior to Palo Alto Networks, I had some additional background in data storage, telecom, and various consumer product companies.

I’ll tart off with a quick definition of S&OP from the [Inaudible] dictionary, that is the function of setting the overall level of Manufacturing output and other activities to best satisfy that current plan level of sales, meeting general business objectives of profitability, productivity, competitive customer lead times, inventory, and backlog levels. Note that sales and lead times that are highlighted here, bolded, there’s a reason for that you should gather when we go through the presentation here.

I’ll start with a little overview. The ability to predict demand and drive supply chain activity to support hyper growth and high customer satisfaction, then our primary goal for most of my time at Palo Alto Networks, the use of tools and processes that enable near real time views of supply and demand, whatever fine tuning of execution outside of our S&OP cadence.

In this presentation, we will review how the S&OP process has allowed the supply chain to stay nimble and meet financial targets. We’ll start with the initial period from when I joined the company, 2012 to 2014. At that time, we had one high volume ODM product, a PCBA, and box build for five core hardware products, so pretty small portfolio. All of our fulfillment and manufacturing is done at a local site to us here in Northern California in the US, so supply chain footprint was very simple.

So our planning and inventory were largely still in startup mode. There was a very much a concern on inventory level liabilities based on the size of the company. We did have a smaller product portfolio that did mean less potential for forecast mix changes, which was a benefit. Product dollars that time were the majority of total sales and revenue, meaning there was a pretty heavy corporate focus on product sales and what the pipeline look like. Company benefited from high margins on the older products. You’ll see shortly we started shipping about five years prior to this period that I started. We did provide build plans to our manufacturing partner in monthly buckets, allowing them some flexibility as a partner. But we didn’t have much leverage with them as a partner, really more as a contract manufacturer versus a partner at that early stage.

Moving on to tools, what we had at the time. We had a very simple tool set, really manual excel heavy work. We’re very much in a mode of ship everything that booked so there was lots of late nights and effort pulling data and reconciling across systems and functions because it was various reports across Salesforce SAP and Legacy ERP system that we’ve been using for some period of time.

So just kind of give an overview of how things looked. 2007, I mentioned was our initial hardware shipments. I joined the company in 2012. Again, simple product portfolio, but that also meant, with the fairly recent history of shipments, those minimal volume history to really reference for forecast models. So, at the time I joined, we had a top down forecasting model that was done in Excel owned by finance, and it’s based on the board plan dollar targets, not truly a sales forecast per se.

In 2013, a year after I started, we saw 55% year over year volume increase, and this is talking about hardware only, like core hardware not [unintelligible] and accessories like transceivers, racks, power cords, those kind of things, just true units, hard manufacturing goods. At that time, we decided to engage with a consulting team to design and start to make an S&OP process to get it developed and stay ahead of the complexity that we saw it coming, and prepare for the growth that we were expecting. As a company, we were expecting things to continue to grow and get bigger and bigger. As we implemented the S&OP process, we did it met consensus forecast, but that process was owned bysupply chain. We still the tops down, but we also added a bottoms up for both the hardware and total sales volumes. That was our initial attempt with S&OP.

Then, in 2014, we saw a 40% year over year volume, so another big growth year. We were striving for a medium maturity S&OP process pretty much out of the gate. We wanted to try and achieve a single number of forecasts across the company. As we’ll talk about a little bit later, we were probably jumping a little too far ahead of where we needed to be for the company. At the same time, with a budget allowed that we could start an evaluation and implementation project for a robust tool with the intent of using it for both S&OP and supply chain collaboration. That’s the first few years of mine at the company, jumping into our hypergrowth period, as we call it 2015 to 2018.

So the supply chain got a bit more complex, but still fairly simple. We now had three OEMs, as well as a new supplier for our chassis products. We did have a short stint where we moved our PCBA Manufacturing down to Mexico that lasted for two and a half years, and we moved it back to the US. Our box build and fulfillment always stayed up here local to our headquarters in Northern California.

Planning an inventory. This hyper growth that we were seeing, with large double digit growth year over year, created an opportunity for finance to set very specific targets on their P&L. This additional offerings help drive increased sales, but the larger customer base with recurring purchases, new product introductions, increased complexity of forecasting, pipeline, cleanliness became a challenge based on that. We changed our strategy to carry larger buffers on finished goods to support demand variability. We did move to a weekly planning bucket methodology to be very prescriptive of what we wanted and when to our contract manufacturing partner. We also increased leverage with that contract Manufacturing partner based on moving everything back to the US. We had a lot of spend with them for their local site that gave us more flexibility to chase supply plan changes within lead time even and prior demand volatility at the end of the quarter.

The tools we had from the stretch of time, we were still heavy in Excel usage, or demand planning and managing the backlog, but we were able to implement Connexus Rapid Response for supply planning, which allowed a single supply planner to support the total portfolio. We did implement reporting and dashboards in Tableau to provide faster views to users, and to help sync data across multiple systems. We were in a very early analytics maturity using data for basic reporting and descriptive metrics.

This is kind of a key takeaway for this period of time, as I mentioned earlier that with all the growth, [unintelligible] a lot of flexibility because we had a lot of sales, a lot of bookings, we could carry over a large backlog. So there was goals to be able to ship complete for any order that booked and land on very precise financial targets. So ultimate financial flexibility, whatever happened.

There was a top down focus on the current quarter. If sales forecast was conservative, we might encouraged to have to scramble at end quarter. That’s despite having large inventory buffers, there was enough variation and enough swings that we still might not have the right coverage. We begin use S&OP bottoms up forecast to plan future quarters and cover supply chain lead times. With little corporate focus outside of the current quarter, this led to turn the forecasts and supply plans as we move across quarters. So really, the company was very much focused on the current quarter. We are trying to stay ahead of that based on supply chain lead times, but we couldn’t get a lot of engagement.

We also started doing these daily and end of quarter syncs across sales, finance, operations, revenue, legal, our channel team, and others that were relevant at any point in time. That was to align on bookings, mix, and large deals coverage. I’ll note here that inventory was not part of what these reviews covered until 2018. The assumption was basically that we would have it, so we’re asked to have all this flexibility and is expected that it would happen regardless of what came in from sales. So that didn’t create a tremendous amount of pressure on the supply chain organization.

Within supply chain, we started doing our own daily end of quarter sync ups to ensure supply coverage, identify mix changes, and chase materials. We basically look at what was in the pipeline, regardless what’s the forecast at the time. If the pipeline said something was going to come in even if it didn’t fit the forecast, we would start loading and chasing that with our contract manufacturing partner, just in case it did come in. Lots of turn. So the extra inventory that we did have based on forecast buffers did help cover some changes, but there was still a lot of load and chase, as I mentioned, which led to a lot of increased cost for over time, expedites, for materials, and so on.

In this period of time, support finance, we also went live with some [unintelligible] decoder dashboards, and in the course, what we call our Decoder Support Process. That was really to show us bookings, billings, and backlog to consolidate that into one place versus across multiple systems. That definitely helped us sink on reporting and to make better decisions.

Again, just kind of put this in the timeline horizon sort of view. We left off prior in 2014. So 2015, 2016, still very solid periods of growth. Like I mentioned, in the S&OP process, we did struggle a bit with the executive engagement, but the core team did a really nice job working well to continuously enhance the process, reporting metrics, and a broad participation.

This is a period of time between 2015 and 2016 where we added our product management team. You could argue why weren’t they in their first place, but regardless, we finally did add them. That was a huge benefit as we move into the 2017 period, where we had a refresh of almost our entire portfolio. Massive refresh of 40% year over year growth. That S&OP process and that team was critical in planning for those product transitions, nailing supply coverage for the sales surge. The process accurately captured impact of lower cost, high performance product transitions that sales and plants had not accounted for in their model. So technically, we launched products that were better, faster, cheaper, replacing old products. We model that in S&OP, so we had a very accurate view of what was expected to happen. Our sales and finance had more of a one to one transition plan.

In 2018, we continue to launch more variations of the current skews of subsets of them for specialized markets. We also refresh the balance of the portfolio, so that led us to 28% year over year growth. Obviously, with more skews, all these transitions happening within a short period of time, the forecasting complexity continues to increase. So &OP continued to evolve, implementing new models for the long range forecasting and trying to gain more statistical models. It’s kind of a hybrid period of growth that we went through as a company.

To summarize that, those six years, 2012 to 2018, we saw nearly six times hardware unit volume growth. Basically 100% year over year on average, just over five and a half times, so 5.7 times dollars from roughly 174 million when I came on to over a billion dollars in run rate sales on product—just one product on the total company. While we were growing rapidly, that product mix actually was declining. That went from around 60% when I started at the company to around 30% at the end of this period. So while we were growing rapidly in product, but overall company was also growing even more rapidly and expanding into other areas. That expansion of subscriptions and support primarily, there was also some acquisitions in that period. The company was really shifting its focus to cloud and more services to really broaden that other part of the business, and to enhance the platform that they were offering to customers.

The takeaway from these slides for this period here is that it was imperative for us to have S&OP started early prior to the real volume growth and be working well enough in time for the surge in hardware hardware demand. Well, large parts of the company were focused on expanding other areas. So early on in the company, we had a lot of executive focus on product. As the product really started to surge, that focus actually went away. So when we needed it the most, we were kind of left relying on this process, which thankfully, it was in place.

We also learned that we expect the SOP process to be mature much faster than realistic. As I mentioned earlier, we want it to be really mid maturity level with a single number process. That way beyond what the company really needed from us honestly. We needed to be able to support the growth and have enough product there with as minimal of expense and cost as possible, but the company was not opposed to spending some money to make sure we had that flexibility in that coverage. If we had known that earlier on, we could have saved some heartache across the team in some efforts of trying to build out the process further than it need to be at the time.

My lesson here would be to ensure the focus is on what the company needs, not what you want the process to be. Don’t just read the textbook, like we did, and say, “Here’s where you want to be. Let’s implement that.” Also, remember that tools can’t replace process, they should support it. So make sure that process is really dialed in for what you need, and then design process or tools to support that. Also, looking at scalability, of course, and growth. Future state, and it’s always been considered there as well.

So all that said, overall, on that hypergrowth period of 2014 to 2018, how did we do as an S&OP team? Objectives were high customer satisfaction, average less than six days to ship versus a lead time of 10, so we did okay there. We did meet our financial goals, regularly met all the earnings targets and estimates, and scaled the business. We never missed finance targets due to lack of product, all that low and chase paid off, and we did this with minimal plantings team staff. I think, up through that period of time, I had four people on a team, so pretty small staff for the size of growth and complexity. Again, that’s spares planning, demand planning, and supply planning. So really those three functions for people doing all that.

So what are we been doing since then? We’ve been maintaining the simple supply chain model, rather than going to a low cost region. That means, we’ve had to find other ways to cut cost. We are getting more leverage out of our contract manufacturer, more ownership and efficiencies to improve inventory turns, and reduce costs. That’s one way we’re going about it. The continued span with them as we continue to grow and keep everything local is a met that we’re now they’re showcase customer in the local site.

We do occasionally review fulfillment expansion. Right now, it’s still local, same site as the manufacturing. But so far, the business case hasn’t really supported that because 99% of our business goes through a channel sales model. And the distributors can easily pick up locally to us, because we’re near San Francisco. Our planning inventory change as time goes on, so we continue to plan for double digit double digit year over year growth. There’s ongoing refreshes of the portfolio happening, expansions happening into new markets. Of course, there’s mergers and acquisitions. So our portfolio continues to get more complex, and the volumes continue to get to increase.

We continue to enhance and look at our processes and metrics to improve our long range forecasting. These newer products, their more complexity can mean longer lead times on the components of their higher or less availability across commodities. So we really have to pay attention to that long range forecast, and have more holistic strategies around how we do buffering to make sure we’re not just throwing money away.

We also can’t lose focus on the core demand. We must continue to meet our customer lead times and commitments. We started going down the path of splitting sales and operations execution off from our S&OP process. Previously, S&OP was kind of a catch all, we would talk about execution, very inquiry focused, we would do out quarter discussions once a quarter. It was really my team that did most of that modeling, everything else was minimal inputs from outside the org.

We must continue to work on inventory optimization, I do have an inventory manager in the team now, as I mentioned. So a lot of focus in increasing our flexibility in terms of new reporting to actually show what we can do flexibility wise to not carry everything in finished goods, but to push the flexibility up the supply chain. We want to reduce the need for expedites and extra cost, obviously.

We’ve moved ourselves to a gross planning process, which is more of a standard process that the contract manufacturing uses with other customers. It’s less restrictive on them on a week to week basis, at least. So we did have to put some new reporting in to cover that, but it’s taking the ease of all the reconciliation off from our very net planning focus methodology prior to, especially when we had [inaudible] buckets. It definitely allowed us to have less focus on the day to day and put more focus on strategies and process improvements.

Improving margins is always going to be a focus for operations in this company. We want the supply chain impact influence decisions rather than pure load and chase mentality, so really focusing on the outputs of the other activities that we’re going through to give us more information and better information for better decision making.

Talking about tools. We’ve actually moved to a new tool set that does all of our S&OP forecasting, demand planning, supply planning, and capacity planning along with some other functionality. We do that process, and the tool doesn’t do it all for us, unfortunately. But we are now aligned on a tool that was also being used in sales ops and some of the finance, so we’re looking at some connected planning activities there.

Looking at starting with a product planning, because that’s our core focus. We expect to see some business case to expand that to other areas over the next couple years. We’re definitely improving the use of more advanced analytics for predictive models, trending, and optimization. We’re really working towards prescriptive analytics. We want to continue to leverage the tools and enhance the processes to manage the complexity, drive efficiency, effectiveness, and focus on exceptions. We know we’re not gonna get a lot of headcount in operations or in my team specifically. So we really have to leverage the tools that we do have available to us get the most out of those.

Measures of success. These don’t really change, I would hope that no matter how big the company gets. On the customer always comes first, we do want to maintain our financial objectives within that customer first mentality. We are more focused on profitability now as the company’s gotten bigger. The dollars, percentage of everything is larger deal with that. So you have to be more responsible to the company as we’re buffering and doing different things within supply chain. So really right sizing, the long range demand to reduce changes within lead time has kind of been a focus of late.

So final thoughts. I went through the definition of S&OP earlier, talking about sales and lead time. Now, if I read through this, setting manufacturing output to best satisfy the current high levels of sales, that’s always gonna be there. But while maintaining general business objectives of profitability, as I mentioned, productivity, competitive customer lead times. Previously, we were very focused on getting stuff out the door as fast as possible. We’re more about what does the customer actually want, and meeting those levels and asks, our backlog levels, and managing a balance of supply and demand in backlog versus trying to clear it at all times. We maintain the same [inaudible], same high level goals, more focus on profitability, efficiency, and affectivity. Thank you for your time. Please leave any questions below.