In improving the supply chain, one of the most difficult steps is knowing how to get started. Too often, a host of things seem to be wrong, and trying to figure out where or how to begin can be overwhelming.
What is the Business Objective?
Businesses frequently aren’t clear about their objectives or goals. From the following list, for example, select your business’ primary objective:
- Meet every order on requested date.
- Be the low-cost producer.
- Maximize manufacturing throughput.
- Minimize working capital.
- Maximize market share.
Each of the above optimizes one aspect of the supply chain, ignoring the fact that it’s the effectiveness of the entire chain that matters. The real objective for almost all businesses is long-term profitability. To achieve that, you must keep both current and future customers satisfied while still making a profit. That, in turn, requires optimizing the whole, not the parts.
What is Optimizing the Whole?
Decision-making up and down the supply chain must be based on finding the best way to reach the business objective, even though this frequently means sub-optimizing one’s own function-specific metrics. For example, manufacturing loves long runs to maximize yield — but meeting customer service goals may require shorter runs for more flexibility. Conversely, sales cannot be allowed to cause major manufacturing disruptions for every rush order. There must be an agreed-upon mechanism for determining the right balance.
Implementing Supply Chain Planning
Once the organization has a clear business objective and a common understanding of how each portion of the supply chain contributes to the whole, it is ready to begin a structured analysis and improvement process. We recommend the following five-step path. Tangible benefits will appear with each step.
Step 1. Analyze your demand. What are your historical demand patterns? How do your customers and product lines differ from each other? Does demand vary by season? What changes from day to day?
At this point, you are not focusing on how much demand you could potentially create through marketing programs, nor are you ready to assess your ability to meet that demand. You just want to understand your demand as thoroughly as possible.
Why don’t more companies do this routinely? The available data is at a transaction level, describing individual shipments and orders. It is hard to get useful business insights by looking directly at this highly detailed data. People are so busy doing their day-to-day jobs that they don’t have the time to manually manipulate it into useful information. Analytical tools are required.
Step 1 takes you through the process of defining the views of demand relevant to your business, using them to analyze the data. The analysis identifies specific problem areas and provides the basis for short term performance improvements.
Step 2. Create an inventory profile. Just going through a disciplined inventory profiling exercise often reveals enough avoidable excesses to pay for the rest of your supply chain planning initiative.
Start by identifying the relevant inventory attributes such as product, package, warehousing and manufacturing locations. You will also need a way to refresh your database with inventory data from the ERP system. Analyze the inventory in relation to shipment quantities and patterns to identify stocks that are not required to satisfy variability.
At the end of this step, you'll have a process to analyze inventory data, aggregate and report on inventory by any combination of the defined inventory attributes, and identify gross excesses of inventory.
Step 3. Create a demand planning process that can be executed routinely. Establishing a routine demand planning process that operates effectively and efficiently to both collect and predict a company’s demand is the next step on the journey.
First, decide on a level of aggregation that generates a meaningful baseline statistical forecast without losing too much detail.
Next, identify the persons or functions that should contribute changes to the demand plan. Who knows real customer changes (e.g., a gain or loss of market share) most quickly? Who knows when we’ll have price increases and what their effect on demand will be?
Third, the business must agree on and document the method for creating a single demand plan from different sources like sales, marketing, operations, etc. Many functions and roles may participate in the demand planning process, but policies and practices must also be created to provide the decision tree for accepting or overriding other functions’ input.
Finally, implement forecast metrics. This involves measuring not only the overall demand plan but also the inputs of the various functions which participate in the demand planning process.
Step 4. Create a model to balance supply with demand. Although most companies have some level of activity in sales, purchasing, manufacturing, and distribution, the relative importance and complexity of these areas will vary from one company to the next. Step 4 involves building a quantitative model of your particular business to determine how to support the demand with available assets (the supply planning model).
Constraints and cost factors such as manufacturing facilities, transportation modes, contract facilities and other resources can be balanced with revenue or margin optimization to find the balance point most in keeping with the business’ objectives. The existence of such a quantitative model allows you to evaluate new business opportunities or capacity improvements with greater certainty.
Step 5. Implement an on-going S&OP Process. Sales and Operations Planning is a continuous, structured process for balancing supply with demand in accordance with the business strategy. Far more than the “monthly meeting” for which it is best known, S&OP is the way effective supply chains are managed on a daily basis. It provides a disciplined way of responding to change while minimizing disruption in day-to-day operations. It ties together Demand Planning, Supply Planning, Inventory Planning and execution, so that the entire business is always following a single set of integrated plans. “Optimizing the Whole” is what the S&OP Process is all about.
Tom Leonarski, CPIM, CIRM, is a senior consultant and industry specialist with Supply Chain Consultants. Supply Chain Consultants (SCC) delivers strategic business solutions that enable clients to gather, process and share information across the extended supply chain.