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The Typical bi-weekly Panic Mode and Supply Chain Initiatives

Having the right product in the right location at the right time, right amount and right price with optimized resource utilization at the same time – this is the aim of most Consumer Products Companies when we talk about Supply Chain Management. Although companies have started with supply chain initiatives they struggle with out-of-stocks especially for promotions and they have high inventories and waste. What exactly cause this unwanted effect? Let’s look at a common monthly supply chain cycle of such a company. Every two weeks departments panic. Night shifts are arranged to cover the demand they did not count on. People work overtime to get the right product produced. At the end of the month the inventories are filled with the product but again it is the wrong product because the demand decreased in the meantime and nobody realized. Wrong or old products on stock tie up the money that would be needed for new product developments and innovations. Financial complains about the bad cash flow, production and supply chain costs. Sales loose their credibility because the company is not able to deliver in a promised way. Customers are unsatisfied. And at the end of the year the company trails competitors that gain advantage and win market shares.

How can companies avoid supply chain issues like that? 

To give you an answer I will only concentrate on factors that can be influenced by the company. Let’s start with the demand forecast. Imagine the sales people would exactly know what consumers and therefore customers will demand (we talk about sales people who have the relevant demand information typically in their heads or in an Excel spreadsheet that is updated only once a month). Most of you will say that this is the answer to all supply chain planning issues. But it is not the only success factor.  What happens if sales people don’t pass the updated demand forecast to operations in time or if operations do not take the sales forecast into account and only look at their own forecast instead? What happens if marketing and new product development do not pass relevant information (such that influence demand) to sales? Imagine the company’s capabilities are not sufficient to match the demand or suppliers were not involved early enough so they are not able to respond in the required time?  The result of all scenarios is that the above mentioned supply chain issues will be immediately activated.An accurate demand forecast is an important success factor but is not sufficient on its own. As long as sales, marketing and new product development do not synchronize their plans, as long as operation is not forced to fulfill this synchronized demand plan, as long as the whole network including partners and production is not enabled to respond as quickly as it should, as long as all parties within the network are structured in a way that does not allow flexible communication and coordination, the supply chain initiative will not be successful.  Other typical supply chain planning issues are daily exceptions. One of my customers gave me a good example: The general manager met a customer at the golf course. This customer placed his order and was promised that it will be delivered two days later. The result of this two minute talk was that the company lost much more money than this deal was worth. The product was not on stock and production had to change the plan. Other sales orders could therefore not be delivered in time. At the end this company had to pay contractual penalty to one of these customers. Is it worth to change the whole plan? How does an exception and its required activity influence my KPI’s? Do I have other options that handle this exception in a better way?      

What should a Supply Chain Initiative consider?

  Looking at the above mentioned issues the company e.g. needs to –     improve forecast accuracy–     provide one demand plan (consider all available information that might increase the forecast accuracy of this plan) –     look at daily demand (POS) in short-term horizon to consider demand deviations early enough (reduces surprise every two weeks) esp. for promotions or fashion  –     make sure that different organizations are committed and their plans are aligned (one set of data)   –     decide on degree of supply flexibility (e.g. for products or categories: inventory based vendor-managed inventory (VMI) versus POS based responsive replenishment, inventory level for SKU versus point of product finishing (postponement), purchase contract versus intensity of supplier collaboration, manufacturing versus integrated manufacturing, etc) –     enable network structure, organizations, departments, people and partners to act in the above defined flexible manner by redefining the organizations, roles and responsibilities if necessary –     define major KPI’s to measure the supply chain performance, financial impacts, exceptions, opportunities, partner performance etc. –     and a lot more  The list touches three major elements: 1. People and behavior2. Processes3. Tools Companies who start to redefine their supply chain strategy need to consider the three elements at the same time and from beginning. Companies with an initiative to become demand driven should evaluate the following areas:  1. Supply Chain Management •     redefining the network •     redefining degree of flexibility (push/pull) •     redefining degree of collaboration •     redefining degree of responsiveness •     redefining degree of service level •     redefining KPI’s •     define Dynamic S&OP process  2. Change Management •     lead must be General Manager/CEO •     establish S&OP •     establish commitment and trust •     change organization and responsibilities •     change policies •     change capabilities  3. Resource Management •     select and purchase physical assets •     hire people •     etc.  4. Information Management •     purchase supporting software/tools •     provide information •     data integration (from strategic objectives to execution) •     one set of data •     task & document management •     etc.  A tool does not automatically change the organization, responsibility and processes. Sales & Operations Planning is a business process that guides a company how to deal with the three elements to get all plans and people synchronized. It supports decision making by giving the full visibility and understanding of the network capabilities. But S&OP does not define the supply chain process or strategy itself. If companies want to move e.g. from a traditional supplychain planning to a Demand Driven Supply Networks strategy (DDSN) they need to establish a new defined supply network that touches people, tools and many sub-processes. At the beginning of such a transformation the companies should consider the three elements and think about the above mentioned actions before starting a supply chain initiative.

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  • Thank you for sharing your thoughts on S&OP. Its great stuff. Can you blog on more such practical issues where you have seen S&OP initiatives fail/falter despite having SAP/Non-SAP applications in place or areas which are potential landmines from a BPX standpoint?

    Kartik Iyengar~

    • Thanks for your comment. Yes, you will find such blogs about S&OP and other SCM topics that relate to DDSN (demand driven supply networks) in the future. I will only talk about business processes and my experience within that area. 
  • Your outline of the typical scenario is right on the mark. 

    I was doing some SAP FI/CO work at a CPG client that has its products manufactured by external suppliers.   They used an outside forecasting system (Demand Solutions Forecast Management) and importing the the forecast (in monthly buckets) into SAP Demand Management to create Planned Independent Requirements that would then be considered in MRP.   Typical lead times for their products were 45 days.

    However, they would update their monthly forecasts weekly (to accomodate adds, deletes, and cancellations of items) and then reimport the data which would effectively overlay the forecast.   The problem this caused was that consumption of the forecast (which in SAP is a calculation) would get overlayed and the calculation of PIR’s would not consider consumption of demand in sales orders that had shipped since the beginning of the period and before the update of the forecast (as their demand solutions system did not track actual sales from SAP).

    This caused SAP to propose more material purchases than were really required.

    Have you seen this scenario before where a client uses an outside forecast system in such a fashion.   How and where should forecast information from an outside system be brought into SAP?    The forecast information is at the customer, material, quantity level. 

    I was wondering if Demand Management may be the wrong place to bring this information into SAP.  

    Would love to understand this to expand my knowledge (even if i am a FICO guy).

    Comments appreciated.