Demanding Times: Part Three - Aligning Supply and Demand
By Bill McBeath
on Oct 4, 2011
Aligning supply and demand is a core purpose of the supply chain function in an enterprise, but is rarely done well. We examine some cultural and technological underpinnings essential to make sales and operations planning work effectively.
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In Part Two of this series, we explored the role of Market Assumptions in providing a foundation for effectively managing and growing demand—how the best companies pull together quantitative, analytical, and social information to gauge the 'market psyche' and create their own assumptions about the markets they serve. Here in Part Three we look at the importance of aligning supply and demand.
Sales & Operations Misalignment
In a too common scenario, green widgets are not selling fast enough, so marketing runs a promotion, but forgets to tell manufacturing. The promotion generates a surge in demand which manufacturing interprets as an increase in long term demand and they ramp up production (just as the promotion is coming to an end). Marketing, seeing the shortage, decides to raise the price after the promotion, causing consumption to fall just as many more are being built. And the beat goes on . . .
Aligning Supply and Demand—Consensus Planning and S&OP
Far too many companies still lack coordination between those in charge of generating and managing demand and those in charge of ensuring supply. When demand and supply are not coordinated, it leads to ludicrous situations such as the manufacturing plant building more inventory while at the same time marketing is reducing price to get rid of inventory (see side bar.) Sales and operations planning is meant to break down these walls between operations, sales, marketing and finance in order to align supply and demand, but typically suffers from inaccurate input forecasts and long (monthly) cycles resulting in stale plans that don't incorporate the latest information. Sales is not held accountable for forecast accuracy and is not incented to help align supply and demand.1 Best practice in consensus planning includes:
Smart Reconciliation of Forecasts
Fast Cycle Planning
True One-number Planning
Due to biases, conflicting incentives, differences in knowledge of events, and different approaches to forecasting, there will be differences in the accuracy of forecasts generated by different people (e.g. sales, marketing, planners, etc.) using different methods (statistical, account based) at different levels of granularity (monthly vs. weekly, SKU vs. family, account vs. region). Consensus planning tries to reconcile these intelligently to produce a more accurate forecast used across the firm to drive planning and execution. Elements of smart reconciliation include:
Integrate awareness of key demand and supply events, such as a large customer order or a promotion.
Measure and incent participants on forecast accuracy. This is critical to change behavior and realize improvements. When there is no penalty for poor forecasts or reward for good ones, salespeople will always over-forecast to make sure they have more than enough to meet, regardless of what combination of demand occurs. As a result, manufacturing never believes the forecasts and creates their own.
Leverage technology that enables scenario building and analysis. Use tools that let people work in the way they are used to, usually with Excel, while integrated to a shared database for analysis and reconciliation.
Build in checks and balances. The person scrubbing the forecast should be on the alert for things that don't make sense, such as a part being forecast before the actual first availability date, perhaps caused by production delays. These conflicts can be resolved; for example the account manager can then go back to the customer to discuss the delay, rather than living with a false expectation, wrong forecast, and ultimately a disappointed customer.
Execution based on stale data and out-of-date plans is pervasive. The best companies have short planning cycles and rapid decision making cultures:
Compressed Decision Cycles and Decisive Execution—Rapid decision making cycles (daily or shorter), based on the best available data. This requires getting the right people in the room together—those who have the authority and resources to make decisions on the spot about demand and supply matching. For example, Dell executives meet before each shift, looking at available inventory, orders that came in, to decide what products to build, in what factories, on what lines. Newer technologies can merge planning and execution to allow incremental or continuous updates to plans.
Fast and direct upward flow of information—breaking news doesn't have to travel sequentially up through the Fast and direct upward flow of information—breaking news doesn't have to travel sequentially up through the ‘chain of command.’ In this type of culture, people are free to directly go several levels up in the organization when the impact is critical.
These can require some radical changes in culture. In these companies, executives are required to be at key planning meetings. And It is understood that underlings bringing issues directly to upper management, when warranted, is not considered to be ‘going around your boss.’
True One-number Planning
A good litmus test of true one-number planning is whether, at all points in time, the parts on order equals the sales quotas. Dell is one company that does it this way, buying parts to the exact same plan that sales commissions are based on. This requires a very disciplined planning process. When a firm purchase commitment for raw materials is about to be made, there must be agreement from sales to sell what you are about to buy. Quotas and/or orders are modified to match, and plans updated rapidly across the enterprise.
One-number planning doesn't mean that you adjust your quarterly goals every week. It is a reality that companies plan on many time horizons simultaneously; perhaps quarterly for strategic capital decisions, monthly for sourcing and manufacturing start decisions, and weekly for assembly and shipping/replenishment decisions. There needs to be rationalization of these different time horizons. New information is incorporated sooner into near-term plans, and you may be doing some tactical actions such as loading or emptying a channel. The variances between long term and short term plans need to be understood, and adjustments made when appropriate.
Aligning supply and demand is a core purpose of the supply chain function in an enterprise. It can make all the difference between profitably building and selling the very items your customers are actually desiring and buying vs. building the wrong items that aren’t really needed, only to be sold at steep discounts.
In Part Four of this series we describe practices that were successfully used to overcome the enormous challenges in managing product lifecycles and transitions.