Supply Chain Planning – a series of panicked heroic efforts or a finely tuned machine?

“The problem with British business is you get more credit for developing work arounds than for fixing the root cause of problems!”

An acute observation from a former client that holds particularly true for supply chain planning in many organisations – staff are warmly praised for getting urgent unexpected orders out of the door but those who prevent the orders being unexpected in the first place receive little recognition.

Sound familiar?

However, the benefits of getting a supply chain working smoothly through a well-run Sales and Operational Planning (S&OP) process can be huge, positively impacting all parts of an organisation from enhanced customer satisfaction and increased sales, improved production stability and efficiency, to enhanced employee satisfaction (or at least reduced frustrations).

This does not apply solely to manufacturing supply chains – it holds true for any organisation where capabilities, capacities, and resources need to be balanced to deliver sales or project requirements (i.e., almost every business).

So if the gains can be so significant why don’t more companies get it right?

Frequently, it is because the mentality highlighted by my former client comes in to play – people would prefer to be known for heroic efforts rather than spending the time and energy to go back to basics to develop and implement something robust.

This can manifest itself across all functions – sales teams keeping orders quiet until the end of the year to boost bonuses; manufacturing not fixing critical quality problems; logistics booking transport at the eleventh hour to demonstrate how well they can expedite.

In many organisations there is also a lack of awareness of what good looks like, in terms of both the process and the outcomes – one supply chain organisation I encountered had ‘learnt’ everything they knew about S&OP from a book but had never lived or breathed it, and ran the ‘process’ in isolation from the rest of the company. Needless to state it didn’t deliver the benefits (or products) expected…

Every consultancy has their own unique approach to supply chain planning (and some have several), and each organisation will tailor them to their own specific needs. However, there are a number of principles which are common to all of the most effective models:

CREATE A TRANSPARENT AND INCLUSIVE PROCESS

Supply chain planning when conducted well requires the involvement of all functions across the organisation, and will have corresponding implications for all of them.

For these interactions to work effectively, a clear and simple process should be defined from the outset so that all stakeholders understand what the expectations are of them, and how they can support others.

Through this process all parties help to build and buy in to a common understanding of the key parameters which define how the organisation will fulfil its objectives – this body of evidence is often referred to as ‘The Single Source of Truth’.

For example, the Sales function will propose its long-range volume forecast each month, which other functions will help to challenge and develop until there is consensus on the most likely outcome.

Similarly, manufacturing will define production capacities based on the most likely product mix, whilst other functions will help to stress-test the key assumptions until agreement on what is possible is reached.

In the initial stages of the roll-out of the new process, this discussion and challenge process can take some time, but once the organisation has been a through a few monthly iterations and reached consensus it should rapidly settle down (although care should be taken to continue to challenge assumptions in the event of changes).

Pitfalls to avoid during the set-up of the overall process include: allowing one function to dominate the process; creating silos between process steps or functions so that accountability is thrown over the wall to the next group rather than held collectively; setting too short a planning horizon to allow effective mid to long-range decisions to be made.

INVEST IN ANALYTICAL RIGOUR

Collating robust data sets, analysing them to identify key trends, and developing compelling insights is a theme I frequently return to when describing management best practices – it is particularly true for the S&OP process in the development of the Single Source of Truth highlighted above.

In preparing their contribution to the overall fact base each function should aim to maximise the level of rigour they apply, or at least be very clear where assumptions have been made so that they can be verified or the sensitivity of key recommendations to them can be assessed.

Key disciplines which can improve the quality of data and insight include:

· Go back to primary sources (i.e., ask a customer directly, and don’t rely on market forecasts)

· Use physical not financial quantities (i.e., number of units, tonnes or hours, rather than revenues which can include many other factors)

· Understand historical performance and trends; if planning assumptions diverge from these significantly, explain why

· Model cyclicality or volatility, and don’t use straight line assumptions just because it is easy as they will be incorrect most of the time

· Be open to challenge. Someone coming afresh to information might identify something that others have missed or might have additional insights

· Highlight issues early. For example if the data starts to show a significant capacity constraint don’t hide it and hope it goes away by next month

Relying on objective evidence as the bases for key analyses can help to overcome organisational biases to over optimism or pessimism – I have closed too many sites during my career due to inflated sales forecasts not being delivered, and missed too many sales opportunities because production has low-balled capacities to allow subjective opinion to drive decision making.

Employing this level of rigour is part of the process of addressing root causes, otherwise poor data going into the process will only result in poor insights being produced.

APPLY AN EXTERNAL PERSPECTIVE

With a strong focus on improving functional collaboration and optimising production efficiencies and effectiveness, there is a danger that S&OP processes can become too internally focussed, with critical external trends being missed that can disrupt performance over time.

The most important external perspective is the insight gained from speaking to customers about their future requirements. This needs to address both the volumes they expect to order as well as other factors which may change product mix, specifications, and service requirements.

At a higher level the sales, marketing, and product management teams ought to be looking out for other changes in overall market demand, which might change sales volumes beyond immediate customers. For example, key discontinuities to identify include changes in regulations, introduction of new technologies by customers, or significant shifts in end-consumer requirements.

In one company I led, new regulations required all customers’ products to include a new fire-resistant material layer, and extensive testing of the fire resistance of the resultant new products. Our test facilities were identified as a critical internal constraint, but by investing quickly in additional capacity we were able to win 7 of the top 10 national accounts within 3 months of the regulation change.

An area less often considered as a key constraint is raw material supply. In many markets, historic over capacity has allowed procurement teams to shop around for the most attractive deal. However, in recent years exponentially increasing demand for certain materials has started to create supply crunches. Suppliers deliberately constraining supply to increase pricing has exacerbated this problem. By understanding these constraints as early as possible, mitigation can be put in place through alternative supply sources, material substitutions, and strategic inventory builds to minimise the impact of potential issues.

Improved planning can create greater visibility for logistics teams when booking transport and allow the lowest cost and emissions mode to be booked to meet customers’ delivery requirements. By maintaining a longer-term view of overall demand teams can book this capacity early, particularly if freight capacities are forecast to become constrained. Having to explain why another consignment has had to be airfreighted at great expense is never an enjoyable task. Looking out for changes in import/export regulations can avoid similarly nasty surprises.

SIMPLIFY THE BUSINESS

“Optionality costs”

A need to reduce business complexity, particularly product portfolios, has been a common conclusion from every S&OP process I have been involved in.

Whilst there is a temptation to customise all products and services to each individual customer it can create significant complexity costs within a business, and greatly hinder supply chain planning.

Customers may not even want the additional choice – many research studies have demonstrated that when offered too many options customers actually buy less to avoid having to make a decision.

Complexity can manifest itself across supply chains and functions, creating delays and additional costs with few if any benefits:

· R&D: Broad research agendas which inhibit staff from focussing on the true breakthrough products, and which create significant disruption for trials

· Sales: Extensive product and service offerings which can confuse staff, let alone customers

· Production: Overly frequent changeovers, reducing efficiencies, increasing waste, and frequently delaying deliveries

· Logistics: Excess inventories to accommodate all products, leading to increased warehousing costs and often greater obsolescence costs

· HR: Needing to hire and retain highly specialist skills to produce a very small number of products, that often turn out to be low margin once all costs are accounted for

The variety of ‘war stories’ I have accumulated on these problems would fill several books and some of them are so extreme to be almost unbelievable. The common thread that ran through them was that all severely restricted the performance of the organisations in which I observed them, and could be addressed rapidly through simplification.

If the problems and increased costs are so evident why do companies allow complexity to increase to this extent? Three themes dominate:

· Weak strategy – unwillingness to make decisions about focus areas, and instead trying to do a little bit of everything

· Ignoring data – not using information available within the business to identify trends and make decisions

· Poor accountability – lack of dedicated roles focussed on controlling complexity within the business (e.g., product management functions proactively managing the portfolio)

A robust S&OP process can rapidly address these issues, and act as monthly progress reviews to ensure that work to mitigate them is being pursued on a timely basis.

***

Enhanced supply chain planning can make significant improvements to an organisation’s performance, but needs to be introduced rigorously and collectively owned by senior management to make it work. The investment of time and resources will be worth it.

If you are thinking about launching a S&OP initiative or need to optimise existing processes, and would like help to structure your approach please get in touch.