INSIGHT’s (www.insightoutsmart.com) president, Jeff Karrenbauer, is a veteran of the supply chain industry and has been evangelizing recently about the integration of supply chain plans with marketing departments:

Strategic planning for supply chain and marketing too often proceed independently, that is, within their respective silos. Even when forecasts are prepared collaboratively or a formal sales and operations planning (S&OP) process is used (and most companies have not reached this level of sophistication), the typical response of supply chain managers is reactive: verify adequate capacity (procurement, manufacturing, warehousing, transportation), certify that service commitments can be met, and approve the plan. The marketers smile — the supply chain costs are not in their budget — and senior management approves the plan. The spreadsheets are in agreement!

This classic myopic approach suffers from a major shortcoming. There is no guarantee that resources are being focused so as to maximize corporate financial objectives such as return on investment or shareholder value. For example, assume for the moment that new marketing initiatives will successfully stimulate demand. Perhaps that demand cannot be satisfied without major capital investment which, in turn, negates the benefits. Or perhaps the effort is wrongly directed to markets, channels, or products, whose margins, from a total supply chain perspective, are inferior or even negative.

For many decades the silo approach has also been accepted for strategic supply chain design analyses as well. Even when analysts employ sophisticated, optimization-based mathematical models, historical or forecasted demand is still assumed to be given for any planning scenario. Alternative demand assumptions require separate exercises. The supply chain, including procurement, manufacturing, warehousing, transportation, inventory, duties, and taxes, is configured in response to the fixed demand. The classic objective is to determine the optimal set of facilities and flows so as to satisfy demand and minimize cost, subject to all capacity limitations and service requirements. There is no consideration given to simultaneously choosing an optimal level of demand.

For the first time in history there is now a much better way. The fundamental change to the traditional approach is to discard the assumption of fixed demand. In its place is a base level of demand (historical or forecast), together with a series of proposed marketing initiatives, or campaigns. Each such campaign is described by a budget (fixed and variable cost components), budget limits (both min and max), and demand response curves that relate marketing expenditures to changes in demand. The model is now charged with simultaneously optimizing marketing and supply chain expenditures so as to maximize margin and total profit. To do so it must select campaigns that result in a level of demand that can be met by the supply chain. Given that requirement, it directs the marketing expenditures to those markets, channels, and products with the greatest margin, thereby maximizing profit. In doing so, it avoids the common strategic planning mistakes described above. In short, the strategic planning objective is completely aligned with the senior executive suite: simultaneously balance all corporate resources so as to maximize profitability and return on shareholder equity.