Sales and Operations Planning Archives

Supply Chain and Marketing: A Growing Collaboration

Consumer Packaged Goods (CPG) | By Steve Banker • 07/29/2009

I recently received a newsletter from Lehigh University’s Center for Value Chain Research that showed the American Marketing Association’s (AMA) definition of “marketing” right next to the Council of Supply Chain Management Professionals (CSCMP) definition of “supply chain management.” Here are their definitions:

AMA – Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.

CSCMP – Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply-and-demand management within and across companies.

(Kudos to the AMA for having a more succinct definition).

Looking at the definitions led me to a few insights:

The definition of supply chain management has gotten broader over the years. In particular, what jumps out at me in the CSCMP definition is the inclusion of procurement as a core SCM process. While this is undoubtedly true, in most organizations the supply chain and procurement groups are distinct entities, with different, nonintegrated, and often conflicting approaches to SCM (see “Do Procurement and Supply Chain Folks Exist in the Same Universe” for a more in-depth discussion).
Compared to the supply chain team, marketing has far greater tools and data available to them to support demand management. In general, and particularly in consumer goods companies, marketing should have final responsibility for the demand plan because pricing, promotion, channel, and placement decisions factor so heavily into demand planning. Also, because marketing is most comfortable doing planning at the product family level, forecasters from the supply chain organization (who can provide historical forecasts at the SKU level) should be co-located with sales and marketing. Further, while we on the supply chain side tend to talk about sales and marketing as if they are on the same team, the chasm between sales and marketing can be as wide as the gap between marketing/sales and operations.
Sales and Operations Planning (S&OP) is a proven process for integrating the sales, marketing, and supply chain organizations. However, few companies have a robust S&OP process in place. In contrast, companies are in the early stages of better integrating merchandising and supply chain management processes. This is the next frontier for marketing-to-supply chain collaboration (see “The First Moment of Truth”).
In the retail/consumer goods supply chain, large retailers are beginning to understand how rationalizing the number of SKUs they carry can lead to both less cluttered, more customer friendly stores, and to supply chain efficiencies, such as inventory reductions and gains in labor productivity. This will lead to improved supply chain synergies between retailers and many of their manufacturing suppliers. However, in some product categories, some vendors will actually find their products are no longer needed (see “Walmart’s ‘Win-Play-Show’ Assortment Strategy”).
Internet retailing and e-fulfillment processes have gone through the hype, boom, and bust stages and have finally ripened into a substantial and mature channel. This e-channel is supported by mature processes and technologies, including online reservation systems, dynamic routing, distributed order management, and product information management. All of this has occurred in a little more than ten years. Amazon’s recent acquisition of Zappos, an online shoe retailer, for almost $900 million dollars is a reminder of how far we have come in such a relatively short period of time.

In light of these trends, what is interesting to me is that supply chain organizations seem to be collaborating more with the marketing team than with their procurement colleagues. This is my viewpoint—do you agree?

The Recession and the Outsourced Supply Chain

Logistics Outsourcing | By Steve Banker • 05/22/2009

Companies that outsource manufacturing, logistics, call centers, IT support, and various back office functions can be better equipped to ride out a recession, particularly if the payments are transaction based. Less demand means fewer transaction fees associated with supply chain services. These companies have minimized their fixed overhead costs, and their warehousing, transportation, and manufacturing costs become variable costs that are strongly correlated to new orders. This becomes even truer if your company can negotiate vendor owned inventory agreements with suppliers.

This strategy, however, will not work for everyone, and it is particularly ineffective for companies whose value proposition is being a low cost provider. Walmart, for example, owns and operates both a large fleet of trucks and a large network of warehouses. They incur the fixed overhead costs, but because they operate their logistics assets very effectively, they can run their warehouses more cost effectively (or at least, as cost-effectively) than a logistics service provider could. Interestingly, because Walmart is a low cost retailer, they have gained market share during this recession and are performing relatively well financially (the company recently reported earnings per share at the high end of the its guidance to Wall Street).

But for companies that compete on product innovations or service, the outsourced supply chain can provide real protection during a recession, but not without risks. Imagine a key contract manufacturing or LSP partner going out of business. This could be ruinous for companies that put “all of their eggs in one basket.” Obviously, companies should monitor the financial health of key partners. But even if a company does this and becomes alarmed that a key partner is becoming financially unviable, finding, qualifying, and ramping up a new relationship is not quick or easy. In fact, in these situations, it is often less costly to invest resources to ensure that the partner survives the recession.

In addition, managing outsourced supply chains can make it harder to have an effective Sales & Operations Planning process. The S&OP process is used to balance supply with demand. If you are able to successfully forecast less demand, but can’t expeditiously ramp down the upstream supply provided by manufacturing partners, you can end up with excess inventory. Further, if your contract manufacturer is not good at lean processes, building in smaller lots more closely aligned with demand, they are apt to end up with excess raw materials, and those costs have a way of eventually migrating downstream, one way or another. Further, in all fairness to offshore contract manufacturers, it is difficult for offshore partners to get truly lean because of the long lead times.

In short, like so many things, the benefits and tradeoffs of having an outsourced supply chain during a recession vary by company and supply chain strategy.

Advanced IBP Leads to Better Service and Profitability

Consumer Packaged Goods (CPG) | By Steve Banker • 03/19/2009

The desire to improve service is the main reason many companies are investing in information technology (IT). Achieving this goal is very difficult without a robust Integrated Business Planning (IBP) process, formerly known as Sales & Operations Planning. The goal of sales and operations planning is to achieve high service levels by effectively balancing demand with supply. This requires both internal and external collaboration. Internally, at a minimum, the manufacturing, demand planning, and sales and marketing groups must collaborate effectively in a IBP process.

To efficiently balance supply with demand, Supply Chain Planning (SCP) applications are evolving to provide better support for external collaboration, better integration with longer term business planning, and better simulation capabilities that support ad hoc contingency planning.

Most IBP processes are too inward facing. For consumer products manufacturers, there is usually some level of interaction between sales and marketing and retailers surrounding promotions. But this is often not properly factored into demand forecasts, and rarely into replenishment plans. For industrial manufacturers, there might be some limited, and generally ineffective, forms of collaboration for trying to understand demand forecasts from channel partners. But most S&OP collaboration has been focused on the internal interaction of manufacturing, sales and marketing, and the forecasting groups. Better demand collaboration and more frequent data on what is actually selling improves forecasting, reduces process lags, and prevents the build-up of bullwhip inventory.

However, over the last decade, many companies have dramatically increased their use of contract manufacturing partners and offshore sourcing of key components. While there are a few exceptions, most supply planning applications were not designed to support advanced forms of supply side collaboration. Implementing more advanced forms of IBP in companies with increasingly outsourced supply chains will clearly require better supply side collaboration.

Some leading companies are evolving their IBP process to better integrate it with their budgeting and financial planning processes. This is driven, in large part, by the fact that financial planning applications are making it far easier (although it’s still not easy) to do rolling quarterly budgets, rather than just one big budget per year. This increase in the number of budget cycles makes it less likely that the assumptions in the budget will become outdated and the budget targets impractical and unrealistic. It also enables the merging of IBP, which is generally conducted on a monthly basis, with budgeting done on a quarterly schedule.

The merging of IBP and integrated business planning begins with a granular understanding of profitability by customer and products. This new form of integrated IBP and financial planning is increasingly leading CFOs to chair their companies’ IBP executive planning meetings.

The action items that come out of executive S&OP meetings should not be confined to the supply chain team. Sales executives can play a key role in balancing supply with demand, particularly by communicating to customers that only the largest and most important (a polite way of saying “profitable”) customers are guaranteed the best service levels.

Having plan-versus-actual information is important to this new form of integrated IBP/financial planning. During the executive IBP meeting, executives need to review how they are performing against budget targets, including revenues, costs, and profits. Simulation tools are critical for both contingency analysis and ad hoc decision-making. In preparing for the executive IBP meeting, key planners can conduct “what-if” analyses. For example, they might run a simulation to understand what the impact would be if demand on key product families is 10 percent less than forecasted. The sales and marketing team could then look at various solutions to this hypothetical (but quite possible) scenario.

Another IBP challenge occurs once the IBP team commits to a plan and the supply chain team tries to implement it over the course of the coming month. For example, demand profiles may change so much from what was planned that continuing to manufacture or replenish to the plan becomes counterproductive. Many companies have so many different SKUs that they cannot plan for all supply/demand contingencies. Companies also struggle with determining what level of deviance from plan (which differs day-by-day during a 30-day planning horizon) should trigger an ad hoc executive IBP meeting and the need for ad hoc contingency planning. Consumer goods companies are beginning to experiment with using real-time demand data to adjust replenishment plans several times a week. Nevertheless, it is clear that plan-versus-actual budget reporting and simulation are important tools in closing the gap between what is planned for during budgeting cycles and what is actually achieved.

The majority of manufacturers do not have formal, documented IBP processes in place. For the IBP process, the “crawl, walk, run” approach is particularly appropriate. While I have discussed how IBP is becoming even more advanced based on enhanced functionality in SCP and financial budgeting applications, many companies are not even at the “crawl” stage yet. Still, an understanding of where the “run” stage is heading can increase the speed with which companies can move to more advanced forms of IBP.

(This posting is an excerpt from a more detailed white paper ARC wrote on behalf of Kinaxis).

Supply Chain Practices and Technologies to Improve Cash Flow

Logistics Technologies | By Steve Banker • 02/11/2009

In a recession, cash is king. What can your supply chain team do to improve cash flow? What processes and technologies can help?

The most obvious action is to lengthen payment terms with key suppliers. Finance may do this without informing supply chain managers, but this works against the mantra of establishing an adaptive, demand-driven supply chain. An adaptive supply chain can efficiently respond to unexpected surges in demand. You will have a hard time responding to these surges if you are not a preferred customer. And if you screw your key suppliers today, they’ll remember for a long time after the recession ends.

Your suppliers are apt to see supplier inventory management programs as being a fairer alternative. One way this can work is that while suppliers may still deliver raw materials or components to a factory warehouse in large quantities, they are not actually paid until the materials or parts are scanned out of the warehouse and used in the production of finished goods. Similarly, lean processes that allow a manufacturer to receive goods in smaller quantities on a just-in-time basis will reduce outlays for raw material inventories.

That is the supplier side of the equation. On the customer side, you can segment your customers and provide the best deals and service levels to “preferred customers”-e.g., profitable customers that pay their bills on time. The Sales and Operations Planning (S&OP) process has begun to merge with Integrated Business Planning processes. In some companies, S&OP is chaired by the finance group. In addition to looking at demand forecasts and supply plans, the executive S&OP team also reviews the profitability of key customers and products. This profitability analysis is based on activity-based costing or theory of constraints costing so that true profitability by customer and by product is understood. In balancing supply with demand, the most profitable customers get preference.

Just as the supply chain team may end up with action items based on the executive S&OP meeting, the sales team should as well. For example, if a preferred customer starts to delay payments or takes other actions that negatively impact their profitability, the account manager should engage with the customer to take corrective action.

From a technology perspective, any solution that facilitates achieving the perfect order metric (i.e., the right goods, in the right quantities and undamaged, delivered on time, and billed accurately) will improve cash flows. Resolving order fulfillment disputes is not only costly, it also prevents timely payments.

A new generation of very low priced Warehouse Management Systems (WMS) has emerged. Traditional WMS solutions have a considerable amount of functionality designed to maximize labor efficiency in the warehouse. In contrast, these very low cost WMS solutions have limited labor efficiency capabilities, but they provide substantial improvements in inventory visibility and delivery accuracy. In many cases, companies that use paper-based pick lists and do not use AutoID to confirm pick locations will improve their pick accuracy from about 92 percent to over 99 percent. Another payback bucket is not ordering inventory that is already present in the warehouse but put-away accidently in the wrong location.

Higher end WMS solutions have functionality that help ensure Value Added Services (VAS) are performed correctly. This prevents charge backs by large retail customers, as well as lengthened payments cycles due to disputes.

Proof-of-delivery solutions allow electronic signature capture, which confirms shipment receipt and could automatically trigger the financial settlement process. Also, a variety of Supply Chain Execution (SCE) solutions now use AutoID devices capable of taking digital pictures. These images, which might show, for example, that a pallet was delivered undamaged, can then be associated with the delivery record in the SCE system.

In international trade, bonded warehouses should be used where possible. A bonded warehouse is a warehouse in which the duties on the goods remain unpaid until they are actually shipped out of the warehouse to a customer. Leading Logistics Service Providers offer these services.

In conclusion, cash is king in a recession. But you don’t want take actions today that constrain future profitability when the economy recovers.

Let’s Make a Deal: How Demand Management Applications Learn

Logistics Software Vendors | By Steve Banker • 01/19/2009

There was a “let’s make a deal” brain teaser that appeared in the “Ask Marilyn” column in Parade magazine several years ago. Readers were asked to suppose they were a contestant on the television game show “Let’s Make A Deal.” The host tells you that there is a car behind one of three large doors on the stage. The other two doors have either a small gift or a goat behind them. You get to choose a door, and keep whatever is behind it.

After you make your choice, the host reveals what is behind one of the two doors you didn’t choose. It isn’t the car. The car, therefore, is behind the door you chose or the other unopened door. The host gives you the option of switching your choice. Should you switch?

Most people, including me, might assume that your odds of winning the car will be the same whether you stick with your original selection or switch. The answer, which is totally non-intuitive, is that you should always switch. Your odds of winning will increase significantly.

I will explain the answer to this riddle later, but first I want to explain how this applies to Demand Management. This game show scenario is the best-known example of the Bayesian approach to probability and forecasting. Bayes asked the question: Does your expectation of a future event change because of what you know about prior events? He mathematically proved that it does.

He wrote about prior and posterior probability and his approach to probability is known as the Bayesian Approach. Basically, the Bayesian approach involves creating a model composed of components that are given different weights. Posterior probability leads to changes in the weightings of certain components of the model. Prior probability is the situation the contestant was first confronted with. Posterior probability occurred when the host opened up a door and showed that the car was not behind it.

Most demand management solutions could be loosely described as “learning” applications. There are multiple statistical forecasting algorithms, from the very simple to the complex. No single algorithm is good or bad- they all have a use and are good for certain history patterns. Most demand management software vendors use at least 15 algorithms. Demand is a moving target. Over time, demand patterns will change and the forecasting algorithms need to change as well.

Several years ago, demand applications became self-grading. They offered alerts that, in effect, said “I’m not performing well.” In the first generation of automated forecasting, the application created automated alerts when the forecast error passed a preset threshold. Users then needed to manually figure out what algorithm would work better for a certain SKU or SKU by location.

In the second generation, the Demand Management applications had automated alerts, but they also automated the selection of the new algorithm. This “best fit automation” combines your new forecasting data with the historical data points and runs it against all the algorithms a vendor offers (usually at least 10) and then measures the forecast error from each and picks the algorithm with the lowest forecast error. However, this automation had unintended consequences. This functionality proved to be too “nervous” in many instances-i.e., the solution could flip-flop the best algorithm for a particular SKU many times a year. As a result, production and procurement personnel are faced with unusually large surges or troughs in what is required of them.

While most Demand Management suppliers continue to use best fit, there is now a third-generation solution of forecasting automation.

There are different ways to approach the “nervousness” problem, some less automated than others. Infor, for example, approaches it through the use of a Bayesian model, which requires less manual intervention. Their model looks at seasonality, level, trend, and variance as completely separate components of the forecast. Each of these components has a weight, or in Bayesian terms, a probability associated with them. As new data comes in, the solution does not completely throw out one algorithm and replace it with another. Instead, it changes the weights associated with the algorithms that are forecasting the various components of the demand plan. This makes the solution less “noisy” but still allows it to automate the forecasting process. How much weight is given to new data points can be preset, which affects the “nervousness” of the solution. Infor claims this technique provides the best forecast results for their customers, with some customers even reporting that forecast accuracy straight from the system is more accurate than when their users have intervened through collaborative efforts.

When it comes to Demand Management, the way we think and talk about these applications has changed substantially over the last five years. We went through a period where suppliers bragged that their algorithms and forecasting models were better than their competitors. In time, we came to the realization that the best statistical forecast was not necessarily the best demand plan, nor does the best demand plan lead to the best results if it does not include inputs from key collaborative stakeholders. This led to a focus on “collaborative demand management”.

However, I am beginning to wonder whether the pendulum has swung too far. Support for collaborative processes, like Sales and Operations Planning, still matters. But forecast accuracy and process automation are still important too.

So what is the solution to the brain teaser? To increase the probability that you’ll get the car, you should switch doors. This seems counter-intuitive because it seems that no matter what the host has revealed, you are left with two doors and no way to know which one has the car. The probability would seem to be 50 percent for either. It isn’t. If you stick with your original choice, prior probability applies, and your odds are one in three. If you switch, posterior probability applies, and your odds are one in two.

Think of it this way: What if there were a thousand doors instead of three? And what if the host eliminated 900 doors instead of one? When you chose your door, you had a one in a thousand chance of being right. The remaining 99 doors, other than the one you picked, have a probability of 99 in 1000 of being the best choice, about 10 percent. A 10 percent chance is much better than a one in a thousand chance

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