De-risk the Supply Planning Forecast
If it wasn’t for humans, the supply chain would work perfectly. Technology will solve the problem. Easy, simple, painless. Then for color and garnish, throw in keywords like artificial intelligence, machine learning, big data and suddenly, all problems are solved automagically.
Technical vendors paint a colorful picture of a highly digitized supply chain. Like magic, forecasting, planning, and execution are fully automated. The vision is a system of self-aware systems, operating without human intervention, adapting to solve problems, and responding dynamically to changes in demand or supply.
Unfortunately, this is still a future vision. There is a saying that “you go to war with the army you have.” Today’s supply chain is a little bit broken. It faces a conflict driven by an on-going effort to remedy error. The result is a perpetual lack of visibility, slow decision making, inaccurate forecasts, and artificial (CYA) buffers.
One company we encountered was creating new forecasts each week using a mix of voodoo, system data, animal sacrifice, field estimates, and executive input. Fear of being wrong meant individual planners inflated forecasts which resulted in excess inventory and higher carrying costs.
In supply planning, everything is assumed to be true
The problem is firmly entrenched in the process – as everything in the forecast is assumed to be true, when it is not, the actual set up of the supply chain becomes distorted. Compensating with extra lead time and extra capacity buffers make up for unplanned variance – combined, this increases cost and diminishes predictability of outcomes.
These are not problems that will be solved by technology. Like a broken clock that is correct twice per day, at best, the forecast is seldom accurate. Poorly derived inputs place even the best systems and processes into jeopardy. Garbage in, garbage out.
People are not the problem. The supply planning process is the problem.
The ERP (MRP) system you employ reads, plans, and executes, all at the same time.
But, if you de-risk the forecast, suddenly fixing the process is cheaper, simpler, and easier to implement than you might expect.
One of our customers, a major global brand, made the decision to centralize all planning, defined by rules that govern the business, and are designed to drive the desired outcomes. Deploying a demand driven MRPII approach enforced global standardization of process. This removed multiple data silos. In a very short period of time they saw massive improvements in performance and efficiency. Planning cycles now take a day instead of a month. They enjoyed a greater than 15X ROI within months of the completed implementation.
When you remove MRP’s dependency on “WHEN something happens,” you remove the need for an unachievable level of forecast accuracy. You also remove significant cost and insecurity from your planning process.
De-Risk the Forecast
By de-risking your supply planning from the forecast, your ability to execute becomes aligned with demand and the business can finally understand its true market demand with service levels and fill rates nearing 100%.
Transition to a robust planning approach, which encompasses demand driven methodology and a positive decision-making policy should be the way supply chains are run.
Unfortunately, like most curriculums, contemporary demand driven methodology is theoretical and abstracted from practical implementation. Even the Demand Driven Institute advises users to adapt the method to fit their business requirements. Additionally, the current Demand Driven curriculum instructs planners to recalculate their buffers each day.
Our twenty years of demand driven experience has taught us when you re-plan buffers daily, you can never really understand your plan, as it’s changing every day – there are simply too many dynamic elements for people to be fully aware of and understand. Consequently, the plan’s inherent (daily) assumptions become hidden from the rest of the business. In an enterprise S&OP process it is good practice to understand the working capital implication of your business decisions. You want to know that a standard process will deliver a planned outcome. Yet, daily changes introduce daily uncertainty, reduced transparency and reportability.
Daily Changes = Daily Uncertainty
Is it realistic to expect to efficiently execute a plan that cannot be understood?
Operational capacity is often defined by historic demand. What does this mean? When you have a SKU by SKU plan built on historical demand, you have a baseline and can implement rules based on company process, policy, and capacity, upon which all future decisions are made.
When new information or new orders arrive, you can adapt and adjust the rules already in place.
The plan is the plan. It doesn’t need to change every week. Everyone knows the rules that form the plan. When you have a plan, you can operate inside that plan where there is a clear link between your input, your capability, market demand, and your working capital.
Operate inside a plan that everyone understands
If you want the plan to perform differently, you can toggle the plan’s rules. You can change the shape of demand, you can change lead times, you can increase or decrease the size of each batch. One of the benefits of operating within the plan is when you segment your supply chain and becoming much more agile in how you are able to respond to the market.
This approach does not prevent you from making mid-cycle corrections. As long as you understand your lead time, you can manage corrections. If your longest lead time is three months and you think you have an opportunity to sell more in two months, the answer should be “No – let’s stick to the plan and add this to the future plan.” These influence your relevant time horizons in S&OP.
If you feel the new order is an opportunity, sticking with the plan helps you treat the opportunity (and the exception) as a one-off event. You can speak with your suppliers candidly and explain that it is a one-off event. Instead of a fire drill, it is a management exercise. Rather than a firefight, it is now fire prevention.
The full benefit of new technologies is only realized when the organization adapts, becomes disruption resilient with people and process. De-risking the forecast – and implementing that process change – has challenges that can be addressed without financial risk.
In crisis is opportunity
Whether you know it or not, the current crisis (and the next) frees you from the legacy constraints of “we’ve always done it this way” supply planning excuses. In fact, this is perhaps the best opportunity to make the case for supply planning transformation.
Resistance to fixing the process side of your supply planning approach is short-sighted and even naive. Even better, you already have the historical data to de-risk the forecast without significant financial risk.
Guaranteed ROI with no financial risk
In fact, this problem can be fixed usually in 90 days with the following performance guarantees:
- Reduce your inventory levels by 30-70%
- Unburden significant capital locked in inventory
- Decrease obsolete inventory by up to 90%
- Diminish plan changes to less than 5%
- Shrink planner workload by 70%
- Perform a fully remote implementation (this is always an option)
- Provide customer service levels above 90%
- Avoid CAPEX and enable higher overhead absorption