Most organizations have looked at ways to optimize their supply chains. However, many of them only concentrate on a portion of the supply chain continuum without regard for how enhancements in one area impact the system as whole. The supply chain is a complex string of interrelated activities. The design should be an integrated end-to-end business process that optimizes service, inventory, capacity and total cost.
Supply Chain Execution (SCE) systems need to be well integrated and perpetually managed to ensure a balance of stability and responsiveness. Efficient execution begins with a solid Supply Chain Planning (SCP) foundation, commencing with a world-class supply chain vision. The following concepts must be considered:
»The supply chain vision views the organization, customers and suppliers as a dynamic integrated entity instead of fixed individual functions.
»Supply chain agility and flexibility is customer-driven and market-focused with a commitment to operational excellence and Continuous Improvement.
»Senior management supports the supply chain with adequate resources: facilities, equipment, personnel and technology.
»Value stream mapping is utilized to understand and optimize activities along the supply chain continuum, not within each function. Lean principles are applied throughout the supply chain in the relentless pursuit of eliminating waste and increasing velocity.
»All supply chain processes are documented and have a clear ownership with corresponding responsibility and authority; departmental goals and objectives are aligned with the supply chain vision. Best-practices are maintained through education and training.
»The company understands the strengths and weaknesses of their supply chain processes. Gaps from current performance and the strategic vision are understood with realistic improvement plans in place.
»Upstream and downstream demand changes are managed in real-time, and the rhythm of demand consumption (Takt Time) is felt throughout the supply chain instantaneously. Key Performance Indicators that monitor the pulse of supply chain are benchmarked and visible throughout the organization.
»Improvements in supply chain agility, velocity and total cost can be demonstrated with data and facts.
»There is strategic synchronization of demand and supply, through sales and operations planning, with a direct correlation to the business plan.
»Solutions are implemented beyond enterprise resource planning and functional SCE including: supplier relationship management, customer relationship management, distribution resource planning and advanced planning systems.
Strategic Supply Chain Planning
Strategic design of the supply chain vision involves physical, process and system components. The location of manufacturing and distribution centers needs to be carefully considered to optimize service and total cost. In a manufacturing environment, an optimal balance between production and outsourcing is desired that both minimizes cost and provides responsiveness to demand variability.
Distribution resource planning provides a continual review of key resources in the distribution infrastructure: warehouse location, capacity, workforce, transport vehicles (or availability), etc. It is critical that best-practice processes are implemented and standardized across all supply chain functions prior to the installation of enabling technologies. Proper visionary planning will provide consistent system architecture for integration of ERP, SCP and SCE systems, ensuring smooth data interfaces to provide real-time information.
Management of the supply chain is governed by sales and operations planning (S&OP). It is the keystone of Supply Chain Planning, a formal business process that synchronizes demand and supply on a monthly basis at the highest levels of the organization. In addition, S&OP provides scheduled periodic review and Demand Planning and Supply Planning performance; cross-functional strategic alignment maintaining consistency between the business plan (budget), SCP and SCE systems; coordination and regulation of the business plan and integrated departmental budgets; early warning system for variations to the business plan utilizing Key Performance Indicators; forum for departmental collaboration and making critical trade-off decisions, including risk and contingency planning; board for policy development and approval, providing unified direction to the organization and vehicle for continuous improvement.
Benefits of effective S&OP include excellent customer and supplier relations; ability to grow market share and respond to new initiatives; shorter lead times and higher inventory velocity; improved service levels at a lower total cost; as well as organization and staffing stability, and business plans and profitability objectives are achieved or exceeded.
Tactical Supply Chain Planning
It is important that the functions of demand planning, supply planning and inventory and logistics planning act in unison. Inventory levels should be monitored and managed, with formal service level agreements and collaborative planning in place with both customers and suppliers. Schedule adherence should be targeted at 99% complete and on-time at all supply chain transaction points for these systems to provide accurate available-to-promise information.
Demand planning should be owned by sales and marketing and performed on a monthly basis to provide one unconstrained plan for the entire business. A typical forecasting system utilizes several algorithms and best fit analysis to integrate customer order management (actual demand) with historical demand that has been adjusted for seasonality and trend. Pyramid forecasting aggregates and disaggregates projected demand by defined product families. This calculated forecast should be reconciled with a sales plan that is based on customer collaboration, promotional activities and leading industry economic indicators.
Some organizations feel that their business cannot be forecast accurately and forego the process; however, without formal demand planning the decisions on proper inventory levels often fall on procurement or production planning personnel and inventories are established without visibility to customer requirements. It is highly recommended that the demand plan is coordinated by those closest to the customer, even if initial forecasts have relatively low accuracy; the objective is a quest for continuous improvement.
Inventory and logistics planning is the heart of the supply chain. This is where the tactical synchronization of demand and supply occurs; and usually the focus of the finger pointing. Inventories are too high, but order fulfillment is too low. More often than not, the root cause resides elsewhere in the supply chain; it just becomes evident here.
Residing in the middle of the supply chain it is impacted by turbulence in demand or supply as well as ineffective strategic planning or execution. Responsibility for inventory accuracy and master data accuracy should be defined and targeted at 99%. Warehousing, distribution and transportation requirements are derived from the formal inventory plan and demand plan. Advanced systems provide buffer stock calculations to manage demand variability and recommended replenishment planning. Reviewing the assortment through product rationalization, traditional ABC classification techniques and disposition of obsolescence are also important elements of this process.
Supply planning needs to be closely integrated with the inventory plan and corresponding demand plan. In the case of manufacturing companies, production planning and material requirements planning may also reside here. The total cost of ownership should be used as a decision making tool that includes: purchase order processing costs, purchase price, transportation costs, import charges, warehousing costs, inventory carrying costs and Invoice processing costs. The impact on warehouse capacity and operations should also be considered. Competitor capabilities and customer requirements should both be clearly understood. A formal vendor performance process and strategies for continuity of supply, including the evaluation of alternative sources, are typical best-practices.
Remember, the chances for success are much greater if, prior to embarking on an SCE system that optimizes on a functional level, an organization first reviews its supply chain structure and planning systems. Theres no sense going into this process blind.
David J. Land is Manager of Professional Services for Cornerstone Solutions, Inc., a supply chain management consulting firm. He is a Certified Supply Chain Professional (CSCP) and is Certified in Production and Inventory Management (CPIM). He can be reached by phone at 260-496-8259 or via email at firstname.lastname@example.org.