Under these testing economic circumstances, detailed planning and supply chain optimisation are going to be crucial factors in maintaining commercial and financial performance. But now, with global supply chains comes complexity and risk. Can technology offer the sophisticated planning solutions required? Nick Allen
Good supply chain planning is fundamental to every successful organisation. In fact, without good planning it’s hard to understand how any commercial enterprise can operate profitably.
Until fairly recently simple spreadsheets proved sufficient to run sales and operations planning (S&OP) on a monthly basis, but with the emergence of globalisation and outsourced manufacturing to distant locations, complexity has clouded the issue and now planning needs to be far more frequent, detailed and sophisticated. In addition, as economic conditions continue to deteriorate, a renewed focus on cost is placing an emphasis on supply chain optimisation and the software tools that facilitate this.
David Platt, senior managing consultant within supply chain management at IBM, sees three hot themes in planning centred around S&OP, supply chain strategy and supply chain optimisation.
According to Platt, S&OP has been around for some time but simple spreadsheets are no longer able to cope with the complexity and levels of sophistication required by practitioners. “So S&OP is back as a hot topic, but now it’s about the technology more than the process. A lot of effort has gone into implementing S&OP processes and the technology is now catching up,” says Platt.
It appears to be the larger global organisations that are looking for more sophisticated planning tools, those that have that level of complexity where SKUs are supplied on a worldwide basis. “When you’ve got a monthly process, to some extent you can live with [spreadsheets], because you can absorb that data management within a month, but when it becomes so complex that it starts to lack integrity, then you need to move on to something more able to cope with volume data from multiple sources,” says Platt.
The traditional APS (advanced planning and scheduling) vendors all have offerings in this space. Then there are a number of niche vendors.
“These niche players take a slightly different approach,” says Platt. “Traditionally, the APS vendors work on the basis that you implement demand and supply network planning across the organisation and then you have an S&OP reporting layer that sits above that. Whereas the S&OP niche players tend to integrate with multiple solutions – whatever the planning solution, be it an Excel spreadsheet to advanced planning solutions – and essentially it’s about data mining that relevant information and presenting it in an S&OP format.”
What the niche players are saying is, solve S&OP first and if you still need demand and supply planning and an operational planning perspective then you can continue on that journey, but it can take many years to implement APS across an organisation. “The two can work together, and it’s easier from an integration perspective if you do have that layer, but it’s not a prerequisite for having S&OP,” adds Platt. The other two areas where Platt sees changes emerging are interlinked: supply chain strategy and supply chain optimisation.
The one size fits all approach to planning, that looks very simple on paper, can often lead to greater complexity later on when it becomes operational. “If you do everything the same way for all different types of product, in all different types of location, it may be very simple to describe and to articulate what you’re doing and what your strategy is. However, in reality that may not be appropriate for every product class or location,” says Platt. “So what tends to happen is that planners will expend the same effort on a low value runner-type product as they would on a high value sporadic product, and really that balance needs to be addressed so that the effort is on the high value sporadic product – dealing with the low value runners should be more automated.”
He believes that if you don’t have that flexibility in your supply chain planning you tend to get caught in a trap. Having flexibility, “unlocks the opportunity to extract benefits on different segments – for example product transport – enabling you to tailor your strategy to those segments and that gives you the opportunity to either do it economically, using automation to plan those low value runner-type products, or have a more collaborative consensus-driven process for the higher value, more difficult to predict, products.”
When it comes to forecasting, “it’s important to decide what you can forecast and what is more difficult to forecast and tailor your demand planning strategies around that,” says Platt. “It’s also incredibly important to make sure that you are planning at the appropriate level of granularity. Sometimes SKU level is going to be appropriate, and sometimes it’s very difficult to forecast at that level because the products are, perhaps sporadic, or do not have enough history. It may be that forecasting at a more family level is more appropriate, disaggregating later to give you a better quality forecast.” However, he warns against planning everything at the lowest level of granularity, as it is easy to get bogged down with data. “You can find yourself just planning data and not focusing on the value added activities.”
Getting demand planning right is fundamental to planning in a make-to-stock environment. But you don’t need to forecast everything; fundamentally there is nothing wrong with other strategies like “reorder point”, “make to order” and “min-max”. They might be appropriate for certain products, for others they may not be.”Increasingly clients are aware that they might not get all of the benefits that they had originally set out to do by implementing ERP and APS alone,” says Platt. “To get the benefits of those tools you need to optimise and fill in the parameters you are using; there is very little point in migrating the data that you’ve got today into a new tool, you’ll pretty much get the same result.”
Overall, there has been a lot more interest in inventory optimisation in the past few years. Careful work and analysis needs to go into determining the optimum reorder point for a product based on Economic Order Quantity principles, ensuring that it’s both economic in terms of handling costs and at an appropriate frequency for that product segment. “With high value products you might replenish more often than you would with low value products, because you don’t want to be having to bear the costs of delivery for those low value products,” he says. “Optimisation and segmentation of products and using some of the optimisation tools that are out there has been a hot topic for the last few years.”
This type of analysis doesn’t necessarily come with a large system implementation, it is about analysing data and feeding that information back. In this way, it lends itself to optimisation modelling as a service. Last year IBM opened an innovation centre in Beijing specifically to do this type of work as an outsourced service.
For those looking to invest in specialist planning software it’s important to fully understand your own needs first. Carol Thomas, operations director at supply chain software selection consultant, Hughenden, points out the importance of knowing exactly what you want from a planning software solution and what processes you want to support before setting out to acquire one.
“If you simply apply modern software to your existing processes you will get exactly what you had before, but a lot faster. Software and technology will not improve your processes, it will only accelerate them, and if you have bad processes in the first place modern technology will only make things worse,” says Thomas. “Modern software quite frequently gives you an optimisation capability that most people have never dreamed of, and if you are not very careful about how you specify what you want, you end up with a degree of capability that you are incapable of handling. You need to understand what you want.”
Hughenden tends to use a workshop environment to get to the bottom of what is required, as forecasters can often be asking for one thing and demand planners something else. Defining the functional requirements needed and ranking them in terms of importance is essential and, as Thomas points out, “always choose software that can grow with you”.
Thomas gives some examples of key questions to ask yourself: how frequently do you need to re-plan? How frequently do you need to re-forecast? How often does your business change? How many times may you want to change your distribution network? Are you likely to consolidate warehouses? Are you pushing into the Far East? And if you haven’t got answers for these questions, going out and buying a piece of software is going to be an expensive disappointment.
Of course, there is also the perennial question: do you want best-of-breed or do you want a one-stop-shop? “If you are an organisation that is doing constant For the big solutions you need to be a big player. There are solutions out there that are still very affordable to the small to medium enterprise, but the big optimisation solutions are really targeted at companies that have got manufacturing in various countries around the world and they are looking for balance, to see local sourcing vs delivery cost, and doubtless, some of them will now be factoring green issues into their optimisation engine.acquisitions, you might do better with a best-of-breed that has the capability to link into any number of ERP systems. It depends on company policy,” she says.
Like David Platt of IBM, Carol Thomas identifies the growing significance of supply chain optimisation – “with the number of products, the rapidly changing markets and the mass customisation that is going on, they [manufacturers] really need these tools; they need the big optimisation engines,” she says.
So what size of company is going for these large optimisation solutions? “From our experience those with a turnover of in excess of £200 million,” says Thomas. “For the big solutions you need to be a big player. There are solutions out there that are still very affordable to the small to medium enterprise, but the big optimisation solutions are really targeted at companies that have got manufacturing in various countries around the world and they are looking for balance, to see local sourcing vs delivery cost, and doubtless, some of them will now be factoring green issues into their optimisation engines.”
When it comes to the interplay between forecasting and planning, Thomas has some clear ideas on which one you want to get right first. “So long as you have some indication of demand coming in you can do something with the plan. Of course, the better the forecast, the better the planning process. But a good forecast with a poor planning process is completely useless; a good planning process with a poor forecast will enable you to fare a bit better, because your planning process can use historical analysis to give you something.”
Barloworld Optimus is a planning software vendor with two well established planning tools: Cast, a strategic network modelling tool, and Optimiza, a program used for managing inventory within the warehouse. And now, the company has just developed Cino, which stands for combined inventory network optimisation, which sort of combines the two.
Fraser Ironside, the company’s global business development director, sees an emerging trend in optimisation as being the emergence of green or environmentally sensitive planning functions. “The Cast tool now permits the calculation of the carbon footprint of a supply chain and the optimisation of that supply chain in terms of its carbon footprint.”
He also sees planning as a strategic tool for determining levels of risk. “Planning tools are a method of quantifying risk in a supply chain. With off-shoring to Asia, supply chains are getting longer, lead times are getting longer, and there are more parts of the network that can break. The risk associated with those “I have to grow my business with what I’ve got” and that means you have to be smarter about how you plan, smarter about how you manage your supply chain and your inventory.supply chains is much higher, you only have to look at what happened when the west coast ports went on strike in the United States in 2004, Wal-Mart couldn’t get its product into the country. The costs can be catastrophic for a business if there is a significant disruption to the supply chain and its supply chain isn’t responsive enough. So we are seeing planning tools being used to do contingency and disaster planning.”
In the current economic climate supply chain planners are going back to basics. When the economy starts to soften and sales stop growing there is an increased focus on cost and, as Ironside sees it, particularly regarding transport. “There is a need to reorganise and replan supply chains to identify opportunities for savings. That could be the closing of warehouses; it could be the switching of transport mode options. Also, the cost of holding inventory has gone up, and with the credit crunch there is much greater urgency to free up working capital – therefore, inventory optimisation is at the forefront of businesses thinking.”
Lorraine White, senior director of planning for software vendor, Manhattan Associates, also highlights the importance of good planning in managing costs and retaining healthy margins. “When you are looking to grow your business, and gain profitability, in countries like the UK or South Africa, where there are not the opportunities to grow the store base or to open new stores and DCs due to space or economic constraints, you have to be smarter about what you have and manage your supply chain more effectively as a result. You have to plan smarter – planning becomes instrumental in becoming more profitable. And most companies in the UK recognise the fact that supply chain planning provides a lot of value.”
White believes sophisticated planning helps you become smarter about how you optimise your supply chain operations, “planning ahead and tracking and managing to that plan and proactively doing order scenarios to evaluate the best decision course to react to a given situation like change in demand or an economic downturn”.
She sees how thinking has changed in the US. In the recent past, “growth has been perceived as adding more stores and expanding the supply chain has been about opening new DCs, widening and broadening your supply chain network and increasing the geography in which you operate – and in a country like the US that has been quite a reasonable strategy to date. But right now the country is severely over-shopped, there are far too many shopping malls and there aren’t enough people going to the stores. So now companies have to be smarter with the infrastructure that they have. ‘I have to grow my business with what I’ve got’ and that means you have to be smarter about how you plan, smarter about how you manage your supply chain and your inventory.”
So what tends to happen is that planners will expend the same effort on a low value runner-type product as they would on a high value sporadic product and really that balance needs to be addressed so that the effort is on the high value sporadic product – dealing with the low value runners should be more automated.
Planning tools are a method of quantifying risk in a supply chain. With off-shoring to Asia supply chains are getting longer, lead times are getting longer, and there are more parts of the network that can break.