Posts Tagged ‘supply chain planning’

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I wonder how many companies are basing their forecast for the 2008 Christmas season on the results from 2007?  Even beyond the Christmas season, how many are basing their forecast for 2009 on their performance in 2008?  When cell phone life cycles are down to 6 months and less, how does one begin to apply seasonality affects to history of a very similar cell phone sold at a different time of the year?

While the current economic climate is (hopefully) an extreme, the cell phone life cycle is not.  Both are graphical illustrations of the dynamic nature of the current business climate highlighted in the white paper “Why You Need to Re-evaluate Your Approach to Supply Chain Planning”.  Process responsiveness and compromise are far more effective weapons in dealing with this volatility than following a set of outdated business rules embedded in optimization software.  Undoubtedly we should all strive to achieve the profitable perfect order for which there was no requirement for additional activities to fulfill the order.  However, forecasts are never 100% accurate meaning that we will always produce the incorrect volumes of products and store them in the incorrect location. 

This is not to suggest we should not plan.  What I am suggesting, which is supported by the white paper, is that a key differentiator for companies is the ability to capture and understand the effects of the deviations from the plan, and to respond to these is a timely and effective manner.  Provided users are presented with fact based information on which they can compare alternative scenarios in order to make an informed decision in a collaborative manner, human intelligence will prevail in arriving at a compromise that meets both “hard” and “soft” objectives.

As described in the white paper, the key is not to create THE optimal supply chain plan (since they only exist in theory), but rather to monitor adherence to the plan and to provide an environment in which users can respond to deviations and surprises in a collaborative and informed manner.

Kirsten Watson and I sat down to discuss one of our new white papers “Why you need to re-evaluate your approach to supply chain planning.”  In this video, we discuss the market forces that are driving this need and why the traditional approach to supply chain planning is no longer meeting today’s requirements.

If you are having trouble viewing the above video, try this link: “Re-evaluating your approach to supply chain planning.”

There is a very good article entitled “Planning the factory of the future“ at IndustryWeek that highlights the three essential trends that are the driving forces behind tomorrow’s factories – globalization of the supply chain, increasing product complexity, and changing demand patterns.  These trends are working in combination to challenge supply chain management with global operations, multiple partners, complex processes and products, short product lifecycles and demanding consumers.   This requires integration, on a global basis, between functions and entities like never before.  Adaptability and flexibility become key as you try to navigate the NPI process and a high-mix manufacturing model as the consumer market wants ever more choices. 

While I believe companies are becoming wise to the need for a different approach to supply chain management, the technology to enable this change is the fundamental stumbling block.  While traditional supply chain planning (SCP) solutions have made tremendous strides in improving planning, the “real world” challenges of highly volatile demand, shorter product life cycles, unexpected supply disruptions and complex outsourcing & supplier relationships are driving rapid change and increased complexity in supply chain operations. The result is that today’s enterprise applications are often out-of-sync with reality and can’t support the level of agility that companies need  today or in the future.  This is actually the theme of one of our recent white papers “Why you need to re-evaluate your approach to supply chain planning.”    The paper highlights the key capabilities that a “factory of the future” needs (including enterprise-wide supply chain visibility, alerting, what-if analysis and scorecarding.)

Ventana Research recently published a white paper entitled “Beyond the supply chain plan” that is available for free at our website here.  Below is an abstract for the paper:

The high degree of volatility in the world economy over the past several years has undercut companies’ expectation that their demand and supply chain plans will remain intact. Supply Chain Planning does not stop with creating a plan; it also requires being ready to change it. Since the only constant in business is change, your organization must be able to adapt quickly to the dynamic environment. Ventana Research proposes nine key questions to ask yourself to get a sense of the opportunity your company has for improving its supply chain planning process.

I then had the opportunity to interview Robert Kugel, senior vice president and research director at Ventana Research, the author of the paper to discuss why they wrote the paper and some of the key insights from the paper.  You can listen to the podcast here.

Can anyone accurately predict demand right now? 

PCWorld has an article entitled “Nintendo Wii shortage turning into a glut for the holidays?“  For the last couple of years all we’ve heard about is the Wii shortages around the holidays due to incredible demand for the product.  I can relate, we tried to find a Wii for months and had to have my parents buy one in another state.  Then we wanted to get the Wii Fit and spent weeks watching the flyers, calling the local stores, etc. to try to find one.  Now, with the the state of the economy and declining consumer demand, there’s talk about a glut of Wiis???

Over at Ben Worthen’s Wall Street Journal Business Technology blog he has a post entitled “Intel junks its forecast earlier than expected.”  In it he talks about Intel changing its forecast within a month of announcing its previous quarter’s results.

So, it brings me back to the question - can anyone accurately predict demand right now?

Many companies rely heavily on the past to predict the future.  Statistical forecasting is used to analyze the past and then try to determine what the future demand will look like.  These methods are never completely accurate, and right now they are really off the mark.  And, what happens when things start to get better at some point in the future (and they will…at some point)?  How accurate will the past be then at predicting how demand will improve when the economy regains its footing?  It won’t be…again.

So, what to do?  The past is a good input, but it can’t be the answer - ever.  Companies need to combine that with a much more collaborative process of demand planning with their key customers and more accurate data reflecting true demand (most companies have a huge lag in sensing true demand).  But, most importantly, the real key for supply chain management professionals is how quickly they can react to changing demand.  And, in supply chain management, reacting means being able to re-balance supply and demand as the demand picture changes - no matter which direction.

Most companies struggle with this.  For years, companies have had one team produce a demand plan and another create a supply plan.  These separate departments rely on separate planning tools.  The demand planning team uses tools that try to predict what demand will be (often relying heavily on the past) and then send a demand plan over the wall to the supply planning team.  This team takes the demand plan as input and produces a supply plan trying to match the demand plan.  The reality is that the actual demand never really matches the demand plan and the supply plan was never really to deliver to the demand plan in the first place.  So, the company is left to deal with a bunch of misalignment issues that are exacerbated by the fact that both demand and supply continue to change on a daily basis.

Now imagine what this is like in today’s economy.  Predictability has gone out the window and there’s mounting pressure on supply chain management professionals to reduce costs in the midst of all this change.  It’s not easy.

The key to surviving, in fact thriving (meaning distancing yourself from the competition) in this environment is to have responsiveness and agility be core competencies of your company.  When misalignments occur, it comes down to quickly sensing them, understanding their impact, developing a set of action alternatives (course corrections) and picking the right one - the one that best supports your business objectives.  And, this needs to be done by your supply chain staff since they have the insights to make the right judgment calls.

To do this quickly and effectively, they need to have the right tools to enable quick and decisive actions.  There are ways to accomplish this, but the key is to build a culture, metrics and tools to support this philosophy at the grassroots level of the organization.

I came across this very interesting blog post entitled “SAP admits that SaaS is cheaper for you too” talking about SAP’s on and off moves into on-demand (or SaaS).  It raises some very interesting questions about the SAP cost structure for on-demand vs. on-premises offerings.  I’ll leave it to you to form your own judgments relative to your use of SAP, but I can just say that I know a lot of companies struggle with the enormity of their SAP projects and costs, which directly ties to the return on investment (ROI) justification.

This is one of the biggest reasons we see people abandoning their deployments of their legacy demand planning and supply chain planning on-premises systems and moving to an on-demand service like RapidResponse that can solve a variety of their supply chain challenges from a single service.

See more discussion on the adoption of on-demand services at the post “Software that works.”

I can’t help but wonder how unnatural and unnerving it must seem to those legacy supply chain software vendors to hear today’s manufacturers talk of the return to human hands involvement in establishing the actions of a given day. Indeed, the optimization vendors saw significant success when their models could approximate the ‘known’ business parameters of a supply chain, but as Randy points out, today is filled with the ‘unknown’. Executives and Supply Chain practitioners are recognizing that approximating the ‘unknown’ elements of a supply chain as a means to determine what to do next is a fool’s errand. Don’t get me wrong; I’m not suggesting that those legacy solutions have completely lost their value, but rather, their value is limited when a supply chain has matured and grown to become a complex network of inter-enterprise connections. As supply chain networks continue to mature and grow, so does the need for a competency in human and system collaboration.

The section on ‘Dealing with Reality…” does a great job of describing the undeniable trends driving the need for a new supply chain planning paradigm. Ask any supply chain executive the following questions, and the need becomes self-evident.

1. Is your supply-chain more or less complex than it was in the 90’s?
2. Are your product life-cycles shorter than they were in the 90’s?
3. Are your customers demanding shorter lead-times, and increased order flexibility then they were in the 90’s?
4. Has it becoming more difficult to maintain customer loyalty than it was in the 90’s?

Unanimously, I hear that supply-chains are more complex, products have a much shorter shelf life, and customers are far more knowledgeable about competitive products, and therefore more demanding of brand owners. Finally, the two questions that lead me to believe that the urgent needs of manufacturers today are dramatically shifting:

1. Do you believe that the next 10 years will relieve any of the previously mentioned trends?
2. Which process do you believe will work to regain control over your company’s performance;
   a. Improve Planning
   b. Improve response to plan variation

The best planning solutions on the planet cannot replace human judgment. As Randy describes in his conclusion, the need for human involvement is making a strong come-back, where people collaborate in teams formed to established rapid and appropriate course corrections when unexpected events occur in the supply-chain. The fact that planning systems are based on fixed assumptive parameters put them at a disadvantage. Better/faster planning can never take into account the assumptions ‘known’ by people at the very moment a course correction is required. Only when people can ‘know sooner’ about events that pose potential future state harm to their business, when people can ‘know’ who is affected by those events, and when otherwise people who are strangers to one another can rapidly form teams to collaborate on an appropriate course correction, will the most optimal and appropriate actions take place.

It is strangely satisfying in the 21st century to watch “people” once again regaining control over what was recently under the strict management of “machines”.

I recently read our new white paper entitled “Why you Need to Re-evaluate Your Approach to Supply Chain Planning”. The paper describes how the old supply chain paradigm is not well suited to today’s dynamic, outsourced environment. It got me thinking about how communication has changed since the early 90’s when i2 and Manugistics were the pioneers – e-mail finally took that first step out of the domain of researchers; the web was under development by Tim Berners-Lee at CERN. As the paper points out companies in the 90’s were much more locally based and fully integrated (outsourcing and off-shoring were barely a glint in someone’s eye). So to collaboratively create or update plans or to collaboratively solve problems was accomplished by verbal communication among relevant participants – usually in the conference room or on the shop floor, depending on what needed to be done.

Fast forward to 2008 … virtually all of the manufacturers I talk to have significantly outsourced their manufacturing. In fact supply chains have been dramatically extended around the globe. Customers, contract manufacturers, suppliers are now located throughout the world. Even within individual companies the actors are spread around the world – demand managers in North America, supply planners in Asia, buyers in each of the regions. Communication, in a word – email! My new smart phone has voice, email, web browsing, and text messaging all in one (as well as music and a camera), but by far and away email is my most used communication tool. Given how participants in the supply chain are in virtually every corner of the world, email is a fantastic tool.

But is email a good tool to collaborate with? Is email not just a mechanism for transmitting words? I contend that in order for you to have a supply chain that fits the current and future dynamic, outsourced, off-shored environment we live in; flinging a spreadsheet over the virtual wall is not an effective form of collaboration. Well what about collaboration hubs or portals? Excellent tools for passing information, but can you really have effective collaboration?

My point here is that collaboration is about understanding the other party. Does your customer have a bias towards over or under forecasting? Are they planning a promotion? Opening new stores? Closing some stores? Are you the major purchaser of your supplier?

So in order to have a supply chain suitable for today and the future, understand the other person or company. Humans get a lot out of verbal communication – the inflections in the tone, the words chosen, the response speed, etc. Encourage verbal communication amongst the internal stakeholders. Pick up the phone and call your customers … get to know their business. Call your suppliers … find out how their business is doing.

Kinaxis has just released a new white paper entitled “Why you need to re-evaluate your approach to supply chain planning.”  I won’t restate the entire paper here, but below is an abstract:

The supply chain planning approach developed in the early 1990’s is failing under today’s market pressures. Today’s environment requires more collaboration than control; more coordination than optimization. Demand and supply chain planning, monitoring and response needs to be performed by many users, on an ad hoc basis, as events occur. A new supply chain planning paradigm is required.

The latest edition of the IndustryWeek Manufacturing Business Challenge - entitled “Plan for a new (supply chain) plan” - is now available. 

This edition features a company struggling to keep up with the pace of change.  They are seeking ways to improve their supply chain planning processes.  Solutions are proposed by Kinaxis and PRTM.

You can find access to all of the prior Manufacturing Business Challenges here.