Key Focus Area: Demand Management

Lately, we have seen that the behavior of the different type of supply chains in different industries varies a lot in case of managing demand. Make to stock style companies tend to focus on demand management using a combination of statistical techniques and collaboration to gain market force knowledge to deliver a forecast for the purpose of setting inventory/ service policies whereas make to order businesses forecast only as a starting point, but more frequently use sales driven “consensus” forecasting with limited statistics, and use the forecast to drive procurement decisions and capacity management, rather than build plans for end items. Moreover, best in class organizations use supply chain techniques to gain control in the demand execution window.

The focus areas for all of them are usually the same:

• Improving demand forecast accuracy using internal demand planning
• Creating customer driven forecasts through robust sales and operations processes
• Creating sell side collaborative processes to manage demand within the demand execution window

These focus areas are important because of the current economic conditions that put pressures like increased volatility of demand and escalating customer service demands. These pressures drive the organizations to keep on improving demand forecast accuracy and developing a more responsive inventory placement strategy to stay ahead of time and to remain best in class. So, how do we improve the forecast accuracy, you might ask this question?

Let us discuss on few steps that I think have the capability to improve the forecast accuracy and brings it closest to the actual demand:

• First of all, we need to utilize the multiple roles within the organization to generate their independent forecasts giving the full set of assumptions that they took
• Include product promotion, competitive pricing, demand shaping events and historical ups and downs into the forecasts
• Collaborate with all internal stakeholders by consolidating the forecasts and having an open forum discussion on what was missed and what can have more impact on the demand in coming time – please note that this should not take more than 15 minutes per product and everybody should come prepared to quickly nail down the numbers
• Collaborate with external stakeholders like customers and/or suppliers
• Integrate trading outbound supply chain partner data with internal process organization
• Ensure that the application that sores the historical data of demand has excellent data accuracy as lot will depend on this data

All above will work for sure in case your organization follows the make to stock strategy but for the make to order organizations, more focus will be on external collaboration like with customers and suppliers so that desired accuracy in the forecasts can be achieved. We have seen different opinions on whether we should follow the make to stock option or got for make to stock option. The summary of the push-pull model of demand management is that the organization finds and continually operates at the optimal operating point between a pure build to stock environment and a pure build to order environment. This optimal operating point varies by model, by market, and over time. Pure build to stock is undesirable because of the cost of deployed inventory and the inevitable mismatches between inventory and what customers want. Even pure build to order is undesirable because of the cost of the deployed capacity required to support highly uneven demand. The optimal solution is somewhere in-between and a blend of both will be the best option to go for.

Strategy: Create Demand with Supply and Unlock Dollars

Yes, you got it right! I meant the same when I said "Create Demand with Supply". The economies have started looking up once again but still the level of demand, that was there two and a half years back, is still not there and organizations are working under capacity. In these times, you might think that creating more supply (and capacity) in market will only block working capital and will result in huge unused inventories. Well, in normal circumstances, this is right but have you looked at some of the scenarios where supply created demand on its own? Yes, there are so many examples in the world where we saw supply creating demand and not only companies but industries could turn around their performance levels riding on this. Why not, resort to one of the strategies of creating demand with supply and surge ahead of your competition? Let me discuss about some of the ways with which you can create demand...

Demand Planning, Forecasting and Inventory Management's Role in Lean Manufacturing

Years (or is it decades) have passed after the introduction of Lean Manufacturing and the Lean Pandits still differ in their thoughts on what exactly is Lean and how it should be performed to get maximum benefits. A new school of thought that is emerging these days is that we need to identify first that 'how much lean' is lean enough and the role of technology (read ERP and SCM Software) plays a major role in maximizing the Lean Manufacturing benefits. The typical gains that a manufacturing organizations aim to attain through Lean is reduced inventory but still better fill rates, lower cost of manufacturing and distribution (Lean Distribution) , shortened cycle times and hence low inventory carrying costs are always on the wishlist. These objectives though, can be hit substantially with the limited knowledge the organizations have on their current performance but often they are caught trying to make out how can they measure where they were before the exercise and where they have reached. How much exactly they improved in terms of key performance indicators? Without additional software modules (such as forecasting, demand planning or Inventory optimization), a basic materials resource planning (MRP) or enterprise resource planning (ERP) system, it will not be easy for them to drive lean benefits completely.

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Lean focuses on execution, but you cannot get the most out of execution unless you do a better job of planning. You can perfect your shop floor execution according to lean principles, but if you're not making the right item at the right time, you are not going to win in the market. Execution alone is not enough. Demand planning, forecasting and Inventory optimization are areas of focus when applying technology to aid your lean initiative. Other than this, the major technology input is in the field of automation of manufacturing and distribution processes.

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While Demand Planning and Forecasting engines will help in right sizing your inventory, automation of manufacturing processes will help reduce the MFG lead times, increase MFG schedule compliance and will contribute in improving inventory turnover. The latest research report by Aberdeen "Lean Manufacturing: Five tips for reducing waste in the supply chain", also suggests that the one of the top actions for becoming best in class organization is that we need to leverage automated Lean Manufacturing and Supply Chain Tools.

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But the facts suggest that Manufacturers are understandably reluctant, especially now, to buy a lot of software modules they may not end up using right away. This is true more for the SMBs as they can not afford to have the same budgets as their larger enterprise counterparts and hence less utilization of technology in maximizing Lean Benefits. Moreover, they don't want their managers staring at the terminals as opposed to walking around the shop floor. But that is beginning to change now with at least some SMBs taking lead to incorporate technology inputs as part of the whole exercise as they have understood that have an equal need for supply chain visibility and better forecasting as their larger enterprise counterparts.

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The mantra, in my view, should be to Think Big, Start Small and Scale Fast when the organizations, specially the SMBs start to use the technology in this endeavor.

Fundamentals to review before 3PL vendor selection

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Third Party Logistics (3PL) is the function by which the owner of goods (The Client Company) outsources various elements of the supply chain to one 3PL company that can perform the management function of the clients inbound freight, customs, warehousing, order fulfilment, distribution, and outbound freight to the clients customers. Utilizing the services of a 3PL company is one activity, demand for which has not gone down much even in these testing times. Though more and more organizations are going towards the 3PL companies for specialized logistics solutions, it is imperative that we all pay attention to few fundamentals points before selecting a 3PL partner company. (Also see: 3PL Industry Trends: Emerging Markets, Sustainability, and Fuel Costs Weigh Heavily at AMRResearch).

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Knowing Demand is key
Material flow information through a supply chain is very important to understand the requirements of you supply chain. Gather all historical data and record the number of items, costing information, how many times the demand comes for that item etc. The data should be for finished goods as well as raw material as it is critical to synchronize planning, material requirements planning (MRP), material delivery, conversion to finished goods and outbound product movement. Modeling the past, with appropriate normalization to accommodate projected future changes, will help manufacturers understand the cost-impacting decisions that drive supply chain requirements and identify which components to outsource or retain.

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Start taking forecasting more seriously
If you can predict your requirements and subsequently pass that forecast to your suppliers, then you are much more likely to get what you need, when you need it. However, demand forecasts are notoriously inaccurate. So, do not just multiply (or divide) the historical data with a number to get a forecast for future. Forecast needs inputs from a variety of stakeholders, including procurement, manufacturing, distribution and commercial. Participation from these stakeholders is critical to establish an accurate forecast and articulate key constraints, and ultimately can drive the success of the transaction, as the provider's ability to meet a company's needs and targeted cost structure will be largely dependent on the accuracy of the forecast. An inaccurate forecast likely will result in either excess capacity (and cost) or constrained capacity (and lost sales), with the implications becoming more pronounced as forecast accuracy decreases. Furthermore, stakeholder understanding of the supply chain performance dependencies is necessary to ensure valid root-cause analysis and issue resolution in an outsourced environment. Remember, a better forecast means less error and that predicts a smaller standard deviation, which in turn means you need to provide less buffer inventory.

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Accountability of Demand
The decisions of business leaders and other stakeholder departments like transportation, warehousing, handling/labor, working capital and obsolescence, heavily impact the Supply chain costs Supply chain leaders may determine where inventory is stored, how much warehouse space to lease/own, or specific transportation carriers and modes, but directives such as customer fulfillment rates and order-to-delivery time drive stocking location decisions, inventory levels and transportation carrier selections. While 3PL providers must be held accountable for optimizing costs within their span of control, internal stakeholders also must take responsibility for the cost implications of their decisions, many of which may limit a 3PL's ability to truly optimize.

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A 3PL can improve many aspects of a company's supply chain, but likely will focus on the objectives articulated by its client and reasonably within its control. Set clear objectives to drive provider behavior, such as specific cost savings or reporting, escalation and explanation. Engage the 3PL in discussions prior to finalizing objectives, as its experience and input can provide better visibility into the trade offs of supply chain decisions.

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SMART Goals
The business impact needs to be measured against the key performance indicators like the number of inventory turns per annum, total cost per unit sold, number of stock outs in an year, ontime delivery etc. and this measurement needs to be a continuous process.