The evolution of linear supply chains into global demand-supply networks has been happening over the last two decades. Companies have benefitted from low cost supply of labour as well as raw materials to bring down the Cost of Goods Sold for the products that they manufacture. This has resulted in bottom-line profits.
However, the path has also been significantly challenging in terms of quality issues, increasing labour costs in emerging markets, lack of agility to respond to market events, etc. There has also been significant improvement in automation in terms of robotics and 3D printing. The goal of this article is not to discuss whether this globalization is good or not. Our assumption is that the inexorable force of global markets is going to shape supply chains in the future as well.
So what does one do to manage the global supply chain? The answer is not anything new – it’s the same as the past few decades: A single minded focus towards a great Sales and Operations Planning (S&OP) process and supporting technologies.
Focus on S&OP (AKA Integrated Business Planning)
Today more than ever, there is financial pressure to perform. This is driven by the increasing power of retailers and circumstances imposed by the recession. This has resulted in the need for companies to clearly understand the financial impact of their decisions; however, four inter-related factors make this difficult:
1. Demand volatility has increased considerably for most companies.
2. Supply complexity has increased. There are more options from which to choose, and subcontracting manufacturing and logistics operations is more common. Supply chains are broader in scope, and goods are distributed across worldwide supply chains.
3. Input cost volatility is a constant that manufacturers must handle on, thus increasing challenges for profitability. No matter the commodity (e.g., aluminum, gas, or petrochemicals), all have experienced market fluctuations unlike times past.
4. Lastly, the connection between costs and volume is not linear. With a mix of fixed and variable costs - some that vary by volume and others by time - it has become more difficult to understand the financial implications of business decisions.
It is important to look at the S&OP problem through the lens of the CEO/CFO. Organizations must look at charts of financial accounts and net income, focusing on the value chain. In other words, you truly need to develop an integrated business plan as part of its data model in terms of finance, supply, demand and any value chain function that needs to be modeled.
Three Characteristics of S&OP Processes for Global Supply Chains
1) Modeling Global Constraints
Companies that have global supply chains need the ability to consider global constraints that span multiple dimensions such as operations, finances and time. Every company operates within a large set of constraints, including annual budgets, material purchase contracts, resource capacity, hospital ward space, environmental regulations, customer order contracts, financial reporting regulations and so on. While these financial, physical and policy constraints can impact an entire organization, most planning processes are still done by department, business unit, geography or some other hierarchy. It is important that there is a global process that balances demand and supply across all these planning levels and aggregates the data so that there is global visibility. Even better will be the ability to generate the plans based on consideration of global constraints – the evolution of computer hardware and software is taking us in that direction.
2) Consideration of strategic planning as part of S&OP process
A big challenge with today’s S&OP processes is that they were designed to solve an operational problem with monthly frequencies. In global supply chains, however, it is important to consider strategic time horizon as well. For a strategic horizon, the ability to model the network, do capital investment analysis, make decisions regarding closing facilities, and model currency fluctuations takes precedence. For a tactical horizon, the ability to model facilities down to the workstation level, batch processing, lot sizes and yields takes precedence.
3) Shape demand instead of just planning for it
Traditional S&OP processes take the demand plan as an input, and at best they allow users to prioritize which demand they want to fulfil first. This is a manual, trial-and-error process where the “strategic” customers always win. Whether the company engages in bid support, customer negotiations, trade promotions or marketing, there is a significant opportunity for companies to evaluate the product, customer and price/discount/promotional mix. But this evaluation must happen in the context of a global optimization, whereby the marginal impact on profit is evaluated simultaneously with the supply and financial plans. By doing this, not only will profits increase, the entire organization will evolve into an advanced level of managing customer, product and campaign profitability.
The globalization of supply chains is a phenomenon that cannot be reversed, and companies that fight it will find it hard to survive in our increasingly competitive environment. Those companies who are smart (and would prefer to remain competitive and profitable) will realize the opportunities within S&OP and rework their existing processes to aggressively manage to the constraints that their organizations face.
Contributed by: Rod Stout, Business Modelling Associates (BMA). BMA is the official distributor for River Logic’s Enterprise Optimizer® platform across Africa.