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.
Closing Remarks
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.
