In the age of expanding global supply chains and developing supply networks, effective, data-driven supply chain planning is more critical than ever. Sometimes detailed supply chain planning may not seem like a compelling time investment because forecasts can be inaccurate and plans can go awry. But here’s the fact: companies do not operate in a bubble.
Their supply chain planning decisions, or indecisions, do not just impact their own operations and sales but also the success of their supply chain partners. Over-forecasting demand could mean that your suppliers have to store or take a loss on any inventory you decide not to buy, but under-forecasting could mean that you do not have enough materials, components or products to support your production or sales needs.
Furthermore, a resilient supply chain management strategy, which stems from supply chain planning, is critical for supporting a company’s business strategy. The business strategy, which charts the overall direction of the company, is supported by operations — a supply chain element — as well as relationships with supply chain partners, including suppliers, distributors and customers. As the market becomes more competitive, these supply chain relationships become more critical. In addition, a solid supply chain strategy can unlock value creation and competitive advantages for the organization.
Therefore, it is important that companies not only partake in supply chain planning but also have an effective planning process that leverages proven techniques alongside sophisticated sensing, analysis, forecasting and planning tools in order to create the best possible forecasts and strategies.
In the last decade, technology has improved companies’ forecasting abilities and, by extension, supply chain plans. Now, computers can run simulations and analyze outcomes for them. This has transitioned the supply chain planning process from the traditional execution-based method that was focused on fighting day-to-day fires.
Now, supply chain professionals are more strategic and better understand the trade-offs of their supply chain decisions. Also, evolving technology has led to shorter sales and operations planning (S&OP) cycles. In turn, companies now must be more agile and make faster decisions. Historical data and related data analytics can certainly help with this.
Before we get too deep into the latest supply chain planning developments, let’s take a step back and review the basic elements of supply chain planning. Gartner’s IT Glossary defines supply chain planning as “the forward-looking process of coordinating assets to optimize the delivery of goods, services and information from supplier to customer, balancing supply and demand.”
The traditional sales and operations planning process starts with a review of sales projects. Then, planners factor in inputs from the operations and supply chain teams as well as the goals of the business.
The output of sales and operations planning is the demand plan. Demand planning involves sensing and analyzing the demand signal and, in turn, using this information to drive the supply chain activities of all the different tiers of suppliers. It is important to ensure that this signal is as stable and realistic as possible so that it can inform a reasonable supply plan that can be met cost-effectively.
Achieving a demand plan is a multi-step process that requires the collaboration of many departments within a company. Previously, planning was done in silos, which resulted in disjointed plans, data discrepancies and some departments not even being aware of plans.
Now, sales and operations planning processes typically involve representatives from various parts of a company, including sales, finance, marketing, operations, materials, product management and more. These groups come together through sales and operations planning meetings to share data, discuss insights and, ultimately, make decisions.
It also helps to share the relevant information prior to the meeting, so that everyone can review it in advance. In addition, teams should meet regularly to keep everyone up-to-date.
Broadly, the typical sales and operations planning steps are:
Sales and operations planning typically starts with the sales aspect. The sales team will set its desired goals and present them to the rest of the planning team. The demand team analyzes the market and uses sophisticated statistical forecasting tools to create an unbiased forecast. Then, the sales and demand teams discuss the differences in their findings.
For example, the sales team might plan to ship 5,000 widgets a month, but the demand team might point out that historically the company has shipped 4,000 widgets a month. The difference might be driven by market expansion, movement into new markets, planned promotions or other reasons.
Then the whole team decides on an appropriate demand level the company can support. It is important for the whole team to look at the long-term trends too. For example, although demand may be expected to decline in the next quarter, there could be a projected spike the following quarter. Therefore, it’s important not to scale down too much just to have to scramble to scale up later.
In some cases, the decision might be to forego attaining the highest potential sales level because the inventory or manufacturing investment might be too much. There certainly are constraints and business trade-offs to every option. The planners need to evaluate those trade-offs and determine what will work best for the company.
Once the demand plan has been determined and executed, supply chain network optimization is an important additional step. This strategic analysis should be done every few months to understand a company’s overall cost and ensure its supply chain network is optimized.
Key factors to consider include:
Upon evaluating these elements, a company may learn that it is more efficient and cost-effective to operate multiple regional sites in or near target markets or to have one global site that supports all of its business.
For example, if your whole supplier base is in Asia, it may make more sense to relocate the company to Asia to save on inbound costs and then distribute from there. The outcome of this analysis also can inform supply chain plans, especially replenishment models.
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Even if an organization has an effective strategy for supply chain planning, constant change consistently complicates this process.
Some of these changes are related to the products themselves. In recent years, there has been a trend of products having shorter life cycles—from electronics to automotive to healthcare—with companies frequently releasing newer models to replace older or outdated items. In the past, products might have had a stable manufacturing and sales run lasting two or three years. Now, many electronics products have a lifespan of a year or less.
In terms of planning, the challenge here is that there is little to no sales history to inform supply chain plans for newer models. Although in some cases the sales history of related products can be helpful, in other cases the products are too different in terms of capacity, durability and usage opportunities. For example, as computer server technology evolves, individual servers can handle greater amounts of data, which subsequently reduces the need for multiple servers. Without specific historical sales information for this type of product, it can be hard to accurately estimate demand.
Market dynamics are also a complicating factor. Right now, component supply shortages, supply base consolidation and other geopolitical considerations are causing companies to rethink their supply chain plans.
Further, 52% reported making significant changes, while 41% made minor changes. In addition, larger companies were slightly more likely to make significant changes, with 60% of companies with more than $5 billion in revenue making such changes compared with 52% of companies with $1 billion to $5 billion in revenue and 47% of companies with $500 million to $1 billion in revenue.
More than half of surveyed companies have begun including risk management plans for potential price fluctuations due to shortages or other issues in their pricing strategy. Participants also said their companies are investing in supplier contingency plans so they can quickly pivot to other supply chain partners in the event of disruptions or trade-driven supply shocks, working on lift and shift manufacturing scenarios to optimize lowest total landed cost strategies and opting for more diversity and redundancy when choosing suppliers.
When changes arise, supply chain planners have to meet and discuss how their company can best respond to these changes. Sometimes this can mean going back to the drawing board; creating a brand-new plan; or factoring in some challenging details, like securing inventory buffers to support operations changeovers.
As you’ve probably surmised, supply chain planning is no easy task. For some companies, especially smaller ones, it can be advantageous to partner with another organization that can provide expertise in this area. This saves the company time and money because it does not necessarily need to invest in the latest analytics technology or hire in-house experts. Subcontracting the planning process to a contract manufacturing partner enables you to focus your time and dollars on your core operations.
On top of this expertise, some manufacturing solutions providers invest in the technology to manage this data and knowledge effectively to create reasonable demand plans.
Even if you are doing your own supply chain planning, a contract manufacturing partner can be a key asset in this process. You want a partner who will collaborate with you but not necessarily agree with you 100% of the time. Experienced contract manufacturers will do their own market research, including reviewing historical shipment and consumption data, to validate your forecast. Then, they should discuss with you any discrepancies and collaborate with you to determine a new, more effective supply chain plan. This practice can spare both parties from investing too little and missing opportunities or investing too much and taking a loss on the product.
Just like forecasting sales, it is hard to accurately guess what the future holds for supply chain planning. There will certainly be more reliance on technology as it continues to improve its abilities. However, it is unlikely that technology will take over the whole supply chain planning process anytime soon, because the process is very nuanced and considers a plethora of factors as well as shifting priorities.
Instead, companies will be more likely to use technology as an asset to handle data analytics and inform the human decision-makers. These planners will use the data and any dashboards the technology creates to look at the big picture, evaluate trade-offs and make decisions that allow the company to meet its goals while balancing cost and efficiency.
Of course, as technology speeds the supply chain planning process, companies will need to be more and more agile. That is where these external partners and other supplier partnerships will become critical. These relationships will enable companies to quickly scale inventory and production up or down to meet changing market needs. In addition, these partners will be key to supporting new product launches, shorter product life cycles and expansion into new markets. With collaboration, your partners can identify supply chain planning strategies that are a win-win for all involved.
Insights from over 300 supply chain decision-makers at OEMs with more than $500 million in revenue on how they are managing their supply chains in light of market forces.