Author(s): Akhil Oltikar - Senior Associate, Diamond Head Associates
Appeared In : Innovations Newsletter, Diamond Head Associates
This is not an unusual scenario for many companies, large and small, around the world. Emerging trends, as stated below, have created a level of complexity previously unheard of. One thing that would remain constant in this century is: “Change”. Companies need to continuously evaluate and improve their value chain strategy and operational performance to best meet the customer requirements while maintaining profitable growth. There are a variety of ‘macro’ and ‘micro’ factors driving these changes. Material price erosion, forecast changes, customs and tax changes, currency fluctuations, shorter product life-cycle, unexpected events and many more are adding to the dynamics of the system.
Trends in Value Chain Management
As business landscape continuously changes, we are asked to make more complex decisions with less time. What are the trends that are increasing this complexity?
Globalization is the scenario described above and it is relevant to almost every business. Newer markets and value chain partners are no longer limited by physical proximity and companies today are selling products and services in more far flung markets while managing relationships with more partners than ever before. Unrelenting pressure to drive down costs saw manufacturing base move from US to Mexico to China. China became the manufacturing hub for the world and we are now seeing its emergence as one of the biggest markets for the goods its manufactures.
Outsourcing and creation of an “Extended Enterprise” is a direct result of Globalization. A company is made up not just of its employees but also its business partners, its suppliers and its customers. The extended enterprise can only by successful if all of the component groups and individual work in sync which require flawless collaboration and execution.
Product Innovation is overrunning the supply chains. Product lifecycles are getting shorter and the customer requirements are increasing. Newer products must replace existing products at much faster time-to-market. Considering that value chain now have a global footprint, the velocity of getting products to market efficiently is being tested.
Shift in Competitive Landscape is driven by new rules of the game. It’s no longer company vs. company but value chain vs. value chain which requires strong relationships between value chain partners. Growing does not necessarily mean getting better and similarly, bigger does not necessarily mean faster.
With this complexity come challenges like imbalance between supply and demand, excess or obsolete inventory which finally results in higher costs and lower service levels to the end customers. The need for consensus-based, unified multi-criteria planning is greater than ever before and will continue to grow as companies create greater value and gain competitive advantage. The complexity associated with managing the value chain has grown to a level previously unheard of due to numerous macro and micro factors including global demand and supply, material price erosion, increasing customer sophistication, shorter product life-cycles, and unexpected events. Fragmented, spreadsheet-based approaches with fixed planning cycles are incapable of responding to these challenges.
Next-Generation Sales Inventory and Operations Planning
Sales Inventory & Operations Planning (SIOP) is a structured, recurring process that is designed to bring various stakeholders within the value chain to agree on how to best manage the value chain going forward. S&OP creates a rigorous approach to gain consensus between sales, finance, procurement, manufacturing and logistics, allowing them to project future performance, efficiently utilize assets, and maintain high levels of service. Traditionally SIOP focused on matching supply and demand but now facilitates organizational alignment between business goals and plans while enabling rapid responses to ever changing business conditions.
Applying a unified and holistic approach to strategic and operational supply chain planning is the key for managing this complexity and having profitable growth. Companies need to continuously and efficiently examine, enhance and execute their value chains. Tactical/operational planning should be a recurring, consensus-based process that aligns the operating plan to the business plan. It ensures optimal balance between demand and supply, proactiveness to manage unexpected fluctuations and most importantly should provide a solid view of the projected business performance.
Shortcomings of Existing Planning Methodologies
- Confined knowledge
- Sluggish response times
- Inflexibility to changing conditions
- Sub-optimal business performance
The focus of SIOP is not only to balance the supply and demand but also maintain this balance on regular basis. The characteristics of the next generation SIOP process are:
- Multi-criteria planning and multi-dimensional analytics: Many a times companies focus on cost aspects of the value chain ignoring other critical performance metrics. Multi-criteria planning enabling concurrent focus on costs, assets, service levels and financial indicators are critical for profitable growth. It is imperative that companies look at impacts on various KPIs and plan to improve across those which are aligned with the business goals.
- Cross-functional and “Extended Enterprise” synchronization: Creating unified platform and common understanding across various functional groups within an organization and also with business partners, suppliers and customers fosters an environment for growth. Traditionally and even today functional groups work in silos which lead to a sub-optimal plan. Sharing information creates visibility and understanding of how different levers within each group impact the others.
- Proactive Monitoring: Next generation SIOP is a continuous review process rather than a fixed planning cycle. Value Chain changes, variety of triggers or management what-ifs drive proactive monitoring for potential bottlenecks and problems. Continuous review of value chain performance helps to avoid problems in the future as well as gives in-depth understanding of sensitive levers that may disrupt or improve the value chain.
- Advanced scenario planning and optimization: Value Chain disruptions or certain triggers may throw an operating plan off track. In such cases, scenario planning and advanced optimization technologies should determine the ‘best’ alternative plan that meets the business goals. Scenario planning should be again consensus-driven and a well-thought scenario planning results in validated decisions and improved business performance. Scenario planning and subsequent optimization should be able to incorporate certain real-world phenomena and perform multi-dimensional analyses.
Our client is a leading global consumer products OEM. Their supply chain network is large with hundreds of suppliers, several manufacturing facilities and distribution centers located in three continents. With thousands of products, a diversified product portfolio and a complex supply chain, the client was looking for a solution that would streamline its monthly SIOP process to achieve operational efficiency, reduce costs and have supply chain visibility to objectively make their business decisions.
The client’s supply chain consists of complex material flows and hundreds of nodes with suppliers, manufacturing and distribution facilities located worldwide. The supply analysis was performed through weekly inter-facility communication via phone calls and emails that addressed tactical issues and longer-range planning. Monthly aggregate planning process was inefficient due to this approach. Moreover, different functional groups and decision makers were using isolated systems, spreadsheets and independent judgments to make business decisions. This resulted in high inventory, inefficient capacity utilization and a wrong product, at the wrong time, at the wrong place at a higher cost. The business managers had limited visibility and did not have a consensus-based process to make decisions that would effectively reduce supply chain waste.
ERP systems were used to “execute to plan” but lacked the “plan to execute” capability. Also, with more than 50% of the demand in the last quarter of the year and some supply lead times as long as 18 to 20 weeks, there was always a dilemma whether to pre-build the inventory and incur high inventory carrying costs or invest in capacity to gain maximum flexibility. Determining optimal inventory and capacity levels was critical for the business to maintain flexibility but at the lowest possible costs.
Diamond Head Associates Inc., with quick implementation, provided a common platform to objectively analyze the supply chain costs, financial implications, and service levels. This was done considering material flows, inventory, capacity constraints and lead times from sub-tier suppliers all the way to end-customers. By creating rapid “as-is” and “what-if” scenarios the business managers are able to quickly understand the impacts of their decisions across the organization. Standardized monthly reports that lend supply chain visibility to managers at different levels of the organization.
Financial projections, costs, inventory, capacity utilization, stock-outs and service levels are some of the metrics that are determined for monthly SIOP meeting. Key supply chain metrics are measured at total supply chain, company, facility and product levels. These reports are also shared continuously with suppliers and other supply chain partners to determine the optimal ‘plan to execute’.
Diamond Head Associates Inc. implemented a streamlined and consensus-based monthly process to make supply chain decisions. The SIOP process time was reduced with more time being spent on making intelligent decisions rather than data collection. Standardized reports improved decision-making process and supply chain visibility. These, in turn, led to a reduction of total supply chain inventories and costs, as well as improvements in capacity utilization and service levels.
- Created a streamlined and consensus-based monthly SIOP process
- Increased supply chain visibility
- Determined the optimal ‘plan to execute’
- End-to-end supply chain cost reduced by 5%
- Increased capacity utilization by 30% and lowered inventory levels by 20%
- Faster responsiveness to changes with less planning resources