Chapter 4 Matching Supply And Demand PDF

CHAPTER 4 MATCHING SUPPLY AND DEMAND Dr. Faiza HAMDI 1 1. The lead-time gap 2. Improving the visibility of demand 3. The supply chain fulcrum 4. Forecast for capacity, execute against demand 5. Demand management and planning 6. Collaborative planning, forecasting and replenishment Dr. Faiza HAM...

CHAPTER 4 MATCHING SUPPLY AND DEMAND Dr. Faiza HAMDI 1 1. The lead-time gap 2. Improving the visibility of demand 3. The supply chain fulcrum 4. Forecast for capacity, execute against demand 5. Demand management and planning 6. Collaborative planning, forecasting and replenishment Dr. Faiza HAMDI 2  The goal of supply chain management is very simple to try to match supply and demand.  However, what makes this seemingly simple task so difficult in reality is the presence of uncertainty.  In other words, for most organizations, on both the supply side and the demand side, there can be no certainty what tomorrow will bring.  This uncertainty brings with it a serious challenge to the classic practice of running a business on the basis of a forecast Dr. Faiza HAMDI 3 The levels of volatility and turbulence that typify today’s business environment add to the problem. It will be apparent that in conditions of stability – and hence lower uncertainty – forecast accuracy should generally be high. Equally the converse will be true, i.e. as uncertainty increases so too will the forecast accuracy reduce. All forecasts are prone to error and the further ahead the forecast horizon is, the greater the error. Figure 4.1 shows how forecast error increases more than proportionally over time. Dr. Faiza HAMDI 4 The lead-time gap Most organizations face a fundamental problem: the time it takes to procure, make and deliver the finished product to a customer is longer than the time the customer is prepared to wait for it. This is the basis of the lead-time gap. Figure 4.2 highlights the problem. Dr. Faiza HAMDI 5 The customer’s order cycle refers to the length of time that the customer is prepared to wait, from when the order is placed through to when the goods are received. This is the maximum period available for order fulflment. In some cases this may be measured in months but in others it is measured in hours. In the conventional organization the only way to bridge the gap between the logistics lead time (i.e. the time taken to complete the process from goods inwards to delivered product) and the customer’s order cycle (i.e. the period they are prepared to wait for delivery) is by carrying inventory. This normally implies a forecast. Dr. Faiza HAMDI 6 Hence, the way most companies address this problem is by seeking to forecast the market’s requirements and then to build inventory ahead of demand. Unfortunately all our experience suggests that no matter how sophisticated the forecast, its accuracy is always less than perfect. It has been suggested that all mistakes in forecasting end up as an inventory problem – whether too much or too little! Dr. Faiza HAMDI 7  . The company that achieves a perfect match between the logistics lead time and the customer’s required order cycle has no need of forecasts and no need for inventory.  The challenge for logistics management is to search for the means whereby the gap between the two lead times can be reduced if not closed (see Figure 4.3)  Reducing the gap can be achieved by shortening the logistics lead time (end-to end pipeline time) whilst simultaneously trying to move the customer’s order cycle closer by gaining earlier warning of requirements through improved visibility of demand. Dr. Faiza HAMDI 8 Improving the visibility of demand  In many cases companies have an inadequate ‘visibility’ of real demand.  By ‘real’ demand we mean the demand in the final marketplace, not the ‘derived’ demand that is filtered upstream through any intermediary organizations that may lie between the company and the final user.  The challenge is to find a way to receive earlier warning of the customers’ requirements. What we frequently find is that, firstly, the demand penetration point is too far down the pipeline and, secondly, real demand is hidden from view and all we tend to see are orders.  Both these points need further explanation Dr. Faiza HAMDI 9 Demand penetration Demand penetration point is that it occurs at that point in the logistics chain where real demand meets the plan. Upstream from this point everything is driven by a forecast and/or a plan. Downstream we can respond to customer demand. Clearly in an ideal world we would like everything to be demand driven so that nothing is purchased, manufactured or shipped unless there is a known requirement. The demand penetration point is often referred to as the decoupling point and is ideally the point in the supply chain where strategic inventory is held Dr. Faiza HAMDI 10  A key concern of logistics management should be to seek to identify ways in which the demand penetration point can be pushed as far as possible upstream.  This might be achieved by the use of information so that manufacturing and purchasing get to hear of what is happening in the marketplace faster than they currently do.  Figure 4.4 illustrates a range of possible demand penetration points in different industrial and market contexts. The inverted triangles represent the strategic inventory that is held at that point, preferably in as ‘generic’ a form as possible. Dr. Faiza HAMDI 11  Perhaps the greatest opportunity for extending the customer’s order cycle is by gaining earlier notice of their requirements.  In so many cases the supplying company receives no indication of the customer’s actual usage until an order arrives. For example, the customer may be using 10 items a day but because he/she orders only intermittently the supplier sometimes receives an order for 100, sometimes for 150 and sometimes for 200. If the supplier could receive ‘feed-forward’ on what was being consumed he would anticipate the customer’s requirement and better schedule his own logistics activities. Dr. Faiza HAMDI 12 In a sense, the information we receive, if we only have the order to rely on, is like the tip of an iceberg. Only a small proportion of the total iceberg is visible above the surface. Likewise the order cycle time (i.e. the required response time from order to delivery) may only be the visible tip of the ‘information iceberg’ (see Figure 4.5) The area below the surface of the iceberg represents the ongoing consumption, demand or usage of the product which is hidden from the view of the supplier. It is only when an order is issued that any visibility of demand becomes transparent. Dr. Faiza HAMDI 13 There are now signs that buyers and suppliers are recognizing the opportunities for mutual advantage if information on requirements can be shared on a continuing basis. If the supplier can see right to the end of the pipeline then the logistics system can become much more responsive to actual demand. Thus, whilst the customer will still require ever swifter delivery, if an on-going feed-forward of information on demand or usage can be established there is a greater chance that the service to the customer will be enhanced and the supplier’s costs reduced. This twin-pronged approach of simultaneously seeking to reduce the logistics lead time whilst extending the customer’s order cycle may never completely closethe lead-time gap. However, the experience of a growing number of companies is that substantial improvements can be made both in responsiveness and in the early capture of information on demand – the end result of which is better customer service at lower cost. Dr. Faiza HAMDI 14 The supply chain fulcrum As we have previously noted, the purpose of the supply chain is to balance supply and demand. Traditionally, this has been achieved through forecasting ahead of demand and creating inventory against that forecast. Alternatively additional capacity might be maintained to cope if demand turned out to be greater than forecast. In this context ‘capacity’ refers to the ability to access supply not currently held as inventory. Either way demand is balanced with supply. Figure 4.6(a) below illustrates a balance with the box marked ‘D’ representing demand and the boxes ‘I’ and ‘C’ representing inventory and capacity respectively. In other words there must be enough capacity and/or inventory to meet anticipated demand. Now imagine that the fulcrum is moved closer to the box marked ‘D’ as in Figure 4.6(b) below. Obviously the same amount of demand can be balanced with less inventory and/or less capacity. Dr. Faiza HAMDI 15 . What does the fulcrum represent in a supply chain? The fulcrum is the point at which we commit to source/produce/ship the product in its final form and where decisions on volume and mix are made. The idea being that if that point of commitment can be delayed as long as possible then the closer we are to make to-order, with all the benefits that brings. The problem for many companies is that the fulcrum in their supply chains is more like that shown in Figure 4.6(c) below. Dr. Faiza HAMDI 16  Here the fulcrum is a long way from demand, i.e. the . forecasting horizon is long, necessitating more inventory and capacity to balance against demand.  How in reality do we move the fulcrum closer to demand? The answer in effect is to improve the visibility of demand along with enhancing the velocity of the supply chain.  In other words if we can have a clearer view of real demand in the final marketplace, rather than the distorted picture that more typically is the case, and if we can respond more rapidly, then a more effective matching of supply and demand can be achieved.  Thus it can be argued that visibility and velocity are the foundations for a responsive supply chain. Dr. Faiza HAMDI 17 . - Dr. Faiza HAMDI 18 Forecast for capacity, execute against demand  We have already made the point that in today’s volatile business environment it is much harder to achieve high levels of forecast accuracy for individual items.  Whilst managers will always be seeking better forecasts, the fact is that as uncertainty increases it gets harder to run a business on the basis of forecast demand at the stock keeping unit (SKU) level.  Instead the focus has to be on how the company can move from a forecast-driven to a demand-driven mentality.  Basically what this means is that ways have to be found to make it possible to react to demand within the customer’s order cycle.  Thus if the customer’s expectation is for a five-day lead time from order to delivery, the goal is to be able to respond within that lead time. Dr. Faiza HAMDI 19 Whilst forecasts will always be required, the argument is that what we should be forecasting is not at the individual item level but rather for aggregate volume to enable the company to plan for the capacity and the resources that will be required to produce that volume. To enable this goal to be achieved will require a radical re-think of conventional ways of balancing supply and demand. In particular it highlights the importance of the ‘de-coupling point’ idea introduced earlier in this chapter. If it is possible to add ‘generic’ inventory at that point (which we might term ‘strategic inventory’), this will facilitate the late configuration or even manufacture of the product against a customer’s specific requirements. Thus at Zara, for example, the generic strategic inventory is the un-dyed fabric. When the market requirement is known, that is when the final garment is manufactured – making use of Zara’s flexible sewing capacity provided by their network of small, independent workshops. So at Zara the forecast is for the resources and the materials, not for the final garment. In many ways Zara is an exemplar of the concept of ‘forecast for capacity, execute against demand’. Dr. Faiza HAMDI 20 Demand management and planning In the past ‘demand’ was often seen as a given and the business must react to it as best it could with only a less-than-accurate sales forecast to help it do so. Today the best run companies are taking a more proactive stance. They recognize that not only do the actions of the business impact demand (e.g. new product launches, sales promotions, advertising campaigns, etc.), but also that even market volatility can be coped with if the appropriate supply chain planning processes are in place. Demand management is the term that has come to be used to describe the various tools and procedures that enable a more effective balancing of supply and demand to be achieved through a deeper understanding of the causes of demand volatility. Dr. Faiza HAMDI 21 Demand management and planning  Demand planning is the translation of our understanding of what the real requirement of the market is into a fulfilment programme, i.e. making sure that products can be made available at the right times and place.  Many companies today have put in place a formalized approach to demand management and planning that is often referred to as sales and operations planning (S&OP).  S&OP seeks to ensure that the organization is able to anticipate the real requirement of the market and to react in the most cost-effective way.  The aim is to ensure the highest level of customer satisfaction through on-time, in-full deliveries with minimum inventory. There are a number of pre-requisites for successful S&OP and these are summarised in Figure 4.8. Dr. Faiza HAMDI 22 Dr. Faiza HAMDI 23 1 Generate aggregate demand forecast Every business needs to plan ahead in order to ensure that they have access to enough capacity and materials. However, wherever possible these plans should be made on the basis of high-level aggregate volume forecasts at the product family level. As we get closer to the point of demand fulfilment then we can start to think about product mix requirements. Because it is generally easier to forecast at the aggregate level, statistical forecasting tools should enable a reasonable level of accuracy to be achieved. Thus a company manufacturing a product that will be sold in many markets around the world will find it easy to forecast and plan on the basis of projected global demand rather than have to forecast for individual customers in individual countries – that will come later. Dr. Faiza HAMDI 24 2 Modify the forecast with demand intelligence Because the stage 1 forecast was based upon a statistical projection using past data, it may be necessary to modify it utilizing specific intelligence on current market conditions and events. Thus, for example, there may be information about a planned competitive product launch that could affect our sales, or there is a change planned for the price of the product which could impact sales and so on. Ideally, this stage of the S&OP process should involve key customers or accounts. The benefit of a joint supplier/ customer process to create a forecast is that a wider array of intelligence can be taken into account. (A wider information) Dr. Faiza HAMDI 25 3 Create a consensus forecast At the heart of the S&OP process is the use of a cross-functional approach to achieving a balance between supply and demand. Whilst the process may be diferent from one company to the next, essentially the principle is that marketing and sales people will meet at regular intervals with operations and supply chain people. The former will present their modifed sales forecast from stage 2 and the latter will detail any constraints that might curtail the achievement of that forecast, e.g. capacity issues, supply shortages, etc. These meetings will also provide the opportunity to look ahead, to recognize the future impact of current trends and to plan for promotion and new product introductions. Figure 4.9 highlights the integrative nature of S&OP processes. Dr. Faiza HAMDI 26 Whereas in conventional businesses there is little integration between 4 Create a ‘rough cut’ capacity plan To ensure that there is enough capacity and resources available to achieve the consensus forecast it is necessary to produce a ‘rough cut’ capacity plan – otherwise known as a resource plan. Essentially the logic behind the rough cut capacity plan is to look at the aggregate product family forecast for the planning period and to translate that into the capacity and resources needed, e.g. how much machine time, how much time in an assembly process, how much transport capacity and so on. Dr. Faiza HAMDI 27 A similar approach should be used to calculate the requirements for materials and supplies to enable arrangements with vendors to be put in place. If the result of this rough cut planning activity is that there is not enough capacity, resources or material to achieve the aggregate forecast then either demand has to be ‘managed’, e.g. delivery lead times renegotiated, prices adjusted to reduce demand, etc, or additional capacity has to be found – possibly by using external providers. Dr. Faiza HAMDI 28 5 Execute at SKU levels against demand As we get closer to real demand then clearly the plan has become much more detailed. Ideally nothing is finally assembled, configured or packaged until we know what the customer’s order specifies. Even if the customer’s required delivery lead time is less than the time we need to make/source and deliver and we have to make inventory ahead of time, at least the forecast will be more accurate since the forecast horizon is closer. **stock-keeping unit SKU Dr. Faiza HAMDI 29 6 Measure performance The real test of how well a demand management/planning process is working should be how high the percentage of perfect order achievement is compared to the number of days of inventory and the amount of capacity needed to achieve that level. The accuracy of short term statistical forecasts can be easily measured but since the goal of the S&OP system is to reduce the dependency on the forecast we should also measure the lead-time gap at the individual item level. The aim should be to progressively reduce this gap by a concerted focus on time compression and improved visibility. One of the exemplars of world class demand management and planning is Dell Inc., the computer company. Their ability to offer high levels of product availability with minimal inventory has given then a leadership position in many markets (see box below). Dr. Faiza HAMDI 30 Dr. Faiza HAMDI 31 Collaborative planning, forecasting and replenishment (CPFR) given to a partnership-based approach to managing the buyer/supplier interfaces across the supply chain. The idea is a development of vendor managed inventory (VMI). VMI is a process through which the supplier rather than the customer manages the flow of product into the customer’s operations. This flow is driven by frequent exchanges of information about the actual off-take or usage of the product by the customer. With this information the supplier is able to take account of current inventories at each level in the chain, as well as goods in transit, when determining what quantity to ship and when to ship it. Dr. Faiza HAMDI 32 Collaborative planning, forecasting and replenishment (CPFR) The supplier is in effect managing the customer’s inventory on the customer’s behalf. In a VMI environment there are no customer orders; instead the supplier makes decisions on shipping quantities based upon the information it receives direct from the point-of-use or the point-of-sale, or more usually from off-take data at the customer’s distribution centre. The supplier can use this information to forecast future requirements and hence to utilize their own production and logistics Dr. Faiza HAMDI capacity better. 33 Benefits of CPFR Benefits of CPFR Until now, most CPFR initiatives focused on reducing variable costs, such as decreasing inventory levels. However, there are further benefits to be gained for companies that integrate CPFR into their standard operational procedure and scale to critical mass (see Figure 4.11). Dr. Faiza HAMDI 34 . - Dr. Faiza HAMDI 35 Reduce capital investment Companies reaching critical mass with their CPFR initiatives may also harvest additional benefits from a reduction in capital investment. Reducing warehousing collaboration increased uncertainty. partners supply capacity in chain Increased the is long visibility forecast possible term and a for the through the reduction accuracy in alongside collaborative long-term planning reduces the need to build up inventories or production capacity to cover unexpected changes in demand. Dr. Faiza HAMDI 36 Decrease cost of goods sold The results from the pilots have shown that CPFR can significantly impact the cost of goods sold. In particular, reductions in inventory, product obsoletes, changeover times and transportation costs can be achieved. Based on an improved forecast accuracy and long-term planning, trading partners are able to reduce inventory levels along the supply chain, stabilize production runs, improve truck fill rates and reduce obsoletes after promotions. Dr. Faiza HAMDI 37 Increase sales revenue Reducing the incidence of out-of-stocks at the point of sale (increase in onshelf availability) improves the service to the consumer and reduces lost sales. Furthermore, the continued availability of the products increases consumer satisfaction and therefore benefits store loyalty for the retailer and the product loyalty for the manufacturer Dr. Faiza HAMDI 38