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A championship football team reaches such heights because of teamwork, practice, and a clear strategy. Both offensively and defensively, team members are drilled over and over to work together and know the plan so that on game day, everyone is working in sync. These are such basic tenets that no one questions them.
But what would happen if a gap existed where half the offense tried to deploy in run formation and the other half in pass formation?
What would happen if, on defense, half the players deployed a pass defense while the other deployed a run defense?
The result would be miscommunication, lost opportunities, and confusion. While no one questions the efficacy of game day strategies in sports, many companies operate with just such a gap in place between supply planning and demand planning. While both are part of the same company, each has traditionally had a different focus and set of priorities. This often results in a disconnect between the efforts of sales and marketing to generate demand for a given product and the operational processes that are needed to fulfill the resulting orders.
Global supply chains are becoming more complex with each passing year. Many countries have now undertaken sustainability and traceability initiatives which put more pressure on those in charge of securing and managing supply. And the return of tariffs, renegotiated trade agreements, and trade wars have introduced new challenges and uncertainty among suppliers and customers.
The very same issues of transparency, sustainability, fair trade, and added regulation impact the demand side as well. These new challenges combined with traditional market realities such as swings in consumer tastes, seasonal successes—or disasters—and other factors to complicate demand planning further. These conditions highlight a key aspect of the two halves of the “team” on the field.
Supply planning tends to be “backward-looking”. Purchases today are the result of looking back over the history of the purchase to monitor it until it arrives, becomes inventory, and then put into production. Decisions are made using history and past production requirements. Purchases made today may not arrive for weeks or months and by then the demand curve may have moved—possibly significantly—up or down. This impairs flexibility that can lead to missed sales opportunity or tight cash flow.
Demand planning on the other hand, is “forward-looking.” It relies on sales data as well as anecdotal evidence from market research, competitor product launches, and intangibles necessary to read the market and create forecasts that can reach out several months or years. A significant jump in sales may find the supply side is unable to fulfill the surge. Or, a significant drop in the demand signal may be seen too late to inform supply planning. This could result in the operation being overwhelmed with raw materials that may not turn for a much longer period than anticipated.
Given these obstacles, more product companies are realizing that they need an end-to-end solution that allows for a unified strategy to address trends, rapidly shifting consumer tastes, and a more volatile demand signal. Many companies have chosen to implement sales and operations planning (S&OP) processes to help close the gap. S&OP definitely helps, as it helps to align key decision makers across the company, but it is still left to those execs to communicate the consensus-based plan to their reports for implementation.
To truly close the gap and eliminate ongoing disconnects requires the seamless integration of demand planning with supply planning. For it is here, at the level of operational reality, where the vision from above can be brought to fruition by combining and including demand signal and sales generation activities with supply planning. And doing so will provide many advantages.
By considering both supply and demand, trade-offs are more visible on the front end of the process. This leads to better decision making due to a broader view of the company’s momentum. With an end-to-end focus, purchasing, warehousing, logistics, finished goods, and distribution may help inform the entire planning effort. As a result, resources can be allocated strategically rather than “intuitively”.
As an example, a decision to purchase in smaller quantities, or a decision to purchase specialized components which would not have factored into decision making previously, can now be included to position new sales for detected demand by demand planners. While not considered “efficient” by the traditional definition, the integrated view allows decisions to be made that are efficient for the bigger picture which is focused on driving higher sales results.
By integrating supply and demand planning, the risk of overstock or shortage can be reduced. This is not only true of raw materials and assembly components, it can have a positive impact on finished goods as well. This allows retailers to shift according to demand changes while mitigating the risk to the manufacturer of being stuck with unsold goods. Operationally, this level of controlled inventory can help promote Just in Time (JIT) production that can result in additional cost savings as well.
With a more JIT production focus, companies are more in tune with customer demands and can make proactive decisions that positively impact margins. Since the two sides are linked and in sync, operational capacity can be better planned without tying up valuable capacity required to “turn” a large quantity of raw materials that may not match the demand signal. This allows the operation to execute faster and with more precision while improving cash flow.
By adding the demand signal to the supply planning process, forecasts can be improved by shortening demand latency. Managers can look at a broader set of variables including time of year, competitor offerings, and trends in product families to proactively plan optimized equipment and staff utilization to address the impact of external events and other changes in demand.
As with the football team using a unified strategy, integrating supply and demand planning defines common goals, standardizes data used in decision making, and allows cross functional collaboration not possible within the silos of traditional systems. This internal communication is enhanced by improved external communication as well.
With a holistic view of supply, decisions are not made simply as a “purchasing” function. Rather, suppliers can be brought into the loop to coordinate and collaborate to address lead time issues, minimum quantity requirements, and other factors to shorten supply lead time. As the collaboration deepens, technology and automation can be introduced putting the supplier into more of a “partner” relationship. The ability to impact critical company goals in a strong and positive manner empowers the team and leads to innovation of further improvements.
For companies that have a formal S&OP process, integrating supply and demand planning is an effective way to align S&OP decisions with the operational reality on the ground. This builds two-way communication of common goals upward and downward within the organization. For companies without formal S&OP, integrated supply and demand planning can provide a framework for C-level action to formalize those efforts.
Finally, the cumulative effect of this integration is increased profitability. By integrating demand and supply planning, efforts become more customer-centric rather than simply “Buy”, “Don’t Buy”. And by fostering JIT production and fulfillment, streamlining processes, deploying a common data set for all system users, and incorporating agile and flexible response to customer demand, companies can improve both their top and bottom line.
By integrating supply and demand planning, companies can signal that they are building a seamless and well-practiced team. As a result, offensive and defensive strategies are coherent, concise and the entire team operates as one. For those who are considering a move to such integration, the above advantages can help build the road to championship level.