Stable and resilient operations are key for successful supply chain management – this proves especially true in the current turbulent corona times. The prerequisite: a paradigm change in supply chain planning. This article describes what needs to be changed and how to start.
Today’s reality: The hyper VUCA world
As described in one of our latest articles, business environment has dramatically changed over the last decades: Supply chains are not as linear and localized anymore as they used to be before the rise of globalization. Today’s reality is increasingly globalized and we see vulnerable supply networks instead of linear “chains”. Those complex networks are subject to constant change and immediately affected by political, economic, ecological, or social events around the globe. The current corona crisis has dramatically shown the vulnerability of global supply chains and will impact operations for a significant time.
However, also before Covid-19 we saw how volatile modern business environment is. Be it for instance the lengthy discussions around Brexit with all their unforeseeable effects to economy and society, the climate crisis as massive ecological challenge, natural disasters like the Eyjafjallajökull disruption in Iceland 2010, or the big Tsunami in Japan 2011. All these things have in common that somehow far-away events have a (direct or indirect) impact on supply chain and business reality.
At the same time, customer requirements – e.g. regarding product variety and lead times – are increasing. Be it a maximum level of customization (how about your name on your running shoes?) or next day delivery (get the Amazon experience!) – delivering superb customer service in a competitive manner becomes more and more difficult. That is what we call the VUCA world: business environment becomes more volatile, uncertain, complex, and ambiguous.
To remain successful under these circumstances, stable and resilient planning of the supply chain is required. Current supply chain planning approaches fail to deliver. They mostly follow suboptimal demand signals (i.e. forecasts), facilitate variability along the supply chain (bullwhip effect), and lead to bad customer service, high inventories, and significant expedite related cost.
Paradigm change in supply chain planning needed
To overcome the shortcomings of traditional planning approaches, a true paradigm change is required. But what does that mean in detail and what needs to be changed? In the end, it is not rocket science and not about re-inventing the wheel. It’s rather about applying known concepts in a different way and the right combination to unfold their full potential. We at Elixum see five key changes being required to prepare the supply chain for the challenges ahead:
Managing inputs instead of outputs
When facing deteriorating supply chain KPIs, many companies’ first reaction is to quickly implement concrete measures to improve performance on short notice. For instance, too high inventories are frequently addressed by programs purely focusing on inventory reduction (following the dictate of “10% reduction is always possible”). Unsatisfactory service level performance is often addressed by expediting shipments (e.g. via airfreight) or other firefighting activities. This behavior is understandable with respect to the need of bringing performance back to track. The problem is that those measures only influence the symptoms (i.e. outcome) of poor supply chain performance and don’t fix the underlying root-causes (i.e. inputs). To ensure sustainable results and enable stable and resilient operations, we need to focus on the root instead of acting on symptoms only. Overall inventory and performance improvements will for instance be achieved by reducing the level of variability in the supply chain, e.g. by replacing unreliable suppliers if possible, stabilizing internal processes with six sigma programs, and switching to more resilient planning approaches.
Use a different approach to tackle variability and complexity
While we might be able to reduce a certain share of self-imposed variability (i.e. variability introduced into the supply chain by our own behavior and decisions), we will never manage to fully eliminate variability (especially external variability, e.g. swings in demand or uncertainties on the supplier side). Therefore, we need to re-think how to best respond to this variability – it’s just a given fact.
With the use of strategically chosen buffers along the supply chain, we are able to respond to unforeseen swings in the supply chain. Besides spare capacities (esp. within production), inventory buffers also play a key role to dampen variability and to stabilize overall operations along the supply chain. Instead of considering unused capacities and inventories generally as “waste”, they provide an important value towards a resilient supply chain if defined in the right way. Even if this may sound trivial, the identification and sizing of adequate buffers requires experience and decides about inventories and spare capacities being an asset or a liability.
Data and parameter-driven planning
Quite often we observe client supply chains being highly dependent from individual planners’ experience and following decisions that are based on local optimizations and gut feeling. With the transformation to a data and parameter driven supply chain, relevant supply chain knowledge becomes formalized in optimized parameter settings and supply chain decision making is based on facts rather than emotions. Defining and regularly updating the right supply chain configuration and parameterization in an automated way based on advanced segmentation approaches, machine-learning techniques, and big data analysis enables consistent and E2E optimized planning along the supply chain.
Integrated planning across functions and planning horizons
One of the key issues in traditional planning approaches is the missing integration along the value chain. Functional units along the value chain typically operate in silos and different planning horizons are frequently not in sync. In contrast to this reality, we need consistency in two dimensions: vertical consistency between targets, strategic segmentation, tactical configuration, and operational decisions. At the same time, horizontal consistency along the different value chain steps from the supplier to the customer. To achieve this, we need to implement two things. First, we need regular bi-directional reconciliation cycles between different planning layers, i.e. structured alignment platforms to ensure consistency of planning decisions. And second, all functions along the supply chain need to work towards the same target: FLOW. That is the only way to overcome contradicting incentives and to ensure the supply chain being in sync.
Clear and visual management
In times of big data and virtually unlimited information, supply chain managers often struggle to see what is really important as basis for their day-to-day decisions. Therefore, it is key to focus on providing relevant information as basis for decision making. Furthermore, it is required to introduce easy-to-understand management methods to supply chain planning directing planner’s attention to where it’s required most.
Demand-Driven SCM: A holistic solution framework
Those key changes sound reasonable and most of them probably don’t come as a surprise– yet, without a holistic approach covering the supply chain end-to-end they are very difficult to achieve. Demand-Driven Supply Chain Management (DDSCM) with Demand-Driven MRP (DDMRP) as the planning engine addresses those key changes – providing better customer service with overall reduced inventories and expedite-related cost at the same time. It is the basis for many successful supply chain transformations we conducted with our clients across various industries.
Key difference compared to classical approaches is the combination of four solution elements being utilized by the unique end-to-end DDMRP planning logic:
Pacing operations to actual demand
One of the main sources of nervousness and variability in the supply chain is the usage of forecasts – which are, by definition, always wrong – as direct input for triggering replenishments and production. By separating tactical planning/ parameterization (still using forecasts) from short-term planning/ execution (utilizing actual demand information) variability is massively reduced and resources are only being used to produce products which are actually sold.
Strategic placement of decoupling points
Another source of variability is the fact that classical MRP-based planning approaches treat everything along the supply chain as dependent to plan replenishment and production across value chain stages and product hierarchies. By using strategically placed decoupling points the amplification of variability along the supply chain is stopped and variability is reduced. Furthermore, planning horizons are dramatically shortened and the utilization of actual demand as trigger for replenishments becomes possible. For instance, by introducing strategic decoupling points within the semi-finished good supply chain of a large steel manufacturer, planning-relevant lead times have been reduced by 50% leading to an overall inventory reduction of 35% with even improved internal material availability.
Strategic placement of control points
Not all stages along the supply chain can and should be decoupled (e.g. for technical, regulatory, or economic reasons), strategically placed control points are used complementary. They represent places in the supply chain (e.g. critical machines or inbound/outbound interfaces to suppliers/customers) to be monitored regarding deviations from defined performance ranges or expected behaviour. This could for instance be unexpected downtimes of critical machines, unusual high scrap rates at a specific production step, or workforce unavailability at material handling points.
Protection with buffers
Decoupling and control points are strategically chosen points within a supply network. Those points need to be protected in a special way. For decoupling points, the protection is achieved by applying DDMRP stock buffers. For control points, time and capacity buffers are used. This is achieved by consciously planning with spare capacity for key machines (capacity buffers) and by planning key activities earlier than required (time buffers). The buffering of critical decoupling and control points leads to a massive stabilization of the supply chain and is the key enabler for more stable and resilient planning.
Immediate impact for the bottom line:
This new planning approach is not only more resilient but has also a significant P&L impact short to mid-term. Demand-Driven SCM unfolds its benefits along the entire value chain including procurement, production, logistics, and sales.
Planning and administration
Main effects in supply chain planning itself are the higher degree of automation for standardized decisions (such as automated replenishment triggers and demand-dependent adaption of inventory buffers) and a better focus of planning efforts to relevant activities (e.g. individual parameterization decisions for particularly important products). This enables that planning results improve while about 10-15% less FTEs are required in supply chain planning.
Much more stable order patterns as well as better aligned order quantities provide a better basis for contract negotiations and significantly smoothen the inbound flow of materials. This in combination with less firefighting activities typically leads to inbound logistics cost reductions of about 10-15%. Furthermore, the constant inbound flow of better aligned quantities significantly reduces the risk of obsolescence by 20-30%.
Within production, patterns are also much more stable and quantities are better aligned. Improved management of resources leads to less re-planning requirements and enables the improvement of production sequences and setup times. On average 5-10% capacity gains are frequently observed while reducing conversion cost by up to 5% at the same time.
Most significant effects are achieved within the logistics section due to the optimized usage of inventories and the massive positive effect on overall inventory levels. Inventory value is typically reduced by around 30-50% while logistics costs (e.g. for handling activities) are reduced by 5-10%.
While significantly reducing inventories, the most important message for Sales is that best service levels are ensured at the same time. With service levels close to 100%, product availability is ensured and lost sales are minimized. This also allows for margin improvements by focusing on high margin products or by better utilizing existing resources.
By positively impacting key drivers along the value chain, DDSCM significantly improves the company’s ROI. Based on our broad project experience and results reported by our partners, profitability increases of 30% are frequently achieved across industries.
These are impressive numbers, but it also needs a dedicated effort to achieve those results. The outlined key changes mean a fundamentally different planning approach and require – first and foremost – a complete rethinking of all involved stakeholders – it’s a journey, not just a simple change of algorithms. This change should be facilitated by a partner being experts for the new concept and experienced in large transformation initiatives.
Leading companies have already started the journey towards a more resilient planning with Demand-Driven SCM and are rolling-out this new paradigm within their supply chains. There is no reason to wait for bringing your supply chain to the next level of maturity as well. Get in touch with us to learn more about the details behind this new concept! What are your thoughts about this topic?