Download Building a Best-in-Class Supply Chain Planning Framework

Building a Best-in-Class Supply
Chain Planning Framework
Part 1 of Spinnaker’s White Paper Series:
Developing a Competitive Advantage through World-Class Supply Chain Planning Capabilities
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SPINNAKER
TABLE OF CONTENTS:
SPI NNAK ER PLANNING WHIT E PA P E R S E R IE S O V E RV IE W . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 3
Bu ilding a B est-in -class s upply chain planning f ra mework . . . . . .............. 4
Supply Chain Planning: From B asic to A dvanced A pproaches .. . . . .............. 4
Demand Planning . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 4
SUPPLY Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 6
Advanced D emand-Su pply P lanning P rocesses . . . . . . . . . . . . . . . . . . . . . . . . . .............. 6
Advanced Analy tics and D ecision S upport T ools . . . . . . . . . . . . . . . . . . . .............. 7
I NT ernal Collaborative P lanning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 8
External Collaborative P lanning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 8
Mat u rity Model . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 9
Concl usion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ 1 0
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white paper
Spinnaker Planning White Paper Series Overview
Welcome to Spinnaker’s white paper series “Developing a Competitive Advantage through World-Class Supply Chain
Planning Capabilities”.
The series addresses eight key requirements for building world-class supply chain planning capabilities:
1. Building a Best-in-Class Supply Chain Planning Framework
2. Supply Chain Planning: Where Should We Start?
3. Planning Business Processes and Decision Support Tools
4. Organizational Design and Supply Chain Planning Performance
5. Overview of Planning Systems and Vendors
6. Developing Advanced Capabilities: S&OP and Integrated Business Planning
7. Developing Advanced Capabilities: Integrating Planning & Execution
8. Measuring Performance and Continuous Improvement
Throughout the series, Spinnaker discusses the common challenges faced by companies trying to improve their supply
chain planning. We examine how companies design their organizations, improve processes, and deploy tools to improve
performance. We’ll share perspectives on the best methods for companies to get started, and advanced concepts that help
companies achieve maximum benefit from their Advanced Planning Systems (APS). And, we’ll reveal valuable insights into
how successful enterprises achieve world-class supply chain performance.
You’ll get tools and guidelines that will help you:
• Understand how best-in-class supply chain planning business processes fit together.
• Understand how decision support tools can be used to enhance planning performance.
• Understand the skills and expertise required to build a world-class planning organization
• Evaluate the options available and focus on where to start
• Create a roadmap to improve end-to-end planning processes
Our series opens with “Building a Best-in-Class Supply Chain Planning Framework”, focusing on the basic concepts of
supply chain planning.
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SPINNAKER
Building a Best-in-Class Supply Chain Planning Framework
Creating an effective, comprehensive planning system and improving supply chain planning performance require the will to
address business processes, organizational capabilities, technology, policies, and metrics interact to. Spinnaker’s approach
considers these elements and how they interact.
To get started, it’s important to define some basic planning concepts and how they are applied to improve planning decision
making. Next, we’ll define Spinnaker’s supply chain planning framework and examine how companies evolve from basic to
advanced planning processes. We’ll also examine the opportunities for internal and external collaboration that exist between
a company and its suppliers and customers. We conclude with a brief discussion of Spinnaker’s Maturity Model and how we
leverage it to help our clients improve supply chain performance.
Supply Chain Planning: From Basic to Advanced Approaches
Any company that provides goods or services executes some form of a supply chain planning process with two core elements:
demand planning and supply planning. These processes provide the estimates for how much demand an organization should
expect at a certain point in time, and how much supply of a product or service must be available to satisfy this demand.
This type of demand planning and supply planning occurs throughout the enterprise with a scope ranging from individual
transactions in isolation to aggregate forecasting and planning over long time horizons across numerous locations, divisions,
and even companies.
Building on the basic foundation of demand planning and supply planning, companies develop advanced processes that
incorporate powerful analytics and integrated business planning (also known as sales and operations planning, or S&OP). This
combination enables enterprises to coordinate operational planning with sales, marketing, finance and engineering teams, and
to collaborate across supply chain partners.
These enhancements allow consideration of inputs, data, objectives, and constraints of a broader swath of the supply chain,
enabling more globally optimal predictions and decisions. With access to data on a real-time basis, decisions can be made faster
and hence be more relevant to the business.
Demand Planning
In the most basic scenario, demand planning is a process for predicting the timing and quantity of demand for a particular
product or service. There are two main approaches companies take:
1) Statistically Based Demand Planning uses historical and other causal data that can be measured to estimate future
demand. Models can range from simple (“whatever we sold last week is our prediction for this week”); to slightly more
complex (“the moving average of sales over the last four weeks is our prediction for this week”); to incredibly complex
statistical models that consider factors such as trending, seasonality, correlation among different demand signals and
causal factors such as weather, demographics, pricing promotional activity, etc.
2) Judgment-Based Demand Planning leverages the expertise and knowledge of individuals in order to predict
future sales. These experts may evaluate data to make their predictions or, in many cases, might simply have better
information about future demand (i.e. likely design wins and the volume of subsequent customer orders) than can
be inferred based on statistical models.
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In practice, companies combine the two approaches to some extent in order to leverage the strengths of each. While statistical
models require a certain degree of sophistication and cost to build and maintain, they have the benefit of being able to evaluate
large numbers of products and customers very rapidly. These models can often uncover trends that would be difficult to identify
using more manual approaches.
Conversely, judgment-based approaches provide the ability for direct input into the forecast when history is not a good
indicator of future demand. These approaches also have the downside of being manually intensive and time-consuming.
Most companies combine the two approaches to achieve their optimal demand planning forecast.
In addition to different methods for developing a forecast number, another important concept in demand planning is the
difference between independent forecasting and consensus forecasting.
1) Independent Forecasting is the process of allowing different parties or methods – oftentimes different functions
within a company, different companies, and/or different statistical models; to develop forecasts in isolation based on
the best information available to that party. Over time, companies can measure the accuracy of these different forecasts
to determine which numbers resulted in the best outcomes. They can also evaluate and improve the individual forecasting
processes by cross-pollinating successful methods and assumptions from one party to another.
2) Consensus Forecasting is a process that involves evaluating the various independent forecasts to arrive at a final
demand plan that is often better than the sum of its parts. This consensus forecast can compare the independent
forecast inputs of various functional groups (e.g. Sales, Marketing, Finance, etc.) with statistical models to arrive at
a final number. More broadly, the concept can also be applied in collaborative situations where different supply chain
partners share forecasts with the goal of producing a better overall plan. In such situations, companies often find that
one independent forecast is better at predicting some aspect of demand while another is consistently better at
something else. Hence the best result is obtained by combining the two.
An old saying about demand planning states that the only thing certain about forecasting is that the forecast is wrong. Forecast
accuracy will always be an interesting challenge for companies, but there is little question that some companies and approaches
are more successful at predicting demand.
The Institute of Business Forecasting and Planning surveyed a group of consumer products companies ranging from $.1B
to $3B in annual sales volume to study the savings or losses that resulted from a small change in forecast accuracy. For the
companies at the survey’s average revenue of $1.2B, a 1% forecast accuracy improvement would realize a gain of $3.5M if the
organization was under-forecasting; a 1% improvement in forecast accuracy produced a savings of $1.43M for those that were
over-forecasting.1
Organizations that apply the right mix of demand planning strategies, tools, and capabilities possess a key competitive
advantage through their planning process that can drive reduced inventory and costs, improved customer service and a more
responsive supply chain.
1
“ Supply Chain Forecasting, Supply Chain Management, Demand Planning – Institute of Business Forecasting & Planning- IBF”, n.d., http://www.ibf.org/index.cfm?fuseaction=show
Objects&objectTypeID=87 (accessed March 6, 2013)
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Supply Planning
Supply planning is the process of determining how supply will be positioned to satisfy this demand. In service-oriented
supply chains, this involves preparing the capacity to service the demand in a timely manner. In product-based supply chains,
supply planning involves either positioning inventory to satisfy demand from stock, or preparing to make or buy the product
when demand occurs.
In its broadest sense, supply planning involves answering different questions in different time horizons to make sure that
materials and capacity are available to meet demand. In general these can be divided into two categories: strategic supply
planning decisions and tactical supply planning decisions.
1) Strategic Supply Planning Decisions include determinations that are made on areas such as:
• Network Design - facility location and size
• Capacity Planning - how much in-sourced and outsourced capacity to have available
• Demand Sourcing - determining which locations will satisfy which demand
The timeframe in which these decisions are made varies by company, and depends on the investment and time required
to implement changes. It also depends on the company’s ability to evaluate and implement such decisions quickly. But in
general these decisions are made on a less frequent basis and take longer to implement.
2) Tactical Supply Planning Decisions are made using the business rules and constraints resulting from strategic
decisions. Companies will attempt to determine a feasible plan for buying, making, distributing, and storing product that
is aligned with a company’s business objectives related to customer service and cost.
Most companies start their process evolution with a focus on the tactical decisions required to keep a business running.
But over time, they evolve to a more sophisticated evaluation of the strategic decisions that set the constraints and rules
that govern short-term responsiveness. The modeling methods used to evaluate different supply planning problems tend
to be similar – albeit with varying constraints and levels of detail depending on the problem being evaluated. As companies mature, they typically evolve from relying on spreadsheet-based analysis to implementing more formal MRP-type
systems. Beyond that, these organizations often move to sophisticated optimization-based decision support tools that are
able to consider a broader set of constraints. As processes mature, the plan output is usually both more realistic from an
execution perspective and better aligned with business strategies and management’s service/cost trade-off objectives.
Advanced Demand-Supply Planning Processes
Once companies have developed basic supply chain processes, they typically begin to explore implementing more advanced
ones. More sophisticated approaches incorporate powerful analytics and decision support tools, internal collaboration to
coordinate operational planning across the enterprise, and external collaboration across supply chain partners. Figure 1
illustrates Spinnaker’s Closed-Loop Planning Framework, the model we’ll use to illustrate these three types of advanced
supply chain planning processes.
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FiguRE 1
Closed-Loop Planning Cycle
Statistical
Forecasting
Network and
Inventory
Planning
Consensus
Demand
Planning
Supply
Planning
DemandSupply
Balancing
Scenarios
Independent
Forecasting
and Customer
Collaboration
Supplier
Collaboration
and
Commits
Financial
Review
DEMAND
SUPPLY
Consensus
Demand
Executive
Review /
Approval
Supply
Response
Financial
Plan
REVIEW/ACTION
Advanced Analytics and Decision Support Tools
As discussed in the Demand Planning and Supply Planning sections, the decision support tools enabling these processes can
range from simple models to complex mathematical models enabled by statistics and optimization. Figure 2 illustrates the
key areas where decision support tools are deployed in an advanced supply chain planning process.
FiguRE 2*
* There will be a more detailed discussion of these processes in future white papers in our series.
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SPINNAKER
Internal Collaborative Planning
The Spinnaker Closed-Loop Planning Framework groups planning activities into three categories – Demand, Supply, and
Review/Action. These categories organize planning activities into a standard Integrated Business Planning (“IBP”) or S&OP
structure that is typically executed on a quarterly, monthly, or even more frequent basis. Most IBP/S&OP processes
coordinate inputs from multiple functional groups within the company, such as Operations, Sales, Marketing, Finance,
and Engineering. The goal of the S&OP process is to:
• Create demand and supply plans that incorporate the inputs from these various functions
• Evaluate and implement cross-functional options to improve the plan when issues occur
• Align executives and functions to the resulting shared Operating Plan.
Practically speaking, this often involves engaging multiple functions in the processes listed in Figure 3:
FiguRE 3*
* There will be a more detailed discussion of these processes in future white papers in our series.
External Collaborative Planning
As companies mature their internal collaborative processes, they often find that touch points with external vendors and
customers provide additional opportunities to understand and manage the key demand and supply constraints in their
supply chains.
These interface points, illustrated in Figure 4, can be thought of as “mini S&OP” business processes that involve the
company sharing forecasts backward to suppliers or forward to their customer. By aligning on a set of shared numbers
through a consensus process, the parties can determine whether supply is available to meet the demand. If supply constraints
exist, the parties can jointly determine a course of action that each can use as an input into their internal planning processes.
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FiguRE 4
MATURITY MODEL
To improve supply chain planning performance, an organization’s leadership must take a comprehensive view of the factors
that influence supply chain outcomes. As part of our consulting methodology, Spinnaker takes a systems approach to
planning capabilities improvements and uses the “five lenses” framework below to help clients assess and improve their
supply chain performance (Figure 5).
FiguRE 5
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SPINNAKER
Spinnaker is a global leader in supply
chain consulting and execution services.
We deliver supply chain excellence
with world-class people, processes,
technology, and operational know-how.
Founded in 2002, Spinnaker operates
on two guiding principles – measure our
success by our client’s accomplishments
and treat every situation with honesty
and integrity. It’s from these guiding
principles that Spinnaker has been
able to achieve tremendous growth.
Spinnaker has worked with
Five Lenses Framework:
• Business Policy – Supply Chain Design and Business Rules
• Organizational Design – Organizational Roles, Responsibilities,
and Capabilities
• Process – Planning Processes and Touch Points with other Functional
Processes
• Technology – Planning and Execution Software Solutions
• Metrics – Company, Organizational, and Functional Metrics
and Objectives
Most companies looking to improve planning performance need to address issues
across the framework. And it takes a coordinated approach to truly manifest the
benefits of a planning improvement investment. The order in which these issues
are addressed will be different from company to company. The model in Figure
5 provides a useful example of how companies typically proceed through various
levels of maturity, and can be used to benchmark current capabilities.
entrepreneurial start-ups to
Fortune 100 enterprises in industries
such as Energy/Oil & Gas, Consumer
Products & Retail, High Tech &
Semiconductor, Industrial Manufacturing,
Medical & Pharmaceutical, and
Telecommunications. We combine
our vast supply chain and business
process knowledge with industry best
practices to deliver solutions that drive
tangible results for our clients.
Denver • Boston • Columbus
Memphis • London • Singapore
www.spinnakermgmt.com
US +1 877-476-0576
International: +1 720-457-5500
CONCLUSION
If your organization provides goods or services to a set of customers, you
understand the need for some level of collaborative planning to match supply to
demand as accurately as possible. However, industry dynamics, customer behavior
and selling channels evolve and become more complex, companies often find
themselves challenged to meet the need with the same planning processes they
have used in the past.
Using our Supply Chain Planning Framework, Spinnaker helps businesses evolve
from basic to advanced planning processes, identify opportunities for greater
internal and external collaboration and improve supply chain performance.
The next white paper in this series, “Supply Chain Planning: Where Should We
Start?” allows companies to take a step back from the day-to-day supply chain
issues. It is designed to help companies evaluate which planning problems to focus
on first, taking into account their unique business environment; organizational
design; and level of process and technical sophistication.
[email protected]
1003131 © 2013 Spinnaker Management Group. All rights reserved.