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Why You Need to Re-evaluate Your Approach to Supply Chain Planning

Introduction

The supply chain planning paradigm developed by i2 and Manugistics in the early 1990's, and adopted by SAP and Oracle, is failing under today's market pressures. These solutions were designed to address some fundamental limitations with Material Requirements Planning (MRP), namely that it does not consider demand, capacity, and supply simultaneously, and that it was awfully slow. At the time, companies were much more locally based and fully integrated than they are today. Outsourcing and off-shoring were still novel concepts. As such, legacy planning solutions assume a world of centralized command and control, in which a few planners at the dominant player in the supply chain determine the fate of all the other actors. This was possible when companies were fully integrated and had full knowledge of the capacity and inventories at all locations in the supply chain, and when suppliers only provided commodity components.

This is no longer the case. The supply chain planning solutions developed to satisfy that world are not suited for a volatile, massively outsourced and heterogeneous data source environment.

The general business environment is a lot more dynamic than in the 1990's, with customer expectations of delivery lead-times shortening tremendously. At the same time, much of the manufacturing capability has been outsourced – meaning that companies have to be much more responsive to the customer, even though they have less direct control over operations. Today's environment requires more collaboration than control; more coordination than optimization.

At the core of legacy supply chain planning solutions is the concept that they own and control all the data. This is simply not true when a supply chain may consist of three or more tiers, each with their own Enterprise Resource Planning (ERP) system. No longer is it an issue of integration between modules, but of integration between companies each having their own ERP systems and other data sources. The goal is not optimization of assets, but of effective coordination between trading partners.

A new supply chain planning paradigm is required.

The Problem with Building a Better Plan – Supply Chain Planning (SCP)

The original SCP design objective was to address several key limitations in traditional MRP based planning:

• the inability to consider demand, capacity and supply simultaneously;
• poor performance;
• lack of forecasting tools;
• the unrealistic assumption of infinite material and capacity; and
• the lack of broader multi-site supply chain planning.

This resulted in the development of planning applications in the following areas:

• Demand Planning – introduces improved statistical forecasting algorithms and better collaboration to achieve a consensus forecast. Demand planning applications such as i2 Demand Planner and SAP APO Demand Planner have generally been successful in improving forecast accuracy, which has contributed to improved supply chain performance.
• Manufacturing Planning (Advanced Planning and Scheduling) – applies advanced optimization technology to produce "optimized" factory production schedules that considers both material and shop floor capacity constraints. Although, APS applications such as i2 Factory Planner have been deployed successfully, they are often challenging to implement because they need expert users to maintain optimization models. This requires accurately maintaining a significant amount of detailed capacity data in order to drive the optimization algorithms. These APS solutions have proven most successful when the optimization model itself does not need to change frequently and weekly execution of the planning application is adequate.
• Supply Chain Optimization – exploits the same optimization technologies pioneered in APS solutions to plan the multi-site flow of demand and supply. Examples of supply chain optimization solutions include i2 Supply Chain Planner and SAP APO Supply Network Planning. These applications have generally seen modest success as it has proven difficult to either model or maintain a complex "optimization" model which adequately addresses the highly dynamic nature of today's extended supply chains. As a result, SCP vendors are introducing other types of heuristic planning algorithms in an attempt to address the complexity.

In all cases, these SCP applications require a team of highly skilled planners who use these applications to develop "better" plans based on the use of sophisticated optimization algorithms. Whether it is demand planning (forecast modeling), manufacturing planning (optimizing a factory schedule) or supply chain planning (multi-site demand/supply optimization) the focus of SCP applications has always been to build a better and more accurate, optimal plan.

Without accurate representation of the business, it is not possible to generate an optimum. One may get close, but a small change in the assumptions or model can have a big effect on the results, especially at the detail level. Yet the quantity of information required to model the business accurately is massive. More importantly, it also changes constantly. Not only does the physical structure of the supply chain – suppliers, items, locations, customers – but so do the business rules and objectives.

Dealing with Reality – The Need for Planning and Response

Supply chains have been replaced by supply networks: virtual enterprises which require coordination of activities among a variety of global partners. Contract manufacturers manage globally distributed manufacturing plants and suppliers. Brand owners have increasingly outsourced their manufacturing to contract manufacturers, but continue to be accountable for end customer satisfaction, quality, compliance, etc. According to AMR,

Despite AMR identifying this issue in 2005, fundamental progress has still yet to be made.

Within this environment, aligning supply and demand has never been harder as a result of:

• Demand Volatility – Today's consumer driven supply chains have become much more demanding. Customers "want it my way", "want it now" and "want to be able to change my mind tomorrow." A company's inability to respond quickly to demand changes can mean the loss of a customer or the inability to win new business.
• Shorter Product Cycles – Product lifecycles, particularly in the consumer driven electronics market, are taking on characteristics of the fashion industry. Poor responsiveness to rapidly changing market conditions raises the risk of excess inventory and/or the wrong mix of inventory.
• Distributed, Outsourced Manufacturing – Multiple enterprises now need to align supply and demand collaboratively. The Electronic Supply Chain Association (ESCA) and Industry Directions reported that "69% of brand owners say they now have less control over at least five key supply chain processes, including: order promising, analyzing and managing risk, inventory liability, and forecast sharing." Brand owners are managing demand in one organization and their contract manufacturers are managing supply in another. Their inability to collaborate effectively across multiple enterprises on demand-supply alignment, results in both excess inventory and poor customer responsiveness.
• Distributed, yet Localized Demand – Brand owners are required to respond to demand from many areas of the world, often across continents. At the same time, regional and even country specific characteristics need to be considered in both product design and service delivery expectations.
• Unexpected Supply Disruptions – Greater separation of supply chain entities, more players involved and more competition for key components, creates an environment of greater risk for supply chain disruption. And, in a "leaned" environment, there's less time to react.

While SCP applications have made tremendous strides in improving planning, the "real world" challenges of highly volatile demand, shorter product life cycles, unexpected supply disruptions and complex outsourcing relationships are driving rapid change and increased complexity in supply chain operations. The result is that enterprise applications are often out-of-sync with reality and can't support the essential response process that companies need to win in today's highly distributed and fast-paced environment.

Attempting to Respond to Change with Continuous Planning

SCP applications approach the challenge of responsiveness by looking to increase the precision, flexibility and frequency of the planning process. ‘Real-time planning', ‘continuous planning', etc. are approaches intended to improve the ability of the planning process to respond to dynamic changes.

However, managing a constantly changing planning process presents a number of significant implementation challenges for SCP applications, notably:

• Increasing Planning Complexity – The greater the precision and flexibility required to model real-world behavior, the greater the complexity of the resultant supply chain planning model, and the more difficult it becomes to understand and deploy.
• Difficult and Slow to Change – Changing the rigorously structured planning model requires highly trained users. Changes are often difficult to define and time consuming to validate. Some model changes may require entirely new input data which can take even longer to implement. And in a fast paced environment, many of the variables will have changed, while you're still trying to model the previous set of assumptions.
• Limited Collaboration – Planning applications were designed for input from a relatively small community of planners who manage the planning process. However, the breadth of business change means that a much broader community, often including third parties, needs to be involved in collaborating to determine an effective response.
• Slow Response – SCP applications were designed as a batch process, consistent with their intended longer-term planning horizons. Therefore, reacting to significant business changes can still require at the very best, hours (if model changes are simple), but more typically, days to respond (when the variables are more complex).

These challenges make it impractical to respond rapidly through planning changes. Despite the best efforts of expert analysts, traditional planning models and SCP applications are often still too inflexible to respond to business change in a timely fashion.

Too many companies have failed to address this response challenge strategically.

The best indication of this is evident in the tool supply chain staffs use for responding to change today. Microsoft Excel is the most relied upon tool in their arsenal. Excel, combined with lots of phone calls, emails and ad hoc meetings is how they try to analyze information and collaborate to determine the right tradeoffs and compromises that will constitute the appropriate response to frequent changes in their supply chain.

The problem, of course, is that Excel was never designed for this problem. Excel cannot handle the extremely large volumes of internal ERP and external supply chain data that is required to properly analyze supply chain problems. Excel also lacks the collaboration abilities that are critical to solve these problems and the sophisticated supply chain analytics that people need to understand the impact of their decisions.

Bottom line… companies need to respond to the reality of an inherently unpredictable supply chain. And there comes a point when increasing the complexity of the mathematical model and the frequency of the planning process in response to frequent business change is infeasible, let alone not an appropriate approach to improving performance.

People need to be able to manage change proactively with adequate tools and technologies. Those on the front-lines need to be empowered to make the tradeoffs and compromises necessary to "course correct" when things don't go according to plan.

As an example, the military is highly regarded for their planning processes, including precise training, fuel and weapons planning, intelligence gathering and briefings, etc. before any mission. Yet the military has also invested in a strategic approach to responding to the unexpected in the form of heads-up displays for pilots, which gives them real-time information and the ability to rapidly course correct when things don't go according to plan. The military practices excellence in planning, monitoring and responding.

The same principal is fundamentally true of achieving enhanced supply chain performance – although enterprise supply chain planning applications are certainly required, additional complementary applications are also essential to ensure success.

The New Paradigm: Plan, Monitor, Respond – Defining the Capaapability Requirements

Handcuffed by elongated planning cycles, coupled with the knowledge that optimization technologies can never provide an exact answer, companies have come to the realization that they need a system in which their front-line staff can rapidly and effectively evaluate real-time response to change using human judgment and compromise.

Unlike traditional SCP applications which continue to focus on developing increasingly sophisticated applications for a small community of planners, new solutions are being designed on the premise that planning, monitoring and response needs to be performed by many users, on an ad hoc basis, as events occur.

Dealing with a last minute order change, an unexpected hiccup in supply availability or trying to manage engineering changes in the midst of rapidly changing demand requires human intervention. It requires key decision makers throughout the supply chain network to have ready access to both the information and tools to quickly understand the impact of these changes and determine the right course of action to take – a course of action that will proactively drive key performance indicators (KPI)'s to meet the businesses objectives.

Specifically, the capabilities to achieve strategic response to change should include:

• Alerting and Event Management – Stakeholders receive proactive alerts enabling them to be exception driven and rapidly respond to change. Alerts identify those exceptions that could cause harm to the financial performance of the company.

  Alerting capabilities provide early warning of an unplanned event that will have a negative impact on the business. Automated solutions can sift through all the activities, uncovering the truly important information and exceptions for a user's particular area of responsibility, and then sends an alert. Such alerting tools, for example, could warn that certain key performance indicators (KPIs) are projected to exceed tolerance levels or that a specific key order is projected to be late.

  For real value though, alerting analytics should take one step further and understand the domino relationship and cumulative effects of multiple events. For example, while a supply order may arrive only one day late (which may be within tolerance from a supplier management perspective), the consequence could be that a major new order will be delivered later, or even worse, lost. This in turn might mean a downward trend for gross margin. Such an occurrence would cause an alert to be sent to a senior manager, allowing him to take appropriate action.

  More importantly, there could be several small changes at the operational level, each of which is within tolerance and therefore does not generate traditional alerts. However, the cumulative effect of these changes could be a 5 percent drop in revenue for the quarter – large enough to warrant executive attention.

• Enterprise-Wide Visibility – Enables multi-enterprise visibility across the extended supply chain, creating a holistic view and empowering staff to view, share and manipulate data across multiple disparate systems and locations.

  A company must have the ability to easily consolidate data from multiple sites and systems for a comprehensive view of the extended supply chain. For global performance management, one needs global visibility. And for decisions to be effective, partners across the organization (internal or external) need to be on the same page, working from the same set of data, in the same way.

  Functionally, this requires a central system that can pull up-to-date information from different operational systems and synchronize it, providing a single version of the truth that is accessible by diverse, ad hoc supply chain management action teams across the extended enterprise.

Planning, monitoring and response needs to be performed by many users, on an ad hoc basis, as events occur.

• What-If Analysis – Allows users to simulate, share and review options with colleagues and suppliers. Automatically calculates (and recalculates) the impact of a change in seconds Tools to simulate, share and assess multiple "what-if" action alternatives in response to unplanned supply chain changes are a necessity. Simulations of what-if scenarios need to be based on current MRP, MPS and demand data pulled from systems throughout the extended supply chain. Against this data, supply chain analytics that accurately model the host system need to be applied.

  In today's fast paced world, these supply chain analytics need to run instantly, not talking the hours or days of traditional planning systems. The ease and speed of use of scenario simulations should be such that multiple scenarios can be assessed and compared simultaneously for a quick, yet comprehensive review of the options. Drill-down features to perform root-cause analysis is important to enable a user to diagnose the gating issue and consider alternatives specific to correcting this problem. And Internal and external participants should be included in the analysis for complete stakeholder input and a full understanding of the impact of decisions prior to execution.

• Scorecarding – Rank and align decisions with financial and other operations performance goals in real time.

  Scorecard technology ranks potential actions to assure that they are aligned with the key performance objectives that are most important to the business. Scorecarding can measure parameters such as customer impact, costs and quality, and adjust the criteria weighting to reflect unique requirements.

  Operational objectives set by executive management are typically expressed in financial measures such as gross margin, cash-to-cash cycle, economic value-add, or similar categories. The best tools can readily convert the unit-based view of the users into financial measures that are relevant to executive management. If standardized measures do not suffice, the tool should also provide capabilities that allow users to develop additional measures specific to their organizational needs – scoring for divisional, departmental and user-defined targets.

  Allowing the decision maker to compare metrics results across various scenarios provides an objective way of determining the best scenario to pursue. So it becomes not about automatically saying yes to a change, but saying yes in the most profitable way for the company.

"Better planning" is no longer the answer to modern-day supply chain management challenges. Integrated and collaborative demand-supply planning, monitoring and response is today's imperative. Such solutions require the ease of use and flexibility of personal productivity applications while having the scalability and robustness to manage enterprise data. They are about empowering a broad community of users with the ability to address the complexities of responding to rapid and constant change within a distributed manufacturing environment.

It's a different paradigm to solve an increasingly critical set of problems.

Conclusion

One of the biggest challenges companies find is that the variables and assumptions that went into building their plans are changing constantly. The pace of change is too frequent to use an advanced planning solution based upon optimization technology to address them, since by the time the changes have been included in the optimization model, the problem has changed.

New solutions are being developed specifically for this dilemma by promoting the use of team-based human judgment to act on the nuances of, and changes to, business rules, rather than approximating these in a mathematical model. They are designed for enhanced planning, monitoring and ad hoc analysis and resolution of unexpected events. Supporting the realities of the decentralized supply chain management process prevalent in today's supply networks, it can be used broadly throughout the organization to analyze the impact of a change and collaborate on ways to resolve the issue quickly and effectively in accordance with metrics defined to achieve corporate objectives.

In many businesses, change is the reality of the day and companies need to empower their people to respond to these changes, to make the tradeoffs and compromises necessary to get things done to meet objectives – and doing so requires that they have access to the right information and tools to act.

ABOUT KINAXIS

Kinaxis™ RapidResponse is a single on-demand service that empowers multi-enterprise manufacturers with integrated demand-supply planning, monitoring, and collaborative response capabilities. RapidResponse embraces human judgment to enable planners and front-line responders to handle unpredictable changes. Global leaders such as Casio, Honeywell, Jabil, Qualcomm, and Raytheon use RapidResponse to achieve breakthroughs in sales and operations planning (S&OP), demand management, supply management, and supply chain risk management. The results are superior customer service, improved operations performance, and a competitive market advantage. For more information, visit the Kinaxis web site at www.kinaxis.com or the company's blog at blog.kinaxis.com.

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