Why supply chain planning matters - May 2019

It seems like almost every day that we hear of an emerging development in the global trade environment, whether it be the fallout of US-China trade talks, United-States-Mexico-Canada Agreement (USMCA) or Brexit. This is, however, only one of the key trends that is affecting the supply chain in 2019.

 

Key supply chain trends in 2019

  • Global trade – according to the World Bank between 1998 and 2017 there was an average reduction in tariffs of 15%*. This is now changing rapidly as the geo-political landscape shifts and tariffs are introduced or increased
  • Emerging technology – the availability of vast amounts of high-quality data increasingly fed from Internet of Things (IoT) and other connected devices has increased visibility along the supply chain and expanded the possibilities for machine learning and artificial intelligence
  • Customer/Consumer expectations – the “Amazon effect” has had a material impact on how people think about the services they receive, especially the speed of response they expect
  • Labour shortages – there are critical shortages in certain professions (e.g. transportation and warehousing) that are materially affecting the physical flow of goods

 

What does all this mean for supply chain planning? In its simplest form supply chain planning is the management of demand and supply-facing activities to eliminate or reduce mismatches, reduce waste and maximise productivity and profit. To be successful it requires for there to be an effective decision-making process, supported by strong cross-functional co-ordination and high-quality plan execution. Increasing uncertainty in global trade, labour shortages and increasing customer expectations place real pressure on these processes. Advances in technology may provide some relief, but require thoughtful integration, especially where legacy solutions are foundational to existing processes.

In the face of these pressures what should organisations be considering?

 

Strengthen the decision-making process

One of the great challenges of supply chain planning is that decisions must often be made without perfect clarity about future demand . Even where there is good information, that data can often be difficult to interpret and apply to the decision-making process. Every effort should be applied to improving the quality and timeliness of data sources, including not just transactional data, but also planning data. It is not uncommon for organisations to have pristine transactional data from their ERP systems to then devalue it with incomplete or unrealistic master data, such as production rates.

Improving the quality and horizon of the forecast is also a critical step. The latest results of the M4 forecasting competition**suggests that the application of hybrid combination models (statistical and machine learning) beat statistical and machine learning techniques on their own. Adding human judgment to these outputs remains important, and measurement of those changes essential.

With uncertainty also comes the requirement to evaluate scenarios and the impact on the supply chain. For instance, the increase in global tariffs has led to 93% of companies in China considering making some changes to their supply chains to mitigate the effects of trade tariffs***. If you source production in China how should you interpret that potential risk or opportunity in your planning process? Including alternate scenarios and using an assumption-based process to evaluate the supply and associated financial impact is essential

 

Improve cross-functional coordination

The supply chain planning process is a cross-functional effort. In most organisations, each functional area has responsibility for its own part of the process – the sales organisation is responsible for creating and managing the demand of customers, finance is responsible for the financial plan and stewardship of that, and so on. With each functional team owning their own specific “area” it is inevitable that there are conflicting priorities and trade-offs that need to be managed. For instance, the sales organisation may want perfect service, but the trade-off for that may come in operations in the form of high inventory levels. Supply chain planning requires a clear cross-functional understanding of the state of the supply chain, needs of the organisation and a clear set of shared goals. The process must then be coordinated, most effectively through a Sales & Operations Planning process that periodically reviews the “state-of-play” and provides a decision-making forum on how to respond to changes in the marketplace or supply. The success of the S&OP process should be judged not just by how well it meets service-level and profit objectives, but also how it enables the organisations agility, and its ability to respond to change to meet emerging priorities

 

Improve execution

Too often improvement in the quality of plans does not result in improvement of end-to-end performance of the supply chain. Frequently this is because there is poor connectivity between monthly S&OP routines and execution on a weekly and daily level. To close this gap many organisations have successfully implemented Sales & Operations Execution (S&OE) routines that connect the output of the monthly S&OP routines. Commonly these replace existing management meetings, avoiding duplication and overlap, but are critically restructured to drive focus on the execution of the plan versus a misaligned set of executional priorities. Essential is a focus, not just on traditional metrics such as quality, line efficiency and asset utilisation, but also critically on measures of plan adherence.

Achieving improvement in these three areas is often difficult, in part because it requires a good baseline understanding of existing processes and how these match up against best practice benchmarks, process descriptions and people capabilities. In an area as broad, and as cross-functional as supply chain planning, without this understanding it is difficult to make process changes .

At Crimson & Co, we have developed scprime®, a supply chain improvement approach that identifies performance weaknesses and prioritises improvements and ensures alignment of the supply chain with overall business strategy. In contrast to other approaches, not only does scprime® identify performance gaps and support target-setting, but it also shows how to close the gaps, directly translating actions into project plans so the business can quickly implement changes.

 

  • *World Bank. (2019).  From the World Integrated Trade Solution system, based on data from UN (TRAINS), WTO (IDB) and (CTS) databases.
  • **Makridakis, S., Spilotis, E., Assimimakopoulos, V. (2018). The M4 Competition: Results, findings, conclusion and way forward. International Journal of Forecasting 34, 802-808
  • ***Baker Mckenzie (2019). The Age of Hypercomplexity: Asia Pacific Business and Legal Macrotrends

 

-Simon Clarke, Executive Supply Chain Consultant, Crimson & Co North America

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