Supply Chain Planning

Objectives Understand demand management and forecasting

objectives

Understand the terminology and objectives of various levels of planning – S&OP, MRP, DRP, CRP, ERP, APS

Understand how different planning activities relate to each other

Recognize the importance of issues such as data accuracy, lead times, integration, and cross-functional inputs in planning processes

Supply Production Fulfillment

O

per

atio

nal

T

acti

cal

Str

ateg

ic

P

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g

P

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P

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Supply Chain Design

MaterialsPlanning

ProductionPlanning

DistributionPlanning

Forecasting

Demand Management

Inventory Management

Purchasing

Receiving

ProductionControl

Sales

Shipping

Adapted from Taylor, “A Master Plan for Software Selection, SCMR, Jan, 2004

Sales & Ops Planning (SOP or SIOP)

Demand Planning

Supply Chain Management Planning Matrix

Elements of Demand PlanningElements of Demand Planning

Demand Forecasting Demand Management

Market, Operating, and Business Environment

Pas

t dem

and

valu

es

Env

iron

men

tal f

acto

rs

Exp

ert j

udgm

ents

Pri

cing

Pro

mot

ion

Ord

er s

ched

ulin

g

Forecasts

Plans

Materials andCapacity Planning

and Scheduling

Objectives:• Influence pattern of customer orders to promote

effectiveness and/or internal efficiency• Reduce unpredictable variability of demand

pattern• Set targets to increase marketing & pricing

effectiveness

Many Factors Influence Demand

Internal

Promotions & sales initiatives

Pricing

Product substitution

New product introductions

External

Competitive actions

Economic conditions

Downstream & related products

Components of Demand Base demand Trend Seasonality and cycles Shifts Random variation

When developing forecasts, every effort should be made to consider

all relevant factors, and to eliminate all irrelevant factors

Forecasting Techniques

Judgment-based

• Grass roots

• Market research

• Historical analogy

• Executive judgment

Model-based

• Time-series models

• Causal models

• Simulation

Sta

ble

Sh

ort

Ter

mIt

em L

evel

Un

stable

Lon

ger Term

Aggregate

Ways to Gather and Develop InputsExecutives and experts• Delphi method• Panel consensus• Focused forecasting

Customers and Sales Representatives• Surveys• Focus groups• “Markets”• “Obermeyer” method

Quantitative Methods

Time series modelsMoving average

Exponential smoothing

Regression Causal models

Regression Simulation Others

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Evaluating Forecast Models Bias

Mean Absolute Deviation

Mean Absolute Percentage Error

Mean Squared Error

Tracking Signal

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The Forecasting Environment

The specific organizational situation must dictate the choice of forecasting technique

• Time horizon/lead time requirements

• Level of detail needed by user

• Range of demand and number of product segments

• Need for early-warning signals and continuing patterns

• Constancy of past performance

• Existing business processes

• Cost of forecasting process versus accuracy of forecasts

Supply Production Fulfillment

O

per

atio

nal

T

acti

cal

Str

ateg

ic

P

lan

nin

g

P

lan

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g

P

lan

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g

Supply Chain Design

MaterialsPlanning

ProductionPlanning

DistributionPlanning

Forecasting

Demand Management

Inventory Management

Purchasing

Receiving

ProductionControl

Sales

Shipping

Adapted from Taylor, “A Master Plan for Software Selection, SCMR, Jan, 2004

Sales & Ops Planning (SOP or SIOP)

Demand Planning

Supply Chain Management Planning Matrix

Inputs• Inventory

Replishment• Capacity

Constraints• Mix Constraints• Material• Transportation &

Storage

Inputs•Orders on hand•Current Customers•New Customers•Competition•Margin Analysis•New Products•Pricing•Economy

Business Planning(Budget/Forecast)

Un

constrained

Marketin

g Plan

VolumeSales & Operations

Planning

Sales PlanOperations

Plan

Resource P

lan

Detailed Planning & Execution Systems

APS, Production Planning, Plant Scheduling, Supplier Scheduling

S&OP Overview

The S&OP Process

Step 6Execute Action

Plan & Follow-up

Step 6Execute Action

Plan & Follow-up

Step 1Demand Review

• Sales • Program Mgmt.• Other

Step 1Demand Review

• Sales • Program Mgmt.• Other

Step 2Supply Review

• Engineering• Manufacturing• Purch&Matls Mgt

Step 2Supply Review

• Engineering• Manufacturing• Purch&Matls Mgt

Step 3Reconcile &

DevelopAlternatives

Step 5Executive Meeting

• Review of alternatives• Decision making

Step 5Executive Meeting

• Review of alternatives• Decision making

Step 4Financial Review

Step 4Financial Review

ONEPLAN

Step 0Creating

Functional Input

Step 0Creating

Functional Input

Plan Adjustments

S&OP Maturity Model

Adapted from: Lapide, Journal of Business Forecasting, 2005

Stage 1: Marginal Process Stage 2: Rudimentary Process

Stage 3: Classic Process Stage 4: Ideal Process

Informal meetings

-Sporadic scheduling

Formal meetings

-Routine schedule

-Spotty attendance and participation

Formal meetings

-100% attendance and participation

Event-driven meetings

-Scheduled to address changes or supply-demand imbalances

Disjointed processes-Separate, misaligned plans

Interfaced processes-Demand plans reconciled-Supply plans aligned to demand plans

Integrated processes-Demand and supply plans jointly aligned-Collaboration with limited number of suppliers and customers

Extended processes

-Demand and supply plans aligned internally and externally

-External collaboration with all important suppliers & customers

Minimal technology

-Multitude of spreadsheets

Interfaced applications

-Demand planning and multi-facility APS systems interfaced on a one-way basis

Integrated applications

-Integrated demand and supply planning packages

-External information brought in manually

Full set of integrated technologies

-Advanced S&OP workbench

-External facing collaborative software integrated with internal systems

Traditional Measures

-Many metrics, function specific, outcomes only

Interfaced Measures

-Consolidated set of metrics

-Cross-functional awareness

Integrated Measures-Functional and aligned metrics approved by team-SOP process scorecard

Ideal Measures

-Profit-based metrics

-Measures of strategic initiative attainment

Lagging Performance

-Lagging in most dimensions

Matching Performance

-On par with industry averages

Few Bright Spots

-Leading in one or two areas

Industry Leader

-Setting the bar in service, turns, margins

Seven Virtues for Effective Planning

1. Planning objectives and metrics tied to business objectives

2. All relevant stakeholders included

3. Cross-LoB (planning unit) resource or demand requirements identified and rationalized

4. Diversity of information sources and analytical methods

5. Planning frequency consistent with the pace of business

6. Common sense usage of technology as an enabler, not as the executor

7. View planning as a process, and manage accordingly

COMPUTE/SYSTEMS

GROWTH

60’s Automated bill of materials

70’s MRP – Material Requirements Planning

80’s MRPII – Manufacturing Resource Planning

90’s ERP – Enterprise Resource Planning

APS – Advanced Planning Systems

00’s Extended Supply Chain

Planning Systems (Internet based)

BOM

MRPMRPII

ERP

BOM

MRPMRPII

BOM

MRP

BOM

APS Capabilities

Evolution in Planning Systems

Evolution of MRP to MRPII to ERP

Nolan, Brown, Kumar. “Esterline Technologies,” Case teaching note, 2006

8

ERP Functional Components

Accounting

Supply Production Demand

Supply Chain Planning Modules of an ERP System

Ope

rati

onal

Tac

tica

l

Str

ateg

ic

Supply Production Fulfillment

MasterPlanning

MasterPlanningM

PS

MP

SC

RP Capacity

PlanningMR

P MaterialsPlanning D

RP Distribution

Planning

Purchasing

Receiving

SalesInventory

ShippingAccounting

Source: Taylor, “A Master Plan for Software Selection, SCMR, Jan, 2004

The ERP Scheduling Process

DR

PM

PS

MR

PC

RP

DistributionRequirementsPlanning

MasterProductionScheduling

MaterialRequirementsPlanning

CapacityRequirementsPlanning

Distribution Schedule

Master Production Schedule

Procurement Schedule

Production Schedule

Source: Taylor, “A Master Plan for Software Selection, SCMR, Jan, 2004

Forecast

• Combines the finite capacity approach and memory-resident fast planning• Determines a plan that meets all demand needs and supply limitations (feasible

plan)• Optimizes the plan, based on math modeling techniques• Recommends a best overall solution that considers both material and resource

availability

Future Internet-based communication with external suppliers and customers

Supplier resources and capacity Demand forecasts Production schedules

Optimization across the extended supply chain

Advanced Planning and Scheduling Systems (APS)

Improving the System, e.g., Inventory/Service Relationship

Service Level

Inventory Level Company A

Company B

A –> B : Improving within the constraints

Company C

B –> C : Improving the constraints

Reduced product or resource complexity (common typology, reduced # categories)

Modular “product” design

Flexible supply (volume) Close collaboration Excess capacity Frequent planning updates Targeted responsiveness

Direct access to POS data (vertically integrated)

Quick updates to forecasts based on actual demands

Near 100% sales and labor data accuracy

Changing Demand-Supply Planning System Constraints

Faster response

More timely and accurate information

Postponement & complexity

management

More Timely and Accurate Information

Source: http://hbswk.hbs.edu/item.jhtml?id=1624&t=globalization&noseek=one

Key Takeaways

Demand Supply Forecasting and Planning must be viewed as a process, and managed accordingly

Better data and responsiveness relieves pressure on Demand-Supply planning

Operational metrics must avoid emphasizing local efficiency at the expense of global responsiveness