Value-Chain Report -- Supply-Chain Success Starts with Planning

The Internet economy demands enhanced visibility into suppliers' systems.

Whether your business is electronic-based or a traditional brick-and-mortar building, your supply-chain goals are the same -- to efficiently deliver goods and services to your customers in the right quantity, at the right time, in the right place, at a competitive cost. However, the rapid growth of B2B e-commerce and electronic trading exchanges is creating new challenges for supply-chain performance. The global visibility enabled by the Internet, providing many companies with access to new markets, also enables new competition. Customers are demanding shorter lead-times, higher reliability, and real-time visibility into suppliers' systems. According to research company META Group "Companies must be prepared for the pressures that selling through exchanges and net markets will place on their core supply-chain processes or risk quickly finding themselves uncompetitive." In the past, supply-chain inefficiencies resulting from disconnected processes had often been concealed through inventory buffers. As a result, operating and financial performance suffered. Factories needed higher inventories to offset poor planning and lack of forward visibility. Assets were not fully utilized, with labor and equipment either bottlenecked or idle. Rescheduling and expediting became the norm rather than the exception, with a significant negative impact on operating efficiency. The wrong product was often produced at the wrong time, consuming valuable capacity needed to produce the right product. In the new electronic trading environment, these inefficiencies can no longer be concealed. Global visibility exposes supply-chain weaknesses. Supply chains also are becoming increasingly complex. Outsourcing of manufacturing, logistics, and other supply-chain processes creates interdependencies among trading partners. An effective, collaborative planning process linking all trading partners is critical. Companies that can profitably receive customer orders and/or create demand via electronic trading channels and plan their operations with all trading partners as a single integrated supply chain will prevail. Companies not prepared to meet this challenge will not prosper. Enhanced Planning Solutions Are Needed Although many firms have implemented ERP or other forms of integrated business systems to support internal operations, most have not interfaced internal business processes to the Internet. These internally focused systems are not likely to possess the capability to integrate all resources or identify all constraints within the extended supply community so that feasible, reliable supply planning can be accomplished. They also are unlikely to be capable of providing forward visibility into potential problems or supporting "what-if" planning for evaluation of potential alternatives. Many lack the ability to support real-time planning, often relying on weekly or, in extreme cases, monthly planning cycles. Fortunately, a new breed of planning tools has emerged to help companies cope with this increasing complex and demanding business environment. These new planning solutions typically address one or more of three major planning areas, including demand planning, supply planning, and production planning/scheduling.

  1. Demand Planning. Effective demand-planning solutions enable companies to anticipate and influence future customer demand. These solutions typically include collaborative forecasting tools that provide consistent demand data and information to all trading partners, so that supply-chain responsiveness is optimized. By implementing an effective demand-planning process, companies are often able to achieve significant improvements in supply-chain performance.
  2. Supply Planning. Effective supply-planning solutions enable companies to determine what products are required and when they are needed, as well as how to distribute available supply most profitably, by matching internal and external sources of supply with prioritized demand. In a complex multi-source, multi-distribution center supply network, effective supply-planning solutions will typically determine which demands will be supplied by which trading partner and/or which distribution center, as well as where to stock specific inventory quantities to support customer-service objectives. An effective supply-planning process supports global visibility and coordination among trading partners, rapid response to change, and reduced working capital requirements.
  3. Production Planning/Scheduling. Effective production planning/scheduling solutions enable companies to determine what to produce and when to produce it, based on finite capacity constraints and material availability. These plans are used to manage labor and equipment loads as well as determine time-phased future material requirements. Scheduling is typically short-term, perhaps at the hour- or even minute-level of detail for each key work center. By implementing an effective production planning/scheduling process, companies are often able to significantly reduce inventories, increase throughput, and improve on-time delivery performance.
Effective Planning Yields Significant Benefits Companies that implement effective planning solutions, which create an integrated supply network with all trading partners, often achieve dramatic benefits. Typical improvements include:
  • 15% to 25% reduction in finished goods inventories, resulting from improved forecasting, reduced lead times, and improved inventory planning.
  • 7% to 15% increase in customer service levels, resulting from identification of realistic delivery commitments based on true capabilities and forward visibility of potential problems with sufficient time to respond.
  • 3% to 7% increase in throughput, resulting from improved scheduling and material planning.
  • 25% to 33% reduction in WIP inventories, resulting from improved coordination of materials and capacity.
  • 20% to 30% reduction in raw materials inventories, resulting from reduced lead times, improved supply planning, and supply-chain integration. Example: Siemens AG implemented an effective demand and supply-planning process to improve forecast accuracy in an environment of decreasing product lifecycles. As a result, customer service improved while reducing overall inventories by 66%. Example: In a configure-to-order business environment, Compaq faced competitive market pressure to increase service levels, as well as provide quick and reliable delivery commitments. By implementing effective planning solutions, responsiveness increased significantly and on-time delivery performance improved to 95%. In summary, in order to ensure that companies are effectively prepared to meet the challenges of the Internet economy, particularly B2B marketplaces, an effective planning process must be in place. Competitive and market pressures will require that businesses be capable of providing visibility into operations, order status, product availability, and lead times. The pace of business continues to increase, straining current ERP systems and planning processes. Enhanced planning solutions enable companies to accelerate planning processes, collaborate with trading partners, increase responsiveness, and provide forward visibility into potential problems. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.
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