Supply Chain Planning Blog

What is a Profit-Driven Supply Chain?

Posted by Cyrus Hadavi on Tue, Oct 27, 2009
Profit Driven Supply ChainsSupply chain decisions impact internal operations, customers, suppliers and, at the end, revenue levels and profits.  The complexities of all the interactions in the supply chain makes it very difficult to understand the true impact of your decisions even if the decisions made are consistent with your previous ones. How would you know what the consequences are under today's circumstances? How would you measure the impact in different areas?  

A Supply chain is really one big inter-linking Jigsaw puzzle.  Let's say demand is going through the roof for red iWidgets, then should you build more of them at the expense of green iWidgets? If so, which key customers are now going to receive their green ones late, as a result?  How much effort should you make to avoid the lateness?  Should you reallocate your inventories going to the distributors? Or should you add a shift at the plant to increase production capacity? If so, can you count on your current raw-material inventories at the production sites, or can the suppliers get the components to you fast enough? And so on.  I am sure you know what I am talking about here.  Operational managers have to make tough decisions like these on daily basis to preserve the flow of the supply chain.  But can they make the right decisions consistently, time after time, especially when it come to what is best for the Company's bottom-line?  Usually these complex supply chain decisions are made based on which customer is screaming the loudest, the experience of an "old timer," or sometimes a person who is only worried about his or her own bottom-line.  But can you blame them?  Since in many cases, their planning capabilities are based on disparate spreadsheets and their visibility is limited to separate organizations with different incentives. Sales people want to increase customer service and have abundant Just-in-Case inventory, Production people want to decrease inventory and reduce cost, but the financial Side of the business wants to increase profit and decrease working capital. How do we resolve these conflicts and make a decision which is right for the Company?

Supply chain planning technologies have evolved a great deal in the past decade.  The right planning system can now model and define competing objectives, such as higher efficiency vs. higher customer service, and calculate the impact of specific decisions in terms of cost, revenue, and profits.   In that way, every major supply chain decision becomes "optimized" for all the interrelated pieces that it touches, rather than just one.  In Adexa, we call this a Profit-Driven Supply Chain©.  In PDSC's, you have the visibility to see the problem, capability to analyze your decision's impact, and then take the best course of action, knowing for certain how it affects the entire picture.  Keep in mind, the "best" course of action may not always be the one with the highest short-term profit, but at least you will know how your profit levels were affected by keeping your best customers happy.    

Profit Driven Supply Chain is more than a concept! It's defining the future of planning technology, since in most progressive enterprises, the finance people are becoming more and more involved with sales and operational decisions, rather than dealing with its aftermath.  For the past two years Adexa has focused its direction on developing PSDC-based planning solutions to marry critical supply chain processes such as Demand Planning, Operational Planning, and Inventory Planning, with full financial visibility.  So we have a number of resources available to you if you would like to learn more about this topic.   I highly recommend to start by reading an important S&OP benchmark study of 214 companies, by Aberdeen Group, entitled Sales and Operation Planning: Integrate with Finance and Improve Revenue.  We also have a great paper entitled: Demand Planning for Profit Driven Supply Chains.  Enjoy the reading, and feel free to comment on this blog with any questions, as I will personally answer you back.  

Cyrus HadaviDr. K. Cyrus Hadavi is the president and CEO of Adexa, for more information about the author please click here.

Topics: Supply Chain, Demand Planning, Inventory Planning, Operations Planning, S&OP