Supply Chain Planning Blog

When should I ignore the customers when planning my supply chain?

Posted by kameron hadavi on Wed, Apr 06, 2011

Supply Chain PlanningThe first answer for most people is:  “never”.  So, lets put this in context, we are not asking if you should totally ignore your customers’ demand and market signals; we are really asking how important is it to track and consider individual customer demands/orders when planning your supply chain?

If you are a  business-to-consumer enterprise, the individual demands do not really impact your supply decisions.  For example, giant consumer product companies (from TV to toothpaste) do not track the individual orders when planning supply.  They are all aggregated up to a total demand for a product.  To that end,  this aggregated-planning approach is ubiquitous in the CPG industry, which has high volumes and low variety of consumer products.  For these industries, it is sufficient to aggregate all the end item demand into a total, and then net the total demand from the on-hand inventory, one period at a time.  The required production, or distribution, is calculated to make up for the predicted deficit.  That production quantity goes through a Bill-of-Materials Explosion (or the equivalent DRP calculation) and the dependent demand is used to do the same calculation on the next level of the BOM.  Devised in the mid 1980’s, this CPG logic is the dominant logic used by most supply chain planning systems, today.   Of course, each company has its own variations on how to handle capacity and material constraints, or includes an LP (Linear Programing) engine to optimize on cost, but the basics of the logic are all the same--they all lose visibility to individual customer demands when planning. 

How about turning the question around, when is it not OK to ignore customers when planning your supply chain?  When does a company need to look for a different logic in their planning system, than the typical CPG logic described above?  The answer is when you have critical constraints in your supply chain that cause you to have to stop treating all customers, and the associated demands, in exactly the same manner.  This comes into play when you need your planning system to help you figure out what orders should get critical capacity, special priority, or materials that are in short supply.  Examples of this are contractor capacity that is used to make multiple products, but is in short supply.  Another example is a critical common component that goes into multiple products.  The need to have visibility into orders when planning also comes into play when customer specifications require dependent levels of the BOM to be processed differently from each other.  An example of this is “date-code” considerations, or qualifications for specific manufacturing locations.  In each of these cases, the identity of the order and its attributes are important while planning it.   

In conclusion, when looking for a new supply chain planning systems (like for demand planning, inventory planning, S&OP, etc.), a company should do the simple check outlined above and decide if traditional CPG logic used in most planning systems today is sufficient to handle their requirements.   Given today’s savvy customers and their complex needs, many enterprises opt for much greater demand visibility and attribute based planning systems. 

To learn more about this topic download this ePaper: Attribute-Based Planning: How To Avoid Commoditization.  

Topics: Supply Chain Planning, Demand Planning, Order Fulfillment, Order Planning