Supply Chain Planning Blog

Where is the S&OE in SAP® IBP?

Posted by kameron hadavi on Mon, Oct 02, 2017

question-mark-1495858_960_720.jpgLike many other S&OP solutions, SAP®-IBP* is designed to perform high level “rough cut” planning. On the supply side, it uses a simplistic logic that has been used in spreadsheets, for decades, to plan production. It assumes fixed leadtimes, pre-defined bottleneck resources and bucketed capacities. This is not much different than the old MRP methodology from the 70’s, but now categorized under S&OP. Advanced planning came to play because this was not effective and plans were not accurate enough to model the capacities and coordination of material and capacity was missing. SAP-IBP, much like almost all other current S&OP solutions, is intended for very high level reporting. Once the plan is generated it can be at most 60% accurate. Hence, once given to the operations side of the business, it does not work. SAP’s answer to this problem is usually faster what-if analysis, which still adds up to lots of manual adjustments, much like working with spreadsheets to make unworkable plans to work.

This is exactly what the APS industry felt the need to change with the use of powerful optimization engines in the late 90’s followed by AI techniques in the past 15 years. Yes, SAP-IBP provides nice reports and charts, and maybe even help in collaboration, but in the final analysis, it lacks realistic plans and cannot feasibly translate generated plans into actual execution of those plans. In other words, it misses the mark when it comes to Sales and Operation Execution (S&OE). Specifically, it lacks proper modeling of resources to understand true capacities, it fails to estimate true leadtimes dynamically, it does not take into account the mix of products, it fails to estimate the impact of setup times and changeovers on the overall capacity of resources and subcontractors, it lacks pegging of orders and it cannot do attribute based planning other than at the finished goods level. Consider this, if SAP-IBP fails to do full pegging of orders, how can it accurately determine the true cause of lateness of any orders? If it does not model capacity of resources properly with dynamic leadtimes, then how can it provide accurate ATP and CTP? -- There is something to think about next time you are wondering why your inventory and service levels are never on target.

Fact: realistic operations plans require accurate modeling of the supply side and all-in-one unified planning environment (what Gartner refers to as the ultimate or stage 5 supply chain). Transformation of plans into execution requires “model integration” By model integration, I mean the ability for S&OE engine to have the same data model as the S&OP albeit at different levels of detail. Accurate plans remove the need for excessive what-if scenarios and wasting time to adjust the plans, over and over. Accurate plans ensure delivery performance levels that are required by customer, by region, by product, and so on. Accurate plans provide much better visibility into the supply chain and what is possible and what is not. Accurate plans ensure the financial projections are realistic and reliable, as you plan for the long term. As an example, one of Adexa’s clients, a global high tech manufacturer plans tens of millions of orders within minutes with accuracy of almost 100%. This is done for both long term planning, as well as short term changes in the orders. Reallocation takes place every day depending on changes in the orders and availability of resources. Visibility is provided for close to one hundred sites worldwide. The best part is that planners have no need to make any adjustments and changes once the plan is published, i.e. they can go home early!

The bottom line, unless the plans are accurate and the model of the supply side is a true reflection of your supply chain then you are not getting much more than just half-accurate, but pretty reports. Spreadsheets will do just fine at this level of planning and give you a lot more control too, not to mention they are most certainly a lot less expensive! By deploying S&OE solutions to SAP solutions, as experienced by more than 70% of our clients, you will experience enormous benefits of what true plans can do for your organization: lower cost of operations and much improvement in delivery performance across all customers and products.

I encourage you to go beyond what is peddled today as S&OP, by SAP or anybody else, and look how much further you can go with more accurate and realistic plans by considering technologies that transition your supply chains into S&OE.

For more information on S&OE visit or send an email to 

*Trademark of SAP®

Topics: Supply Chain, Supply Chain Planning, Supply Chain Performance Management, Spreadsheets, S&OP, SAP, S&OE, planning and execution

Supply Chain Risk and How to Mitigate

Posted by Cyrus Hadavi on Tue, Aug 15, 2017


Planning is all about risk mitigation. Risks come in many forms: too much inventory, too little inventory, not enough to meet the demand, delivery interruptions because of weather, supplier issues, Acts of God, sanctions, labor disputes and so on. We also plan because we cannot react fast enough when the need arises. The more reactive we are the less planning is needed. How far in advance we plan has to do with how fast we can get what we want. Not every little detail needs to be planned. For example, when you plan for a road trip there is no need to plan for all the bumps on the road. The shock absorbers take care of that. Because they can react a lot faster and therefore remove the need for that level of planning. Furthermore, there is very little “cost” associated with running into small bumps on the road. However, if there is a potential snow storm on the day of travel then the cost might be a lot higher and re-planning needs to be done unless you have already accounted for this risk!

How can we do that? When the original plan was made, because of the season there was a chance of winter storm on that day of travel. We should have sufficient data (in our head for this situation) that indicates snow could be an issue during the winter season in certain parts of the country. Therefore, a risk factor needed to be attached to the plan for that reason. If the risk factor is high enough then a plan B is devised.  The latter could be acquiring snow tires or taking the train amongst others. A summer travel would not have that risk factor but it might have other potential risks. Thus, plans and risks go hand in hand. With every plan, the associated risk needs to be taken into account to ensure that when and if the plan cannot be executed what the potential cost would be. Is there an alternative plan? Is it more expensive? And is the cost high enough to pay the premium to avoid the potential cost?

In supply chains, we are constantly facing these situations. However, we are not necessarily aware of all the underlying trends and moving parts that change the risk factors.  For example, if the product mix changes, then our reliance on some suppliers become more than before. And if these suppliers are single-sourced and/or in earthquake zones then we could be facing a much higher risk than before the product mix was changed. If a new product is introduced and demand is much higher than expected, then do we have the additional capacity needed by the subcontractors to meet the surge in demand?

This is where planning systems become extremely valuable. A planning system has to be able to perform two tasks: Look for underlying changes in risk factors as plans are made for the future and identify the areas of brittleness. Secondly, when and if the risks are too high and the cost is justified, recommend alternative plans as to what can be done when and if the inevitable but unexpected occurs!

Performing such tasks is beyond the capability of human mind especially when it is done in an almost real-time manner. A note of caution, what we are describing here is not just a “what-if” analysis. This is having a system that is intelligent enough to evaluate the future risks and make changes to the plan and/or recommendation as to what needs to be done, based on the severity of the risks.

The interested reader is referred to Self-Improving Supply Chain Systems  and Risk Resiliency for related topics.

Topics: Supply Chain, Risk Management, Enterprise Risk Management, Risk Planning

Why Lot Release is So Important in Semiconductor Manufacturing

Posted by Cyrus Hadavi on Thu, Jun 08, 2017

If I arrive on-time or early at the airport but there is a problem with the airplane and a long delay in the scheduled takeoff time, does it get me to my destination on time? Clearly the answer is No! Is it better for me to stay in the comfort of my home and go when I know the plane is ready to take off? Or even better, find another flight to my destination so that I get there on time. By going to the airport at the “wrong time” and waiting I am only increasing “WIP” or waiting time and I am also contributing to airport congestion which adds to the traffic and boarding of other flights possibly causing others to miss their flights.  Such problems can be avoided by an intelligent planner or, release strategy, that can figure out exactly what the right time is for me to leave home given the traffic situation, the speed of cars, the parking time and time it takes to go through security. This kind of predictive planning is ideal for releasing lots in a semiconductor manufacturing line where depending on the mix of products, availability of resources and masks as well as WIP, it can decide which lots should be released and which ones should be held back so that we meet the following three objectives optimally:

  • Cycle time
  • Equipment utilization
  • Delivery performance

The following diagram shows the relationship between these three parameters and how they change with WIP increase. In a high mix environment, increase in WIP does not necessarily imply additional wait times or delay in delivery because of multiple routes and balance of allocation of jobs by the system. The grey shaded area represents optimal region of operation where the desired objectives can be achieved.


In environments where there is a high mix of products, such as foundries, we can increase the number of lots released without increasing their waiting time by ensuring that they are balanced across different bottleneck equipment such as lithography equipment. Given the complexity of such environments where each process has 400-600 steps using hundreds of equipment requiring anything from 10 minutes to 10 hours with highly sensitive set up times (implanters) or batching requirements (ovens), one has to intelligently look ahead and look behind to ensure proper balance of lots re-entering the process and or entering the process with different priorities.

Unfortunately, sequencing engines with simplistic rules have been given too much attention in order to solve such a complex problem. Through years of R&D, we have concluded that unless a proper release strategy is deployed, sequencing would not be of much value. It is a reactive engine not a preventive one. But more importantly, in the presence of an adequate release strategy, sequencing can be a liability in the sense that it would try to resolve issues locally not being aware of the potential issues it might be causing 50 steps later! Can you imagine being at the gate, and the airline personnel try to sequence your entry into the plane when the plane is not even at the gate or being fixed!

One other myth is the use of simulation tools to plan fabs! Simulation tools look nice and show movement. It is like a video game, we all enjoy watching it. However, they DO NOT PROVIDE a strategy. They only show you where the problem might lie ahead without telling you how to avoid it. How could they? They do not look ahead; by definition simulation is one sequence at a time!

As in our opening example, a good release strategy is aware of the right mix of products in the fab as well as the work load of each equipment, now and future, and is constantly trying to balance what needs to go next such that the bottlenecks, as they are changing, will be fully utilized and at the same time keeping in mind which lots need to be ready and when for on-time delivery. In fact, our research shows that in the presence of a good release strategy, a simple FIFO is the best sequence for the resources. In the context of our airport example, if you left your home at the right time, as you approach your gate, without much waiting, you will show your boarding pass and get into your seat for takeoff.  No need to be sequenced!

Topics: Supply Chain, Supply Chain Planning, Supply Chain Performance Management, Manufacturing Software, Manufacturing Planning, Inventory Optimization, Semiconductor, Factory Planning, Fabrication planning

Supply Chain Risk Resiliency

Posted by Cyrus Hadavi on Tue, Oct 04, 2016

risk-dice.pngThere is risk in almost everything we do. It is unavoidable. Supply chains are no exception facing all kinds of unexpected but inevitable surprises. Some can be very costly to the company. It is imperative that the management are prepared to deal with unfavorable issues when they occur without building too much redundancy increasing the cost of operations. In a typical supply chain, having thousands of SKU’s and suppliers as well as other factors such as geopolitical issues, labor related issues and demand volatility, makes the supply chain operation very complex and in the absence of appropriate tools almost impossible to manage in an efficient manner. The key is to identify the potential risks before they happen so that adequate measures can be put in place.

There are many ways to assess risk vs cost and reward. As an example, one can use Multi Echelon Inventory Optimization (MEIO) to assess risk of on-time delivery vs cost. This can be done by SKU and customer. For certain customers, the desired delivery performance must remain at 98% or higher. Obviously this can be accomplished at a higher cost of inventory at different stages of the supply chains. On the other hand, for many other customers, a delivery performance of 90% might be acceptable at much lower cost of operations. As the demand patterns change, MEIO behaves as an almost perfect postponement strategy, to show where and when inventory is needed for a desired delivery performance and cost by customer and SKU. This algorithmic approach, based on probability distribution and queuing theory, is by far superior to the traditional methods of historical data such as moving averages and/or min-max types of approach.

Having visibility into meeting the financial goals of the company is critical. Any risks associated with that must be detected as early as possible and addressed. Likewise, meeting delivery performance for certain key customers, making sure that the right mix of inventory is available to keep the production running, knowing what options are available in case of capacity shortage, or material running out (or not delivered in time) are all factors that may increase delivery risks, increase cost and even cause loss of market share. Optimization models of systems designed to assess the impact of risks can act as a crystal ball to provide visibility to the end users and furthermore provide guidelines and advise end users as to what the best course of action would be. It is a proactive way of responding to potential risks than reactive.

One other critical use of systems is to perform what-if stress tests on the entire supply chain. By either overloading the supply chain model or trying to break certain links in the chain, one can observe the consequences of such events and what can go wrong, what the financial impact would be and what can be done from the convenience of your desk, before it happens! Preventing such potential disasters are how modern heroes are made of in the world of leading companies!  Learn more about Supply Chain Risk Resiliency by clicking this link.

Topics: Supply Chain, Risk Management, MEIO, Enterprise Risk Management, Risk Planning

Spreadsheets and Planning

Posted by Cyrus Hadavi on Wed, Apr 06, 2016

Givspreadsheet.jpgen that more than 90% of the enterprises in the world use spreadsheets in one form or another, one may conclude that spreadsheets are the most desirable and successful enterprise software in the world! So, why would you want tospend so much money and effort to invest in planning software? The justifications to use spreadsheets are that they are simple, easy to manipulate and they “do the job!”  There are a number of reasons, discussed below, that make spreadsheets inadequate for planning purposes. Mostly the fact that just an ad hoc plan can be far inferior to other more optimized plans; and in the absence of suitable systems and algorithms, one cannot tell one from the other. I am sure you have heard of the expression: good is the enemy of great! In case of spreadsheets, it is merely the perception of good that is preventing companies to do something exceptional and distance themselves from their competition! It is amazing that companies invest hundreds of millions of dollars in people and equipment and then rely on a simple spreadsheet to run their business and make use of the resources that they have so heavily invested in. Every one percent improvement in plan can translate into millions, if not tens of millions, of dollars in inventory savings and higher utilization of resources. In fact, it is more than just savings that need to be considered; it is more relevant to know that there are opportunities for increasing revenue and market share, by deploying adequate planning systems. More recently companies have been investing more heavily in supply chain execution systems such as warehouse management and logistics or even shop floor sequencing. The problem is that executing without a good plan results in a more efficient way of doing the wrong thing! What is the point of building and delivering the wrong goods to the wrong place in an “efficient” manner? Planning prevents making costly mistakes, it makes companies more responsive, it shows where to spend money before it is spent and it creates opportunities to expand market share by having the right product at the right place at the right time. A multinational CPG customer of Adexa with over 100distribution centers reduced inventory by 33%, reduced material cost by 5% and improved delivery performance by deploying planning systems that enable optimization and improve visibility of the entire supply chain. ROI for the project was over 2100% realized within half a month! The point is that before deploying Adexa, they were running a successful and profitable business but could not see the hidden potential of their supply chain and opportunities that could be exploited using a more sophisticated system.

There are many reasons that make spreadsheets less than ideal for planning purposes. Spreadsheets cannot account for mix of products (different mix results in different capacity needs and different lead-times). They assume fixed lead-time whereas in reality lead-times are variable depending on the mix. In addition, they do not take into account availability and synchronization of material and capacity at the same time. Furthermore, there are myriads of other constraints such as tool availability, setup times, batching possibility, process and product attributes etc. that all need to be accounted for that spreadsheets cannot model. Many users are fond of spreadsheets because they can manually manipulate the plan.  The question is why is there a need for manual interaction? The answer lies in the fact that the plan that is being created is not accurate enough to execute therefore requires manual adjustments.  The planning systems create an accurate and near-optimal plans such that little manual effort is needed.  Finally, spreadsheets cannot perform incremental planning, dynamic allocation and ATP/CTP, and the underlying models are static, deviating from reality the more they are used. As an example, one of our clients used to take up to two weeks to figure out delivery dates of orders to respond to its customers. It would take about a week of spreadsheet planning in their HQ in US and another week with their subcontractors in Asia. After they started using Adexa’s planning engine, the commitment dates to their customers have been practically instantaneous and more importantly accurate and reliable.

With the recent innovations in processor speed of computers and advances in programming and Artificial Intelligence, we are now in a position to accurately predict inventory requirements at every level of the supply chain by considering the probability of usage of every part# from raw material to WIP to finished goods. This allows companies to keep the right amount and mix of inventory at different stages of supply chain to maximize responsiveness at lowest cost of inventory. Such disruptive technologies help to save tens of millions of dollars in inventory cost and improving responsiveness dramatically.

When it comes to efficiency, use of spreadsheets to perform planning function is probably as good and efficient as using a bicycle to travel from Los Angeles to New York city! It gets the job done but …

Topics: Supply Chain, Supply Chain Planning, Inventory Planning, Excel, Spreadsheets, WIP, Manufacturing Planning, Inventory Optimization, CPG, Factory Planning, Material Planning, Scheduling, Business Planning, MRP

Run Your Supply Chain without a Bullwhip!

Posted by Cyrus Hadavi on Thu, Feb 26, 2015

Bullwhip or Forrester effect is result of uncertainty and changes in demand that magnify as we move upstream in the supply chain. The farther upstream the supplier is, in the supply chain, the more variations in inventory levels.  Unfortunately this behavior is taken for granted for most industries. Some advocates of Kanban and JIT believe that using these techniques would eliminate such behavior and makes the supply chain more predictable to the extent that large variations are avoided. This is not a true assumption for the following reason. Kanban and JIT are not planning tools, they are execution methods. Hence they cannot be used to dynamically plan ahead of time when there are inevitable variations in demand. When you design your supply chains with a certain demand in mind, then as the demand goes down, Kanban would react accordingly unless your buffers are too large such that much of the inventory will remain unused between stages resulting in excess inventory. If the buffers are NOT big enough to avoid the excess inventory problem, then it is likely that shortages will occur when there is a surge in demand? The buffers are all used up and the pipeline will sit empty resulting in shortages and loss in revenue etc.

Here are some observations and reasons why we no longer have to run our supply chain under the assumption of bullwhip phenomena. We all know that plans are not perfect however re-planning is the key and doing it fast and in parallel is the reason why we can avoid BW effect. This is explained in more detail below. 

From Serial to Parallel

Bullwhip happens because of the serial behavior of the supply chains. In other words each downstream stage tells the stage before it until it gets to the first stage. This delay is one of the reasons for the rise in the amplitude of the inventory. However this behavior can be changed by providing multiple levels of visibility upstream using collaboration tools. Such tools can be set up to send signals to suppliers as far back as needed in order to share with them the trends in demand that are observed in the consumer behavior. Using point of sale information as well as demand signaling and demand planning technologies, the information shared can save suppliers much cost as well as make them a better and more reliable supplier.

Whole vs Segments

Another notion related to parallel analysis of the supply chain has to do with how the buffers are set up at various stages of the supply chain. In contrast to the traditional techniques of each stage deciding on their own inventory levels before, during and after that stage, Multi Echelon Inventory Optimization (MEIO) technology looks at the entire supply chain and each layer thereof in parallel, not in an isolated and serial manner. Using probability and queuing theory it can make fairly accurate predictions as to how much inventory of each item should be at every stage of the supply chain to avoid shortages and/or excesses yielding unprecedented delivery performance while minimizing cost. Such a parallel treatment of the supply chain would eliminate the BW effect and change it to a “stick effect.” MEIO takes into account both the cost and service levels at every stage given the lead-times and interactions between stages to produce a holistic solution not an isolated serial solution. 

Responsive vs Predictive

The more responsive we are the less predictive we need to be. Widespread use of cell phones have made all of us a lot more responsive. As a result we do a lot less planning. How many times have you heard someone saying “I will call you when I get there.”  In the past you had to specify exact time and location to meet up with someone! Today’s S&OP technology allows real-time planning to be more responsive. In other words within hours a new plan can be generated if and when there is a change in demand or supply. Obviously faster planning does not eliminate the time it take to physically build and transfer goods, however it does significantly shorten the cycle time to delivery. Hence it can reduce the potential amount of inventory quite considerably resulting in a more stable supply chain rather than a BW supply chain. This is more of a responsive planning in contrast to predictive planning. 

Risk Factor

The value of an item at the most downstream point in the supply chain is several times higher than the cost of an item at the most upstream location! So if you look at the weighted variation of inventory taking into account cost factors, then the variation in value is fairly constant and not as variable as the quantity depicted in the BW. This is a key issue in balancing the supply chain and risk management. In order to ensure the availability of parts, the upstream locations can take higher risks than the downstream locations. However, the way the supply chains are set up today, the reward/risk ratio is a lot higher for the downstream companies than the upstream suppliers. By making this ratio more equitable, much better and more efficient supply chains can result in terms of adaptability and responsiveness. One way to do this is a commitment to buy a minimum amount within a defined window of time. With this level of confidence, suppliers can assess their own risk and not only ensure delivery of what is needed but take additional risk knowing that they have some level of downside protection.

Although BW effect may not be completely eliminated however the size of the waves can be significantly reduced resulting in a much more stable and predictable supply chain.

Topics: Multi Echelon Inventory Optimization, Supply Chain, Supply Chain Planning, Supply Chain Performance Management, MEIO, Inventory Management Software, Inventory Management, Sales & Operations Planning, S&OP

Who Do You Blame For Your Supply Chain Woes?

Posted by kameron hadavi on Thu, Feb 25, 2010

Supply Chain BlameIs it the People, Process, or System? 

Here we go again: "Systems can't solve our problems, we need to fix our processes." Have you heard that before? I bet you have. Also, have you heard this one: "We need better people!" Although, I do not disagree with the importance of processes and people, have you considered that it might not be their fault? The fact is that, Processes, People and Systems are like a 3 legged stool. You take one of them out...and well, you fall on your...(you know what) and it really hurts!

Let's consider each one. If you don't have the right people then you should not be in business--and you have much bigger problems than processes and systems to worry about, anyways. So let's assume that you have the right people. If so, then they are intelligent and experienced enough to put in place the right processes. OK, now you got the people and you got the processes, but why bother with systems--spreadsheets are just as good! I can hear the old-timers saying: "all my life I used spreadsheets and managed to get products out the door for 30 years," or "I don't need no fancy system to do my job!" Well, they have a point, they can do their job. That is not even the question. The real question is how fast can they do it? How accurately can they do it? And how about process integration? (That's gobbledygook for being in synch with everybody else in your organization).

We recently upgraded a client's planning system that took over 23 hours to generate a plan. That meant they were always two days behind in order to get the updated data, run the plan, and then execute the plan. They could have easily avoided building the wrong stuff if they simply had a faster system. Essentially you can lower your inventory by a large percentage if you plan more frequently. Also, you can make better use of your resources by making the right items and deliver on time-because you are making what you should be making in the first place. Now, I know spreadsheets are fast but they are not nearly as fast, accurate, and integrated enough to run an entire supply chain efficiently.

Another telling example: one of our large electronic clients with off-shore manufacturing, in China, used to take about 2 weeks to perform Available-to-Promise (ATP). Why? Well, it took a week in the HQ to check inventory levels and allocations; and another week in China to decide what can be done about it. They overhauled their supply chain planning system and now they are doing the whole thing in less than couple of hours! They did that simply by upgrading their system, and not even touching their people and processes. Remember, no matter how many people you throw at this and how good your processes are, ATP requires a ton of data, and disparate pieces of information, from allocations, to capacities, to suppliers to inventory, to priorities, etc., etc. By the time you bring all these information under one roof, it is too late and your data is too old for the correct decisions to be made. Only systems are fast enough, accurate enough, and integrated enough to pull all that information together in real-time, and give you an answer almost instantly.

Remember, this is not about systems being just faster than people; it's about how the right planning system can take your people, and processes, to a whole new level of efficiency and productivity--Whether it's for demand planning, inventory planning, S&OP planning or any other types of planning. But how do you know if you have the right planning system? Well for one thing, if it takes 23 hours to get an answer, or you are using spreadsheets-on-steroids, my guess is that you don't have the right one. If that's the case, stop blaming your people and processes and start looking for one. We recently published an eBook about how to justify a supply chain planning system, and that should provide a few good hints on what to look for when it comes to picking the right system.

I really would like to hear if you have any blame game stories to share with others...feel free to comment any time.


For more information about different types of Supply Chain Planning systems visit: Demand Planning, Inventory Planning, or Sales and Operations Planning.

Topics: Supply Chain, Supply Chain Planning, Planning Process, Planning People, Planning Systems

Retune your supply chain planning from JIT to Available-on-Demand

Posted by Cyrus Hadavi on Thu, Nov 12, 2009
demand planningHere is a question for you, is JIT a push-system or a pull-system? For decades you have been lead to believe that it is a "pull" system, but in fact you are "pushing" to make parts available, thinking that the resource will need it or use it. Just because the resource used the previous supply does not mean that it will use the next. In other words, the past is not necessarily an indication of the future. You may have already known that, and may argue that just filling buffer-zones is the best way to minimize inventory, especially if the buffers are not owned by your company.  However, you are just passing the responsibility of holding the supply to some other point in the supply chain, along with the associated cost-of-capital that goes with it. Naturally, the buffers need to be able to handle the largest tolerable demand surge.  So, if the past demand is more than the future, then inventory will sit there until it is needed or written-off. 

With that in mind, I think it's logical to say that a JIT system that looks at historical demand is really a push-system, but we want to do better than that.  We want to be able to look to the future in order to have a real pull-system.  At the end of the day, JIT is a cost-reduction system to keep up utilization and reduce inventory levels in a supply chain that has fairly steady demand.  What happens if the demand changes all of a sudden? What if red-widgets are more popular than green ones, today? How fast can you propagate the changes by resetting all of the buffers?  Undoing the buffers is like pushing the proverbial tooth paste back into the tube!  It will stay out until you finally use it, or wash it down the sink.  Of course as long as the supply chain is simple, with a linear flow, flat demand, and just a few constraints, fixed buffer-based inventory planning will still work well.  But it will also come down crashing if you have tens of different products sharing resources, constant changes in demand patterns, or supply lead-times.  These factors, and many others, change the production "rhythm" to the market.  Should the supply rhythm on a certain product be bang-bang-bang-bang, or would it be bang-----bang-----bang---.bang?  Which rhythm would generate the most revenue and profit while satisfying your customers?  

In the final analysis, JIT is a system of Available-on-Supply and it pushes based on a fixed rhythm associated to the speed of a machine or inventory availability. In that case, you better prey the historical demand does not change.  Why would you want to be held hostage by your supply?!  So what should we do if we want a system that is Available-on-Demand, that is more responsive to changes in the market place.  A system like this would change the "beat" and buffer-allocations based on the actual demand, and would be more attuned to the market-whether it be bang-bang--bang, or bang-bang...bang-bang-bang---bangbangbangbangbangbang--------bang.   For each product you would have a different "bang" profile.  The combination of all the profiles sets the rhythm for your entire supply chain.  Hence, when you put it all together, the result is a beautiful orchestration of drum-beats harmonized to the tune of the market demand.

To dynamically re-tune and reallocate material, capacity, and buffers is not easy but it's being done by many best-in-class companies out there.  You basically need two critical components, visibility and control of your supply chain.  That means visibility into your demand, inventory levels, and the ability to quickly control your production capacity, and suppliers' capabilities.  It is not a near sighted system that only looks at one level down the stream.  You must understand what needs to be done in all areas of the supply chain as the demand conditions change. To have this kind of control over your supply chain, it takes some reexamination of your processes and advanced technologies in the areas of Demand Planning, Multi-Echelon Inventory Optimization, Production Planning, and Performance Management.  Demand Planning will focus on making sure you are getting accurate demand signals from the market, MEIO will help you manage the right buffers for the expected demand, Production Planning will control your supply flow to those buffers, and Performance Management will give you dashboard like visibility over all of these critical points in your supply chain.  Again, I have said this many time before, but it's very hard to do this with spreadsheets and pure experience.  So take a little time to see how advanced technology can help you in one or more of these areas and you maybe surprised how quickly you can retune your supply chain from JIT to Available-on-Demand.  

If you are interested in this topic, I also suggest reading: How-to-Guide: Justify A Supply Chain Planning System, or feel free to contact us at any time.  

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

Topics: Supply Chain, Supply Chain Planning, Demand Planning, Supply Chain Performance Management, Inventory Planning, JIT, Adexa, Multi-Echelon Inventory Planning

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

How to Justify a Supply Chain Planning System?

Posted by Cyrus Hadavi on Wed, Sep 30, 2009
SCP SelectionAlmost everyone understands the role that people, processes and systems play in running a modern day enterprise.  What they might disagree on is the importance of the role each one of these legs plays to holdup and grow the enterprise. The role of people and processes are given.  The Systems' role is the least understood aspect of the three. There are many managers who believe systems are all the same and as long as the basics are covered any additional sophistication does not add any value. We disagree! And here is why:
  • Systems enforce good practices and processes: Companies spend a lot of time and money to design business processes only to see them deteriorate very quickly as people and organization, as well as processes change.  Systems are capable of cross checking millions of variables in the business and point out inconsistencies, lack of proper data and information, or point out who has not done their part. They can check and monitor what we should be doing and how we are doing it!
  • Unlike people, systems are fast, very fast! How can you check across 3 continents, to provide reliable delivery information to an end customer when you have thousands of products, suppliers, customers?  In addition, systems are capable of analysis across millions of variables.  An example is a system for Multi-Echelon Inventory Planning where it can calculate the right level of inventories across multiple layers of the supply chain to ensure the desired service level.  It does not matter how many people you throw at this and how often they meet, they will not be able to optimize nearly as well or as fast! So how is that done now in most companies? Well just using their gut feeling and experience which might be good but it can be done better, and in most cases, a lot better. The right system for inventory planning can easily save millions of capital dollars and facilitate for much better customer service.
  • System tie processes together, for exmpale planning to execution, sales to operations, and forecasting to financials. Generally disparate spreadsheets are incapable of integrating these processes resulting in waste, delay and sub-optimal results.
  • Systems allow you to plan more frequently which results less inventories.  Systems can help us plan what to build, where to build, where to keep, what to keep and when to do it all-accurately.  And they can plan the entire supply chain in minutes, allowing multiple planning runs per day as the demand and supply conditions change. In the absence of the right system, inaccurate plans are done based on spreadsheets, once a week or month, resulting in excess inventory and lower customer service levels.
  • Systems keep people accountable, e.g. forecast accuracy by sales or customers, commit vs. actual in production, and supplier delivery performance. They also play an active role to point out where the excesses are and where the deficiencies lie.

Given the above, would you trust millions of dollars of your assets to just a spreadsheet?

There is a comprehensive eBook on this topic with a lot more detailed information.  To download please click on "How-to-Guide: Justify a Supply Chain Planning System".

Topics: Supply Chain, Supply Chain Planning, Inventory Planning, SCP System, Multi-Echelon Inventory Planning