- On 03/09/2021
The ability to maintain a healthy flow of raw materials from suppliers and product shipments to customers has become increasingly challenging for many manufacturers. Even with the effects of import tariffs and COVID-related disruptions aside, the optimal balancing of supply and demand at key points in the supply chain can still remain elusive for many practitioners.
Supply chain planning and execution, when examined comprehensively, is multi-dimensional and involves various aspects of customer behavior, internal inventory and production management, and supplier performance. It's not uncommon for the execution of one or more of these links in the chain to be lagging or problematic, thus affecting the ability of the company as a whole to efficiently fulfill customer orders on time.
This short 3:43 video illustrates some of the considerations when managing a manufacturing supply chain:
Let's consider some of the foundational elements of supply chain management that are required to:
- Maximize sales revenue
- Reduce lead times
- Maximize stock availability
- Minimize overstock
- Eliminate backorders
- Eliminate expediting
- Reduce overtime
- Promote on-time performance
- Enable improved supplier performance
1 - Effective Demand Forecasting
The relevance of demand forecasting to your company's operation depends on the nature of your business. For example, some make-to-order manufacturers that do not hold finished goods inventory may rely on sales forecasting as a strategic planning tool to drive staffing, capital investment, and cash flow planning. Make-to-stock manufacturers, on the other hand, may additionally focus their forecasting efforts towards the tactical aim of planning inventory to better align it with customer demand.
Whatever your goals may be, the formulation of forecasts can often be simplified in a way that not only makes them easier to maintain but also actually makes them more effective. One pitfall that can lead to unnecessary complications is the idea that increasing the frequency of forecasting makes it better. This may not be true, particularly if it tends to turn sales forecasting into more of a market-timing exercise than an evidence-based planning effort. The frequency, methods, and data formats used to develop demand forecasts can often be improved in a way that makes them more useful to informing key operating decisions.
2 - Effective Inventory Planning
Trivia question: How do you determine how much safety stock you need? If your answer involves multiplying the average rate of demand with the lead time to calculate the number of days of inventory on-hand, then you may very well have a fundamental problem that could be spilling over into your manufacturing operation and creating a need for frequent expediting. "D x L" is the most commonly practiced inventory planning method. Unfortunately, it is wholly inadequate as a method for determining target inventory levels that will enable you to effectively fulfill customer orders and reduce lead times.
The key is to design minimum inventory levels based on demand variability, not average demand. We have found that we are almost always able to significantly reduce inventory by 20% to 80% using statistical techniques while at the same time improving warehouse fulfillment rates to 98% or greater.
3 - Effective Production Scheduling
It is critical to have the right working philosophy about what your company's production schedule is intended to achieve. Is it intended to drive shop floor work or do you want to use the schedule to provide estimated completion dates (ECDs)?
All too many times the answer is that you want to meet both of these aims. And why not? These are both perfectly reasonable objectives. Unfortunately, you cannot use one production schedule to meet both objectives. You either have to formulate your production schedule to focus on one of these objectives (while foregoing the other) or have two schedules as described in this article so that you can have your cake and eat it too. Using a single schedule to manage the shop floor and generate ECDs is folly unless your customers are OK with receiving your product whenever you're ready to ship it.
4 - Effective Supplier Management
As was illustrated in the earlier video, suppliers often suffer from the upstream practices and behavior of their customers and their customers' customers. An entire supply chain can become infected if the effects of problematic production planning and execution percolate down the supply chain to lower-tier suppliers. Only once a company works to resolve its internal material planning and purchasing execution issues in a way that promotes stability can it effectively drive its supplier base. Fortunately, it is possible to have a stable production operation even if customer demand is very dynamic.
5 - Stable and Sustained Strategic Planning and Execution
We've touched upon four practical operating areas where improvements can often make a dramatic difference in a company's ability to effectively and efficiently fulfill customer orders. Once these planning and executional issues have been addressed, it is important to establish standardized repeatable processes and a common understanding among employees and other stakeholders so that these processes can be repeated sustainably and reliably.
This then opens the door to enabling a strategic Sales, Inventory, & Operations Planning (SIOP/S&OP) program to provide a platform for reliable, routine, and timely capacity planning -- Capacity planning that addresses internal resources and production rates as well the effective capacity of key suppliers.
Altemir Consulting focuses exclusively on assisting manufacturing and distribution businesses. Click here to schedule a no-obligation 30-minute phone call to learn how Altemir Consulting can address your supply chain management challenges.