Planning supply chains
There has been much discussion and articles concerning disruptions to organisations’ supply chains. They assume that disruptions are only an external event, but disruptions can also come from within.
The previous blogpost discussed the ‘One Plan’ approach for planning your supply chains. At some point realism must also be included that the sales forecast input may not contain the whole story. This is because Sales can offer discounts and extended payment terms that encourage wholesalers, distributors and retailers to purchase products in advance and in excess of actual sales expectations.
To illustrate the process
A producer/importer company that sells its consumer products through retail outlets. At a particular retailer it regularly sells approximately 1,000 cases per order. The supplier’s sale price is $10 per shipper (case) and the retail selling price is $20 per case, providing a gross margin to the retailer of 100 percent.
It is near the end of financial year and to meet its sales budget, the supplier makes a special promotion offer to the retailer. If they buy 10,000 cases, the buy price will be $8 per case. This will enable the retailer to offer a ‘special’ retail shelf sale price of $18 per case. The retailer’s gross margin increases to 120 percent, along with the hope of increased sales, based on a lower selling price.
This ’deal’ is a benefit for the consumer, because their buying price will be less. The supplier’s sales representative will gain, having achieved their sales quota and therefore will receive a sales commission. The retail buyer will be pleased because they have gained an additional 20 percent in gross margin and therefore a bonus. In addition, the sales director at the supplier and buying director at the retailer will be assured of their bonus for achieving targets.
This is called ‘Channel Stuffing’ by sales and ‘Investment Buying’ by retail buyers. It works while the supply chains through to retailers and out to consumers continue to flow. And it appears that all will gain. But, because the measurement of success is based on gross margin, not the net margin, it is the Supply Chains group at the supplier that will lose, as they incur additional costs which are not charged to Sales. For example:
- Express freight on expedited (‘rush’) supply items (materials or finished goods)
- Re-scheduling operations to include increased volumes
- Costs of holding inventory to account for the increased production/import order
- Use of short-term storage and double handling costs within warehouse(s)
- Additional intra-warehouse movement of product
- Hire additional short-term/casual staff for the warehouse
- Overtime worked to get increased orders to retailers
- Handling additional product returns (for whatever reason)
- Entering and tracking of changing prices
- Order entry detail changes
- Higher incidence of disputed invoices – resolve sale items against regular items
Channel Stuffing is unfortunately common in some retail channels and more so where the players are paid commissions and bonus based on gross sales. The practice can also occur when using resources ‘efficiently’ to a fixed budget for making/importing products. Here, excess inventory can build and affect working capital, therefore sales offers are required to clear excess inventory. In both situations, the supplier’s sales department will believe that the additional sales satisfies actual demand; therefore the inflated sales inputs to forecasts satisfies a market which is not real.
Additional disruptions to effective planning
- The situation where state or province sales managers are able to initiate promotions without informing Operations Planning. A promotion is only known when a large order lands in distribution and the sales manager complains when it cannot be filled without disrupting plans and schedules.
- Disruption can be caused by CEO edicts. These range from ‘improve net earnings’, to ‘reduce inventory’ or ‘improve customer service’ (by increasing inventory). Another edict is to insist on ‘stretch targets’. That is, to increase sales targets beyond those that Sales has established and without evidence that the increased targets can be achieved.
- ‘End of month rush’ to meet periodic (month, quarter) sales targets can be a disruption, as distribution works overtime and premium freight is paid to deliver orders that were brought forward in the make or purchase schedule. However, from a customer service perspective, an ‘in full, on time’ order delivery on the first day of a month is no different from the last day of the previous month.
- Advertising campaigns that create or add to seasonal demand create artificial peaks, which require finished goods to be made/purchased and stored months in advance. Erratic advertising can also affect planning, by increasing demand as the campaign occurs, but demand drops when the advertising stops. This creates erratic demand, which can cause shortages and excess inventory.
- The payment period and payment discount structure can affect when customers place orders to obtain the longest period for payment. This can harm the effectiveness of supply chains, due to the bunching of customer orders at certain time periods.
Addressing internal disruptions
Uncertainty in supply chains is driven by three factors: Complexity (external and internal), Variability in lead times and Constraints (capacity bottlenecks). These factors interact with and amplify each other and without being addressed, Uncertainty will increase. Therefore, to reduce Uncertainty requires functional teams to come together on a common ground, working through the Sales & Operations Planning (S&OP) process, which has been discussed in previous blogposts.
Collaboration in S&OP requires co-operation (a willingness to work together across functions and build trust) and co-ordination (use a common terminology and processes to share data and information). However, this is much easier to write than achieve! The major challenge being that ‘we behave how we are measured’ and corporate performance metrics are rarely compatible between functions.
It is concerning that in the most recent Supply Chains to Admire report, only one company in the winners list has its marketing and sales teams trained in supply chain complexity and constraints and using segmentation within product lifecycle management. This illustrates that even the ‘best’ supply chains have a long road ahead to reduce internal complexity through Collaboration within the S&OP process. To start, the senior supply chains person could meet ‘off the record’ with the senior sales manager/director to identify what stops their teams from Collaborating.