Supply and demand: The secret to getting the balance right
A perennial problem, which management thinker, Peter Drucker, labelled one of the ‘great divides’ in management more than 40 years ago, is the disconnect between supply and demand. This divide is a key reason why companies are so often trapped into selling excess products well below market rates or lose sales because an inventory shortage makes it impossible to fulfil demand. Bringing the supply and demand sides of an enterprise together can represent a significant opportunity for efficiency and value creation.
And, as remarkable as it might seem in this age of big data and just-in-time delivery, research suggests that the divide between supply and demand is as serious a problem today as it was in the learned professor’s time. Despite all of our technological and managerial advances, many companies are still trying to play off three different sheets of music — the financial plan, the marketing plan and the operations plan — with results that seldom end in a three-part harmony. In other words, many companies still do not know how to serve their most important customers in a way that maximizes the value to their customers and to themselves.
Signals that supply and demand are not effectively integrated
A tell-tale sign that forecasting and business planning processes are running into trouble is when some important performance metric – often inventory turnover, carrying costs, expedited freight costs, or fill rate – has fallen below targeted levels. Ask yourself whether any of these situations apply to your company:
- Does manufacturing complain that sales overstates demand forecasts, doesn’t sell the product, and then the supply chain gets blamed for too much inventory?
- Does the sales team complain that manufacturing can’t deliver on its production commitments and is therefore hurting sales?
- Does manufacturing complain that the sales team doesn’t let them know when new product introductions should be scheduled, which results in sales complaining about missed customer commitments?
- Does the sales team initiate promotional events to achieve end-of-quarter goals, but fail to coordinate those promotional activities with the supply chain?
- Does the business not take advantage of global supply capabilities to profitably satisfy regional requirements?
- Are raw material purchases out of alignment with either production needs or demand requirements?
- Does the business team adequately identify potential risks and opportunities well ahead of time?
- Are forward actions taken to reduce risk and meet goals, or are surprises the order of the day?
A single, responsive plan to balance supply and demand
Integrated business planning (IBP), also known as demand/supply integration or ‘advanced S&OP’, is a single process that engages all functions in creating aligned, forward-looking plans and in making decisions that will optimize resources and achieve a balanced set of organizational goals. Through having a single, yet responsive, plan for all sales and operational activities, the organization can create a synchronous supply chain that can shape and influence demand.
For integrated business planning to operate effectively, three important elements must be in place: culture, process, and tools. Easily the most difficult, and certainly the most important way to achieve integration is through influencing the organizational culture. An organization’s culture must be focused on transparency, collaboration, and commitment to organization-wide goals. Processes must be clearly articulated, documented and followed to ensure that all planning steps are completed. Effective tools, normally thought of as information technology tools, are also needed to provide the right information at the right time to the right people.
Traditional attempts at coordinating supply and demand have generally focused on functional levels of the organization. The lower levels of the organization have been left to go through the motions of integration without the appropriate mindset, knowledge, motivation, incentives or structure to actually execute the plan. Those organizations that do succeed tend to pass through five stages, each of which demands patience and perseverance:
Stage 1: Develop a relevant value focus
Senior leaders must cultivate a focus on creating value for the organization and for customers. Achieving this typically requires developing cross-functional structures and installing dashboard metrics that keep the business focused on implementing supply and demand integration.
Stage 2: Share knowledge across the organization
Collaboration is enhanced through an extended learning network, and knowledge sharing opportunities are created to reduce complexity and enhance the value of partnership networks.
Stage 3: Allocate resources and capacity strategically
Once the entire organization shares the same set of facts, the company can then begin to make a more thoughtful analysis of where and where not to allocate resources based on which customers deserve priority.
Stage 4: Walk the talk
Executive and specialist IBP competencies are in place and all planning employees have a clear understanding of their roles and responsibilities. Individuals are accountable not just for their own unit’s performance, but for the overall performance of the organization.
Stage 5: Balance capacity and demand
All of the work in stages 1 to 4 is just a prerequisite for the final goal: To make sure that the company’s most important customers’ needs can be satisfied profitably. This typically requires streamlining processes and then developing flexibility and fluid scheduling to meet variable demand.
IBP is an organization-wide orientation that spans functional domains and company politics to provide a basis on which to effectively and efficiently run an entire business enterprise. Building that capability takes time and effort. Leaders need to create the right organizational climate for supply and demand integration, and establish goals and metrics that align functions to organizational goals that enable the entire organization to create relevant value for customers of choice.