Tight Lines Edge – The Essence of Supply Chain Management
The essence of Supply Chain management is to balance or match supply with demand at the most economical cost to ensure the right service level for customers. Note I did not say lowest cost – we can discuss it later, but we all know there are trade-offs to managing supply, inventory, and customer demand.
So – why is it companies of all sizes continue to struggle to manage this fundamental requirement. Too much inventory, not enough demand, too little inventory, too much demand.
There are many factors that impact demand and supply, too long to list here for sure, but below are 3 focus areas to scrutinize if you continue to find yourself being surprised by the state of your supply chain and business.
Is it easy – not always – but tackling the 3 areas below should make your ride a bit smoother. Supply Chain management is about pro-active management and a process to review results and make adjustments. Not paying attention to these 3 areas will put your business at risk and keep you in firefighting mode.
3 Reasons – Why you can’t balance demand and supply!
1st reason you can’t balance demand and supply.
Planning Processes are non-existent
Your activities are scattered – responding to the latest crisis in your supply chain – there is not a rhythm to your business activities.
The planning process is the most underrated process in the sphere of supply chain management. The most common issue I see with many companies, big and small, is that they are just not doing it, relying on heroic efforts of individuals to pull rabbits out of the hat to meet customer needs.
There are 3 areas of planning you should be doing.
- Step one in your planning process: Create a demand plan for each item you sell.
- Demand Planning – Your sales, marketing processes are expected to generate demand for your products. It is likely you have actual sales going back 2-3 years. You also probably have current sales orders on your books.
- Then why are you not forecasting demand? Well, it can be hard – but doesn’t have to be. How do you understand anything about your business if you do not have some expectation of demand?
- I see this time and time again – companies do not have a sales/demand forecast – some very successful but wondering how much better they would be with a formal demand plan and planning process.
- Step two: Create a supply plan, generating new purchase requirements, inventory re-balancing and resource management.
- Supply Planning – The supply planning process is the ability to convert your demand plan into a material requirements plan. This involves understanding current inventory available, new supply order requirements, inventory strategy and sound procurement practices.
- Preferred method is with a modern day tool to do all the math for you. No, you do not need an integrated or expensive ERP system, plenty of options available to help you with this exercise.
- Step three: Create a financial plan – what does the resulting demand and supply plan mean for your business, for your cash and for your P&L.
No planning process– get to it, all 3 steps will reduce your business risk and allow you to take measured action to achieve results.
2nd Reason you can’t balance demand and supply.
You treat your suppliers as a transaction, not a relationship.
Are you going to develop a strategic relationship with every supplier – of course not – but there are a handful where you do need a deeper relationship.
Identify 3 suppliers that are critical to your success.
Develop a supplier management program that deepens your relationship but will also likely improve their performance and ensure a better supply plan for your business – it only takes one component to create a shortage.
At a minimum do these two things:
- Send your key suppliers a 6-month forecast for the items you are buying – after you complete your monthly planning cycle. Suppliers cannot support you if they do not know your needs. Purchase Orders are a way to create a financial transaction, not a method of planning.
- Conduct quarterly/semi-annual business reviews – This could be one hour/two hours – cover your industry, communicate trends and develop a few key metrics to measure their performance.
Manage your key suppliers.
Develop a relationship beyond the purchase order.
3rd Reason you can’t balance demand and supply.
WAY underinvested in technology!
Ugh, this is a frustrating one for me, especially at smaller companies, but big ones make this mistake as well.
Yes, technology can be confusing, which software to get, how to use it etc. etc. etc. Yes, software can be expensive as well, but with the recent advances in all technology – there are very reasonable solutions out there that can be affordable and have a large impact on your business.
I know, you don’t have the time or energy to research it – hit me up, let me know what you are wondering about – I have already done the research.
Here are some areas to consider for technology you might not be considering.
- Demand Planning – simple cloud-based forecasting tools to help organize your demand data and have statistical models facilitate the generation of a forecast, with the ability to override where needed.
- Supply/inventory Planning – Many tools/software in this area – but have a wide variety of capabilities and uses. No – you do not need an integrated ERP to do supply/inventory planning – but once you get over 25 or 30 sku’s with a bill of materials – the challenge of continuing to manage on spreadsheets will leave your business at a ton of risk.
So, if your budget/financial plan does not have any technology investments – better take another look.
IT is not just an expense; it needs to be viewed as an investment with an expected return on that investment. (Most do not know how to analyze software and the value it can bring to your business)
So, to improve your balance between supply & demand, get a plan, improve your supplier relationships, and, by all means, think about some technology to help.
Tight Lines – Tim