Supply Chain Optimization (I)
What is the Supply Chain Optimization? What is the role of Demand planning in Supply Chain Optimization? How can Inventory Planning contribute to Supply Chain optimization?
Posted: Jan 2009
The Supply Chain today is the integrating process that connects different business function. The supply chain starts with the planning and procurement, continues with warehousing of raw materials, production of finished goods, storing of finished goods and finishing with distribution and transport to the customer premises. This is a very long chain of interlinked and interdependent business function. The competitive advantage of the company depends on optimization across the supply chain.
The competitive market is imposing rules to all participants in the game of market competition. The company that strives to become successful in the market needs to excel in one of two segments, but ideally in both; product value advantage and production cost advantage.
The product value advantage is the can be achieved by providing the product to the customer that will be perceived as good value for the money paid. The value can be perceived by product's brand, functionality, service, etc.
The cost advantage of the company is important element obtained by application of effective technologies, efficient organizational abilities and through the economy of scale.
Both of these factors make the competitive advantage of one company compared to the other companies in the market. Supply chain optimization plays the significant role in this process. It is possible to reach a sustainable competitive advantage through successful supply chain optimization. There are several important segments of supply chain management that contributes significantly to the supply chain optimization.
The successful demand planning has the key role in supply chain optimization. Everything starts with the demand management. Therefore, the supply chain optimization starts with the assessment of market demand. Demand planning is the process of supply chain planning where complex calculation is made, in order to provide the following supply chain segments inputs for further activities. The input data for the demand planning are the historical data, seasonality, marketing plan, launching of new products, changes in commercial policy, market trends, competition activities, legislation changes, etc. Now we see that the demand planning is complex process and it plays a very important role for the supply chain optimization. If the demand planning is overestimated it can lead to excessive stock. On the other side, if the demand planning is underestimated than it is possible to have stock out situation.
The next step of supply chain optimization is the inventory planning. Based on the demand plan, supply chain planners are planning stocks of raw materials for production. All components for production are planned based on demand planning. At this point the supply chain optimization process becomes even more complex.
Even the best demand planning cannot remedy mistakes made during the inventory planning. In order to conduct supply chain optimization it is necessary to have accurate and timely inventory planning, with the respect to the time needed to purchase and ship all raw materials.
The production planning is the next step of supply chain optimization. After having the demand plan and inventory planning done, it is necessary to set aligned production planning. With the production planning the complexity of supply chain optimization grows even more.
In case that production planning deviate versus demand, than overstock or stock out may occur. Even when production plan is properly aligned with the demand, any delay or stoppages in production can decrease the production accuracy, what can lead the unbalanced supply of products.
During all mentioned segments there is one more important factor to be respected – Lead Time. By definition, the Lead Time is the time required from initiation of the activity until the activity end. For example; the procurement of raw material has its own lead-time, depending on the supplier responsiveness, administration time, transport time, delays, etc. This means if the raw material quantity is planned according the demand planning, but the lead-time was not assessed from all aspects, then some delays and raw material shortages may happen. Any deviation in raw material delivery may produce further problems in supply chain. In case of late delivery of raw material the production can be stopped. This is making additional costs of idle production line and creating cost of missed sales opportunity and missed revenue and profit. Therefore, the lead-time must be properly assessed for every activity, in order to satisfy the supply chain planning.