Page 90 - DMGT525_MATERIALS_MANAGEMENT

Unit 6: Supply Chain Management

Initial results were dismaying. Sales volume dropped sharply, as excess inventory had to be Notes
consumed by the marketplace. But today, the company enjoys lower inventory and warehousing
costs and much greater ability to maintain price levels and limit discounting. Like all the best
Sales and Operations Planning (S&OP), this process recognizes the needs and objectives of each
functional group but bases final operational decisions on overall profit potential.
Excellent supply chain management, in fact, calls for S&OP that transcends company boundaries
to involve every link of the supply chain (from the supplier’s supplier to the customer’s customer)
in developing forecasts collaboratively and then maintaining the required capacity across the
operations. Channel-wide S&OP can detect early warning signals of demand lurking in customer
promotions, ordering patterns, and restocking algorithms and takes into account vendor and
carrier capabilities, capacity, and constraints.

Figure 6.3: Market Signals

Source: Anderson Consulting
Figure 6.3 illustrates the difference that cross supply chain planning has made for one manufacturer
of laboratory products. As shown on the left of this exhibit, uneven distributor demand
unsynchronized with actual end-user demand made real inventory needs impossible to predict
and forced high inventory levels that still failed to prevent out-of-stocks. Distributors began
sharing information on actual (and fairly stable) end-user demand with the manufacturer, and
the manufacturer began managing inventory for the distributors. This coordination of
manufacturing scheduling and inventory deployment decisions paid off handsomely, improving
fill rates, asset turns, and cost metrics for all concerned.

Such demand-based planning takes time to get right. The first step is typically a pilot of a
leading-edge program, such as vendor-managed inventory or jointly managed forecasting and
replenishment, conducted in conjunction with a few high-volume, sophisticated partners in the
supply chain. As the partners refine their collaborative forecasting, planned orders become firm
orders. The customer no longer sends a purchase order, and the manufacturer commits inventory
from its available-to-promise stock. After this pilot formalizes a planning process, infrastructure,
and measures, the program expands to include other channel partners, until enough are

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