Why digitalization can't fix your supply chain problems

There's a pretty good chance that when you asked for a solution to your supply chain problems, someone brushed you off saying "don't worry, we're digitalizing soon". Just look at all the software vendor's marketing pitches, browse discussion groups and networks on the internet, listen to analysts and consultants... more often than not digitalization is perceived to be the holy grail. While writing this post I called up LinkedIn and the second post had the following text:

"Delighted to host the <name left out> workshop with more than 30 top customers in <location left out>. Focus on <software vendor left out> Digital Supply Chain Product Strategy and tangible business use-cases for Intelligent Technologies like IoT, Machine Learning and Blockchain. Thank you for your participation and insightful discussions. hashtag#digitalsupplychain "

The 3rd and 5th article were similar but I simply want to point out that the talk about digital supply chains is over proportional compared to the necessary talk about human factors influencing the outcome of planning. Undoubtedly, digitalization is coming and it certainly is necessary, however, my point here is that by simply digitalizing your supply chain or shop floor or company or whatever, you're not brushing away the problems inherent to supply chain dynamics.

In my opinion digitalization or, as it was previously called, software implementations will get you two primary benefits:
- process automation and standardization to free a planner's time away from doing busy work
- improved quality of information which allows the planner to make decisions that the machine (that digital thing) is not good at making

Now many of you will say "but the machine is now intelligent... " Really? Are we there yet? Then our manufacturing and distribution companies can be solely run by IT departments (they are already anyway) and we don't need planners anymore? The VUCA world (Variability, Uncertainty, Complexity, Ambiguity) is real and unfortunately (or thankfully) we're still dependent on the excellent functioning, very creative and immensely intelligent human brain. Humans are still making decisions and are still running the show. Machines are still stupendous data crunchers but they're very good at that.

Let's remain flat footed and not exaggerate what digitalization can do for us. Except, of course, if you're making a living selling digitalization. But for the rest of us... those that struggle to keep the right inventory at the right place in the right quantity at the right time, let's use the machines (and software and all things digitalized) for what the are good at...

- automating so we have more time to work and think analytically and make good decisions
- increase the quality of data we use to make decisions so that we make better decisions

...and further our knowledge and experience with the dynamics of a supply chain, so we can effectively use our brains to fight the challenges we're faced with by the VUCA world.

Intelligent, experienced and effective planners are still rocking the supply chain world! Let's work on raising good, effective human planners too... spend some of the digitalization budget on the human factor... it pays.

...and then I wonder why my plan doesn't work out!

Taking the noise out of the planning process improves delivery reliability and therefore fill rates to customers and production lines. I don't believe that many people would disagree with me on this. But why? Because when you send your suppliers (internal or external) an even demand, chances are that they deliver regularly and more reliably as well. Therefore, when we engage in a supply chain transformation, the first order of business is to stabilize and dampen inventory swings and generate leveled demand to the production lines and outside vendors. We do so using buffers and shock absorbers.

Now the big question is how and where to set the buffers and how big these ought to be. In my quest to optimize buffer levels I like to apply various mental models so I can analyze the problem from various viewpoints (if you follow discussions around the subject on the internet you will find out quickly that the topic is quite complex and supply chain dynamics are not necessarily easy to understand or intuitive). First of all I have come to the conclusion that chasing forecast accuracy is not very benefiting. Even If you’re lucky enough to work out the ideal plan (with very high forecast accuracy), what is it good for if your suppliers can’t deliver to it? It does seem nonsensical to shift priorities from trying to increase forecast accuracy to worrying about your suppliers, but don’t you think that when your supply comes in regular and reliable that you have a lot more control over your inventories and fill rates?

So if the intention is to level the demand to our production schedulers and/or outside suppliers then we must absorb as much noise as we can. Some suggest to de-couple parts from demand using buffers. That works in some cases but when you need visibility into future changes, this can fatally mess with your plan. I personally believe in absorbers, cushions, whatever you want to call them. In a cushion noise is absorbed to a degree and if there's a big change coming at you, you'll be notified by your planning alerts. Depending on the situation (high or slow mover, consistency in consumption, value of part etc.) you need to decide on the size of your absorber.

Other than most believe, absorbers can be implemented not only on the supply side but also on the demand side as the following graphic shows:

The absorber on the supply side is a dynamic safety stock that goes up and down with varying demand and has a minimum, a target and a maximum level. If the minimum is breached, noise transmits and alerts. The same happens if the maximum is exceeded. On the demand side we use the forecast as a buffer. To make it effective we increase the demand forecast and level it so it wraps around - and absorbs - actual demand. Once, through carefully defined consumption logic, the actual demand exceeds the forecast envelope, we use the supply absorber until the minimum is breached.

This all means that I am sending a very level demand to my suppliers and it stays that way with all the little changes until a big change alerts me to take action and expedite. My suppliers will thank me for that and after I get deliveries as expected and reliably, I really don't care that much anymore whether I had a forecast accuracy of 96 or 97 per cent.

People often wonder why their plan doesn't work out, but is it really so difficult to figure out that when you disable your suppliers from delivering on time, that it's impossible to fulfill a plan?

What's wrong with this picture?

Just this week I came back from an analysis on how a very large, global company is planning their replenishment of purchased raw materials and manufactured goods. We've looked into many functional areas and interviewed most of the users in that plant. Then there was one thing that really stuck out to me. You can see it in the following graphic:

The graphic shows one of their highest mover's consumption and receipts pattern as posted into SAP. when the red line goes up the receipts outweigh consumption and if the line goes down the opposite is true. The resulting level represents the inventory holding of that day. Whilst it is not difficult to discern that there is an upward trend of some sort going on over time, the real question is why does it consistently go up.
The easy answer is that there are simply more receipts than issues. Yes, but why do they keep on bringing more in than they consume? Wouldn't it be prudent to adjust the receipts to the issues so that the inventory level stays at the same low level as it was in June 2016 (which was plenty)?
To make my point of what's happening here, I also called up the Receipts/Issue diagram in SAP. It displays cumulative receipts and issues and if you take a close look you can see that the gap between those ever widens - which means receipts consistently outweigh issues or consumption.

Back to the question why and the 'not so easy' answer... if you look at the red line (inventory) you can see that consumption goes down very regularly (it's always the same angle). But receipts are pretty regular too. Only do they go up steeper than the issues, which go down flat. There are a number of dynamics going on here. For one this material is planned deterministic by placing replenishment orders with a long lead time to an anticipated demand. That demand is stubbornly overstated and there is no check in place when inventory keeps rising. Also, the planner is much more afraid of stock-outs than they are punished for holding too much inventory. Therefore, if one can't look at every part every day then keeping it coming is not a bad solution for them.
In my relentless efforts to try to convince organizations that placing buffers to absorb variability is better than to try to bring in... 'exactly what I need in exactly the quantity that I need it at the exact time that I need it', I often am faced with resistance to do so (calculating and placing buffers after analyzing historic consumption by the system) because planners do not want to hand over their calculations to SAP. They'd rather do it themselves to stay in control...

look again at above graphics! How did that work out for you?

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The incredible Power of a Material Forecast

What is a material forecast? This is not to confuse with sales forecasting or a master plan where finished good's demands are forecasted through product groups. A material forecast relates to the anticipation of future consumption of purchased parts. In SAP ECC, for example, you can assign a material forecast as a policy. In that case you would use the MRP type VV together with a lot size procedure and a buffering strategy (I suggest a dynamic safety stock through a Range of Coverage profile).

This would result in a de-coupling of the part from any dependent requirements coming through the Bill of Material and the only demand that triggers replenishment, is the material forecast itself. Let me be a little more descriptive… When using such a policy you are - for planning purposes - ignoring any demand coming from a master plan and simply fill up stock at the beginning of each period… irrespective of what that a finish goods or production planner thinks you need to put up, based on what they think they will need.

To not have visibility into the future scares the living daylight out of most buyers and materials planners! This is so, because most people are told that they must bring in exactly what we need, exactly when we need it (who the heck came up with that mantra?). The problem with this kind of thinking is, that you will never exactly need what you think you need when exactly you think you need it. But because you act this way (and order this way) your supplier is chasing your lead… and that "lead" pulls in and pushes out and pulls in and pushes out and orders less and orders more and…

Because your supplier never knows what you want and when you want it, they get frustrated and won't make stuff to stock anymore. They say "if you want 25 pieces on November 20 then place an order and I start the process the first week of July. You can then have it delivered on 11/20 because it takes me 3 months to get my raw materials, 2 months to manufacture the parts and 3 weeks for transportation to your facility." So you place the Purchase Order and after 2 weeks the master plan has changed and you need 22 --> order an additional 2! One week after that it turns out that we need the parts only in December ---> exception: push out the order. Then a rush order for the finished product comes in and we need some of these parts in September ---> exception: pull in.

Now, this game can be repeated (and will happen) over and over and over and you end up in exception message galore… and you'll experience a constant back and forth between stock-outs and excess inventory… and the supplier goes crazy!

Here is an idea! Ignore all this stuff because it is not going to happen anyway, and - if you have some sort of a consistent consumption pattern - just fill up your inventory at the beginning of the period, so that you can consume what you need without running out and with no excess stock. How do you do that? You forecast an approximate future consumption (which is easy if you have somewhat consistent consumption) and put an additional buffer on top (but it must be a buffer, not a static safety stock) and tell your supplier to deliver the same quantity at the beginning of every period (so you end up ordering the same quantity regularly). Provide the supplier with that forecast and give them a guarantee that you'll pick up that quantity at that time for at least the next [fill in blank here] months. You will be surprised how the supplier all of the sudden makes the parts to stock before you ask for them, how the lead time shrinks to the transportation time only and how you get your stuff on time and in full like clockwork…

I know, I know what you say… "I can't do this. What if I have an unusual demand? What if I don't have any demand anymore? What if Florida freezes over?" Let's compare what you do today and what a material forecast does.

1. Today your suppliers experience an incredible amount of noise in your ordering. They insist to start the process ONLY when they know what you order. Tomorrow they would experience a leveled demand from you and make this stuff to stock and deliver regularly to fill your inventory at the beginning of every period.
2. Today you receive your parts after a long lead time and sometimes you'll get what you ordered. The problem is that what you ordered a long time ago is not what you need anymore. Tomorrow you just consume what you have in stock and the supplier fills it back up. Should you need more than what you forecasted, you'll run out… BUT!... The next receipt from the supplier is near. (You will not run out at the beginning of the period and if you run out at the end your next, scheduled receipt is close)
3. Today you are fire-fighting the hell out of your ordering process (exception messages are plentiful)… AND… nobody is able to help you. The suppliers can't keep up with your ordering patterns and will give up on you. Tomorrow, the supplier receives a leveled and consistent stream of orders which they are able to plan for on their side. Once the relationship has improved, engage with the supplier to have him take on part of the safety buffer your maintaining ion your side

The graphic shows the effects when you switch from a deterministic replenishment policy to a material forecast (we call the policy "Dynamic Buffer"). In this example the average inventory holding drops from 200 parts to 40 parts. The supplier is given a forecast to deliver 62 parts at the end of every months. This will ensure that there are 62 pieces plus 8 pieces buffer (5 days in the Range of Coverage profile) in inventory at the beginning of every month. With an average daily consumption in the past of 3 pieces per day, a stock-out - if it ever happens - can only occur towards the very end of the months and therefore, the worst that could happen is that a production order would have to wait for a few days until the next receipt comes in.

I strongly suggest that you explain this new situation to the supplier and give him a guarantee that you will pick up these exact quantities at exactly that time for at least the next 3 months. This should motivate them to make the parts into their own stock ahead of time so that they only need to pick the parts from their inventory and ship it on the 28th of every months. Can you see how now the lead time (Planned Delivery Time in MRP2) drops dramatically? In the above example the lead time was cut from a whopping 212 days down to 2 days transportation.

Let me be clear, this is not for every part… it has to have some sort of consistent consumption pattern and there must be some movement. But I am sure there are plenty of parts in your business that match that description… so why not improving your life as a planner at least to some extend?

Per my experience it is very difficult to get planners to not only dare to move to a "dynamic buffer" policy but to also leave it there. They feel an incredible amount of pressure coming at them when their managers, partners or colleagues do not agree with what they see now in MD04. The key to getting the change done is to communicate properly with all parties involved. You'll have to explain your intent and show the benefits this will bring along.

The switch is very hard to get done - not because it's not working - but it's hard to imagine that all of a sudden the system works for you, instead of you working for the system.