Friday, October 5, 2018

...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?