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- Jan. 3, 2012 -
Supply Chain Network Design: Integrating Supply Chain Network Design Tools into Sales and Operations Planning
More and More Companies See the Value; New Product Helps Determine what Marketing Campaigns Deliver Bottom Line Results
by SCDigest Editorial Staff
Many companies have been expanding their use of supply chain network optimization tools far beyond the "where should I locate my distribution centers?" kind of questions that for many years drove the vast preponderance of the network design projects.
Supply chain leaders from PepsiCo, Procter & Gamble, Exxon Mobile, Tyco and many others have been using network design tools on a continuous basis to answer an on-going series of questions, and keep their networks tuned to changes in the environment and overall company strategy. Those issues include where to optimally source materials and components, what products should be made where, how the supply chain should optimally support new product introductions, insource versus outsource decisions, and many more.
This kind of analysis is commonly performed on the sales and marketing side of a company - but rarely is it then fully integrated into the supply side view of the world.
Among the other uses for network optimization tools is to support the sales and operations planning (S&OP) process, providing a company with an expanded "what if" and scenario planning capability as well as tools that can help to ensure that consensus demand plans are in fact feasible and that the supply chain can support them at an acceptable cost.
"Network optimization tools can help in an S&OP process to determine, for example, what should be made where and when. These tools can also help you evaluate potential capacity bottlenecks of various sales scenarios," says Dr. Michael Watson, adjunct professor at Northwestern University co-author of the recent book "Supply Chain Network Design, and SCDigest expert columnist. (See Supply Chain Network Design - By the Book). "For example, if you are considering a big promotion, these tools can see if you have the capacity to handle it. In addition, if you are creative, you can use these tools to help determine what should be promoted. If you have excess capacity on a particular line, you could run a promotion on items made on that line."
Watson also says that "Optimization is too often left out the S&OP process. A company's operations are likely very complicated and interconnected. If the S&OP process does not use optimization to help explore options, you are potentially missing some big opportunities."
Jeff Karrenbauer, CEO of Insight, a leading provider network optimization software and consulting services, recently noted on a Videocast on our Supply Chain Television Channel that "A key focus of S&OP is obviously supply and demand synchronization. So we'd like to do that I think in the context of the entire supply chain."
To view the full broadcast, go here: Supply Chain Design and Analytics: Where the Real Money Is Part 2. A short excerpt from the Videocast with Karrenbauer and SCDigest Editor Dan Gilmore discussing new software from Insight that enables integration of marketing campaigns with supply chain network design to deliver "profit maximization" is provided later in this article.
He said that it can be very difficult if not impossible to really do that full synchronization without a model of the supply chain network, which is what a network design tool will provide to a company. Otherwise, Karrenbauer said, it often boils down to what he said one company executive said characterized their S&OP process: "warring spreadsheets." A network design tool, on the other hand, gives everyone one version of the truth in terms of the supply side of the equation.
(Supply Chain Trends and Issues Article - Continued Below)
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Spreadsheets, Karrenbauer adds, should not be confused with "advanced analytics" - spreadsheets do "arithmetic." They "are not capable of doing this advanced synchronization," he said. "You've got finite manufacturing capability, procurement above that, downstream distribution…by relying on spreadsheets, you are often just winging it" with regard to a comprehensive analysis. "You need powerful analytics" to do the job right, he said.
He added that what is especially powerful is the ability of the network model to look at how demand forecasts over some time period - say 12 or 18 months - might be supported by the entire supply network, and where there may be problems coming down the road. Those issues can start to be addressed proactively, rather than not realizing the constraints until there is little time to do much about it, or the costs to support the demand are very high.
Bringing Demand Generation into Network Optimization
In general, demand for SKU families and geographies is a fixed input a network design tool, both generally and specifically in support of the on-going S&OP process. Companies can look at different levels of demand forecast in a "what if" type run, but historically each run of the model has a fixed level of demand associated with it.
A couple of years ago, based in part on some comments in an article from SCDigest editor Dan Gilmore, Insight decided to look at whether it was possible to relax that constraint on demand being fixed within a supply chain network model – letting demand becomes adjustable.
To accomplish this, another set of inputs is added to Insight's network optimization tool relative to marketing campaigns – specific potential marketing spend, and the resulting "lift" to demand that will come from these various potential advertising campaigns, promotions, etc. for a given period.
Of course, this kind of analysis is commonly performed on the sales and marketing side of a company - but rarely is it then fully integrated into the supply side view of the world.
That is what the new add-on component to the Insights Supply Chain Optimizer (ISCO) network optimization tool does. It looks at the full range of potential marketing campaigns and their forecast impact on demand in terms of the supply chain costs to support that demand - with the goal of "profit maximization."
This can be a bit of a change for supply chain managers and network design tool outputs, which are usually more focused on "cost minimization." But company executives are interested in maximizing profits, and the approach is more consistent with the growing trend of what is often now called Integrated Business Planning (IBP), which is generally considered to integrate a traditional S&OP process with a company's financial planning.
The thinking is very simple, even if the underlying processing is very sophisticated.
Videocast Excerpt of Gilmore and Karrenbauer Discussing
Integration of Marketing Campaign Planning with Network Design Tools
"First, you look at what demand creation is profitable to begin with," Karrenbauer said. "Second, if the demand is profitable, do I have the capability to fulfill it?"
On the latter point, SCDigest editor Dan Gilmore noted that when companies look at the return from different marketing initiatives, it is often just at a revenue level, or sometimes the gross margin return based on standard cost data. But if the supply chain as it stands can't support the additional demand, those gross margin numbers may be inaccurate, such as if a company must incur higher costs by sourcing the product versus producing in-house.
Karrenbauer agreed, and said the analysis can get a lot more detailed, such as looking at whether it may make sense to do for example a given campaign on the East Coast but not on the West Coast, due to differing supply chain costs or constraints.
The key, Karrenbauer said, is that companies have to accept the idea that they may discover some of the marketing spend they do turns out to not be profitable when it is connected to supply chain costs and capacities – and that might be uncomfortable at first.
"It seems to me this is bringing a more dynamic view of demand into the IBP process," Gilmore later added during the broadcast.
Are you using supply chain network design tools with S&OP? What is your reaction to the idea of integrating marketing campaign planning with supply chain network optimization? Let us know your thoughts at the Feedback section (email) or button below.