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  - March 26, 2008 -  

Supply Chain News: Order Promising is where the Supply and Demand Balancing really Intersect


Too Many Companies Fail to Understand the True Nature of Order Promising, MIT’s Larry Lapide Says



SCDigest Editorial Staff

SCDigest Says:
The most effective demand-management approach aligns a company’s tactical supply-demand plans with its customer segmentation strategies, policies, and priorities.

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With all the focus on supply chain management and supply and demand balancing, sometimes companies forget a very simple truth – for many, in the end, it all comes down to what happens when its time for a customer to place the order.

That’s the perspective of MIT’s Dr. Larry Lapide, director of MIT’s Demand Management Solutions Group since it was launched in 2006 (See MIT Announces New Project to Help Companies Understand “Demand Management.")

The order promising process addresses a basic customer question: Can you fill the order when the customer wants to take delivery and, if not, when can you? If planning inadequacies cause supply shortages or if a customer’s expectations are set too high, the order will not be filled satisfactorily,” Lapide recently wrote in MIT’s Supply Chain Strategy newsletter. “For this reason, order promising is the linchpin of demand management, in which companies aim to match supply and demand over time both during and in between planning cycles.”

One basic problem, Lapide says, is that companies often fail to well-align their order promising strategies with the corporation’s overall business and customer strategies. This becomes especially critical given the advance of Lean (i.e., low inventory) and make-to-order supply chain approaches, when a customer can no longer bank on piles of inventory to support order promising.

A survey performed for the Demand Management Center in 2006 found that almost 90% of respondent companies promise an order delivery time when the order is taken and that almost one-half of all respondents quote from a standard lead time list (see graphic below – more than one answer allowed). Many of these responses indicate customer commitments are being given based on incomplete or misleading information. The inevitable result: order promises that too often cannot be met.

(Supply Chain Trends and Issues Article - Continued Below)



Order Promising Accuracy is Different than Optimization

Lapide notes fixing order promising accuracy isn’t the same thing as optimizing order promising strategies. The former looks only from the view of getting the right information to the customer. Order promising optimization, however, attempts to execute order promising strategies that balance customer requirements with the needs and strategies of the company.

That can only be achieved through segmentation, in which certain customers and orders receive preferential treatment, Lapide says.

Relatively few companies are using sophisticated order promising segmentation strategies. In the MIT survey, 40% of companies operated on a FIFO basis – orders were taken and commitments made based purely on order sequence – a percentage that SCDigest believes may actually be below the true number. Another one-third of the companies gave preference to customers that generated the largest sale revenues.

“Such practices and fulfillment strategies are not usually part of optimal order promising, which requires that limited resources be supplied to those customers that are prepared to pay more for them or to the most strategically important customers,” Lapide writes.

The bottom line, says Lapide: The most effective demand-management approach aligns a company’s tactical supply-demand plans with its customer segmentation strategies, policies, and priorities. When these components are in step, the company is well-prepared for its moment of truth—when a customer places an order and a fulfillment promise is made.

Do we need to pay more attention to “order promising?” What is the difference between accuracy and optimization? What should companies be doing here? Let us know your thoughts at the Feedback button below.

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