A changing business landscape.

Organisations tend to take a safe path when selecting an enterprise resources planning (ERP) system. The desire from senior management and corporate IT for an ‘integrated’ system can override calls from functions to implement applications that best suit the needs of the organisation. This situation can occur for Operations Planning, a core part of your supply chains.

The most recent blogs have discussed three operational objectives for supply chains – delivery performance (DIFOTA), which is underpinned through providing Availability for customers (S&OP) and minimising uncertainty (risk). The DIFOTA probability measures evaluates the likely future performance in providing Availability, but the expectations of customers and consumers concerning Availability continues to change.

A situation has been developing (and gathering pace) over the past forty years for consumers to be presented with an expanding range of items, one of which should meet their exact needs. This has caused an increase in stock keeping units (SKUs), each with lower sales volumes. And, the structure flows back through supply chains to affect tier 2 and 3 ‘industrial’ suppliers, such as fabric mills and electrical cable suppliers, with requirements for a product range having more patterns and colours, but with smaller SKU order quantities. So, for many businesses in consumer packaged goods (CPG) or fast moving consumer goods (FMCG) supply chains, there is a need to plan their product lines with different attributes:

• Intermittent demand: The driver of replenishment has become many retail shelves, rather than a few main and secondary distribution centres. Consequently, there is a more intermittent demand pattern from multiple stock holdings
• Lumpy demand: a more unpredictable demand pattern that does not comply with a normal distribution (high volume items have a fairly regular and predictable demand pattern that fits a normal distribution). The traditional inventory techniques of calculating safety stock based on a normal demand distribution, is therefore insufficient
• High service levels for low volume items: Some of the product lines will be considered important, such as new product introductions, which are often heavily promoted. A high service level (98 to 99 percent) is therefore expected; however, the cycle and safety stock required under intermittent and lumpy demands (a skewed distribution) will be higher than under a normal distribution

Under this scenario, change is required through (at least) the core supply chains, to address the more uneven re-ordering patterns and product replenishment time (from the inventory or sales trigger to receipt of new stock). As the total volume of sales increases, but the order size decreases, supply chains must become even more responsive, to contain costs. Shortening global supply chains (called ‘on-shoring’ and ‘near-shoring’) to reduce lead times is a possible objective, but re-designing a supply network can be disruptive and takes time. Another approach is to become an Agile business and through example, influence your tier 1 and 2 suppliers to do likewise.

Responding to the situation in this way indicates a recognition of Uncertainty in your supply chains, requiring the organisation’s response to identified risks. One of the risks is that the approach and tools used by Operations Planning are not sufficiently robust to address an intermittent and lumpy demand and supply business model.

Different applications for Operations Planning

As noted, the demand patterns for intermittent and lumpy demand will not comply with a normal distribution, which could be the foundation of the inventory tool in your ERP system. There are other probability distribution models (e.g. Poisson, Laplace and Croston) that recognise the ordering pattern of smaller and less frequent demands, but they are not commonly found in Operations Planning modules. So, the planning methodology for addressing a different business model may not be available in the ERP system.

In recent years, applications have been developed, based on the calculation of probabilities for all possible demands on an item. This allows for many iterations of an intermittent and lumpy demand profile and provides a statistically robust outcome for the required inventory to cover the likely demands over the replenishment period. The applications operate through cloud computing services or on desktop computers.

This approach can be considered as a comprehensive ‘what-if’, with all possibilities considered. It changes the planning approach from an assumption that the future sales forecasts will approximate the past pattern to considering the required service levels and probabilities of future demands for the most probable and alternative future outcomes.

The challenge for Operations Planning and the Supply Chain group is convincing senior management and corporate IT that it is preferable to use a planning application that is more relevant to changing circumstances. This is not a new challenge – on two occasions I presented management with a proposal to acquire inventory modelling software and its hardware. The result was one win and one loss – you will not win all your battles. But, the world of business and supply chains has always been changing and you need to be across the changes to convincingly argue for a different way to operate.