Who Loves Ya? Demand Planning or Supply Planning? (Part 3)

Sven Aunapu

Director of LifeLine Services & Education

View From The Ridge: 50

April 1, 2016

In Part 1 of “Who Loves Ya?” we tackled the giant Elephant in the Room: What exactly is the difference between Demand Planning and Supply Planning? It’s all about managing the Customer Forecast (Demand Planning) and the Inventory Supply (Supply Planning).

In Part 2 of the series, we explored some of the tools that enable superior Demand Planning:

  • The Demand Forecast
    • Causal Forecasting
    • Deterministic Forecasting
    • Stochastic Forecasting
  • Aggregate Forecast Management
  • Advanced Seasonality
  • Daily Demand Forecast Profile
  • Trend Calculation
  • Lost Sales

For the final pieces of the puzzle, we must identify the tools available to manage Inventory Supply and deliver superior Supply Planning.

Order Projections

When managing inventory supply, its important to understand what our inventory needs will be tomorrow, next week, next month and even next year. Order projections enable you to view periodic demand plans and purchase requirements, while projecting demand and purchases as far out as one year. These projections also give you the ability to apply annual growth rate to projection calculations (e.g.: growth through new marketing plans, new markets, etc.).

Don’t forget to share this information with your suppliers because this tool is the first step in Supplier Collaboration.
The system will enable you to:

  • Build and customize an order projections report for the selected period (by sales, purchases, receipts, on hand, etc.) and write the report to an Excel output file
  • Share projection reports with suppliers to shorten production schedules, minimize supply problems, and provide a basis for negotiating lower prices over a projected period
  • Confirm with a supplier that ordering requirements will be met
  • Assist warehouse management with labor scheduling
  • Include any or all of the following, by period, on the projection report: purchases, demand and dollars
  • Use an annual growth rate in the projection calculations and add this to an item’s trend
  • Help management determine future cash requirements

Secondary Suppliers/RFQ

In many commodity industries, there are multiple suppliers for the same item, with different costs and lead times. In these industries, being out of stock costs more than a single lost sale; it will cost you customer experience and loyalty.

For these types of items, a process is needed to identify potential out-of-stocks due to supplier backorders, and to re-route these order quantities to a secondary supplier. Because there can be multiple secondary suppliers for a given item, with different costs and lead times, this process includes a Request for Quotation (RFQ). The RFQ solicits quotes from the available suppliers, and identifies the appropriate option to receive the ‘fill-in’ order for the backordered quantity.

Public Holiday Calendar

Here is one of our favorites – a little tool that make the life of a planner so much easier! The Public Holiday Calendar is used to manage holiday shutdowns and closures. The tool maintains inventory and service around a vendor’s closure and ensures no service disruptions.

Holidays are treated as a Supply Capacity Plan where the supplier’s capacity to fill an order is zero Supply Chain Planning (SCP) will automatically recognize the zero capacity and suggest earlier orders to account for the impending closure. For example, you may have a supplier that shuts down for Chinese New Year. In this case, the system will may suggest earlier order(s) so that you can still meet demand despite the supplier's closure.

Planners … Who Loves Ya?

Multi Echelon Inventory Optimization (MEIO)

Traditionally, Multi-Echelon is one of the most misunderstood and poorly-developed tools in the industry. The need for Multi-Echelon has been touted for years now.  Looking at locations (warehouses, stores, etc.) as “siloes” results in redundant safety stock. On closer examination, we recognize there is no connection between the store silo and the distribution center silo. Many solutions simply roll up POS sales. Remember this: the correct demand signal for a supplying location is not just an aggregate of SKU sales from customer facing locations; the correct demand signal is what the customer facing locations will actually order (which accounts for constraints like order schedule, buying multiple, etc.). The difference is profound and the results from using the correct demand signal is game-changing.

Multi-echelon inventory optimization considers the entire inventory investment, taking into consideration the demand forecast at the customer facing echelon as well as order and logistics constraint, e.g. some items must be bought in case packs versus individually. Demand forecasting and inventory planning decisions are made at the enterprise-level in a single-optimization exercise, rather than in a sequence of individual exercises for each echelon. This is a holistic approach that allows you to achieve service goals with the most profitable inventory investment possible.

True MEIO must:

  • Forecast correctly up the supply chain
  • Use accurate lead times between echelons
  • Control order batching between echelons to identify optimal order sizes
  • Coordinate demands up the network to support events
  • Exploit full network visibility when performing constrained supply allocation (auto constrained supply allocation must be part of the MEIO solution)

Blue Ridge has developed a time-phased daily SKU order projection that enables true MEIO.

  1. Start with all segments of forecast at the customer facing echelon.
  2. Take into account seasonality, trend, daily profile (if applicable) and event uplift.
  3. Project forecasts out for a year and add in committed quantities, expected receipts, inventory positions and any necessary rules and constraints: like buying multiples, minimums, maximums and lead times.
  4. Move forward a day and compute the next inventory position, low stock point (LSP), order up to level and suggested order quantity.
  5. Calculate time phased SKU order projections (order forecast), expected receipts and inventory positions.
  6. Repeat the process until the time horizon is satisfied. The store/SKU order projections are aggregated and become the SKU forecast at the distribution center to drive replenishment optimization at the DC (remember, they have all the demand and inventory influences built into them)


Supply Planning/Capacity Calendar

Supply Planning compares future order projections to manufacturing capacity. When projected orders exceed capacity, the items are ordered earlier. This provides the ability to compare future order projections against a supplier’s available capacity. Orders in excess of capacity can potentially be revised – pulling future orders to an earlier time period when capacity is not yet met.  Capacity levels can be defined for individual items as well as groups of items.

For customers that have suppliers with manufacturing constraints, a feature has been added that allows SCP to anticipate and adjust current replenishment orders so that the product is available before its needed, when supplier constraints would otherwise jeopardize service goals.

We started out the series asking you which piece of Supply Chain Management is most important to you- Demand Planning or Supply Planning? We think the answer is pretty obvious … both are equally important and one cannot work well without the other. Having each of them work together is key.  Our hope is that this series has shed some light on tools that will help you manage both parts effectively and profitably. Blue Ridge loves ya!

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Back to Part 2