robust sales and operations planning...working capital (inventory & cash & credit) ensure...

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All contents © copyright 2016 Demand Driven Institute, all rights reserved. 1

Robust Sales and Operations Planning

Supply Chain Characteristics 1965 Today

Supply Chain Complexity Low High

Product Life Cycles Long Short

Customer Tolerance Times Long Short

Product Complexity Low High

Product Customization Low High

Product Variety Low High

Long Lead Time Parts Few Many

Forecast Accuracy High Low

Pressure for Leaner Inventories Low High

Transactional Friction High Low

Complex and Volatile is the “New Normal”


Conventional planning rules have not appreciably changed since the 1960s. MRP still plans today the way it did 50 years ago!

Today’s supply chains look VERY different from 1960’s supply chains when conventional planning rules were formulated but…

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The New Normal and Inventory Implications


Supply chains have elongated and fragmented while customer tolerance times have dropped dramatically.

This disparity means holding stock at some strategic point is a must to keep and/or grow sales.

Also, there are more products with shorter life spans to manage ‐ many use common components and resources.

This means managing stock positions effectively is a must for effective capital and resource management.

This also means that planning horizons are more remote from actual demand realization (longer range forecast).

This also means that detailed item level forecasting is much more difficult.

How is the conventional approach fairing with all of this?

The three rules of forecasts:1. They start out wrong2. The longer the range, the

more wrong they are3. The more detailed, the

more wrong they are

Conventional Failure


S&OP

Strategicforecast

MRP

Operational

date and quantity synchronization MPS

planned orders

Tactical

Relevant Ranges

Convention fails to manage ranges properly.

Flow‐Based Operating Model

Many flow‐based models have been proposed (e.g. Lean and TOC) but most have remained compartmentalized with only pockets of success.

Flow‐Based Metrics

Any conventional flow‐based metrics (e.g. due date performance) come into conflict with and are countered by the proliferation of cost‐based metrics.

Tactical Reconciliation

Reconciliation is not bi‐directional – it is a one‐way street. Reconciliation is also painful by introducing nervousness with every new MRP run and monthly S&OP updates.

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≠

Mismanagement of Relevant Range


Using Fully Absorbed Cost Metrics Using Forecast for Supply Order Generation

Fully absorbed unit cost = direct material cost + labor cost + overhead costs.

Direct material costs are VARIABLE costs.Labor and overhead costs are FIXED costs in the short range.

Combining VARIABLE and FIXED costs creates the false impression that fixed costs vary within the short range. They do not and that is why they are called fixed costs.

There are three rules about forecasts:1. They start out wrong.2. The more remote in time the extend

the more wrong they are3. The more detailed they are the

more wrong they are.

Forecasts drive planned orders in the MPS. These planned orders generate supply orders in MRP.

Capacity, capital, materials and space are committed to signals that have significant rates of error associated with them!

No Flow‐Based Operating Model

• Many flow‐based models have been articulated but…

• Conventional S&OP, MPS and MRP are configured to be a push based model.

• This means that flow‐based operating models like Lean and TOC typically remain compartmentalized and limited and most often conflict with the conventional system

• Is there a flow‐based model that can be implemented at the system level?


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Conflicting Metrics

• Convention has some flow‐based metrics in use.

• Their effectiveness is limited by conflicting cost‐based metrics.

• These conflicting metrics obscure what is relevant and introduce self‐imposed variability within organizations as personnel oscillate between protecting flow and protecting cost performance.

• When flow is promoted and protected, costs are under control. The inverse, however, is not true.


∆Flow → ∆Cash Velocity → ∆Net Profit

Investment( )→ ∆ROIDue Date PerformanceFill RatesInventory Turns

∆Cost → ∆Cash Velocity → ∆Net ProfitInvestment( )→ ∆ROI OEE

Fully Absorbed Unit Cost

System Nervousness and Bullwhip

Painful “Reconciliation”


Monthly S&OP Update

Monthly S&OP updates create massive shifts at the beginning of every month.

New MRP RunsMRP run results in massive cascading schedule changes as date and quantity changes at higher levels effect all connected lower level components.

Tactical reconciliation is not bi‐directional – it is a one way street.

Tactical Demolition and Reconstruction

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Thoughtware

These four prerequisites allow an organization to think, communicate and behave systemically for flow.

When these prerequisites are in place an organization has the proper “thoughtware” installed for flow.

Now we need a framework to utilize this thoughtware.


Four Prerequisites for Relevant Information

1. Understanding Relevant Ranges

2. Implement a Flow‐Based Operating Model

3. Tactical Reconciliation (bi‐directional) between Relevant Ranges

4. Implement Flow‐Based Metrics


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Demand Driven

Enterprise

Adaptive

TM

Demand Driven Adaptive Enterprise Model

All contents © copyright 2017 Demand Driven Institute, all rights reserved.

Actual Demand

Market Driven

Innovation

Model Configuration

Variance Analysis

Model Projections, Innovation & Strategic Recommendations

Business Plan Parameters

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Actual Demand

Market Driven

Innovation

FLOW‐BASED METRICS SUITEOperational Tactical Strategic


RELEVANT RANGESOperational Tactical Strategic

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1

2

3

4

1. Relevant Ranges in the DDAE Model


Actual Demand

Market Driven

Innovation

RELEVANT RANGESOperational Tactical Strategic

(hourly, daily, weekly time buckets)

(blends the present, short‐range past and future)

(annual, quarterly monthly time buckets)

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At Least the Cumulative Lead Time of the Product

(Past and Future)

Up to the longest Decoupled Lead Time

Cumulative Lead Time of the Product and Beyond

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2. The Flow‐Based Operating Model

Combines elements of MRP, DRP, Lean, Theory of Constraints, Factory Physics and Six‐Sigma.

Strategically places decoupling points for lead time compression and variability (bullwhip)

mitigation.

Paces operations to actual demand

Protects decoupling and control points through stock, time and capacity

buffers

Strategically places control points for

schedule synchronization

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Demand Driven MRP(Supply Order Generation)

Demand Driven Scheduling (Finite Control Point Scheduling)

Demand Driven Execution (Buffer

Management)

POs & STOs

Released MOs

MOs w/ Request Dates

MO w/ Promise Dates

On‐Hand & Synchronization

Alerts

MO Progression

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Variance Analysis Return Loop (supply order generation and stock management)

Variance Analysis Return Loop (scheduling, resources and execution)

Actual Demand

Model Configuration

2. The Flow‐Based Operating Model

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Example of a Demand Driven Operating Model Design

laser

machining

assembly

weld

saw

shear

paint configure

purchased component

stocks

Raw stocks

CC

Lead time = 1 weekLead time = 3 weeks

C

C

C

Customer

Decoupling Point (Stock) Buffer

Control Point (Time) Buffer

Capacity Buffer

C Control Point

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Actual Demand

Market Driven

Innovation

Model Configuration

Variance Analysis



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3. Flow‐Based Metrics


Actual Demand

Market Driven

Innovation

Model Configuration

Variance Analysis



FLOW‐BASED METRICS SUITEOperational Tactical Strategic

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Flow‐Based Metrics in the DDAE Model


Metric Objectives The Message Behind the Objective

Tactical

Operational

Strategic

Contribution Margin (cash generation rate)Drive innovation (internal and external) and growth toincrease cash generation capability (RATE)

Working Capital (inventory & cash & credit)Ensure proper levels of working capital to protect and promote flow in the short and long term

Customer Base (market share, sales & service & quality)

Ensure and grow a solid base of business for the enterprise (VOLUME)

System Improvement & Waste Reduction (Opportunity $)

Identify and prioritize obstacles/conflicts to flow

Local Operating Expense Control Spend minimization to capture the market opportunity

Strategic ContributionMaximize system return according to relevant model factors (volume and rate)

System ReliabilityExecute to the model, plan, schedule and market expectation;

System Stability Pass on as little variation as possible;

System Speed/Velocity Pass the right work on as fast as possible;

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4. Tactical Reconciliation


Actual Demand

Market Driven

Innovation

Model Configuration

Variance Analysis





The elements of DDS&OP

• Tactical Configuration/Reconciliation (shaping model to the evolving business strategy)

• Tactical Review (Demand Driven Variance Analysis)

• Tactical Exploitation (short range supplements to flow when necessary)

• Tactical Projection (projecting model performance under different scenarios)

• Strategic Recommendation (ideas for better model performance needing senior–level approval)


robust sales and operations planning...working capital (inventory & cash & credit) ensure...

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