Plan for profit – Supply Chain Optimization
May 16 2012
We all know that effective planning is a key factor in delivering a positive net result for manufacturing and distribution. However, existing planning methods do not deliver the absolute best plan for planners, and specifically – one that is focused on profit. The advent of Supply Chain Optimization changes all that. It is, in short, a game-changer for supply chain planners.
Managing the complexities of the supply chain
It goes without saying that the Supply Chain is extremely complex, so over the years a myriad of methodologies have been developed in an attempt to maximize effectiveness, meet customer demands, while reducing unnecessary costs, such as with over-stocking of inventory. The plan also needs to consider and address a complex range of constraints and business rules:
- Balancing resource and capacity
- Working with lead times, expiry dates and product change-overs
- Consider infrastructure, maintenance and storage capacity
- Building stock appropriately
- Catering for transport capacity and cost
- Optimizing batch sizes
- Responding to sales opportunities and new product launches
- Meeting all demand at lowest cost.
The traditional supply chain approach has been to forecast future inventory demand as accurately as possible, looking at the statistics of historic demand and predicted future events. A key disadvantage in this methodology is that unpredictability in demand is managed through setting ‘safety stock’ levels to cater for fluctuations. This forecast demand is then used to create a manufacturing and distribution plan to meet the forecast.
Leap in technology capability
For many years, theoreticians have been aware of the concept of “Supply Chain Optimization”, which considers all the constraints, and produces the absolute best plan from a profit point of view. Until recently, the vast quantities of data involved meant that the technology simply did not exist to make Optimization a practical option for planners.
Technical strides have now changed the landscape for planners dramatically, meaning the emergence of a new breed of Supply Chain Optimization solutions. The best of the specialist companies offer supply chain optimization solutions that are academically robust, with significant expertise and investment going into research and development by academic institutions and consultaning firms who have identified the potential that now exists.
Focusing on commercial effectiveness
The key draw card for planners wishing to use Optimization solutions is that they are commercially effective. The primary focus is that the plan now considers profitability as its main goal. It does this mainly by considering the optimal placement of inventory within the supply chain, and minimizing the operating costs (eg manufacturing, transportation and distribution). This is of course, highly appealing in the current economic environment, where companies are showing intense interest in reducing logistics overheads – especially in an era of rising transport and fuel costs. Planners can get clear economic value by identifying the plans that provide the optimal balance between resource utilization, delivery capacity and cost.
Supply chain optimization does this by identifying opportunities to lower cost at any and every point of the supply chain, with a view to delivering the lowest total cost.
Traditional planning and scheduling systems rely on forecasts and expected demand. Where they really start to fail is when unexpected events occur. Unfortunately this is a fact of life in the supply chain. These events can occur at any point in the supply chain, and are almost infinite. Regular fluctuations can be due to unexpected unavailability of stock, transportation problems, breakdowns or stoppages in the plant or warehouse, or sales promotions in response to changing market demand. Some fluctuations may be foreseeable and planned for with maintenance cycles and some can be completely unpredictable, such as natural disasters or changes in legislation. The usual response to this uncertainty is to store excess inventory as a back-up. Supply Chain Optimization applications give planners far more certainty about where and how much inventory needs to be placed across the supply chain.
Strategic and operational benefits
Corporations can use supply chain optimization across the decision making spectrum. It gives the ability to make strategic, long-term decisions such as quantity and location of facilities in the supply chain network, and also drill down in granularity to enable day-to-day operational planning decisions.
Real-time Control and Visibility
Supply Chain Optimization has ushered in a new era for planners, who can now get real-time control and visibility over their entire supply chain, and use it to produce the plan which will deliver the most profit.