“Demand and supply are happening at the same time, don’t separate them integrate them”.
The notion that ‘demand’ occurs and ‘supply’ responds is a fallacy, in fact, the two are symbiotic whereby one is as dependent upon the other as much as the other on the one. These two entities have a mutually beneficial relationship that should, must, be leveraged however there’s one significant issue; they speak different languages.
When I say ‘different languages’ I don’t mean variants of the Germanic language, I mean one speaks Klingon and the other Dothraki. Although by no means an expert linguist I can’t imagine beings from either existence would find communicating particularly easy with the other! Demand talks in terms of customers, accounts, segments, and revenue while supply talks in terms of plant, asset, and shifts.
The significance of this difference only becomes visible when you introduce a monolithic Enterprise Resource Planning (ERP) system which is invariably configured by financial hierarchy. Unless the ERP hierarchy aligns finance, demand and supply there will be significant challenges aligning supply and demand in the execution horizon. ‘Ah’ I hear you say, ‘you don’t understand’; ‘IBP is a strategic business management process, design to drive the aspirations of the enterprise-focused on 4 to 36 months’. But here’s the gotchya; what credibility is there to a long-term commercial plan when there’s repeatedly poor demonstrated execution . “Trust us, we’re going to double in revenue in 36 months, our customers won’t mind current poor service and high backorders”!
To validate the long-term plan, the business must demonstrate capable execution. Aligning and integrating demand and supply over the short-term horizon is the context of numerous prestigious publications however, perhaps I can provide a synopsis of the dynamics. Within the 6 month horizon there are forces which influence the demand plan which are virtually impossible to accurately forecast; sales teams incentivized to sell, segment marketers, channel marketers, tenders, promotions, the list goes on.
The long-term plan, dollarized and aggregated to one level below the P&L smooths the peaks and troughs to an acceptable accuracy. However, ‘supply’ is left to respond to the customer demand i.e. SKU mix and volume – which only vaguely resembles the system generated statistical forecast, disaggregated from a revenue number via historical attachment rates.
During the weekly S&OP review ‘demand’ confidently displays upper quartile aggregated, dollarized demand plan accuracy while supply shows wild inaccuracies in customer order SKU mix and volume verses the system demand plan.
For a business with high SKU proliferation it is unreasonable for ‘demand’ to validate SKU level demand plan accuracies, besides the business is more interested in evaluating the commercial trajectory. Although ‘supply’ repeatedly demonstrate base-unit-of-measure demand plan inaccuracies, there is little ‘demand’ can do since monthly manual SKU level demand plan validation is simply not feasible, and the ERP system is geared to aggregate, dollar corroboration. So the weekly S&OP merry-go-round continues with ‘supply’ pointing to ‘demand’ and ‘demand’ demonstrating stela performance.
There is a solution, albeit outside the system of record; the premise is based upon ‘demand profiling’ and establishing service and supply tactics to align to unique demand profiles. Although this principle means an additional level of analysis it provides an effective means to translate and integrate beings who speak Klingon, those who speak Dothraki, and the all-powerful financial wizard.
