Increase profits by tweaking behavior
– It sounds tempting and simple right?
By Benjamin Obling, COO & Partner at Perito Consulting
So, you made your S&OP transformation project, had all the plans and processes ready, made the perfect implementation and roll-out. BUT the results are not as expected. Yes, you have improved the demand and supply planning but not nearly as much as you had hoped.
It all looked good on paper, but even with the best intentions what ends up happening in most cases is an unsuccessful transformation. You get some of the way, but not all the way. The profit you promised the board did not become a reality. There are still millions missing, and you cannot help but wonder: What went wrong?
More often than not it is corporate culture getting in the way of strategy. People are still doing exactly the same as they used to. They have not changed their behavior, and they are still planning on gut feeling and not on data. This is not optimal.
When you do not trust the data and advice coming from forecasting, then you are leaving money on the table. It is as simple as that.
So, the question is: Are you ready to change behavior in the organization?
Get in Control of Your Inventory
It is all about stock controlling… and getting things optimized.
Stock controlling helps you improve your planning behavior by focusing on the actual behavior after the forecasting and parameter optimization like MOQ and safety stock, etc. is complete. Do we trust the forecast and use the data OR do we just buy and produce as we have always done?
So how to get started? These 5 steps will help you with Stock Controlling and hopefully bring you closer to efficient profitable planning in your organization, so let’s get going.
1: Identify Stock Dissimilar to Your MRP Proposals
First step is to find out where the problem is. Stock Controlling should identify and quantify non-compliance (where we don’t follow the data). In practice, this means identifying where behavior has been dissimilar to the MRP proposals.
The most important planning input parameters are:
- Demand forecast
- Safety stock/Reorder point
- Minimum order (lot sizes, minimum purchases)
- Lead time
- Stock status and order
Once you have located all the places where your data is out of balance, you can continue onto the next step.
2: Sort Your Data
Now that you have located where behavior is dissimilar to the MRP proposals, the next step is to make an audit of all the materials, planned material combinations, and warehouse combinations and classify them into either:
- Optimal stock (compliance stock) or
- High/low stock compared to the MRP proposals (non-compliance stock)
All your non-compliance data should be further separated into separate piles by answering the following questions:
- Is it a safety stock issue where you are ordering things too early or too late?
- Is it due to lot sizes where you are able to purchase 100, but end up buying a quantity of 500 and then have 400 in additional stock, because this is what you are used to purchasing?
- Is it a legacy issue where the stock is out of balance but it is not a new issue, but due to earlier non-compliance or forecast errors.
- Do you have deadstock that needs to be separated from active stocks? How is it developing and what can we do about it?
- Is it due to forecast errors where your planners are doing what they are supposed to, but there is a systematic over- or underestimation?
Locating the issues behind your non-compliance data is important for the following step, which is figuring out the root causes of the issues.
3: Analyze the Root Causes
We have figured out there is a problem and what we are doing wrong, practically speaking. Now we need to answer the question of “why?”.
Non-optimal inventories have one of two causes:
- Your planning parameters are off – your data is not ready to be trusted
- Your planning behavior is non-compliant and different than the proposals in the MRP systems
The first one is easily changed and improved, when you have robust Integrated Business Planning tools. You need to bring your planning data like forecast, safety stock, etc. up to the mark. However, behavioral changes are of a more challenging nature. In my experience, there are different root causes to why actual planning behavior does not follow the forecasts made by the MRP. It can be anything from the fear of a stock out, cultural distrust in forecasts, or capacity optimization.
No matter the reason, it is important to analyze and locate why you and your team are not following the MRP proposals – what are your fears, and why are you distrusting the proposals made by the system?
Once you can pin-point the causes behind the behavior, it will become much easier to change and thereby also optimize your procedures.
4: Integrate Feedback Loops
The second to last point and the secret ingredient to optimizing planning behavior and stock-controlling is the integration of feedback loops into your planning parameter optimization. Do we need to change safety stock, ROP, forecast, lead times, etc. to improve the MRP proposals?
Before explaining the genius concept of feedback loops, we need to revisit the benefits of beginning a stock-controlling process in the first place.
Finding the difference between your actual inventory and the simulated inventory gives you the potential inventory – the difference between what your inventories look like and how they should look like according to the simulations. This is the whole point of a stock controlling process.
You then need to create feedback loops along the way in your S&OP process. Thereby, allowing newly found issues from the stock controlling need to be considered in the planning system continuously and thereby correcting the behavior as we go along.
Incorporating all your findings from the previous steps into a feedback loop and sending the knowledge back into your planning systems creates more up-to-date and precise data. Feedback loops become a way to always enable reality checks of how the situation is going. This, furthermore, makes you able to adjust demand forecast, safety stock/ROP, vender lead time, or correct incorrect master data continuously.
So, get on it and start integrating your feedback loops!
5. Are you ready?
The only question left to ask is: Are you ready to believe in your data and is your data ready to be believed in? Because, believe me, when you get both right the profits will be coming your way.