Q. What is the ultimate goal of supply chain management in business?
A. To perfectly match the supply side activities of procurement, production planning, distribution planning, production allocation, warehouse planning, inventory planning and so forth with the demand side activities of incoming orders and forecasts so that all demands are met with the least cost.
Are today's enterprise resource planning (ERP), supply chain management (SCM), customer relationship management (CRM) systems able to achieve this holistic goal? Hardly! Then what is the solution?
Let us have a closer look. Traditional ERP systems are enablers of business activities, including supply chain, largely through their vast number of touch points. They do not have the capability to make plans so that demand is fulfilled with the least amount of cost through supply side activities. On the other hand, specialized SCM systems (the ones that pride themselves to be different from the SCM part of traditional ERP systems) try to come closer to close the gap between supply side activities and demand side activities. The limitation here is that, they do not have enough intelligence or flexibility to cope with the tremendous amount of data, activities, and other considerations which are part of today's big businesses. CRM systems are just one part of the equation in that they only take care of the demand side of business activities, so they do not help to match the supply side to the demand side in a cost-effective manner.
Fortunately, there is one tool which beautifully captures this lofty goal of matching supply side with demand or is at least capable of doing so. At some places it is called "advance planning"; at others, it is known as "supply chain optimization" or "advance scheduling" etc. Regardless of what the tool is called, nowadays many software vendors are trying to make their own versions to do almost the same thing, such as matching the supply side activities with demand side activities and trying to make the two balance. Some vendors have been able to achieve some success with their tool, but many others are still figuring out how to achieve it. For this discussion, we will call this tool advanced planning and optimization (APO). In fact, an APO tool enables the business to gear all its activities in tandem with the customer requirements.
Several notable benefits come from an optimization tool. It enables businesses to know how and when to fulfill orders and forecasts to get the best efficiency. It makes a business flexible and helps attain the best optimization of material resources. Ultimately, optimization results in massive savings in operation costs, while at the same time, improves customer services levels and can eliminate stock outs completely. All of these factors make APO a powerful tool for any business. Some other benefits of APO include
- Shorter scheduling cycles
- Reduced inventory levels
- Increased inventory turns
- Increased customer responsiveness (the ability to make changes in orders)
- Increased flexibility to make cheaper alternatives
How APO Works
APO starts from looking at the orders and forecasts and then mixes and matches similar ones. When required, it divides orders and forecasts into sub-orders and sub-forecasts and again mixes and matches those that are similar. Matched orders, forecasts or sub-forecasts and sub-orders are then combined for the purpose of planning distribution or production or for any other business plan. The APO defines distribution, production or any other constraints in addition to capacity and availability of resources. The APO also defines lead times, order priority, and other fulfillment requirements.
Once all the constraints, priorities, capacity etc. from the supply side are determined, the system calculates against the bundled orders and forecasts and comes back with the most suitable production, distribution or any other plan. This plan may contain groupings of common production operations. In other words, multiple products that require the same production operations are combined into a single production order.
Thus the planning data that comes out of this kind of tool is then fed into various execution systems like production execution, distribution execution, warehouse management, inventory control etc. In other words, whereas other systems act as enablers to do the business activities. This optimization tool works as the brain behind all supply chain activities.
The Technology Behind APO
Most optimization tools are constraint-based programming, genetic algorithm-based computing, linear programming, or Taabu Search etc. It is interesting to note that most of the big ERP and SCM vendors (including "the Big 5") use an algorithm developed by a single company to achieve this optimization functionality.
Linear programming is good for small and less complex kinds of problems. However, it does not give satisfactory performance in complex situation because the number of performable calculations increase in geometric proportion to the problem's increased complexity. The best bet is genetic algorithm-based computing. This technique does not need the user to define any rules in order to perform any necessary calculations. The number of calculations required to perform operations are fewer when compared to other techniques. Genetic algorithm-based computing is also transparent to the user as it does not need any user input and performs well in complex situations. Consequently, optimization tools which use genetic algorithm-based computing are the best performers of the lot.
Because of the tremendous capability of the advance planning and optimization tool, businesses can witness massive savings by optimizing their business processes. These savings can be as high as 200 percent and, in most cases; at least a 50 to 60 percent saving is possible. These savings alone make an investment in this tool very attractive. But there are a lot of other benefits (which are mentioned throughout this article) which make this tool truly irresistible. Moreover, this tool is effective in both process and discrete industries.
About the author
Ashfaque Ahmed is a consultant of advanced planning, scheduling and optimization techniques in the area of manufacturing and distribution. He works with small- to medium organizations in the food and beverage, textiles, pharmaceuticals, packaging, paper, metals, CPG process manufacturing industries, and automotive in the discrete manufacturing industry to solve their supply chain-related problems. He holds an MBA in information systems and a bachelor degree in engineering.
Personal web page: http://www.geocities.com/ahmedashfaque2002/
He can be reached at firstname.lastname@example.org