Profitable-to-promise: A New Exciting Era
Written By: Ashfaque Ahmed
Published On: November 24 2005
You could be following make-to-stock, assemble-to-order, engineer-to-order, make-to-order, or any of the many other variant manufacturing environments that are available to fulfill your customer orders. In all cases, you are always faced with the perennial question of how to stick to the delivery dates you have promised to your clients. In the case of make-to-stock companies, the relationship between inventory and customer service levels (read: delivery date compliance) is always a tenuous one. Even if you keep surplus stocks at each distribution point, it may not help you to achieve desired customer service levels as the product mix may not be appropriate, there may be problems in transportation etc. In the case of make-to-order companies, any link in your supply chain may fail, and you can end up with poor service levels. Even worse, your manufacturing finite capacity calculations may be wrong making it simply impossible to deliver the goods on the promised dates.
On the one hand, you have to worry about the customer service level. On the other, you have to look after your bottom line. If you are providing desired customer service levels but your cost for this service level is too high (because some lower priority orders have been discarded, or optimization in your production process has been minimized or done away with, and so forth) then you will not be profitable. That is why you will have to make a balance between the bottom line and service levels.
There is one factor which can influence this balance substantially, though. What if you are able to provide the desired level of customer service, and at the same time, improve your bottom line? This sounds exciting but how it can be achieved?
The functionality required to calculate an accurate delivery date is dependent on many components of the supply chain system including material requirement planning (MRP), master production scheduling (MPS), advance planning and scheduling (APS), supplier management, transportation and distribution systems, etc. If these components do not work properly for you then you will not be able to calculate delivery dates accurately.
To see if you are able to keep your bottom line in check, you need to know what are your costs (such as material costs, inventory costs, production costs, stock out costs, transportation costs, etc.) for delivering the orders and what price you are getting for your products. Once again, these same components of your supply chain system along with your accounting system will give you the figures for your costs.
At least for these reasons, it is important that your supply chain system gives you proper results. Literature is available from many software vendors on how to achieve this using their software, but unfortunately, many of these software systems fail when actually put into operation. Even though systems may incorporate the functionality to calculate delivery dates and check your bottom lines, the foundation components upon which this functionality is built may be weak and so the systems will fail to deliver good results.
Delivery Date Calculation Techniques
Here are some techniques to calculate delivery dates. These techniques also take into consideration your bottom lines, though the degree to which your profitability can be figured vary, depending on both capability of the software as well as the fitness of the software to your operating environment (this is the reason the software should fit 100% to your operating environment). The effectiveness of these techniques varies from industry to industry. Industries which benefit from the different types of delivery date calculations are included below.
If you are a make-to-stock manufacturer, then this technique will help you substantially. Many industries like chemicals, paints, pharmaceuticals, CPG, food, oil & gas follow the make-to-stock manufacturing strategy. Here the manufacturer makes products and distributes them to their distribution points. From distribution points, the customers buy the products. If available-to-promise functionality is implemented correctly, then these manufacturers will be able to save money by reducing inventory levels, reducing transportation costs. At the same time, they will be able to increase customer service levels. This is accomplished by reducing lead times and traveling distances in transportation, analyzing product mix at distribution points, and making sure that the products which sell more will have more quantity in hand compared to slow moving products. At the same time, optimal quantities of all finished products should be stocked so that there is neither stock-outs nor excess inventory at any distribution point at any point of time. This will make sure that your bottom lines are in check.
The weakness of this technique is that the profitability of your business can be measured only at the batch level, at, for example, the planning period level but not at any individual order level.
If you are a make-to-order, engineer-to-order or assemble-to-order company then capable-to-promise functionality will be of immense help to you. In this case, you need to look into your manufacturing capabilities to see when incoming orders can be fulfilled. For this, the software looks into your bill of material and calculates work-in-order and raw material requirements. The software also looks into routing of materials through your work centers to determine the lead times required in production. Then the software looks into manufacturing constraints and optimizes by grouping, sequencing, and breaking orders. Many industries such as textiles, primary and secondary metals, furniture, automotive, semi-conductor materials, paper, packaging, and so forth follow this strategy.
The weakness of this technique is the same as described for available-to-promise. This technique is much more difficult to implement compared to available-to-promise because of the need to group and sequence orders against finite capacity of your manufacturing facility.
If you are a manufacturer and have a big product mix and many kinds of customers then you can prioritize individual orders based on the margins, preferred customer, preferred orders or any other criteria, which affects your bottom line. You can directly see the effect of any individual order on your bottom line and so you will be able to make decisions whether you will like to accept or reject the order. Sometimes urgent orders come and you will want to determine if shifting or canceling other, not-so-important orders will affect your bottom line.
If raw material availability, machine capacity, and production lead time are known at the time of order taking, then it is possible to give a definite delivery date to the customer. This is known as capable-to-promise. If we can also provide information about customer, production, inventory, stock out, material, and other overhead costs down to the item level, and then after comparing all costs which will be incurred for making and delivering the order to the selling price, it will be possible to decide at the time the order is being taken whether the incoming order should be taken and what priority it can be assigned.
In conjunction with above mentioned factors, a planning system that is also capable of grouping, breaking, and sequencing orders while it is doing total lead time calculations to determine a delivery date will solve many production planning problems. It will eliminate waste, reduce the generation of extra inventory, increase machine capacity utilization, increase customer service levels, eliminate stock out costs, and reduce production costs.
Profitable-to-promise is the exciting new idea, which has extended the benefits of capable-to-promise and available-to-promise to a new high level for customer to improve their bottom lines. Customers should look for these new features in the software they are evaluating but should also be cautious of the claims of the vendor. Profitable-to-promise can work well only when your order management system, supply chain system, and your ERP work well together to give accurate delivery dates as well as give your exact costs in making the orders.
Profitable-to-promise analysis allows the business to find out if the particular order will be profitable to make considering the raw material costs, process costs, inventory costs and other costs against the price the customer is willing to pay. Thus it can be seen that some orders will be a lot more profitable than other orders. This analysis is perfectly possible if you have the right software tool which can provide you with this kind of information.
A software system capable of profitable-to-promise ability must be having a solid base on which it can deliver this functionality. The major components of this base include good MRP, MPS, APS, distribution and transportation, supplier management, and in fact, most of the components of the supply chain management software. It will also need good manufacturing accounting software to provide crucial financial data. The order data information including the price of goods and value of orders will come from order information management software.
If all of these components are in place and are working in harmony then it is possible to achieve this feat.
Profitable-to-promise works well for all industries whether it is discrete, process, mill, or flow manufacturing. The only difference in how it works is on the basis of whether the manufacturing is in make-to-stock or make-to-order environment. In case of make-to-stock companies, profitable-to-promise works on the data from distribution planning. In case of make-to-order companies, profitable-to-promise works on data from production planning. Profitable-to-promise is well-suited for businesses who face the dilemma of sacrificing some orders to fulfill some particular orders. Using profitable-to-promise, businesses can have a strong hold on their service levels as well as their bottom lines even at the individual order level.
The manufacturing industry as a whole is going through a lot of changes. The most crucial change that is happening is the kind and size of orders that a manufacturing business receives. Variation in the size of orders, demand for early delivery dates, variation in range of products which are ordered are some examples that contribute to the manufacturer's headache. Total number of products, which a manufacturer produces, is on the rise. The other change is the way the manufacturer treats all incoming orders. In the fierce competition and slow economy scenario, no manufacturer would like to lose even small orders if the order is profitable.
Profitability and customer satisfaction are the two most important considerations for any company. Making timely decisions based on integrated information is critical to achieving your goals for profitability and customer satisfaction. Any of the above mentioned techniques, particularly the profitable-to-promise functionality allows you to have a total control of your manufacturing or distribution network.
It is not easy to calculate accurate delivery dates especially if your business requires grouping and sequencing of orders. Only software systems which are built on a strong foundation of underlying supply chain system can accomplish this. Similarly, it is difficult to get your total costs data accurately for individual orders and not many software systems can do it. So if you are evaluating any order promising system, make sure that the underlying supply chain system on which it is built meets your specific requirements and can deliver goods.
About the Author
Ashfaque Ahmed is a seasoned consultant and business analyst in the areas of advance planning and scheduling in SCM. He has worked with many big to medium sized clients in retail, distribution and manufacturing industries. Some of these industries include automotive, CPG, pharmaceutical, food, textile, steel, packaging materials etc. He holds a bachelor's degree in engineering and an MBA in Information Systems.
Web page: http://www.geocities.com/ahmedashfaque2002