Why Demand/Supply Integration Is the Key to World-Class Demand Forecasting

This chapter is from the book

Demand and Supply Integration: The Key to World-Class Demand Forecasting

Learn More Buy

This chapter is from the book

This chapter is from the book 

Demand and Supply Integration: The Key to World-Class Demand Forecasting

Learn More Buy

Critical Components of DSI

This book is not intended to be a primer on the detailed implementation of DSI. Many other books do an outstanding job of providing that level of detail. However, in my experience of working with dozens of companies, I have observed that five critical components must be in place for DSI to work well. These components are

1. Portfolio and product review
2. Demand review
3. Supply review
4. Reconciliation review
5. Executive review

The following sections discuss each of these in terms of high-level objectives rather than tactical, implementation level details.

Portfolio and Product Review

The portfolio and product review is often absent from DSI processes, but including this step represents best practice. Its purpose is to serve as input to the demand review for any changes to the product portfolio. These changes typically come about from two sources: new product introductions and product (SKU) rationalization. New product forecasting is a worthy subject for an entire book,¹ and as such, I will not dwell on it here other than to say that predicting demand for new products, whether they are new-to-the-world products or simple upgrades to existing products, represents a complex set of forecasting challenges. Too often, new product development (NPD) efforts are inadequately connected to the DSI process, and the result is lack of alignment across the enterprise on the effect that new product introductions will have on the current product portfolio.

Another key element of the portfolio and product review stage of the DSI process is product, or SKU, rationalization. It is the rare company that has a formal, disciplined process in place for ongoing analysis of the product portfolio, and the result of this lack of discipline is the situation described by a senior supply chain executive at one company: “We’re great at introducing new products, but terrible at killing old ones.” This unwillingness to dispassionately analyze the overall product portfolio on an ongoing basis leads to SKU proliferation, and this leads to often unnecessary, and costly, supply chain complexity. By including product, or SKU rationalization as an ongoing element of the DSI process, companies have a strong foundation that permits the next step—the demand review—to accurately and effectively assess anticipated future demand across the entire product portfolio.

Demand Review

The demand review is, in essence, the raison d’etre for this book. The ultimate objective of the demand review is an unconstrained, consensus forecast of future demand. This meeting should be chaired by the business executive with P&L responsibility for the line of business, which constitutes the focus of the DSI process. This could be the company as a whole, or it could be an individual division or strategic business unit (SBU) of the company. Key, decision-capable representatives from the demand side of the enterprise should attend the demand review meeting, including product or brand marketing, sales, customer service, and key account management. One company that I’ve worked with has a protocol for its monthly demand review meeting. Sales and marketing personnel are invited and expected to attend and actively participate. Supply chain personnel are invited, but attendance is optional, and if they attend, they are not allowed to participate in the discussion! The intent is that the supply chain representatives are not allowed to chime in with statements like, “Well, we can’t supply that level of demand.” This protocol is one way that this company keeps the focus on unconstrained demand.

Because Chapter 8, “Bringing It Back to Demand/Supply Integration: Managing the Demand Review,” covers the details of preparing for and conducting the demand review, I do not dwell on the specific agenda items or outcomes of the demand review here. For now, suffice it to say that the critical output of this stage in DSI is a consensus forecast of expected future demand.

Supply Review

The supply chain executive with relevant responsibility for the focal line of business being planned by the DSI process should chair the supply review meeting. The purpose of the supply review is to arrive at a capacity forecast, defined as the firm’s best guess of its ability to supply products or services in some future time period, given a set of assumptions that are both internal and external. In addition, the supply review is that step in the DSI process where the demand forecast is matched up with the capacity forecast, and any gaps are identified, resolved, or deferred to future meetings.

The capacity forecast is determined by examining a number of pieces of information that are focused on the firm’s supply chain. The components include supplier capabilities, actual manufacturing capabilities, and logistics capabilities. Supplier capabilities are typically provided by the purchasing, or procurement, side of the supply chain organization, and reflect any known future constraints that could result from raw material or component part availability. Manufacturing capabilities are determined through a number of pieces of information. These include:

• Historical manufacturing capacity
• Equipment plans, including new equipment that could increase throughput or scheduled maintenance that could temporarily reduce capacity
• Anticipated labor constraints, in terms of available specialty skills, vacation time, training time, and so on
• Improvement plans beyond equipment plans, such as process improvements that could increase throughput

Logistics capabilities can include any anticipated constraints on either inbound or outbound logistics, including possible transportation or warehousing disruptions. Altogether, these three categories of capabilities (supplier, manufacturing, and logistics) determine the overall capacity forecast for the firm.

After this capacity forecast is determined, it can be matched up against the demand forecast produced during the demand review stage of DSI. This is the critical point—where the firm identifies the kind of gaps described earlier in this chapter. This is also where DSI becomes the mechanism to plan the business. These gaps must be closed: when there is more demand than there is supply, or when there is more supply than there is demand. In some cases, these gaps are fairly straightforward, and solutions are fairly apparent. For example, if excess demand exists for Product A, and simultaneously excess capacity exists for Product B, simply shifting manufacturing capacity from B to A might be possible. The answer might be obvious. However, in other cases, as was described earlier in the chapter, the optimal solution to the demand-supply gap might not be so apparent. In those cases, one must take other perspectives into consideration, which is the reason behind the next step in the DSI process: the reconciliation review.

Reconciliation Review

If a firm were to stop the process with the supply review, described in the preceding section, it would have a perfectly serviceable, albeit tactical, S&OP process. The reconciliation review, along with the executive DSI review, transforms S&OP into DSI, for this is where the process is transformed from one that is designed to plan the supply chain into one that is designed to plan the business. The objective of the reconciliation review is to begin to engage the firm’s senior leadership in applying both financial and strategic criteria to the question of how to balance demand with supply. The reconciliation review focuses on the financial implications of demand-supply balancing, and the meeting is thus typically chaired by the chief financial officer responsible for the line of business being planned. Attendees at this meeting include the demand-side executives (sales, marketing, and line-of-business leaders), and supply-side executives (the supply chain executive team), along with the CFO. Its aim is to have senior financial leadership lead the discussion that resolves any issues that emerged from the demand or supply reviews, and to ensure that all agreed-upon business plans are in alignment with overall firm objectives. At this point the discussions that have taken place in previous steps, which have typically focused on demand and supply of physical units, become “cashed-up.” In other words, the financial implications of the various scenarios that have been discussed in the demand and supply reviews are now considered. Most unresolved issues can be settled at the reconciliation review, although some highly strategic issues might be deferred to the executive DSI review, discussed next.

Executive DSI Review

The executive DSI review is the final critical component of the DSI process, and it constitutes the regularly scheduled (usually monthly) gathering of the leadership team of the organization. The chair of this meeting is typically the CEO of the entity being planned, whether that is the entire firm or an identified division or SBU. The overall objective of the executive DSI meeting is to

• Review business performance
• Resolve any outstanding issues that could not be resolved at the reconciliation meeting
• Ensure alignment of all key business functions

This leadership meeting is where all key functions of the enterprise, from sales to marketing to supply chain to human resources to finance to senior leadership, come together to affirm the output of all the other pieces of the process, and where all functions can agree on the plans that need to be executed for the firm to achieve both its short- and long-term goals. In other words, this is where all functions gather to make sure that everyone is singing out of the same hymnal.

Clearly, for this process to be effective, the right preparation work must be completed before each of the scheduled meetings so that decision-makers have relevant information available to them to guide their decisions. Also, the right people must be present at each of these meetings. Both of these requirements lead directly to our next topic.