Written by: Rich Cary
The great recession of 2008-2010 changed everything for US manufacturers. At the risk of sounding like Mr. Obvious the rapid decline in manufacturing orders, followed by the slow and sputtering recovery in new factory orders starting in 2010, has completely changed the landscape for US manufacturers. The old rules just don’t seem to apply anymore, and nowhere is that more prominently seen than in how companies manage their Sales, Inventory, and Operations Planning (SIOP) process.
Forecasting has always been as much art as science, and most people working in manufacturing understand that all forecasts have one thing in common: they’re wrong! That said, attempts at forecasting demand in this post-recession manufacturing era has become an even more daunting (and important) task. Manufacturing companies that have thrived without SIOP in the past are learning a hard lesson: You may not need SIOP to RUN your business, but you must have it to improve and grow your manufacturing business. More companies than ever are recognizing that SIOP is the infrastructure of sustainable growth and are investigating how to improve their demand and supply planning processes.
To start this journey, a company must come to a common understanding of what SIOP is for their business. The traditional definition of SIOP (or as many of you may know it, Sales & Operations Planning-SIOP) is a business process designed to balance supply and demand. The analogy here is like an arm wrestling match. Supply and demand have to balance, and to do so one or the other has to compromise to keep demand and supply in balance. Definity Partners defines SIOP differently, what we call SIOP SyNCTM: a fully integrated, systematic business management system designed to make decision making easier. The difference is subtle but significant. SIOP SyNCTM doesn’t seek to simply balance supply and demand through give and take. Rather it seeks to find leverage in the overall system to allow supply (i.e. operations resources) to flex to support variable demand patterns and to capitalize on growth opportunities. This is the proactive improvement of Run-Improve-Grow.
Through years of experience working with dozens of companies that sought to improve their planning processes, Definity Partners has developed a “three S” approach to SIOP SyNCTM implementation. Simplify your current planning process and your understanding of your demand patterns and inventory policies. Reducing complexity and making sense of mountains of transactional data is a pre-requisite of SIOP-SyNCTM. Standardize the way you develop your demand and supply plans. Your company needs a single statement of demand and a common understanding of supply chain performance if it hopes to proactively find leverage in your systems. Then (and only then) implement and upgrade the management systems to sustain your SIOP processes. This is where a structured cadence of demand, supply, and executive SIOP meetings comes into play. Most companies work this process backwards, attempting to first institute a series of new meetings and management systems before revamping their current forecasting and planning processes. As a result, the meetings become unproductive sources of internal conflict that only serve to make the divide between functional silos wider and more destructive.
Imagine this scenario. You are a supplier of industrial lab equipment to a global market of consumer testing and research customers. One of your largest international distributors approaches you with a potential opportunity to sell equipment into a new geographical market at volumes that would nearly double your current throughput, but deliveries must start in the next four months and at a price that is 15% below your current pricing structure. Do you take the ‘bold bet;” Most companies would study their current capacity, backlog, and ability to ramp up capacity before responding. Ultimately, they may attempt to negotiate a slower ramp up of production and seek to make up some of the difference in pricing before accepting the challenge. Otherwise, it just isn’t a profitable move for their business and could do damage to their reputation in the market. Sales ultimately misses out on yet another growth opportunity because the laggards in operations won’t commit.
By contrast, a company with a robust SIOP SyNCTM business system in place already has a systematic, integrated approach to be proactive and make these kinds of decisions easier. Where is the leverage in the system? In this case it is in using the supply chain as a competitive advantage. A machined parts supply partner has been seeking higher volumes and more value-added assembly work, and you’ve been modeling what that would look like when conditions were right. The company meets with the supplier, shares the challenge with them, and works out a deal to move a significant portion of their sub-assembly operations to the supply partner. They handle the sourcing of the parts they don’t already produce for the sub-assemblies, thus reducing cost and complexity. The employees currently supporting sub-assembly operations assist with the transition and then move to cross-training on final assembly and test operations. The company reduces costs, which allow them to meet the new pricing requirements, and they increase capacity to meet the higher demand. Bold bet taken!
SIOP SyNCTM isn’t a silver bullet. It’s not just better scheduling, although that’s often a result. It isn’t just better technology tools, though some may be needed for successful sustainment of the system. And it isn’t “reactiveness in disguise.” It is true proactive business improvement through simplifying, standardizing, and sustaining a new, integrated business system that makes decision making easier. It is truly the management system infrastructure for growing your business in uncertain times. The old rules just don’t apply any more. And for that we can be thankful.