Decades ago, organizations debated how to integrate information systems to cover the information flow across internal departments. A key challenge was how to make the same information available to all appropriate team members within the organization, building a solid flow of inputs and outputs, decisions, restrictions, plans, and so on.
This integrated scenario is now the reality in high-performance organizations. Just as quickly as information sharing inside the four walls of an organization achieved critical mindshare, it became apparent that information must also be shared outside the four walls, as well. Organizations quickly realized that the information flow does not start or end within its boundaries but flows across the entire supply chain.
Why is this information important? Information received from customers and suppliers is used to plan activities, production levels, investments in capabilities, inventory levels, and numerous other operational and organizational aspects. These are the elements that enable an intelligent enterprise.
The lack of visibility into trading partners’ inventory levels and capacities remains a large challenge in supply chain management and integration. Often, large organizations trade with smaller partners and vice-versa. Different companies have different capacities to react to fluctuations and challenges. Large companies, for instance, usually have more resources but also interact with a wide range of customers, markets, products, and geographies, adding complexity to any decision-making process and exposing how momentum inhibits the organization’s ability to be agile and nimble.
Small companies, on the other hand, tend to be more flexible and more dedicated to a small set of customers and products but with fewer resources to absorb variations.
In summary, there are two approaches for planning collaboration in the supply chain: either the buyer can be responsible for the plan and collect restrictions, commitments, and other relevant information from the supplier; or the buyer can share its information with the supplier and delegate the planning.
The first option is what we call “Forecast Collaboration.” With this approach, the buyer will use better, earlier, and richer information, such as demand, inventory, historical consumption, contractual terms, service level agreements (SLAs), and more, to create a best-case scenario for its supply requirements – a list with suppliers, products, dates, quantities, and locations.
This list will be shared with suppliers, which will analyze the demand and match it with their supply capacity, returning a new proposed list that should be as close as possible to the original. With this answer, the buyer can re-plan demand, adapting the list according to the supply constraints received.
Let’s use a Thanksgiving turkey as an example of how complex this can be.
A Thanksgiving turkey provider will share its demand, considering the historical consumption of turkeys in past years along with other variables such as economic power, inflation, cultural influences, and promotional signals from the retail channel – all by specific location, for turkeys, seasonings, plastic, packing, and cardboard boxes with its suppliers.
A packing material supplier may respond with the ability to meet some of the demand, but not all the necessary materials, by a certain date. Therefore, the buyer must modify the first version of its plan to prevent acquiring all the other components except packaging material. This would be a nightmare scenario where the buyer would have to store the components, unable to produce the final product to be delivered to the retailers. The ramifications? Inventory piles up and becomes obsolete, costs rise, customer commitments are not met, and market perception crumbles. These are examples of what can happen with a poorly performing supply chain.
In this complex scenario, the buyer must make decisions, such as acquiring packaging material from another supplier, buying different packaging materials (considering all the implications that may raise), assuming the risk of not buying the other components, not producing as expected, and being exposed to sales cuts.
This is Forecast Collaboration. The next article will review Vendor Managed inventory – a second way to manage buyer-supplier collaboration, whereby costs can decrease while service levels can increase.
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