Supply Chain Frontiers Issue #24. Read all articles in this issue
What is the difference between short-term and long-term? At a December retreat, the MIT Center for Transportation & Logistics’ (MIT-CTL) Demand Management Interest Group (DMIG) considered the difference not as a philosophical question but in the context of demand management planning horizons. Another noteworthy idea that surfaced at the one-day retreat: rewarding customers for the accuracy of their forecasts.
A short-term planning horizon in one company might be regarded as long-term in another enterprise. For two DMIG companies in high-tech and CPG markets , tactical supply-demand planning (e.g., Sales and Operations Planning, or S&OP) is an 18-24 month rolling process, and a semiconductor company has an 18-month horizon.
In a Demand Management Solutions Group survey of supply chain managers conducted in the summer of 2007, the most common planning horizon cited was 1-2 years (used by 43% of companies). One-quarter of respondent companies looked ahead two years or longer; the rest had horizons of 6 months or less (16%) or between 6 and 9 months (16%). The threshold between what is considered “long” and “short” decision-making within the planning horizon also varied. The most popular short vs. long dividing lines were 12 months (33% of surveyed companies) and 6 months (28%).
Another topic that is interpreted differently from company to company is customer segmentation policies, a major element of demand management programs. Every company represented at the retreat had segmentation programs. One high-tech firm finds that a particular customer may request a special program, which the company designs and then expands and standardizes in order to offer it to other companies. Another high-tech member company noted that within B2B markets there is little visibility into the cost of services; service is often embedded in the product price. As a result, a customer can’t determine whether a given service is worth paying for. “Most companies create customer segments without profitability in mind, which creates problems for their organizations,” observed Larry Lapide, Director of Demand Management, MIT-CTL.
As a practice, customer segmentation is migrating into the retail business. Home Depot has special programs for building contractors; Staples targets small businesses; even grocery stores are looking at segmentation via loyalty card programs. "Sound customer segmentation helps maximize profits by controlling cost-to-serve and aligning service with profit margins," Lapide said.
A way to keep customers happy is to stay on top of unexpected demand fluctuations, and that requires effective exception management. The MIT-CTL survey results showed that only half of the companies used formal exception management processes - 53% employed it on the demand side and 49% on the supply side. As one high-tech company at the retreat pointed out, if S&OP-related meetings are being held weekly, then exception-handling is done during that meeting. A food manufacturer explained that supply-side folks often handle fluctuations by deploying safety stock, and only escalate such actions to the exception level if there is a chance that product will be in short supply before the monthly planning meeting cycle.
Increasing the accuracy of forecasts is one way to preempt unexpected runs on inventory. An interesting concept that arose at the retreat is the idea of giving customers a rebate based on the accuracy of their forecasts. “This type of incentive makes sense if it saves the supplier money and reduces the total cost to service that order,” Lapide said.
One DMIG member summed up the one-day retreat this way: “It was good to hear the different perspectives. I learned that our company is not that different from others – we tend to think we are, but in fact, we’re all struggling with the same issues.”
More information on the DMIG and the retreat is available online. You can also contact Larry Lapide, Director, Demand Management, MIT-CTL