Every dark cloud has a silver lining and COVID-19 caused a dual conundrum. On one hand, manufacturers experienced unprecedented spikes and troughs in customer orders and on the other, their suppliers’ ability to optimally meet the vagaries of this demand. Maintaining optimal inventory to augment production emerged as a challenge as never before.
Most organizations, that were earlier optimizing & improving upon their capabilities to manage, plan & execute their production and shop floor strategy, are now looking outwards/upstream to drive production efficiencies. Interestingly, the market shift towards looking for better ways to plan inventory and meet revenue recognition is agnostic to the size of the organization. Companies, big or small, can no longer afford mistakes in strategic planning as far as planning their inventory is concerned. The last thing organizations want is failing to execute an order because of lack of planning.
The puzzle — How much to sell? Make & sell? Buy-make and sell?
The modern-day planning function is required to drive agility to support the revenue function. Let us meet Super Pans, a very fictitious company struggling with meeting its very realistic revenue objectives. Super Pans makes frying pans, and their planning meetings have these discussion topics:
- Planning: How many frying pans to supply? What should we be looking at? Previous periods production or looking at confirmed orders or expected & incomplete orders. Are any of these numbers untenable due to our production capacity?
- Buy: Are the buffer levels for raw material, input products & unfinished goods conducive to fulfilling revenue and production requirements? How, when and what should be ordered/bought from the suppliers to ensure that there is least unplanned idle time on the shop floor?
- Sell: Which orders can be completed since some volume of frying pans are ready? If we do need to make more, are we making a sales commitment that is beyond our capacity to fulfil in the time frame needed by the client? Shall we allow/disallow or transparently quote and bill the client based on a realistic order fulfilment capacity?
- Make: Some pans are ready, for some, we have unfinished products and for the rest, we have raw materials to start production. Compare and understand what we can make based on what we have in the inventory.
ERP and access to inventory data take time, which does not serve the purpose. Using spreadsheets creates complexity and in most cases, inability to forecast and pre-empt production bottlenecks that ill-planned inventories can cause. Planning on spreadsheets just shows information that team members already know from experience and trade know-how. The planning function needs answers that can be used for the production team, purchase, finance and sales divisions. With these constraints, how does one go about making an optimal plan for their inventory that will allow for unhindered order fulfillment?
Solution: Sales forecasting + ratio analysis + scenario planning + inventory + purchase working in tandem.
Sales Forecasting
Traditionally, these issues have been solved from different perspectives – there is no simple framework that can benefit CXOs and strategic planning professionals. Most systems and principles discount or do not fully cover customer orders of the past & the future in this planning. Today, planning for an inventory must include a framework that is able to utilize sales forecasting as a necessary and real-time input for the basis of this planning. Combining sales forecasting that is based on customer communication makes production planning more accurate. To develop a clearer picture of how much to produce, we must combine past sales, forecast orders from the sales & marketing teams and/or distributors with what is in store/inventory – both in finished products as well as input products or raw materials.
Constituent ratio analysis
The framework must also analyze & create a relationship between raw material/input product into one unit of the finished product. For example, in the case of M/S Super Pans, to make one (fictional) frying pan they need:
- Three screws: They buy these from either of their three suppliers based on how soon they need the screws.
- The sheet of metal for metal handle: Super Pans have a machine that makes metal handles. In this machine, one needs to put in a specific type of metal sheet of a specific dimension, and it produces an average of x long handles/day.
- One heat-resistant handle cover: They buy these from one supplier.
- One circular plate for pan base: Since Super Pans only makes frying pans of one size, they need a specific metal sheet of a specific dimension and add it to another machine, which produces x circular pan bases/day.
- Metal sheet for making panhandle: 10×30 sq cm metal sheet from either of the two usual vendors.
The purpose of the ratio analysis function is to manage this relationship between what is needed from the vendors as well as the shop floor to fulfil the customers’ orders. Input from this process can be used for the shop floor as well as purchase and store divisions.
Scenario planning
In this framework, when order forecasting synchronizes with ratio analysis and inventory, the strategic planner gets a wealth of insights. It becomes easy to see which of the demand scenarios the organization can meet, at what cost and time. This will allow creating several simulations of outcomes based on the empirical data that can predict in what quantities the organization can sell, make and sell or buy-make and sell. Based on the nature of products & market, this scenario planning can also be used to moderate & guide delivery and order fulfillment schedules – which, in turn, can give an accurate indicator for financial planning. In the case of M/S Super Pans, it would mean that the CXOs or strategic planners can now investigate what would happen when their customer orders reach different levels. Sales & marketing divisions may forecast one level of order quantity, distributor network another and past order history at an altogether different value. The organization can use this framework to simulate either of these scenarios and understand how it would impact their shop floor’s production plan, inventory levels & requirement from its vendors.
Inventory and purchase
In the modern framework, two very important concepts related to inventory planning are being implemented and practiced. The first is defining the buffer level of a raw material or input product in a more dynamic manner. It is no longer being seen as a numerical figure of count or measurement that is set manually but a more fluid and adaptive number that changes with change in the needs. Buffer level or reserves needed must factor in vendor dependencies, fault or rejection ratio at store or QC levels, production backlogs and order volume variances. The other important concepts and practices that are now gaining ground are to do with more informed inventory-driving purchase on an auto-mode. Both these important areas of development can only be achieved when there is a seamless flow of information from the order planning and estimation function.
The way forward: Customer-driven, outwards-in
Concepts such as Just-in-Time (JIT) inventory and Materials Requirement Planning (MRP) have been both an area of practice and innovation globally. In the Indian context, there are fewer success stories. Issues in implementing, adopting and scaling these practices are often attributed to the resentment of production staff, inherent intolerance or limited tolerance to order variations and inaccuracies in planning that does not tolerate the risks of the shop floor’s capacity variance. The SMB segment, in general, is yet to fully adopt and utilize ERP, thereby making JIT/MRP a distant possibility. Having said that, newer concepts and principles, such as IoT for the shop floor, are making their way into the mainstream. From monitoring to automating machinery that produces a company’s end product to ensuring optimal efficiencies of the production environment – everything is undergoing a rapid change.
Indian manufacturers are exploring & adopting production management principles that go beyond ‘inexpensive workforce’ as their business differentiator. This has heralded a new era where production is also being seen as more outwards-in and a customer-driven process. The future of more efficient production hinges on the manufacturer’s ability to see farther, plan better and execute faster with the help of strategic analytical tools that can maximize the revenue potential of an organization.
