What is supply chain planning and
why is it important to your business?
The purpose of supply chains is to establish a link between the processes by which a given product can take shape from an idea to reaching the final customer. To this end, there is a need to establish links between suppliers, production, logistics sites, and customers.
Such a network can only achieve optimal results if all partners, processes and systems work in harmony. This requires professional coordination and a well-thought-out supply chain strategy.
In this post, we explain what supply chain planning means, why it plays a prominent role in the life of any company, and how to tackle the task of designing and building your supply chain.
What is ‘supply chain planning’?
According to the existing literature, ‘supply chain’ can be defined as a series of value-creating processes across cooperating companies, which creates products and services suitable for satisfying customer needs.
This term covers processes from the extraction of raw materials to the delivery of finished products to end-users, but it also includes various services related to the product, such as service provision, waste management or recycling.
Supply chain planning is the process by which we determine the optimal production and sales volumes that a company wants to achieve as well as the steps needed to achieve the quantitative goals and related revenue targets.
In short, supply chain planning is the optimised process of aligning assets. During planning, you balance demand with supply, from material sourcing through the manufacturing process to delivery to the customer.
Why does a company need
supply chain planning?
Today, as global supply chains evolve and expand, designing an efficient, data-driven supply chain is more critical than ever. Moreover, the coronavirus epidemic has taught us to always think ahead, as a crisis can not only change the demand for a particular product at any time but there can also be potential supply problems with raw materials and components.
Not to mention that a well-designed supply chain also plays an important role in business strategy, as it largely determines the relationships maintained with suppliers, distributors, and customers.
A solid supply chain planning strategy helps create value in the long term and can provide your company with a competitive advantage, which is why it is extremely important to always implement your supply chain thoughtfully, using sophisticated predictive analytics and planning tools.
Over the past decade, technological progress has greatly contributed to improving companies’ forecasting capabilities, which has also made supply chain planning more efficient. However, companies need to be more agile and make decisions faster.
On the other hand, the computer processing and analysis of data help in this task, thanks to which we are now able to think ahead and make predictions taking different possibilities into account, which means that it is easier to prepare for even the worst situations.
Key steps in supply chain planning
Supply chain planning is a multi-step process that requires the collaboration of many units within a company, including sales, finance, marketing, materials sourcing, product management and all other important activities. This is because if the tasks to be performed are scattered, data discrepancies can occur, which hampers the efficiency of the design.
• Overview of goals and inputs
In each case, the process begins with a key step, an overview of sales projects. Planners consider the goals of the business as well as the inputs from the actors in the supply chain. The information obtained from the analysis of demand input provides an excellent starting point for optimising supplier activities at different levels of the supply chain.
That is why the demand input must be as stable and realistic as possible in all cases, as this will enable the establishment of a cost-effective, well-functioning planning process.
• Inventory optimisation
As a next step, having the various data and analyses, you are now able to determine the safety stocks and you can take action to develop the necessary re-ordering and replenishment models. Inventories are optimised, thus balancing supply and demand. It is important to adjust our limits so that there is always enough capacity to meet the increase in demand and that the capacity of the labour resources is in balance with the amount of material waiting to be processed.
• Planning and grouping of financial resources
Finally, we need to rethink what material resources we need to reallocate and what financial compromises will be needed for processes to work smoothly and efficiently.
For example, many companies put more effort into the activities of supplying parts than would be ideal. The solution to such problems could be, for example, rethinking certain production sites and relocating the production of parts that require long and cumbersome logistics to a more optimal location.
How does planning work in practice?
The planning of the process typically begins with the consideration and rethinking of the sales aspects. At this stage, the sales team sets goals to accomplish and presents them to the rest of the planning team. Meanwhile, the supply team also conducts detailed market analysis and supports its data using sophisticated statistical tools for unbiased forecasting. The two groups then discuss the differences between their findings.
For example, the sales team may consider it ideal to sell 2,000 units of product per month, but the supply team may point out that the company has only sold 1,000 units in the past. The difference may be due to market expansion, entry into new markets, or other reasons.
Finally, the appropriate level of demand supported by the company is decided by the entire planning team in the knowledge of the information. This decision is not an easy task, as in most cases with business, financial compromise for the optimisation to be effective. So, at this stage, planners need to determine what might be the best solution for the company by taking stock of possible trade-offs.
It is important to note here that the decision must always take into account the long-term goals and opportunities because if we plan only e.g. one quarter, it can easily lead to unexpected inconveniences later on.
Of course, it’s not worth planning for too long either. It is worth re-performing the strategic analysis every few months to see through the organisation’s budget, expenses, and revenues, and to ensure that the supply chain is properly optimised with proper scaling.
What are the key factors
in supply chain planning?
For the supply chain to be optimised, the following factors should be taken into account:
- the costs of doing business in the company’s target markets,
- production costs,
- the location of the suppliers,
- shipping costs,
- the location of the most important target markets.
In evaluating these elements, the company can easily draw some important conclusions, for example, that it is more efficient and cost-effective to operate multiple regional locations in or near target markets or to combine them to have a single global location capable of serving the entire business.
Or just that relocating production to Europe in whole or in part can be much more cost-effective than supplying parts and raw materials from the Far East.
Benefits of supply chain planning
Thanks to a well-designed supply chain, both workflows and company expenditure can be optimised efficiently. This means that with less or just the same amount of spending, productivity can be effectively increased, which ultimately leads to higher revenues.
It is therefore worthwhile for even the smallest companies to rethink how their current supply chain works and how efficient it is, as it is easy for a poorly organised action to reduce productivity or even increase costs, and – on the other hand – thanks to a well-optimised supply chain, small businesses can work 15 to 20 percent more efficiently.
Supply chain planning, of course, is a complex and by no means an easy task, which is why it may be worthwhile for most companies to enlist the help of an outside specialist who offers expertise in this area.
This will save time and money, as it is not necessary to invest in the latest supply chain analysis technology or hire in-house experts to carry out the task.