The “Solution” to Successfully Dealing with Shortages, Delays & Inflation
Supply Chains: There is No “Return to Normal”
There is no “return to normal”. Non-stop disruptions are the norm. Proactive clients are still struggling to hire the “right” talent in the “right” place at the “right” time. Material lead times are extended and shortages remain yet, in other situations, there is surplus supply. Unfortunately, the bullwhip effect ensured that companies went from scarcity to excess and experienced a whip saw effect.
There are countless examples. At the airport on the flight home from a client, the restaurant was out of several items. While at the client, we held several meetings about offload suppliers that were short on capacity for a variety of reasons related to labor, materials, changing requirements, and capabilities. In talking with another client on a Teams call, there were shortages of minor yet required items to keep customers orders flowing. In the interim, one of the parts for my car will take an extra week, delaying the entire job. And these were just in one week.
Inflation Is Real
In listening to the news, there is a lot of talk about how inflation is cooling. I guess it is all relative. My recent flights were less expensive than they were a year ago, but still higher than pre-pandemic. My car’s engine and surrounding parts are FAR higher than they were pre-pandemic. House maintenance and upgrades are steep. Building materials are cooling vs skyrocketing prices during the pandemic, yet they are MUCH higher than they were pre-pandemic. A few 10-20% price increases take a bite out of affordability! Even if the current prices are stagnant or 1-3% up, prices are a minimum of 30-50% higher than pre-pandemic.
When it comes to food items, 30-50% would be welcome. Eggs increased 70% in the last year. The media doesn’t even horrify us with the statistics in comparison to pre-pandemic. Milk is up over 40% since pre-pandemic. These prices will have a direct impact on hospitality, restaurants, etc.
Manufacturing clients are experiencing these same cost increases for materials, components, and outsourced products. It depends on the type of manufacturer; however, 100% of clients are experiencing these issues. The only question is whether the price increases have leveled off or continue at aggressive rate increases. For example, multiple clients had substantial material price increases that couldn’t be completely offset in customer price increases, thereby reducing margins. In one case, margins went down by 5-8%. That is not pocket change!
How Can SIOP / S&OP Help?
SIOP (Sales Inventory Operations Planning), also known as S&OP, is a process that starts by enabling clarity and predictability with the sales forecast (demand plan) and then determines the best way to fulfill that sales plan from an operations, supply chain, warehousing/ distribution, and transportation perspective. So what does that really mean?
How Does This Relate to Resolving Shortages & Delays?
In our first example, SIOP has proven effective in helping clients over the shortage and extended lead time scenario. Of course, SIOP is not a magical solution that solves “world peace”; however, as you improve the predictability of your revenue plan (sales forecast), the supply plan can be stabilized. For example, when we started working with a life sciences manufacturer, spikes in sales drove variability and volatility in manufacturing. This was especially challenging with the aggressive growth expected. Not only did they have issues in determining the appropriate number of people and skills required for specific timeframes, but they also had continual issues with long lead-time materials and equipment needs.
Once we built a collaborative forecast based on historical sales and growth rates, incorporated feedback from the Sales team, Product Managers, R&D, and customers (inventory agreements, etc.), we stabilized the demand plan. It was not perfect on an item by item or customer by customer basis; however, when looking at meaningful groups (such as a product line that required the same machinery, skills or materials), it was directionally correct, thereby stabilizing the supply plans.
From the opposite point-of-view, we had to get a better view of capacity in the base unit of measure so that we would know how many people are required for which work center. After converting the custom units of measure to a base unit of measure, we were able to visualize the required capacity. Similarly, we dug into available capacity. One would think that would be easy, but it is rarely easy. There are always many exceptions and nuances when it comes to skills, cross-training/ shared resource complications, etc.
As we gained clarity of capacity by work center and related to specific groups of products, we could see our gaps to the supply plan and address accordingly (hire, transfer, reallocate etc.). Now the supply plan was stabilized, which enabled stability in the demand plan. Similar to a teeter totter, it is never one-sided. Demand creates challenges for supply and vice-versa. SIOP helps to align the two sides on the same plan.
Once the two are aligned, shortages and delays are minimized. It will also help with supplier related shortages and delays because you can give your suppliers better notice and clarity about what is needed to support your sales plan. If they have issues, you can proactively address and build into your demand and supply plans. For example, you might be able to use a like-material or contact a backup supplier. On the other hand, you could also adjust your supply plans to account for issues or proactively prioritize customer orders, price changes, and take other actions to address until supply is rectified. The bottom line is that SIOP can create predictability in your revenue plan (and the fulfillment of that revenue plan).
How Does This Relate to Dealing with Inflation?
In our second example, SIOP can also help clients proactively address inflationary pressures. By better aligning demand and supply, you can provide forecasts to material and component suppliers. Many clients use those forecasts and better view into changing demand patterns to set up supplier agreements which can help offset inflationary price pressures. For example, an aerospace and defense manufacturer improved margins by 5% largely through material price reductions with supplier agreements after stabilizing demand.
A key part of SIOP is also to analyze customer and product profitability. This information will provide key insights into how to manage inflationary pressures. Every client has passed on price increases to customers. Some were quickly on top of changing conditions and were able to pass on price increases immediately. Others responded quickly although the price increases didn’t take effect immediately due to lead times.
Additional clients absorbed a portion of the price increases but not the full price increase depending on market conditions, margin impacts or other factors. In addition to price increases, clients re-evaluated low profitability products, deprioritized unprofitable customers (extended lead times or increased prices), added service level tiers, prioritized customers and/or suppliers to partner with to redesign, repackage, and streamline, and utilized other strategies to proactively address inflationary pressures. SIOP will support margins, profitability, and EBITDA growth.
SIOP can be an important process in aligning people (within your organization and with your supply chain partners) and processes (demand and supply) to address several issues such as supply chain disruptions and inflationary pressures. It also supports capital spending requirements, cash flow management, and several supporting items. The bottom line is to take control of your manufacturing and supply chain to support growth and profitability.
Refer to our SIOP webpage for more information, our blog for hundreds of articles and learn more about SIOP and what’s important for a successful implementation in our new release eBook, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. If you are interested in talking about how to reshape your supply chain, get in front of it with a SIOP process, and successfully navigate these waters, contact us.
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Getting Ahead of Inflationary and Deflationary Pressures Using S&OP