Supply chain planning is a team sport like football, where each player brings their specific skills and knowledge to make the whole game plan work. It is played best when all the players that have something to contribute can do so in a way they are comfortable and in a voice that leverages their insights. Supply chain operational professionals live and breathe quantities, but a lot of other participants in the demand planning process, such as sales and marketing, often deal with their demand planning-related activities more comfortably in dollars.
Three key takeaways:
- Enable participants to use units or dollars, depending on their role, so that they can provide the demand intelligence inputs most effectively.
- Any final consensus demand plan will have to align with corporate financial plans, such as the Annual Operating Plan (AOP).
- The further out into time the plan goes and the higher level of executives that participate, the more dollars will be the currency of conversation.
Please read on for a more detailed description
Getting other involved
Supply chain professionals do much of their work in units, often with specific items/part numbers. Sometimes down to specific orders (past, backlog or hoped for in the future). But there are other functions in any company that can, and should, participate in supply chain planning, especially in the demand planning process(es). Many of those functions work in dollar expressions – such as revenue and margin.
It is important to have sufficient measures of dollars so all parties can participate with numbers they use and that facilitates them adding value. And to eliminate an endless debate of where those dollarized numbers came from in consensus meetings. But not to have so many measures of dollars that planning turns into a pure financial planning exercise (and debate).
It is also common for those groups to work at some level of aggregation and not at the individual item/part number level. The next section combines those thoughts and provides some examples.
The devil is not always in the detail
The best demand plans are the results of a consensus process. To get a consensus, the demand plan(s) need to be expressed in dollars and ultimately must align with corporate financial plans, such as the Annual Operating Plan (AOP). The number of dollar expressions, such as revenue, margins, etc., in current dollar terms and in future/projected dollar terms, is a function of the industry, the volatility of the pricing in the markets served, etc. There is no one answer as to the number of dollarization, but there is a need to have at least one good one!
One of the subtle (and, in some companies, not so subtle) challenges in making the decision of how much dollarization may need to be done is finding the right balance between precision and the practical use of aggregations. As supply chain practitioners, we tend to think that everything needs to be precise at the lowest level of information and then aggregated up, as needed. Other functions may very well work only at various levels of aggregation but may vary the measures of dollarization to fit their planning objectives and their planning time horizons. In any consensus process, we need to provide a way for these other contributors to bring their insights into the planning process at those higher levels using the various dollarization measures they may have used to generate their portion of the plan. For example:
- Sales may work in dollars of revenue, by sales group, who may be organized by some geography definition, by market, by customer type (key customer (corporate account) or indirect customer such as distributors), etc. Sales quotas can be a key measure and those quotas will have to be rolled up at multiple levels (and most likely will produce a unique number at higher levels and not a direct mathematical roll-up from the bottom level). Sales revenue forecasts may be based on an average selling price (ASP) that does not exist in the ERP/ordering system. ASPs may vary by region/geography; by channel and/or markets; even by various product groupings. ASPs may vary (trending up or down, depending on the competitive market landscape) as a way to plan up or down selling expectations.
- Pricing can be a complicated discussion. Suffice it to say that it is highly unlikely that every possible selling price will exist in the supply chain-demand planning system. And it should not! However, there needs to be an agreed-upon general selling price sets of numbers/assumptions that the supply chain and the sales organizations can both use.
- Marketing works with events that are designed to change historical patterns. Selling prices, via promotional offers and other programs, are planned to increase total revenue. How the past impact of those events is captured and how it is used in planning in the future varies across and, even within, industries. But the common thread there is normally a revenue/margin impact or percent change to revenue/margin impact that is part of that plan, not just an item/part number quantity increase.
- Product management is typically product and product family oriented. Their view of the market (and potential revenue) may be a percentage increase in revenue based on the competitive landscape and new products their company may be releasing.
- Finance often is top-down driven (but not always). There is certainly an aspect that all finance organization share – they take the broad top-line numbers that are generated at the executive level and are board approved, and then allocate them down to markets, to geographies, etc. by product families. Some of those allocations may reach into the supply chain where manufacturing costs may be allocated to plants and even to distribution centers.
Executives think dollars
Executives often think and work in dollars of revenue, and in margin and market share percentages. And in product families and broad product groupings. And in market segments and broad geographies. Any good demand planning process must include (and encourage) executive participation in the consensus process, even if just in the S&OP portion of getting to a final demand plan, consensus demand constrained by supply.
There may be mini-consensus processes, like in geographical regions or in market segments, in the creation of the unconstrained demand plan, where the number of units are more prominent than dollars, or at least of equal importance. But the further those plans go out into time, certainly, for the Executive S&OP processes, the more likely dollars will be a key measure to define problems. And dollars will assuredly be a key component in deciding what course of action is necessary to resolve supply-demand mismatches, as well as to consider courses of action at a more strategic level.
Dollarizing demand plans is not only a way to double-check the sanity of quantities being forecasted, but it is also a way to encourage those that can contribute to “marketing or field intelligence” to participate in the process. Sales, marketing, and certainly financial people are often more comfortable in thinking about and contributing their insights in terms of dollars. Executives, who we want to participate in the unconstrained demand plan and in S&OP processes, often think in terms of dollars, especially the further into the future the planning goes. Making dollarizing demand plans part of your normal planning routine will pay dividends.