MOTIVATORS FOR IMPLEMENTING COLLABORATION INITIATIVES IN THE DEMAND PLANEJ PROC – PART 1

After decades of studying and discussing sophisticated statistical models for making sales forecasts, companies are investing more and more time and resources in new initiatives to improve the demand planning process and, with that, improve the quality of marketing decisions , sales and operations that are impacted by it.

Increasingly, companies seek integration of their functional areas, such as marketing, logistics and production, and partnerships with customers and suppliers in an attempt to improve the demand planning process, minimizing logistical costs, especially inventory costs, and increasing service level. S&OP initiatives (Sales and Operations Planning) and CPFR (Collaborative Planning, Forecasting and Replenishment) have appeared with increasing frequency in specialized publications.

Despite the enormous benefits intended from these practices, the motivations and challenges to be faced are not always clear to companies. Therefore, before entering the topic of collaborative demand planning, it is necessary to discuss the demand planning process, its problems and impacts on the decisions of the functional areas in order to understand the main motivations and challenges for the implementation of cooperation and integration programs between companies. .

DEMAND PLANNING

The increase in complexity in organizations and in the environment, with the growth in the number of SKU's (Stock keeping unit), competition and geographic coverage, combined with the search for systematic decision-making, where there are explicit justifications for individual decisions, has led companies to pay greater attention to the demand planning process.

Demand planning plays a very important role in coordinating the flows of information and physical products in a company, having relevant impacts on marketing management, production scheduling and control, and logistical operations. Some of the companies' main strategic and operational decisions, such as launching new products, defining distribution strategies, coordinating distribution channels, scheduling production and capacity planning, among others, are directly impacted by demand planning.

In general terms, the demand planning process occurs as follows: a set of information, which is made up of historical data - sales, price and investment in advertising - and market information - economic situation, competitor actions and customers, is processed through statistical analysis of historical data and managerial interpretation of market information. With this, a forecast of future demand is generated, which will then be used by the functional areas of the company for operational and strategic decision-making. Over time, the functional areas learn from planning mistakes and thereby generate gains in experience and tacit knowledge, which are fundamental for improving the interpretation of market information. Note in Figure 1 the simplified demand planning process.

Figure 1 - Overall demand planning process

Describing in more detail and highlighting the stages of statistical analysis of historical data and managerial interpretation of market information, there would be a flow of activities for the demand planning process as described in figure 2:

Figure 2 - Activities of the demand planning process

Figure 2 presents the main types of historical data and market information used in the demand planning process, according to the steps to carry out the sales forecast.

CHALLENGES IN DEMAND PLANNING

The challenges in the demand planning process can be grouped according to the steps:

– Statistical Treatment of Historical Data

• Statistical technique used;
• Sales forecasting system (software).

– Interpretation of Market Information

• Judgment and decision-making in demand planning;
• Integration between functional areas;
• Integration between companies in the supply chain.

The first stage of the process, statistical treatment of historical data, despite the inefficiencies resulting from the lack of qualified professionals, the inappropriate use of quantitative techniques and underutilization of support systems, will not be addressed in this text, as it has been receiving, in general, greater attention from companies and scholars. The second stage, in turn, is carried out in a non-structured manner by specialists who are responsible for incorporating the interpretation of market information into the result of the statistical treatment. Interdepartmental and intercompany collaborative planning emerges as an important instrument at this stage, seeking a better process structuring and the consequent improvement in capturing and interpreting market information and, with that, improving the physical flows of products.

COST OF FAILURES IN DEMAND PLANNING

The two main costs that result from failure to plan to meet demand are the cost of holding excess inventory and the cost of running out of products. The cost of excess inventory is related to the cost of capital invested in the asset and losses due to obsolescence and perishability. The cost of product shortages is directly related to the loss of service level and, consequently, loss of unitary margin of unsold products, operational costs of managing backorders and the intangible cost of customer dissatisfaction and/or loss. .

The motivations for improving the demand planning process are related to reducing these costs for the company, that is, reducing inventory costs and improving the level of service, and therefore involve addressing the causes of problems in planning of demand. The main drivers for implementing collaborative demand planning programs are:

– improvement in judgment and decision-making, that is, in the interpretation of market information;

– exchange of information and cooperation between functional areas of the company;

– decrease in the “whiplash” effect;

- reducing double marginalization.

Each of these motivators will be commented below and how collaboration initiatives can help eliminate problems related to the interpretation of market information, thus improving demand planning and bringing the intended benefits.

JUDGMENT AND DECISION-MAKING IN DEMAND PLANNING

It is a fundamental part of the demand planning process, the interpretation of market information that may impact the consumption of a given item. Respond to questions such as: “What will be the impact of the increase in the price of a barrel of oil on diesel fuel consumption?”, “What is the percentage of sales of a given product that will be impacted by the launch of a similar product?” or “If the projections indicate a 10% increase in global sales, what will be the sales increase in each store?” is fundamental for the assertiveness of the sales forecast. This interpretation of market information is configured in a judgment and decision-making process in demand planning.

Typically, an expert, who may be from sales, marketing, or operations, is responsible for interpreting and incorporating this information into the sales forecast. This process has as its basic premises that the specialist has extensive knowledge and extensive experience in the market and that he will use all his rationality or “common sense” to carry out this interpretation. However, studies indicate that budget and time restrictions in companies compromise, in part, this process. Therefore, to circumvent these restrictions, some rules are unconsciously used to simplify the process of interpreting market information. These rules are known in the decision-making literature as decision heuristics.

Heuristics are rules unconsciously used by decision makers to speed up the process of interpreting information in situations where detailed analyzes are not possible. Despite their importance, heuristics lead to systematic, predictable errors that are difficult to eliminate. In this way, the cost and time constraints that lead to the adoption of simplifying rules in the judgment and decision-making process (interpretation of market information) present major challenges for improving the demand planning process.

Collaboration initiatives between the different departments of a company, or even between commercial partners, can improve judgment and decision-making in demand planning through the sharing of information, which allows for a more accurate analysis of the variables involved in the process by the responsible experts. Furthermore, in this process of interaction and exchange of information, flaws in the interpretation of some information may be detected, which could not be identified by individual interpretation.

INTEGRATION BETWEEN FUNCTIONAL AREAS

Another challenge in demand planning is the lack of integration between the company's functional areas. In general, the goals and performance indicators of the functional areas are quite different and often conflicting, which can lead to disagreement and lack of cooperation between the areas. These indicators were developed in a decentralized manner by each of the functional areas, according to the need to measure and monitor their activities and, many times, are not directly aligned with the company's overall result.

For example, the marketing and sales area has indicators such as market share, sales volume and customer satisfaction. A way to increase sales and earn market share, increasing consumer satisfaction, can be through increasing the mix of products offered to the market. The increase in the product mix, however, means more time to setup of production, resulting in loss of efficiency, the main indicator of this area, and increase in logistical costs of inventory and storage, important indicators of the logistics area. In this way, the decision to increase the product line can favor marketing and sales indicators, but, at the same time, harm production and logistics indicators.

These divergences can cause problems in demand planning, since the area responsible for sales forecasting tends to seek to maximize its performance indicators. In addition, the lack of integration between the functional areas causes, as a rule, sub-optimization in the interpretation of market information and in the operationalization of demand planning, considering that each area has a set of different knowledge and information that could assist in this process.

Collaboration between the different areas of the company can improve the demand planning process and subsequent decisions as it seeks to structure the process of interpreting information, with the systematization of periodic meetings, where representatives of the areas involved in planning the demand present their information and conjectural analyses, as well as deal with existing divergences. Decisions to meet demand are taken together, aiming at optimizing the company's global result and not the result of each area separately.

INTEGRATION BETWEEN COMPANIES

In addition to the huge challenges in demand planning caused by the lack of internal integration, there are others arising from the relationship between companies in a supply chain, such as the “whiplash” effect and double marginalization.

BULLWHIP EFFECT"

The lack of visibility of real demand along a supply chain is caused by the format of traditional relationships between companies. In general, each link in the chain tries to manage its demand in the best possible way, maintaining inventory levels that ensure supply to its customer (subsequent link), even with variations in demand, delivery time and supplier availability (previous link). . This policy, however, can bring major inconvenience to the supply chain.

This traditional demand management format in the supply chain works as follows: the retailer tries to meet the final consumer demand and, for that, it must maintain a safety stock, which considers the variability of this demand and the variability related to the process. of supply. The dealer, who is the retailer's supplier, also tries to serve his customer (retail) in the best possible way, ensuring product availability. For this, he also forms a safety stock to protect himself from process variability (demand and supply). Note, however, that the demand that the reseller is meeting is not the same as the final consumer demand served by the retailer, but the retailer's demand. The retailer's demand for the reseller is equal to the end consumer's demand plus their safety stock replenishment. This means that the demand for resale behaves completely differently from the demand for the retailer. This process is repeated throughout the entire supply chain, causing the so-called “whiplash” effect. Graphs 1 and 2 show the “whiplash” effect and its results in the volume demanded and in the stocks of companies in a supply chain.

Graph 2 - Amount of inventory at each link in the supply chain

The “whiplash” effect, a term coined by Forrester in the 60s when he was analyzing the behavior of beer supply chains in the US, causes major problems in demand planning, leading to excess inventory at times and supply disruptions at others, as can be seen in Graph 2. In addition, one can see, through the analysis of Graph 1, the operational disorders caused by the “whiplash” effect, such as the concentration of orders, which leads to idleness in the distribution system in some moments and overload in others.

Collaborative planning between companies, with the sharing of sales forecasting and inventory management decisions, can minimize the causes of the “whiplash” effect, since the availability of information about real demand, positioning and quantity of stock provides an improvement in decision-making on ways to meet demand within the supply chain.

DOUBLE MARGINALIZATION

Another problem caused by the lack of integration between companies in a supply chain is double marginalization, that is, the incidence of a profit margin on the profit margin of the previous link in the supply chain.

For example, an industry has a unit cost of R$ 5,00 to produce a certain item. In negotiations with the retailer, he manages to place an order for 100.000 units for R$5,50 each. In this way, it obtains a remuneration of 10% for the capital invested in the production of these 100.000 units. The retailer has an additional cost of R$ 1,00 for moving, stocking and distributing each unit and manages to sell them for R$ 7,15 each. With this, it also obtains a remuneration of 10% for the capital invested in the purchase of products.

It is believed that the supply and demand curves are balanced and, therefore, the selling price of the product for a demand of 100.000 units is R$ 7,15. Carrying out this same transaction without the margin (mark up) that the industry charged retailers and calculating the total result of the transaction at the time of purchase by the final consumer, the total transaction margin would be R$ 1,15, which is equal to the sale price (R$ 7,15. 6,00) minus total operating costs (R$10). This margin pays the remuneration of 0,50% intended by the industry (R$ 0,60) and retail (R$ 0,05), with R$ 10 still remaining, which is the double margin (0,50% of R$ 2. XNUMX) of the traditional ratio, to be divided between the companies. Table XNUMX presents a summary of these two situations.

Table 1 - Double marginalization

The result for dividing the second situation is the double margin resulting from the traditional ratio (10% x BRL 0.50). This double margin does not remunerate the capital of the companies' shareholders and, therefore, represents a loss of income. The double margin is the result of the traditional format in the relationship between companies, where each one seeks to maximize its result. This type of relationship leads to a dispute over margin absorption along a supply chain and, as a result, presents major challenges for demand planning, as it makes integration and information exchange between companies difficult.

Collaboration initiatives between companies almost always involve the elaboration of partnership contracts. Despite the restrictions of the legislation for the complete elimination of double marginalization, it is possible to use partnership contracts to reduce its effects and, therefore, increase the rental capacity of the business and obtain operational gains.

COLLABORATIVE DEMAND PLANNING

Collaborative demand planning is understood as the different forms of interdepartmental cooperation and between companies in a supply chain, through the intensive exchange of information and organizational, structural and technological changes, to increase the efficiency of the process and decisions related to service of demand.

Collaborative demand planning initiatives can be divided into internal, when they occur between functional areas of a company, and external, when they involve different companies. The most common initiatives are the Sales and Operations Planning (internal integration) and the Collaborative Planning, Forecasting and Replenishment (external integration).

The goal of collaborative initiatives in the demand planning process is to ensure the flow of data and information inside and outside the organization, ensuring that planning decisions are based on the best information available. With this, the aim is to overcome the challenges imposed by difficulties in individual judgment, lack of integration between functional areas and between companies in a supply chain.

CONCLUSION

The text sought to present the main motivators for the adoption of collaboration initiatives, highlighting some of the difficulties encountered in the traditional process of demand planning. Table 1 summarizes the main drivers and collaborative demand planning initiatives:

Table 1 – Summary of main drivers and initiatives

The intended benefits are many and the motivations for implementing collaborative planning are quite strong. However, companies that seek to improve their processes, increase the level of service and reduce operational and inventory costs with collaboration initiatives must pay attention to the enormous challenges and obstacles of this undertaking. In the second part of this text, based on research and published cases, the main challenges in the implementation of collaboration initiatives in companies will be presented.

BIBLIOGRAPHY

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