Infor mative gu i des on i n du s t r y bes t pr ac t ic e s
Creating a Win-Win
Scenario through
Supplier Scheduling
Tom Strohl – Oliver Wight Americas
Inspiring
Business
Excellence
It was Monday morning, and Doug sat at
his desk staring blankly at his computer
screen displaying today’s raw material
shortage list or the “Hot List,” as it was
called in his company.
Of course, “Hot” was a relative term relating to who was screaming the loudest; so
the list ultimately had to be separated into subcategories using descriptive phrases
such as “red-hot,” “boiling hot,” and Doug’s least favorite, “thermonuclear-hot.”
2
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
Next to his terminal was a computer
That, along with countless requests
printout of past-due orders which
to delay or cancel purchase orders
were not needed and which nobody
(PO) already released, was having a
seemed to have any questions about.
negative effect on his relationships
He looked over at his inbox and saw
with his suppliers. They were becom-
that it was full again with new requisitions he had received from his
planners the previous day. He still
needed to approve and generate
new purchase orders for them, but
wondered quietly to himself which list
“
Your suppliers already know your company is
incompetent. Why continue to prove it to them?
each one would ultimately land on
after he placed the order.
He could not escape the feeling that
his title of Director of Purchasing
should probably be changed to Chief
Expediting and Paper Shuffling Officer. He was dreading the rest of his
day as he dreaded most days; he
knew what was coming.
His morning would be filled with calls
to suppliers requesting that they move
out or cancel orders he had already
placed and placing new orders for
other materials that were needed
immediately. The number of orders
expedited inside the suppliers’ lead
times has been increasing steadily for
several months.
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
3
”
“
Creation of valid plans
and the application
of supplier scheduling
techniques will change
Doug’s life and
significantly improve
his company’s
bottom line.
”
ing less willing to meet his ever-changing needs. He knew his suppliers were
now placating him by accepting his order and giving him a promise date that
met his request, but for the past several months, they had been consistently
delivering late. Their behavior was making his life miserable; the unmet expectations were destroying his credibility with his peers and with executive management.
Later that day, he had been scheduled to meet with the production manager
and the financial controller. He knew the production manager would ask why
he didn’t have the materials he needed to support his production schedule.
The controller would ask why raw material inventories were so high and what
steps was he taking to reduce them. The irony of the conflicting interests of the
two functional leaders was not lost on him.
Unfortunately, Doug’s plight is all too familiar; it is repeated every day in far too
many companies. Fortunately, there is a way out of this chaos. Creation of
valid plans and the application of supplier scheduling techniques will change
Doug’s life and significantly improve his company’s bottom line. If Doug’s situation
seems similar to yours, these techniques will change your life, too.
VALID PLANS
Before you attempt to provide long-range plans to your suppliers, you’ll need
to get your own house in order, namely, by creating valid plans and proving
that you can actually execute those plans predictably. Communicating long-range
plans to your suppliers in the absence of valid supply plans is ill-advised and
will do more harm than good to your supplier relationships and material costs.
Communication of raw material plans that turn out to be unreliable creates excessive disruptions throughout the end-to-end supply chain and
undermines credibility with your suppliers. Suppliers often take the full
brunt of supply chain disruptions, much like the unfortunate last person in
a children’s game of “crack-the-whip.” In the heat of expediting to respond
4
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
to last-minute production schedule changes, too little regard is paid to the
added costs and long-term damage done to supplier relationships. Those
relationships soon become adversarial to the detriment of both parties. In
valid plans
“ For
to exist, there must
be alignment between
aggregate and
detailed plans.
this context, a colleague of mine once summed it up nicely by saying, “Your
suppliers already know your company is incompetent. Why continue to prove
it to them?”
”
Let’s start at the beginning. For valid plans to exist, there must be alignment
between aggregate and detailed plans. That alignment is created through
multiple levels of planning which are reviewed and updated with the latest
view of the business each month (see Figure 1).
At the top of the monthly planning cycle chart below, forward-looking, aggregate
Figure 1. Planning and Scheduling Processes - Monthly Cycle
Integrated Business Planning
Product
Management
Review
Demand Review
Supply Review
Integrated
Reconciliation
Management
Business Review
Senior Team
Horizon = minimum of 24 months; Focus months 4+; Strategic
Planning:
Supply - Demand - Production
Weekly
Planning Review
Weekly
Planning Review
Weekly
Planning Review
Weekly
Planning Review
Demand Planners, Supply Planners, Production Planners
Horizon = 1-4 weeks & 2 months; Focus months 1-3; Tactical
Scheduling
Daily
Planning
Meeting
Daily
Planning
Meeting
Daily
Planning
Meeting
Daily
Planning
Meeting
Daily
Planning
Meeting
Daily
Planning
Meeting
Daily
Planning
Meeting
Supervisors, Team Leaders, Operators, Suppliers
Horizon = 3-4 days; Focus days; Here & now
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
5
supply plans, looking out a minimum
the supply organization. The supply
Review (MBR), the culmination of
of a rolling 24 months, are devel-
organization analyzes the uncon-
the month-long Integrated Business
oped as an output of Integrated Busi-
strained request for product against
Planning process. It is during that
ness Planning (IBP). The Integrated
rough-cut capacity and inventory to
meeting that Product, Demand, Supply,
Business Planning process is shown
create an aggregate Supply Plan.
and Financial Plans are approved, and
in the top portion of Figure 2.
Following financial analysis and recon-
decisions are made to resolve issues
ciliation of all three plans, analysis of
and ensure alignment with strategic
The output of the Product Manage-
potential gaps to the business strategy,
plans and business commitments.
ment Review and Demand Review
business commitments, and con-
is a time-phased request for prod-
sideration of any resulting issues, the
Following approval of valid, aggre-
uct expressed in unit volume for
resulting plans and recommendations
gate Demand and Supply Plans in the
each agreed-upon product family or
are brought to senior management
MBR, the master supply scheduler
subfamily that is communicated to
during the Management Business
begins the process of disaggregating
Figure 2. Integrated Business Model
Strategic Alignment
Enabling Processes
6
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
Aggregate Planning
Detail Planning
the aggregate family and subfamily
exceed 95 percent, the ERP system
Production Plan into detailed SKU
will be supportive of effective Master
production schedules, normally over
Scheduling, Material Planning, and
a three- to six-month planning horizon,
Capacity Planning processes. It is
ensuring these detailed schedules are
commonly understood that 70 to 80
aggregated to the family Production
percent of ERP implementations fail
Plan and are also valid; that is, the
to deliver expected benefits. The root
product is needed, and the neces-
cause of those failures is quite often
sary production resources are, or will
invalid master data.
be, available. This translation of the
aggregate to detailed plan occurs at
Effective Master Supply Planning and
the SKU level and is presented in daily
Scheduling is also enabled by daily
(near-term horizon), weekly, and monthly
and weekly production schedules
(longer-term horizon) time buckets
that provide detailed execution plans
balanced against detailed capacity
to the shop floor and to each work
and inventory objectives.
location. These plans are typically
presented in daily buckets by Work
Underpinning Master Supply Planning
Location at the SKU level of detail
and Scheduling within an Enterprise
looking out one to three weeks. Vari-
Resource Planning (ERP) system is
ances to plan at the detailed level
a vast array of planning master data
are communicated back up to Supply
that must be maintained and audited
and Demand planners so that plans
regularly to ensure accuracy. If they
can be modified to ensure consistent
are not accurate, no plan will be valid,
alignment of all functional activities.
and the company will be in a continuous state of chaos. These critical
The Master Supply Schedule is “ex-
planning elements within the ERP
ploded” through Bills of Material and
system encompass Item Masters,
Routings to develop a view of materials
Bills of Material, Routings, and Work
and capacity requirements needed to
Location files.
support the Master Supply Schedule
and, in turn, the aggregate Production
When Planning Master Data and
and Inventory Plans approved in the
Inventory Record Accuracy regularly
MBR. Given accurate Planning Master
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
7
Data, the ERP system will produce from the Master Supply Schedule recommended Material Requirement Plans (MRP) and Capacity Requirement Plans
(CRP).
The plans recommended by the system, particularly those within the cumulative
lead time, are subject to review by a planner who accepts or rejects the system
recommendations based upon their knowledge and experience and is accountable for these decisions. These plans define a time-phased projection of required
materials and capacity (labor and equipment) over the full planning horizon.
For now, let’s focus on material needs. Once the Master Supply Plan has
“ Supplier
Scheduling offers
an opportunity to
eliminate the waste
of unnecessary
paperwork and
the cost of reactive
scheduling for your
suppliers.
”
stabilized and performance consistently exceeds 95 percent, material requirements are now viewed as credible plans that are aligned, updated, and formally
reviewed each month. Confidence in the reliability and predictability of long-range
material requirements conveyed to suppliers increases and becomes the foundation
for Supplier Schedules. With increased credibility comes improved on-time delivery
performance, reduction of quality issues, and improved supplier relationships.
SUPPLIER SCHEDULING
Companies often use cumbersome purchase requisitions and purchase orders
to release raw material orders. Planners identify the need for a raw material and
fill out a purchase requisition for that material order. The requisition is passed
to the buyer for approval. That buyer then creates a purchase order defining
the terms, conditions, quantities, and timing for procurement of that material.
These purchase orders are contracts obligating each party and are created for
each material order. These requisitions and purchase orders must be modified
each time the schedule is changed.
This resulting mountain of paperwork and bureaucracy is costly, inefficient,
non-value added, and not even required by external accounting audit firms.
Worse yet, this approach to material acquisition provides suppliers absolutely no
forward visibility and, thereby, ensures they will continue to operate reactively
8
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
and inefficiently—read that as providing you with unnecessarily high-cost
materials.
Why are purchased requisitions and purchase orders needed? When you
consider that the business strategy has been approved by senior management;
the annual operating plan (or budget) based upon documented demand, supply, and financial plans has been approved; and the updated Integrated Business Planning process has enabled the leadership team to formally review and
approve updated sales, production, inventory, and financial plans covering at
least a rolling 24 months by family each month over a 24-month horizon, there
requisitions and
“ These
purchase orders must
be modified each
time the schedule is
changed.
”
is simply no need to create purchase requisitions and purchase orders that
simply support what has already been approved. Issuing a Supplier Schedule is a far better approach that will better serve you and your suppliers.
Supplier Scheduling offers an opportunity to eliminate the waste of unnecessary
paperwork and the cost of reactive scheduling for your suppliers. Long-term
contracts or agreements, defining the terms and conditions around which the
two companies will do business, are negotiated by the procurement organization
with the supplier. The contracts, or agreements, are based upon the aggregate volumes agreed to by the Leadership Team in the MBR and the detailed,
time-phased requirements as recommended by the ERP system and approved
by the master supply schedulers and material planners.
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
9
Table 1.* Example of Supplier Schedule
Jones Company supplier schedule for: Smith, Inc. - Week of 02/01/xx
Supplier Scheduler: AB
Buyer: CD
Firm Zone: first 4 weeks
Material Zone: next 6 weeks
Requirements
F
Item #
Description
13579
Plate
24680
4257
77543
Panel
Tube
Frame
1-Feb
F
2-Feb
F
3-Feb
F
4-Feb
F
F
5-Feb
8-Feb
F
9-Feb
Qty:
100
PO#:
B1146
F
F
F
F
F
F
F
F
F
F
F
F
F
M
M
M
Next
Next
10-Feb 11-Feb 12-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb Wk 3/1 Wk 3/8 4 Wks 12 Wks
Qty:
20
20
20
20
PO#:
B1122
B1146
B1180
B1203
20
Qty:
300
200
PO#:
B1122
B1203
Qty:
40
PO#:
B1180
100
100
300
20
80
340
1100
3500
40
*Adapted from Purchasing in the 21st Century, Second Edition, John E. Schorr
Under those terms and conditions,
This approach reduces or eliminates
tive when your own house is in order
schedules are issued each week by
much of the clerical paperwork as-
and your plans are reliable (see Table 1).
the supplier scheduler providing time-
sociated with the purchase requisition/
phased quantities, by item, with re-
purchase order management and frees
The Supplier Schedule depicted in
quired due dates. Because MRP and
up significant time for the buyer to fo-
Table 1 is for all four material items
the resulting Supplier Schedules are
cus on the more value-added activities
being acquired from one supplier,
now based upon valid data, the sys-
of sourcing strategies, quality improve-
Smith, Inc. The specific materials
tem output for material requirements
ments, and collaboration efforts with
addressed by the Supplier Schedule
is simply the result of a mathematical
suppliers for gaining cost, product,
are listed in the first column on the left.
calculation within the ERP system.
and competitive advantages.
Time-phased volume requirements for
This virtually eliminates the need for
each item are shown by time period.
redundant purchase requisition and
The format and content of a supplier
purchase order review and approval.
schedule is fairly simple but very effec-
10
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
In this example, the Firm and Material
Zones are clearly identified twice
lows the supplier to track requirements
on the Supplier Schedule; first, in
over time as they begin to move into
the header and also above each of
the Material and Firm Zones. Forward
the time periods, with ‘F’ defining the
visibility and increased plan stability
Firm Zone and ‘M’ defining the Material
allow the supplier to optimize its pro-
Zone. The Firm Zone is generally con-
duction schedule, thus significantly
sistent with the length of the supplier’s
reducing overall supplier lead time
cycle for producing its finished prod-
and production costs.
ucts. The Material Zone is generally
consistent with the supplier’s lead time
Companies operating at best practice
to acquire the materials needed to
performance levels modify less than
produce each product. These zones
five percent of its supplier orders
are agreed upon between the buyer
inside the Firm Zone. This level of
and supplier during contract nego-
schedule stability enables the supplier
tiations.
to optimize its operating costs, and it
also enables the supplier to respond
In the example above, the Firm
more effectively when the rare change
Zone is defined as 4 weeks and is
is required inside the Firm Zone.
presented in daily requirements for
each material. The Material Zone is
The level of commitment to the plan
defined as the subsequent 6 weeks.
is also negotiated and agreed upon
Requirements over the next 12 weeks,
in contract negotiations. Within the
often referred to as the Open Zone, are
firm zone, authorization is given to
provided for information purposes only
the supplier to produce the finished
to allow the supplier to see anticipated,
product. The company is making
long-range material requirements.
a commitment to the supplier to
The length of the Open Zone should
purchase that item, and the supplier
also be agreed in contract negotiations
is making a commitment to deliver it
and could cover a much longer time
on time.
horizon if desired by the supplier.
While there is no longer a need for
As stated previously, the Supplier
written purchase orders, internal
Schedule is updated weekly and al-
company procedure may still require
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
11
“
In preparation to
implement Supplier
Schedules, it is
important to educate
your suppliers on
the new process,
but not until you have
demonstrated stability
in your own master
supply schedules
and material plans.
”
a PO number be assigned to each release to properly track the material.
Note that PO numbers are assigned for each requirement in the Firm Zone.
This number is typically assigned automatically by the ERP system and
requires no action by the material planners or supplier schedulers other than
releasing that order to the supplier.
Generally, within the Material Zone, no POs are assigned by the system.
However, because the requirement appears in the Material Zone of the supplier schedule, the company has authorized the supplier to secure the raw
materials necessary to make the scheduled item. It is not uncommon for a
company to negotiate agreement to pay for any long lead-time component
used in no other product produced by the supplier even when, due to product
design or market changes, that material is no longer required.
There is no financial commitment to anticipated requirements appearing in the
Open Zone. These requirements are provided for the supplier’s long-range
volume and capacity planning.
In preparation to implement Supplier Schedules, it is important to educate your
suppliers on the new process, but not until you have demonstrated stability in
your own master supply schedules and material plans. Best practice is to bring
in small groups of key suppliers (follow the 80/20 rule) and formally educate
them on the details of the process, your commitment to plan stability, and your
expectations of the suppliers.
This is often done off site to minimize disruptions. The sessions should be
kicked off by the general manager of the business unit or production facility.
This formal launch provides the supplier’s representatives assurance that the
change is important and that the process has the full support and commitment of senior management.
12
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
Table 2.* Key Performance Measures
Performance Measurements:
Target:
Master Data File Accuracy
> 95%
Item Masters
> 95%
Bills of Material
> 98%
Routing Files
> 95%
Work Locations
> 95%
Inventory Record Accuracy
< 5%
Master Schedule Changes in the Firm Zone
< 5%
Orders Released with Less-Than-Planned Lead Time
< 5%
Supplier Delivery Performance
> 95%
Supplier Quality Performance
> 95%
Recall, as in Doug’s situation, your relationships with key suppliers have likely
been strained, and your credibility has been damaged. Despite that, suppliers, by
their very nature, want to support their customers to the best of their ability. Like
you, they cannot afford to lose a customer.
The formal launch session affords an opportunity to acknowledge your sins of
the past and start anew on a fresh path of collaboration and partnership. This
is also a good time to start the conversation about working collaboratively on
cost reduction initiatives and on sharing in the future financial benefits realized
through improved forward visibility and schedule stability, defining a win-win
scenario to benefit both parties.
“
Gaining control
and deploying valid
plans provide a solid
foundation from which
to deploy Supplier
Schedules, improve
supplier relationships,
and reduce costs.
”
Lastly, it is important to support the process with robust performance measures.
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
13
Having the ability to understand how both parties are
performing helps drive continuous improvement of organization behaviors and results. Table 2 above identifies
a list of essential measures and minimum performance
levels needed to ensure success.
SUMMARY
Common symptoms begin to emerge when plans are invalid. Inventories increase even while customer service
decreases. Inventories are of the wrong items while
items that are needed are in short supply and often are
at the wrong place. The unneeded items begin to age
and become obsolete, severely damaging
the bottom line, often causing financial surprises at the
end of the quarter or end of the year. Buyers find that
they are overwhelmed with past-due orders for items
not needed and are required to expedite items that are
needed tomorrow. As buyers routinely place orders with
less-than-agreed-to lead times, the supplier is faced
with a choice of whether to disrupt its own production
schedule or to simply miss the delivery date and allow
the backorder to occur. That disruptive influence ripples
across the entire extended end-to-end supply chain
causing chaos and deepening adversarial relationships.
14
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
Supplier Scheduling can change everything. The benefits of
implementing Supplier Scheduling include:
• Reduced/eliminated past-due orders and hot lists
“
• Increased customer service
• Improved supplier delivery performance
• Reduced supplier lead times
• Improved supplier relations
• Lowered inventories
• Lower material costs
• Minimized expediting costs
• Reduced paperwork and non-value added activities
• Improved teamwork in joint supply chain cost reduction projects
• Improved quality of work life throughout the entire organization
Gaining control and deploying valid plans provide a solid foundation
The ability to
provide suppliers
with forward
visibility of material
needs as well as
improved schedule
stability creates a
win-win scenario
for both the
company and the
supplier.
”
from which to deploy Supplier Schedules, improve supplier relationships,
and reduce costs. The ability to provide suppliers with forward
visibility of material needs as well as improved schedule stability
creates a win-win scenario for both the company and the supplier.
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
15
REFERENCES
BOOKS
Purchasing in the 21st Century, A Guide to State-of-the-Art Techniques
and Strategies;
John Schorr
Master Scheduling, A Practical Guide to Competitive Manufacturing;
John Proud
The Transition from Sales and Operations Planning to Integrated Business
Planning – Moving from Fundamental Demand and Supply Balancing to Strategic
Management;
George Palmatier with Colleen Crum
WHITE PAPERS
Integrated Business Planning/Sales & Operations Planning – An Executive-Level
Synopsis;
George Palmatier
Integrated Planning and Control – The Lost Art of Managing the Supply Chain;
Jim Correll
Managing the Extended Supply Chain – An Introduction;
Ron Ireland
Visit the Oliver Wight Americas' website https://www.oliverwight-americas.com/
to buy any of these books or to read any of these white papers.
CREATING A WIN-WIN SCENARIO THROUGH SUPPLIER SCHEDULING
16
Infor mative gu i des on i n du s t r y bes t pr ac t ic e s
ABOUT THE AUTHOR
Tom Strohl, an Oliver Wight Americas principal, is a consultant, coach, and educator
providing companies with guidance in Operations Planning and Control and Integrated
Business Planning. In a career spanning more than 30 years, Tom has developed an
acute awareness of the need to bring formality and process to both the business systems and the human capital needed to run those systems. He views the readiness of
employees to embrace fundamental change in any business process as a critical success factor for sustained excellence.
CONTRIBUTORS
The author gratefully acknowledges the feedback and insights of Dennis Groves and
Eric Deutsch shared for this article.
Oliver Wight - leading business improvement specialists who educate, coach, and mentor people to lead
and sustain change on the journey to business excellence and outstanding business perfomance.
Oliver Wight Americas, Inc
Asia/Pacific
PO Box 368, 292 Main Street
New London, New Hampshire 03257, USA
131 Martin Street
Brighton, VIC 3186, Australia
Telephone:
1.800.258.3862
1.603.526.5800
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Facsimile:
1.603.526.5809
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The Steadings Business Centre
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[email protected]
www.oliverwight-americas.com
© Oliver Wight International
Inspiring
Business
Excellence