CFOs of supply chain businesses often observe that the amount of cash tied up in inventory creeps upward over time because of the way decision makers react to a variety of internal and external forces. Sales executives may forecast on the high side to avoid stock-outs that can lead to lost sales and adversely affect customer relationships. Marketing may have high hopes for new product launches and want to strike with an abundance of inventory while the iron is hot. Purchasing may know about the impending shortage of a key product component from a key supplier in the months ahead and determine that prudence dictates increasing stock levels.
All of these factors lead to the same conclusion: that it is not only permissible but advisable to carry more inventory than the forecast justifies. Often the different teams will raise their forecasts, or have inventory planners increase safety stock, to cover their expectations.
When various groups within a business start making these assumptions in parallel and modify the forecast accordingly (often using inconsistent data from their own systems as the basis for their assumptions), a series of cascading errors leads to a "perfect storm" variation of plan-versus-performance (variability). The net result is that inventory balloons exponentially. This not only affects the immediate financial situation, it effectively hinders CFOs from getting the truest picture of the supply chain in formulating budgets and projections for the current year, and may even affect the following year if the variations aren't noted. With carrying costs of such inventory often underestimated, this aggregate error can impose enormous costs on the organization, seriously damaging corporate profitability.
Why is all this so important to CFOs? All too often, CFOs rely only on the historical reporting capabilities of financial analytics, while not giving full weight to the capabilities offered by operational analytics to support demand forecasting, sales and operations planning, and the continuous tracking of performance throughout the supply chain enterprise. CFOs can therefore balance their financial analytics view with an operational analytics perspective that is available through EPM.
The Demand-Driven Supply Network and EPM
Demand-Driven Supply Networks (DDSNs) are recent phenomenons that have changed the rules for supply chain-dependent organizations. AMR Research identifies DDSN as a next-generation supply chain that build all supply chain processes, infrastructure and information flows to serve the downstream source of demand, rather than the upstream supply constraints of factories and distribution systems.
Why is this important? Early adopters are already saving 5 percent of top-line revenue compared to non-adopters, according to a 2004 AMR Research benchmark study.
So how does EPM fit into the DDSN picture? Let's take a look at three key EPM factors that have an impact on demand-driven supplier networks:
* Unit-level demand visibility — RFID, point of sale (POS), business-to-consumer (B2C) e-commerce: buzzwords, yes, but all represent demand at its most granular and therefore most precise. For some, this may be no different than bar codes marking the passage of inventory through the system. For others, the ability to leverage this data could be the critical ingredient to maximizing fleeting spikes in demand. The ability to use such data provides a view of the present rather than the past, giving key personnel the ability to act on information rather than merely analyze it after the fact.
* Demand management — Think about forecasting, price and revenue optimization, and promotions management. EPM tools can help users tap into demand variability as a resource, which is useful in weathering the storm of data from unit-level demand. EPM offers the analytics, sales and promotion (S&P), and collaboration tools to pinpoint demand variability.
* Executive dashboards — Benchmarking and balanced performance measurement is the ultimate expression of business judgment driving supply chain decisions. What data populates the dashboard and how it differs by role is a deceptively thorny, and potentially political, issue. With EPM, users receive key performance indicators (KPIs) in dashboard format for executives and decision makers according to predetermined rules specific to the organization.
EPM provides a way to let loose the power of previous technology investments while simplifying their output, turning data into useful, actionable information. For supply chain-oriented organizations, it also allows them to meet the challenges of the sea of change caused by demand-driven supply networks.