Demand Planning Relationships

All supply chains hold inventory and the selection, design and management of inventory locations and levels along the supply chain can reduce transfer and operating costs. The location and levels of inventory is usually not determined optimally for the supply chain, but is determined by who has the most power on the supply chain. Most employees interviewed stated either the customer or the component part manufacturer has the most power on the supply chains we studied. However, it is clear to see that the customer has the most power on all the supply chains we studied due to the levels of inventory held at the component part manufacturer and at the finished goods assembly plant. In addition, both plants react quickly to short notice changes in demand from the customer and reschedule their production and transfer processes often to meet new requirements of the Big Box customer. Buffer stock (or cycle stock) is used to cover variation and uncertainty in transfer and manufacturing processes and safety stocks are held to cover demand variation and uncertainty. Since the component part manufacturer’s product is related to weather, large safety stocks are held during peak season either by the finished goods

56

assembly plant or its customer. The component part manufacturer keeps safety stocks related to weather as well. In addition, negotiations with key suppliers are made by both plants to hold safety stock as well. Buffer stocks or raw materials and component parts are also held by the component part manufacturer due to the trade-offs of purchasing larger lots and large batches in order to reduce setups times or get production or transfer batch discounts. In addition, the longer the transfer process, the more levels of buffer stock the manufacturer or assembler must keep in storage. Other demand planning and inventory issues involve the necessity to level production at both component part and assembly facilities which creates levels of inventory which are not related to variation or uncertainty at all.

Some methods used by the manufacturer to deal with demand variation, demand uncertainty, and seasonality include the use of focused plants which allows them to buy similar materials at higher volumes. Both manufacturing plants negotiate contracts with key international suppliers to hold materials in the United States, which shortens lead-time for raw materials and component parts. Purchasing managers at the component part manufacturer help their suppliers manage their production schedules and create pre-build schedules for them to insure the supplier can meet peak periods of demand. The manufacturer also builds plants where short-term labor is available during peak periods and the manufacturing plants are designed to have more than one peak period in order to level production schedules. So both plants maintain complementary seasonality of products. The manufacturer also deals with demand variation and uncertainty by using delayed differentiation at the component part

57

manufacturer. Some components are not added until the finished goods assembly process, although the parts could have been added at the component part plant.

The most significant impact to the manufacturer’s demand planning processes are requirements from the customer to make frequent short term changes to demand. The manufacturer is able to reschedule often and meet the customer’s changing demand requirements, which results in a strong relationship with the customer, from the customer’s perspective. The component part production plant uses some degree of delayed differentiation to cope with frequent demand changes, but should try to identify other raw materials and components for delayed differentiation. Continuously changing demand requirements from the customers lead suppliers to hedge and wait until the last minute to deliver product. Many component deliveries occur within 3-4 days of production. This affects relationships with suppliers adversely. Changing demand requirements from one customer affect relationships with other suppliers for all customers due to the need to reschedule production lines often. The customer has more power in the relationship, so drives and controls the entire supply chain. Frequent demand plan changes cause the need to frequently reschedule transfer activities and functions and leads to the manufacturer’s inability to plan transfers and obtain consolidate pricing from their 3PL.

The manufacturer can adopt better demand planning practices to reduce the number of production reschedules, lower the number of required expedited shipments of raw materials, and improve notification time to the 3PL. This process would require a greater level of understanding and communication with the customer across demand planning functions of the entire supply chain. In addition, streamlined

58

communications processes need to be adopted across the supply chain to handle short- term demand changes. The manufacturer’s service distribution group has developed some streamline methods for communicating demand to is planners that could be adopted corporate-wide. In addition, the use and design of the automated vendor scheduling (AVS) module needs to be re-evaluated on its effectiveness. Production control expediters and purchasing managers report that in many cases the frequency and timing of demand updates does not help the demand planning process. The demand planning process for the United States is shown in Figure 3-7.

Figure 3-7. Demand Planning Process for Component Part Manufacturer. (Mary Krome Hamilton and Amy Thompson)

59