Demantra is a wonderful set of products for creating, updating and managing forecast demand within any organization. Taking Demantra’s Demand Planning applications one step further though is where true value is gained by any company. That additional step is simple in theory but in practice extremely difficult to execute. What is the additional step of which I speak? Sales and Operations Planning or put another way, building consensus amongst the management team.

Demantra’s Real Time Sales and Operations Planning or RTSOP is the tool used to pull all of the departments within your organization together. RTSOP allows each department to review the system generated forecast both before and after adjustments by various groups who have input to the forecast numbers.

The typical flow is for the system to generate a baseline forecast based on sales history with causal factors for seasonality, promotional events etc. factored in. Once the baseline forecast is created by the “system” then the planning group, marketing group, and/or sales group all make changes to the baseline forecast based on additional information they may have. For instance Marketing may be planning a new promotional event. Planning may be looking at a short term shutdown on the shop floor and Sales may know of an order from a new customer that is going to skew the forecasted requirements for key components.

Management may know of some of these events or maybe only the Director over a given department may have this information. In the modern world the key is to make sure all of the various department heads know what is going to be happening in the future so they can plan accordingly. RTSOP is the tool that makes this so much easier than in the past.

Let’s look at what used to happen with some frequency, maybe it is still occurring at your company. The monthly planning meeting is about to begin. It is chaired by the planning manager who is going to go through the latest forecast and production schedules designed to support the anticipated demand.

The planning manager begins by projecting the forecast for the 30, 60, 90 days followed by a report on production over the past 30 days, any shortfalls or overruns. Before the report is completed the marketing director intervenes and states the forecast is wrong based on the numbers he’s been given by his team. The VP of Sales chimes in that they both have errors in their number since her team has given her the latest sales projections and the forecast is off by at least 15%. Over the next hour the discussion isn’t about how the company is going to meet the requirements each department is looking at but rather which set of numbers the company should be working to.

RTSOP along with the Demantra Demand Planning applications reduces if not eliminates this type of scenario as changes to the baseline forecast can be modeled quickly and effectively. As additional information is gained the forecast can be updated and all concerned can see the results. The eventual outcome is the consensus by all concerned of what the demand facing the company should be. With consensus the focus can shift to where it should be; “How do we meet the demand requirement with the available resources?”
It is only through reaching a consensus that all departments can work together to achieve the common goal and move the company to maximum efficiency. It is a goal all companies share but which many are struggling to reach.

If you haven’t yet looked at the Oracle Demantra suite of Demand Management applications, we strongly suggest you arrange for a demonstration. You’ll witness firsthand the advantages that Demantra’s Demand Management applications can bring to your organization.

When you begin your new Supply Chain Planning project the obvious first step is the calculation of the Return on Investment (ROI) for the project. If the new software doesn’t add significant value for the company in terms of the benefits to be gained exceeding the costs or the project, then the project should be reconsidered immediately! Most of the software vendors will provide assistance in the calculation of ROI but extreme caution should be given to the numbers created. Simply put, it is in the best interests of the software providers to accelerate the ROI in terms of dollars and years to help them sell their software.

While there are many different ways and tools which can be used to assist you in calculating the ROI for any project, please consider these facts. ROI is a measure of the potential projects profitability discounted over the project life. It is normally expressed as a percentage of the initial investment. Some of the methods discussed by financial analysts include: payback period, net present value and internal rate of return. Some companies may opt for a more simplistic method to calculate ROI but it is critical that proper analysis is done to ensure the project is cost effective.

What is ROI?

To begin with, let’s look at some assumptions that are generally WRONG! First off, many people want to believe that the finance guys are extremely accurate and we can believe their numbers. The fact is that the numbers they put forth are a forecast of the future and as we all know, forecasts are always wrong. Any factor ignored, overlooked, or miscalculated causes the forecast to be in error. Then there are the external factors which are extremely difficult to predict which will impact the numbers. These may include: Market movement, new or ending competition, and changes in technology to name a few. Financial forecasts are as difficult as any other type of forecasting to base decision on.
Second, if we selected 5 different financial analysts to calculate the ROI for our project we’d likely get 5 different results as each analyst would likely place different weights on the various factors in the ROI calculation. Additionally, they may not all utilize the same factors choosing to include or ignore factors based on their past experience.

Conclusion:

ROI is the Key element in determining whether or not to proceed with a Supply Chain Planning or any software project for that matter. But it is the calculation of ROI that is difficult and sometimes even a little mysterious due to the forward looking nature of financial forecasting.

While there are several methods which can be employed, the most important element is to include all factors that will have a current and future impact on the “numbers”. Remember that the software vendors will likely provide an ROI calculation during the sales cycle, but the results should be seen with a skeptical eye. It is in their best interest to show a rapid ROI to aid in the sales process. Whether creating your own forecast or using the ROI forecast from a vendor, it is important to remember that forecasting of any type is an inexact science. Finally, going into as much detail as possible for each point to be considered is important in reaching an accurate ROI.

In part II of this discussion we will look into the various elements that make up the ROI calculation. We’ll discuss how these elements should be considered and utilized in reaching your ROI. In past III we’ll discuss the many programs and aids available assist in creating the ROI.

In Part I and II of this discussion we went through some of the basics for determining ROI for your supply chain planning project. In Part I we discussed the need to create a good, realistic financial forecast and the various elements that make doing this possible and also those issues that increase the difficulty of creating a good projection. In part II we discussed using a cost related timeline to account for costs, define benefits both direct and indirect.

In part III lets’ take a few minutes to look at some of the financial analysis tools available to anyone doing an ROI calculation. Use of these tools along with the points discussed in parts I and II will help you reach a strong ROI calculation.

Introduction to the Financial Analysis Tools

Before we begin let’s take a quick minute to discuss the time value of money. Many of the financial tools and software products on the market today include this important element but there are those that do not. Make sure your calculation includes the time value of money. If you are unfamiliar with this term it is simply the concept that a dollar today is worth more than a dollar in the future. As you go forward keep in mind that the cash flow in a year or two or three will be worth less than that same cash today.

Tool #1 – Net Present Value (NPV)

Definition: The NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discount cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Provided by Wikipedia

For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at NPV which here is zero ($1,000-$1,000). A zero NPV means the project repays original investment plus the required rate of return. A positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV.

A good rule of thumb for NPV on technology is approximately three years. But for a supply chain planning software solution the three year timeframe may not be justified. Unlike hardware, software is constantly being upgraded and most upgrades are included in the support/maintenance fees your be paying on a annual basis.

Using NPV there are some basic steps we need to take. Let’s start by laying out our cash flow projections by year. The initial cost of the software will be at time zero (unless your software vendor is carrying a purchase agreement over a 2 year, 3 year or longer period of time) and our cash inflows and outflows will begin at the end of the year. Next we will need to discount those projected cash flows to a value for today. This is the discounted cash flow referred to earlier in our definition. To do this we’ll need to determine a discount rate which is likely your required rate of return. You’ll need to determine what this discount rate is, many companies would project between 10 and 20 percent. Keeping in mind that a dollar today is worth more than a dollar next year be sure and discount the future years at a higher rate.

After you have completed your NPV calculation the analysis becomes relatively simple. If the NPV is positive then proceeding with the project makes sense. If the NPV is even or negative proceeding with the project is not supported by the calculation. A note here; many analysts will adjust the numbers to get the positive results they are looking for. Be sure you have fairly assessed the strengths and weaknesses of your cash flows to achieve an accurate number.

One last thought; NPV is not widely used as a decision making tool as many companies choose to focus more on the percentage of return. We support the use of the NPV technique to determine a Go, No Go for projects based on solid financial analysis.

Tool #2 – Internal Rate of Return (IRR)

Definition: The Internal Rate of Return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR).[1] In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation). Provided by Wikipedia
First a cautionary word about IRR calculations. IRR calculations work for conventional project cash flows or in other words, where the first cash is negative and all remaining cash flows are positive. If the cash flows for your project are not conventional you may have multiple rates of return where the NPV is zero. Since many computer packages do not account for this problem they return the lowest or first IRR. If you find yourself with unconventional cash flows then the use of NPV is even more important as you can get some very strange results with IRR.

If you are undertaking a review of the cash flows for multiple projects which are all conventional, then the IRR method is a great way to compare projects. IRR allow you to discuss the projects using rates of return instead of dollar amounts (NPV). Plus comparing two or more projects using rate of return allows you to evaluate your projects evenly.

For example: project #1 returns a large dollar amount via the NPV calculation. Project #2 returns a much smaller dollar amount, but project #2 has a much higher rate of return, or IRR. In this case, IRR provided another way of looking at NPV as a percentage. For both calculations, you still need to set up your timeline of costs and benefits.

IRR does have at least one practical advantage over using NPV. The NPV cannot be estimated unless an appropriate discount rate or cost of capital can be determined. IRR though can still be estimated. Also, if you have done an IRR calculation and come up with a 45% return, you’d likely approve your supply chain planning project as it is very unlikely that there would be a required return that high.

Conclusion: In the next part of our discussion we will finish the financial analysis tools and our discussion on ROI. It is noteworthy to keep in mind the amount of effort that is required to come up with an accurate ROI for you supply chain planning project. But in the end, the effort may save you hundreds of thousands of dollars for un-needed software or provide the justification to move forward.

Over the years software applications have become more and more sophisticated and our ability to control and understand our product flows and processes has been greatly enhanced. Over time we have reached a point where we don’t have to load data based on any of a number of studies, rather, we can have the “system” capture production rates, material costs, resource usage etc. Yet, as the old saying goes, “It’s hard to teach an old dog new tricks.”

In today’s Supply Chain Planning world we have extremely sophisticated computers and software which will plan and execute up and down our supply chains. Case in point; we can have our systems forecast and purchase items to arrive at the exact moment raw materials and components are needed to support production. We partner with our suppliers, sharing information that reduces inventories for both organizations. We work with our customers to meet exacting shipping deadlines and minimize costs throughout our supply chains. Or at least we have the capabilities to do so.

One of the biggest issues confronting supply chains today is the manual calculation of Product Costs! For the past 15 years as Planning software and computing power has grown exponentially, our adoption of these systems has been slow or non-existent! Here is one of the most common situations a Value Chain Planning consultant encounters. The company has spent hundreds of thousands of dollars to buy and install the latest Supply Chain Planning (SCP) software, sometimes as part of a larger Enterprise Resource Planning (ERP) software package.

Instead of utilizing all of the new planning capabilities of the SCP software we find that the company has implemented a traditional approach to planning, decades old MRP style planning. Why? Simple, the new software doesn’t provide a “number” that meets what the planners and other department users expect, the new number is different! It fact, if the software has been set up with constraint based planning in place, either the material or resource constraints, or both, are likely generating a “bad” number. Again, Why?
Let’s look at constraint based planning with Material as the constraint. The planning software utilizes all of the setups within the system to calculate the desired amounts, dates, etc. If the lead times, order modifiers, supplier splits etc. are not accurate then the outcome won’t be accurate. Early programmers used the phrase; “Garbage in, garbage out” and it still applies. We have to have all attributes of any given item set up correctly. The data originally loaded may have been correct but over time improvements or changes have rendered the data obsolete and not suitable for planning purposes in the new, more sophisticated world. Previously, the planning department or the company simply carried additional safety stock or safety lead time and dealt with the changes manually.

An even worse scenario is the constraints around Resources. Companies would love to be able to plan around resource constraints to improve their abilities to meet customer demands. If we need to run an extra shift this weekend, or produce the items a week early to meet our customers’ needs we’re usually willing to make the adjustments. After all, our customers are our lifeline and we will do anything to keep them happy. Well, almost anything.

One of the most common areas of misinformation in a company is in the production times and quantities contained in the Routings. While Bills of Materials (BoM’s) are usually kept to very exacting levels, the routings are frequently wrong. What’s worse, we often manipulate the routings run times and quantities to meet a predefined and desirable cost for our products.

In the days of MRP systems adjusting the costing information coming from the shop floor was a fairly common occurrence. After all, our accounting department had calculated the costs down to the penny for each and every step of the production process. These costs were “known” to be correct and if the system provided a different number then we knew the system was wrong! As mentioned earlier these minor differences between system costs outcomes and our own calculated costs didn’t matter much as we didn’t use constraint based planning, just good old MRP. Today, this has changed!

Think of the following. If we manipulate the data used by the system to support the costing number, then we have created a situation where our planning system, for which we have paid upwards of a million dollars, is not providing the needed outputs. If the resources are over/under stated then the planning system is planning in shorter/longer cycles based on the bad resource numbers. If this is the case, the output is worthless! ALL data in the ERP system must be accurately loaded and NOT manipulated to provide a desired outcome. If the data is correct and the outcome isn’t to our liking, we have to take the necessary steps to correct OUR errors, be they process or business oriented.

Please don’t kid yourself. This is the single most common reason why the new, up to date planning system you just spent hundreds of thousands of dollars to buy and implement is throwing off a “bad” number. We have manipulated the data to get a desired result, an inaccurate number in fact but one that we have used for years because previously it was the best number we had. Final thought; Get the data right and make the adjustments required, regardless of how painful those adjustments might be.

Over the past few years many companies have reduced their investment in their Value Chains in order to decrease costs and make it through the tough economic times. Now that the recession is showing signs of ending most forward looking companies are identifying new initiatives to improve current processes. Chief among these for many companies is the improvement of the Demand Planning side of the Value Chain. They may have been caught off guard by the recession and want better visibility to an ever changing market going forward.

There are several key issues that have to be addressed in the Demand Planning side of the business to obtain the desired improvements. Among these are: Improved Forecasting of New and Existing Products, Faster Response time to changing demand patterns, Better management of service parts, Enhanced control of inventory throughout the Supply Chain; to name a few.

Enhancing the Demand Planning side of the business allows a company to gain better control and visibility over many of the issues listed above. The real question though is HOW to do this? Should we buy new software? Change current business processes? Implement software purchased prior to the recent downturn? Hire new experts to come in and review processes and make recommendations? The questions are tough and most will require a substantial amount of money to accomplish the desired effect. Or, will they?

While there are several excellent software products in the marketplace buying a new software package likely isn’t the first step to be taken. Nor should we bring in the experts just yet. There is a more prudent and cost effective effort that should be completed first.

Let’s explore where our efforts should begin. I love to go kayaking and find a lot a correlations between kayaking and preparing for a major project. Please consider the following.

You enter a river and the current picks you up and moves you downstream. You paddle to guide the kayak and avoid the many obstacles that arise. With this simple analogy in place, let’s consider what might be the appropriate starting point for your project. In kayaking the first thing you’d do is examine the river and equipment. Here’s a quick checklist:

• Are your skills up to the task ahead of you?
• Is your equipment up to the task?
• How will you know where to begin and where to end your journey?
• Have you prepared for the inevitable “what if” scenarios?
• Do you have the time and energy needed to accomplish the trip?

If course each question could spawn a whole bunch of additional questions and the prudent kayaker will make sure they are totally prepared for each contingency. A very similar checklist should be used prior to starting a new demand planning project. Consider the same checklist for your demand planning project:

• Are your skills up to the task ahead of you?
  • Only a fool would enter into category five rapids without the correct training, experience and equipment to make the trip.
  • Similarly a fool hardy person may begin a new project without assessing their current capabilities. Some questions to be answered:
    • What is our current demand planning process?
    • What should our demand planning process look like?
    • What do we need to complete our journey?
      • People
      • Time
      • Cost
      • Ability to change current methods/processes
  • What is our current state? This is the ultimate question, do you understand what is currently going on in regards to Demand Planning.
    • Who has control?
    • Who has input?
    • Who has veto power?
    • Does everyone “buy-in”
• Is your equipment up to the task?
  • There are many types of kayaks on the market just as there are many types of Demand Planning tools. Kayaks are made for traveling on lakes, rivers, the oceans. Long trips, short trips through extreme water conditions. Single passenger or tandems. Recreational, fishing, sport, white water, etc. Which tool matches what you need or want to do?
  • If you have a tool or are going to need to purchase a new Demand Planning tool there are several things to keep in mind.
    • Is the tool set capable of expanding as your capabilities grow?
      • What seems like a quick simple solution can quickly be outgrown and then you are starting all over again.
      • Conversely, an overly complicated tool may never replace the Excel spreadsheets your people are currently comfortable using.
    • Can you obtain consensus within the organization in using this tool? If we aren’t all using the same equipment we’ll have problems, lot’s of problems. Think of a trip down the white water in a kayak made for traveling long distances on large lakes and oceans. If it doesn’t shatter and sink you’ll be lucky, forgetting of course how hard you had to work to keep it from crashing into the rocks. Right tool for the job is critical, and that means for everyone using the tool set!
  • How will you know where to begin and where to end your journey?
    • Sometimes this seems like a funny question but it is a good one. Consider Alice in Wonderland. She was walking down the path and came to a fork in the road. The Cheshire cat asked her where she was going and she replied; “I don’t know where I’m going”. The cat smiled and told her it didn’t matter then which path she took. Similarly, if you don’t have a clear idea of where you are starting and where you wish to go, any path is fine; just don’t complain if you end up in a place you didn’t anticipate!
    • Back to my kayak tales; I always put in at a place with calm waters to give myself a chance to get settled and start out smoothly. I know there will be rapids, that are part of the fun, but I don’t launch in the middle of them. The other side of the story is I look for a similarly quiet place to exit a river. Everything has gone relatively smoothly, a few bumps along the way but in the end all is well and I am looking forward to my next journey as I exit this one.
  • Have you prepared for the inevitable “what if” scenarios?
    • What ifs are going to need to be examined. What if I lose my paddle? What if a key member of my team leaves in the midst of the project? What if the kayak fills with water? What if we exceed our budget?
    • Try to think of every possible contingency and plan for them.
    • The biggest what if is normally “Scope Creep”. As you learn more and more about a new tool set you will likely want to add that functionality to the project. Ask yourself: If I do this, will I stay on budget? Will I stay on time? Missing either can cause major issues with management and the team.
  • Do you have the time and energy needed to accomplish the trip?
    • Are you ready? Have you trained and prepared for the project?
    • Same question for the organization, is everyone ready? Rarely is “everyone” ready, but are the key stakeholders on board.
    • One more CRITICAL question; Have you identified who is going to try to undermine your project? There is almost always someone who doesn’t want to see the project succeed. Who is it?

  Take a few minutes and assess where you are and where you want to go. This is the right time to begin to get your Demand Planning activities updated and under better control.

  See You Downstream!