Friday, September 12, 2008

Forecasting vs Lean vs Theory of Constraints in Supply Chain Management

I've been thinking about different philosophies for managing supply chains. If you do a search on the web, you will see different "schools of thought" including

-- Planning
-- Lean
-- TOC (Goldratt's Work )

And many people seem to believe that each "school" has the best approach. I'm not so sure - I believe that there are a critical few pieces of each philosophy that can be combined to improve the supply chain.

Forecasting Principles does a great job laying out the options for forecasting in general and for demand forecasting in particular. From my experience, forecasting can make a very large difference in a clients business, particular when combined with an S&OP process.

Lean and to a lesser extent TOC debate the need for forecasting - some lean components declare it is not necessary if you remove all sources of variation.

Unfortunately, in the CPG industry and for folks in working in supply chain or manufacturing the sources of variation are outside of their control
--- End customer desires for holiday shopping for example
--- promotional behavior of retail customers (holiday promotions)
--- and their own marketing departments desires to push more into the channel

In all 3 of these cases, I believe a better solution is to take key elements of each philosophy and work the problem to the "pareto-optimal" solution.

First, segment your business into two different areas --
1. from your DC's back into your suppliers business
2. From your DC's into your (retail) customers business

In segment 1
Implement a robust analytic process that includes both Expert Input (sales teams, etc) and Statistical Analysis. Include customers in the scope of your forecasting but aggregate them to the DC rather than to individual customers -- forecasting is always better when you allow the statistics to work for you than against (average out random fluctuations rather than try to predict them)

In segment 2 -- Implement a pull replenishment process using POS data if possible (e.g., use Lean Principles). P&G appears to be getting the results doing so according to the FT. But I'm willing to bet they forecast as well -- suppling retailers is a tricky business and the sell one pull one won't work if it suddenly jumps to 500....

Combining them together with a robust Sales and Operations Planning (S&OP) process will allow improve the organization and see where the constraints are that are blocking you from growth. The key to the process is having a common language and tool set where differing groups (Demand Planning, Supply Planning, Marketing, Finance and Sales) can work together on a problem rather than arguing about the data from a spreadsheet.

Once that happens, Goldratt's work in Theory of Constraints provides a useful framework for thinking about the problem -- what is the constraint in growing revenues by 2 or 6x? What is your "mafia" offer? And what is stopping you from achieving it? Many times a management teams perception is that the constraint is "the market" but in reality, they have many internal constraints that are blocking them from success. Besides, Eli would suggest to them that even the market is not a legitimate excuse - but rather how you serve the market.


TOCJonah said...

Karl, You might want to revisit your logic if you consider a few things.

1 - Test is forecasting can be accurate enough within replenishment lead-times when compared to customer tolerance time. This should be obvious: forecasting cannot be accurate enough within customer tolerance times. So if you attempt to forecast you will unavoidably have stock outs and excess inventory. Goldratt is very clear: forecasting does not work. Besides, if forecasting did work, why not just point your forecasting model at a stock and buy / sell the stock? Because the error of margin is huge with any forecasting model and forecasting should not be used to manage inventory replenishment.

TOCJonah said...

2. If you cannot forecast because it is too inaccurate, what do you do? You still need to protect sales and dont want to go broke with too much inventory. This is where the Theory of Constraints is incredibly powerful. The conflict of any retailer is "in order to protect sales I must have inventory and in order to effectively manage costs is want no inventory."
Dr. Goldratt has solved this problem with the Replenishment Solution of TOC. He reviews the solution in the novel "It's Not Luck." In good timing, this past week he has also released the details of how to implement the solution. Here is a link to the webcast . Look at the MTA Make To Availability. I think he charges for the webcast, but you should be able to pick up Its Not Luck quite affordably. It will change your views of forecasting and how to manage a retail system. Good luck!

Karl said...


Sounds interesting and would love to find out about it -- but the link to the $9875 video is a bit steep.

I enjoyed It's Not Luck and probably time to reread with your points in mind.

Thanks for the comments.