Managing demand is becoming increasingly important as manufacturers move to demand driven production. Stephen Pritchard discovers what the IT vendors can offer to make this an easier task
Over the last ten years, manufacturers have made great strides by using computers to control costs. Systems such as manufacturing resource planning (MRP) and supply chain management (SCM) allow companies to cut delivery times and to have better control of stock levels, both vital for lean manufacturing.
However, better capacity planning and shorter component lead times only address part of the decision-making process. Conventional manufacturing automation systems are designed around the assumption that the decision to produce goods has already been made. The question is how to make them efficiently.
In industries where customers place orders well in advance, this approach will be adequate. But in faster-moving sectors, including consumer goods and contract manufacturing, companies are starting to look for ways to tie their production systems more closely with demand. In practical terms, this means adding price to the planning equation.
Other industries, especially travel, have used price-based capacity planning for many years. Companies supplying highly perishable goods or services, such as hotel room stays or seats on flights, need sophisticated systems that ensure that they sell as much capacity as possible at the highest possible price, but that capacity does not go to waste. Unlike a manufacturing company, a services business such as an airline cannot hold stock, so any missed sale is lost revenue.
With manufacturers under pressure to reduce their stock levels, the ability to adjust output to demand is an increasingly valuable tool. And, unlike the services sector where capacity is fixed in advance and operating costs are hard to adjust, a manufacturer can change the component mix in a product in line with customer demand, or switch production to a different item. In some cases, it could even pay to stop making a particular product.
“Conventional manufacturing automation software does not always show the bigger picture,” says Hossein Parvin, a management consultant in PA Consulting Group’s global systems integration and solutions group. “You might be delighted that sales of your product are soaring, but when you analyse it, it could be value destroying.”
This would happen if a product costs more to make and distribute than the price consumers will pay for it. A shorter production run of a more expensive product could be more profitable; in the contract manufacturing space, it could pay to switch capacity to another, more profitable customer.
Coupled with supply chain and MRP systems, adding pricing brings an extra level of precision to business decisions. A contract for a customer who is willing to pay a good price can be brought forward; a highly price-sensitive customer could be offered a very good deal in return for a later delivery time. This way the production line is used to its maximum advantage. Connecting strategic pricing to production planning opens the door to far more rapid responses to changes in demand, production capacity or the cost of components. Yet so far relatively few enterprise software companies offer systems that make an explicit link between production and profit or pricing.
The main vendor to do so is Manugistics, which offers enterprise profit optimisation (EPO) as a key selling point for its supply chain and planning software. “EPO is about using demand to manage your business, as well as managing the supply chain,” says Brian Love, director of strategic consulting at Manugistics. “Our strength has been reactive supply chain management. The addition of EPO allows you to use price to optimise your margin across the production process.”
The usefulness to a manufacturer of applying price management will depend on how price sensitive its market is, and how quickly its supply chain can react. If tier two and tier three suppliers are tightly integrated, sharing the same order information, then a manufacturer should be able to tailor its prices so that they accurately reflect both demand and production capacity.
“EPO will not suit every manufacturing company,” explains Mika Lindholm, of software company ILOG, which makes pricing tools for a companies including Manugistics. “It works well in consumer goods and the hi-tech sector, where it is a good way of making the maximum use of assets and providing better links between assets and pricing.” However, Lindholm warns that a company will need a sophisticated ERP system, built around accurate data, in order to make the most of EPO.
Manufacturers might also worry that with only one major enterprise software company -Manugistics - offering EPO, the market is not yet fully mature. While it is true that not all ERP suites support profit optimisation, more are now offering demand management tools which perform broadly similar functions.
JD Edwards, for example, offers an order promising module for its systems. This allows companies to offer alternative delivery dates or order substitutions to their customers. This, JD Edwards claims, allows companies to take profit margins into account, rather than simply pursuing a ‘serve at all cost’ strategy.
According to Ed Stubbs, a solutions consultant at JD Edwards, order promising is especially suited to build to order markets, such as computer hardware and increasingly, the automotive sector. In these markets, customers might be offered a discount for an in-stock or near-stock product, or they could be ‘upsold’ to a better and more profitable model in return for immediate delivery.
“Profit optimisation has always been a strategic and tactical consideration for businesses, but now it is becoming more granular,” says Stubbs. “It is now a question of how to make the most profit from each order.” As companies start to maximise the efficiencies from their supply chain and operations, demand management tools - whichever label they go under - can only grow in popularity.
And, as Hossein Parvin at PA Consulting Group points out, users of other enterprise planning systems could also develop their own revenue and pricing tools if the vendors do not do it for them. It is a question of extracting manufacturing and pricing data, running it through a model and then acting on the results.
But to do this, the data needs to be good, and the manufacturer has to be able to respond quickly to the results of the model. For many companies that, rather than a lack of choice of EPO software, will be the real barrier.
