Logistics 101: Supply chain planning

Jan. 4, 2005
Supply chain planning is a major component of supply chain management (the other main component being supply chain execution). Supply chain planning (SCP)

Supply chain planning is a major component of supply chain management (the other main component being supply chain execution). Supply chain planning (SCP) coordinates assets to optimize the delivery of goods, services and information from supplier to customer, balancing supply and demand. SCP tools provide planning, what-if scenario analysis capabilities and real-time demand commitments.

What does an SCP solution actually do?
Typical SCP modules include network planning, capacity planning, demand planning, manufacturing planning and scheduling, distribution and deployment planning, and transportation planning and scheduling. Tactical and execution planning systems focus on short-term planning, while strategic and network planning systems look more to long-term planning.

How does it work?
SCP software operates within an enterprise, on top of a transactional system. It receives information from customerfacing systems (e.g., order entry systems) and interfaces that data with supplier information. The interfaced data — including bills, material and inventory — is then linked with enterprise resource planning (ERP) programs.

What's the ROI?
"Billions [of dollars] in operating margin and trillions in market capitalization separate supply chain winners from losers," reports AMR Research, but where exactly do the benefits derive from? According to AMR, companies that are best-in-class at demand forecasting average 15% less inventory, 17% stronger perfect-order fulfillment ("perfect" means complete, accurate and on time), and 35% shorter cash-to-cash cycle times, and have only a tenth of the stockouts of their competitors. In terms Wall Street appreciates, an improvement of 10 percentage points in a perfect-order rating correlates with 50 cents better earnings per share.

Who uses SCP solutions?
Just about every industry vertical uses SCP, with consumer packaged goods and apparel companies accounting for 35% of the business, according to analyst firm ARC Advisory Group. Process manufacturers (e.g., chemical and pharmaceutical companies) account for 19%. Manufacturers represent 85% of the user base, with retailers and third-party logistics providers (3PLs) making up the other 15%, says ARC.

It used to be that SCP solutions were primarily bought by billion-dollar companies, but the bar has been lowered in recent years as the ERP vendors have begun offering procure-to pay features as well as order-to-cash features, points out ARC analyst Steve Clouther. Other key ERP capabilities include the integration of analytics and event management into the SCP product suite.

What's the market for SCP tools?
The market for these solutions was $1.95 billion in 2003, according to analyst firm AMR Research Inc., a slight increase from the $1.88 billion in sales the previous year. There's the feeling that the market has peaked — a growth rate of 36% in 2000 has slowed to a projected rate of 2.5% for 2005. The marketplace itself has been characterized by a massive vendor shakeout since at least the late 1990s.

The market is looking for supply chain solutions that combine workflow, analytics and optimization to improve demanddriven supply, direct material procurement and service excellence, reports AMR.

Who are the main providers of SCP solutions?
Check out this month's Solution Selector, which begins on p. 30, or access the online evaluation guide.

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