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Supply chain

Planning as a Service: short-term gimmick or emerging strategy? 

Published 25 September 2023 in Supply chain • 8 min read

Are you weighing up the potential benefits and pitfalls of outsourcing planning? Here’s what you must first consider

At a supply chain software vendor event this summer in the United States, the CSCO of a major fast-moving consumer goods company declared, almost as an aside, that his company was in the midst of a progressive transfer of baseline demand planning to third-party service providers. Since this does not seem to have yet been formally announced, the parties won’t be identified here. But the development is consistent with anecdotal information that is circulating concerning other companies. 

With the apparent emerging trend of planning as a service now being questioned as a core competency, it’s worthwhile to consider the potential benefits and pitfalls of outsourcing demand planning and the contexts where the trade-offs could make sense. 

The potential pitfalls 

There is a temptation to consider the activity of demand planning as a purely analytical and statistical undertaking, wherein if the company has chosen the best tool and the planner chosen the best algorithm, then the resulting demand plan will be as accurate as possible and there is nothing more to be done. 

Experienced supply chain managers know this not to be the case. The most challenging part of demand planning is not finding the right algorithm or machine learning technique, it is largely about getting the market intelligence. Market intelligence may be information on customer or consumer behavior, growth, and expansion plans, media spending, or new accounts – and so applies not just to launches and promotions but also to baseline forecasts. The holders of this information, usually sales and marketing, often look upon the supply chain as a secondary function, not as a valued partner. Using an outside firm to prepare demand plans will only add friction to the information flow to planners, making it less likely that the demand plans fully reflect the best forward knowledge of future activity. 

One recent trend in demand planning is to move towards probabilistic planning, where different demand scenarios are evaluated, assigned probabilities and the resulting aggregate vision is used as the demand plan. This would be much harder to implement with outsourced planners as it requires even deeper collaboration between business functions to identify and weigh the possible scenarios. 

Similarly, it will be difficult for an outside firm to have all necessary information to properly execute the initial ‘cleansing’ stage of demand plan preparation by taking into account known past events like a stock-out or other extraordinary event that should be corrected before initiating statistical data treatment. These frictions to data flow are in addition to the more first-order technical ones such as product master files, actual sales, cost of goods that also come with set-up costs. 

There are broader managerial considerations at play when evaluating the potential pitfalls. Research has shown that 80% of large, global, mature companies suffer from demand plan manipulation, where the general manager will take the demand plan that resulted from careful analysis and construction, and force arbitrary changes to the number in order to preserve stock buffers and enable a form of shortage gaming. This unfortunate behavior is likely to increase if the planners creating the demand plan are outsourced. One of the principal reasons the sales and operations planning ‘one set of numbers’ pillar was developed was to discourage this sort of manipulative behavior. 

market intelligenceThe most challenging part of demand planning is not finding the right algorithm or machine learning technique, it is largely about getting the market intelligence

Even when the supply chain planning process is entirely internal, there is inevitably much unproductive finger-pointing that occurs, trying to find the guilty party rather than focusing on identifying as resolving issues. Questions that are seemingly simple like, “Is this shortage due to overselling or underproduction?” can become quite knotty problems, both analytically and politically. When a third party is performing the demand plan, it will be very tempting to blame them for all supply chain ills.  

The implication is that it will be difficult to set up KPIs to monitor demand planning as a service performance level. For example, if there is a supply problem that leads to an undersell, the service provider will understandably strongly resist a negative impact to their evaluation. Similarly, supply chain disturbances and dysfunctions elsewhere can impact demand planning performance, or if key market intelligence is not shared with the service partner it will also lead to inaccurate demand plans. All of this makes for complex contractual performance level definitions and ongoing calculation. 

The potential benefits 

Though the list of pitfalls may seem extensive, if large serious companies are moving in the direction of demand planning as a service, one imagines that there are compelling reasons, and indeed there are. 

The first, clearest benefit is that the company lowers its direct headcount, turning payroll into an expense line. This provides flexibility for restructuring and adapting to business cycles, not unlike the benefits companies see when they consider outsourcing their logistics activities. There is also a cost benefit from ‘rounding’ of headcount. For many contexts, companies do not need a full-time demand planning headcount, or at least not a round number. And experience shows that when demand planners are given incremental tasks simply because they have surplus bandwidth, the demand plan is inevitably the responsibility that is neglected. The immediate concerns of execution will trump the longer-term benefits of proper planning. And, of course, lower headcount implies lower payroll charges, office space, etc. 

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Another clear benefit is one of expertise. Finding, training, and retaining talented demand planners is challenging, particularly in low-unemployment cycles. Outsourced demand planning firms are better suited to the task, as it is their key value proposition. This expertise can be leveraged to use the most appropriate statistical or machine learning treatments. They will also be more adept at using a segmented approach, looking to optimize forecast-value-add and not focus on easy-to-plan SKUs. 

If the challenges detailed in the potential pitfalls are addressed, or the context is such that they are minimized, the potential benefits have a genuine appeal. 

The ideal conditions 

Weighing the plusses and minuses of demand planning as a service enables the delineation of an optimal context for considering the outsourcing option, at least for the baseline segment of the catalogue. 

Multinational companies, particularly those that have a manufacturing footprint that is not country-based, wrestle with the question of whether to place the demand planning in the market or at a centralized level. If the market intelligence is centralized, this in turn tilts that decision heavily toward centralizing demand planning. Having a centralized planning model greatly increases the attractivity of outsourcing demand planning. There is a simpler contractual relationship and fewer interfaces and interaction to manage, and it is also more conducive to establishing productive exchanges with sales and marketing.

stocksThe ability of a company to anticipate events lowers the need for safety stocks to protect against unforeseen events

A corollary of this is that ideally each SKU would only have market, rather than being sold in multiple markets. Should a SKU be sold in more than one market, the demand plan would have to be disaggregated. This would be a fraught political and financial exercise if each market is run as an independent business unit with its own P&L. 

One way to dodge some of the issues of collecting market intelligence would be for the company to be in an environment where the stakes of obtaining market intelligence are lower. In other words, where there are relatively fewer launches and promotions. Industries like pharma come to mind. 

Ideally, the company would have a high level of data maturity, and master data management as well as an entrenched and established advanced planning system. This will both make the transition smoother and enable the company to better harvest the benefits of a (hopefully) more refined demand plan.  

Management implications 

Gartner, the supply chain advisory firm, places demand planning accuracy at the peak of its hierarchy pyramid of supply chain key performance indicators. There is sound reasoning behind this. The ability of a company to anticipate events lowers the need for safety stocks to protect against unforeseen events. It also lessens the impact of long lead times, since waiting longer only comes with risks to the extent that the company is unprepared for demand shocks, and demand shocks are less likely with strong demand plans. This has a direct impact on inventory levels and service level. 

Fewer demand shocks also lead to tangible impacts on other KPIs. Fewer demand shocks imply fewer expedited productions, which in turn implies less air freight, overtime, and incremental machine setups. 

There is something a bit counterintuitive to this. Demand planning accuracy is a means, after all, not an end unto itself. But it has shown itself to be on the critical path to the desired ends of better service, lower inventory, and lower costs. By outsourcing demand planning, companies lose some measure of control of this essential lever for supply chain performance. 

There is a larger, overarching consideration at stake here as well. Supply chain managers have struggled for years to be seen as a critical business function, worthy of a seat at the table when defining the overall, forward business strategy. The post-COVID era of nearshoring and concern with resilience has contributed to this regard. 

Demand planning served to bring supply chain into collaborative contact with other business functions like sales, marketing, and finance. Outsourcing even part of demand planning undermines the progress that has been made, and instead signals that supply chain is not a true core competency, which may bring deeper long-term implications than an immediate cost/benefit analysis is capable of revealing. 

Authors

Ralf Seifert - IMD Professor

Ralf W. Seifert

Professor of Operations Management at IMD

Ralf W Seifert is Professor of Operations Management at IMD and co-author of The Digital Supply Chain Challenge: Breaking Through. He directs IMD’s Leading the Future Supply Chain (LFSC) program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and the impact of new technologies.

Richard Markoff

Richard Markoff

Supply chain researcher, consultant, coach and lecturer

Richard Markoff is a supply chain researcher, consultant, coach, and lecturer. He has worked in supply chain for L’Oréal for 22 years, in Canada, the US and France, spanning the entire value chain from manufacturing to customer collaboration. He is also Co-Founder and Operating Partner of the Venture Capital firm Innovobot.

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