Collaborate, then calculate

Posted on November 1, 2023 by Mike Doherty

“Never forecast what you can calculate.” – Dr. Joseph Orlicky

Collaboration promises much to the retail supply chain, and rightly so. Retailers and their trading partners are beginning to understand they are not alone. The retail supply chain does not act as a series of islands – each independent entity working for its own purpose. Rather, smart companies understand that they are really working as part of one, completely integrated network that is designed (or should be) to deliver products to their end customers.

Almost 50 years ago, at the 1975 APICS conference in San Diego, Dr. Joseph Orlicky (the pioneer of MRP – Material Requirements Planning) made a profound statement regarding supply chain planning. Having just learned of Andre Martin’s idea to calculate factory demand from the distribution centre requirements, he told Andre that his idea was good since you should “never forecast what you can calculate”.

Leveraging this profound truth is the key to improved collaboration, addressing the shortcomings of CPFR and, importantly, making a significant dent in stock outs, overstocks, and the bullwhip effect.

The retail/CPG supply chain should be driven only by a forecast of consumer demand – time-phased by item/selling-location (e.g., store, webstore, etc.). The consumer demand forecast should then be used to calculate a series of integrated, time-phased product flow plans and planned shipments (for a 52+ week planning horizon) from the store to the supplier factory – what we call Flowcasting.

Sharing planned shipments allows the retailer to inform the supplier about future product flow requirements, by item and shipping location, with all known variables factored in – what we often refer to as the supplier schedule. This allows the supplier to eliminate all efforts previously expended to attempt to forecast that retailer orders. The planned shipments replace all this effort – improving the supplier order plan and allowing the collaborative process to work using the profound power of silence.

In the new collaborative model, since the planned shipments provide a long-term view of future required inventory flows, the expectation is that the retailer and supplier work to the principle of “silence is approval”. What that means is that the retailer expects the supplier to be prepared to deliver to the up-to-date, forward-looking schedule and only when they cannot supply to the schedule and/or they don’t understand the projected schedule, is collaboration required.

Collaboration based on a shared view of planned shipments (i.e., the supplier schedule) allows for the collaborative model to become more strategic and value added. In this new approach retailers and suppliers will collaborate on strategies to drive sales and potentially inventory plans – in essence, the inputs to drive joint business plans.

That’s a complete reversal of the traditional CPFR model where each company developed their own independent order forecasts and then spent considerable time and effort to reconcile these forecasts. In the new approach, the collaboration mostly focuses on a common language: sales to the end consumer. And, again, largely by exception. There is no need to collaborate on the plethora of retail forecasts and planned shipments since these have been automatically translated into the requirements, product flows and various languages of the business (e.g., dollars, cube, capacity, resource needs) for all trading partners.

The following diagram depicts the paradigm shift in collaborative planning between retailers and their merchandise suppliers – collaborating primarily on the inputs to the joint business plans, and only by exception if any issues or opportunities arise based on the resultant operational product flow plans:

Leading retailers and their suppliers will collaborate where they believe it is worthy of each partner’s time and largely on strategies (i.e., inputs to the joint plans) that drive growth and/or improved performance. That could be on promotional forecasts, new items, and ideas and concepts about product flows – to name a few. Both partners understand that the planned shipments resulting from these strategies are calculated – so collaboration on these shared projections is only needed if supply is at risk.

Dr. Orlicky’s famous and profound quote, “never forecast what you can calculate” is embedded in my mind and cemented in all the retail clients I’ve worked with. We can, and should, build on this profound truth and work to ingrain this thinking and practice between retailers and their trading partners…

Collaborate, then calculate.

Grandmaster Collaboration

Posted on January 1, 2020 by Mike Doherty

Garry Kasparov is one of the world’s greatest ever chess grandmasters – reigning as World Champion for 15 years from 1985-2000, the longest such reign in chess history. Kasparov was a brilliant tactician, able to out-calculate his opponents and “see” many moves into the future.

In addition to his chess prowess, Kasparov is famous for the 1997 chess showdown, aptly billed as the final battle for supremacy between human and artificial intelligence. The IBM supercomputer, Deep Blue, defeated Kasparov in a 6 game match – the first time that a machine beat a reigning World Champion.

Of course chess is a natural game for the computational power of AI – Deep Blue reportedly being able to calculate over 200 million moves per second. Today, virtually all top chess programs that you and I can purchase are stronger than any human on earth.

The loss to Deep Blue intrigued Kasparov and made him think. He recalled Moravec’s paradox: machines and humans frequently have opposite strengths and weaknesses. There’s a saying that chess is “99 percent tactics” – that is, the short combinations of moves players use to get an advantage in position. Computers are tactically flawless compared to humans.

On the flip side, humans, especially chess Grandmasters were brilliant at recognizing strategic themes of positions and deeply grasping chess strategy.

What if, Kasparov wondered, if the computational tactical prowess were combined with the human big-picture, strategic thinking that top Grandmasters had honed after years of play and positional study?

In 1998 he helped organize the first “advanced chess” tournament in which each human player had a machine partner to help during each game. The results were incredible and the combination of human/machine teams regularly beat the strongest chess computers (all of which were stronger than Kasparov). According to Kasparov, “human creativity was more important under these conditions”.

By 2014, and to this day, there continue to be what is described as “freestyle” chess tournaments in which teams made up of humans and any combination of computers compete against each other, along with the strongest stand-alone machines. The human-machine combination wins most of the time.

In freestyle chess the “team” is led by human executives, who have a team of mega-grandmaster tactical advisers helping decide whose advice to probe in depth and ultimately the strategic direction to take the game in.

For us folks in supply chain, and especially in supply chain planning, there’s a lot to be learned from the surprisingly beneficial collaboration of chess grandmaster and supercomputer.

Humans excel at certain things. So do computers.

Combine them, effectively, like Kasparov inspired and you’ll undoubtedly get…

Grandmaster Collaboration.

Flipping your thinking

Posted on May 3, 2017 by Mike Doherty

When students at Segerstrom High School in California attend calculus class, they’ve already learned the day’s lesson beforehand — having watched it on a short online video prepared by their teacher, the night before.

So without a lecture delivered by a teacher, students spend class time doing practice problems in small groups, taking snap quizzes, explaining concepts to the class, and sometimes making their own videos while the teacher moves from student to student to help kids who are having problems.

It’s a new form of learning called Flip – because the idea has flipped traditional education on its head – homework is for the lecture, while the classroom, traditionally reserved for the lecture, is for practice and deeper learning and collaboration.

Flipped learning is catching on in a number of schools across North America, as a younger, more tech-savvy student population – including teachers – now make up the typical classroom.

When it comes to supply chain planning, the concept of flipping applies nicely and most people, and most companies, could benefit greatly by flipping their thinking.

Let’s take CPG manufacturers. When it comes to demand planning, they have it difficult. Trying to forecast what their retail and other customers are going to do and want is difficult and it’s not getting any easier. The empowered consumer, changing and dynamic retailer-led strategies are just two examples of shifts that are making it almost impossible to predict the demand, with any level of reasonableness. The result? Additional inventory and buffer stock required to respond, “just in case”.

There are a number of studies that prove this point. Forecast accuracy has not improved and, in most cases, it’s getting worse.

Supply chain practitioners and experts are responding in the typical fashion. We need better algorithms, fancier formulas, maybe even artificial intelligence and some big data sprinkled on top in order to find a better forecasting engine.

Sorry folks, that’s not working and as consumers and customers become more demanding and expectations rise, it’s going to get worse. What’s needed is to flip the thinking and to change the paradigm.

CPG manufacturers, for the most part, are forecasting what should be calculated. The demand plan they are trying to predict for their customer, should be provided to them in the form of a supplier schedule. And that schedule should reflect the latest knowledge about the consumer, and any and all associated strategies and tactics that will entice the consumer’s buying patterns and/or product flows.

Forecasting consumer demand is, as has been proven, simpler and easier that trying to predict dependent demand – that is, the resulting demand on DC’s and plants based on ordering rules, lead times, and other constraints that tend to “pollute” the dependent demand plan.

When it comes to demand planning, Joe Orlicky had it right some 40 years ago: you should never forecast what can be calculated.

Of course, what we’re talking about is a retailer using the Flowcasting process to plan all flows from supplier to consumer – factoring in any and all constraints that translate the consumer forecast into the purchase projection from retailer to supplier.

Why is this so much better than the traditional approaches? First, the entire retail supply chain (or any industrial supply chain) is driven by only one forecast – consumer demand. All other demands can and should be calculated. The effect is to dramatically simplify planning. The retailer and manufacturer are working to a single, shared forecast of what’s expected to sell.

Second, the entire supply chain can be re-planned quickly and effortlessly – making the supply chain agile and dynamic. Changes are and can be viewed almost in real-time and the changes are automatically translated for all partners in the supply chain – in units, cube, weight, dollars, capacity or any language needed throughout the supply chain. The result is that the entire supply chain is working to a single set of numbers.

Third, when you embrace the idea of Flowcasting as it relates to planning, you get so much more than a better forecast. Unlike traditional approaches that are trying to mathematically predict the demand, the supplier schedules that are a resultant of the Flowcasting process, calculate the demand by aggregating product flows.

Therefore, trading partners can see, well into the future, projected product flows between any two locations and this provides tremendous insight and flexibility to improve and smooth flows, as well as proactively put in place solutions to potential flow issues before they happen. The retailer and manufacturer can actually work, using the same system and process, as if they were one company – all oriented to delight and deliver to the consumer, in the most profitable manner possible.

Finally, in addition to providing product flows the approach also produces projections of sales, inventory, purchases, receipts and, as mentioned, flows in any language of the business – units, cube, weight and capacities for operations folks and dollars for financial folks and Management in order to get better control of the business and ensure that plans stay on track.

If you’re planning the retail supply chain, you get so much more when you forecast less.

So, what is the path forward for manufacturers?

They need to flip their thinking and understand that they are trying to forecast what should be calculated – and that this practice will soon be obsolete.

Next, they should engage and work with their key retail and other customers to help educate their customers that a process like Flowcasting not only helps them (in the form of a supplier schedule and complete visibility), it provides even more value to the retail customer. In fact, to date, it’s the only planning approach that consistently delivers in-stock levels of 98%+, even during promotions – crushing the industry averages of around 92%.

Once they are successful, a CPG manufacturer, over time, can be working with their top retail customers and receiving valid, up-to-date, supplier schedules that in most companies account for 70-85% of their volume. The additional demands can then be forecasted using the latest approaches – demand sensing, etc.

Imagine, for a moment, what that would mean to the retail industry and the CPG manufacturers in general. The impact would be enormous – from increased sales and profits, to significant reductions in inventory and working capital. Not to mention the impact to consumers and customer loyalty.

Is all this possible?

Sure, but to make it happen the first step is to flip your thinking.

In Praise of Non-Collaboration

Posted on June 3, 2015 by Jeff Harrop

According to dictionary.com, the definition of ‘collaborate’ is: ‘to work, one with another; cooperate’.

Recently, I received an email from Supply Chain Digest asking me to participate in a survey called ‘The State of Retail and Vendor Supply Chain Relations 2015’ – perhaps you received it too. (As a consultant, I never participate in these surveys as I feel it could taint the results, but I’m always interested in what they’re trying to find out).

The Research Summary reads: ‘What is the state of retailer and vendor/supplier relations today? Is it getting better and more collaborative – or heading the other way?’ The implication is crystal clear: More Collaboration = Better.

It seems foolish to argue against that. But that’s just what I’m going to do.

Over the years, supply chain collaboration initiatives were conceived with the notion that ‘two heads are better than one’, especially when there’s uncertainty afoot that could cause havoc in the supply chain, such as for promotions or product launches.

And because trading partners’ planning processes weren’t integrated with a common set of numbers, collaboration was seen as the way to bridge the gap (i.e. ‘we have two sets of plans that are misaligned, so let’s talk our way through it until we agree’). But to what extent is collaboration necessary (or even advisable) when trading partners are fully integrated?

Collaboration is work. Integration is effortless.

All that said, I would tend to agree with the ‘two heads’ argument, so long as all available information is shared between the ‘heads’ This is rarely the case, however, and it’s most often the result of inability to share, rather than unwillingness to share.

Consider a common scenario whereby a retailer and a supplier collaborate on a sales forecast. In order for the demand picture to be complete, the following information must be known and disclosed during the collaboration:

Pricing and promotion strategy for the supplier’s products at the retailer’s stores
Pricing and promotion strategy for the supplier’s competitors’ products at the retailer’s stores
Pricing and promotion strategy for the supplier’s products at the retailer’s competitors’ stores

Point 1 is generally already known by both parties. Points 2 & 3 are at best, unethical (and at worst illegal) for either party to share with the other.

It’s sort of like having two people collaborate on what bet to place on a 5 card poker hand. Each person can only see 3 of the 5 cards with one common known card between them and they aren’t allowed to discuss the cards they can see with their collaboration partner. But the strength of the hand is determined by all 5 cards together.

As a general rule, the retailer faces the customer and they know the breadth of their offerings across all of their competing and complementary products. They may not know exactly what their competitors are doing that could impact their sales, but they pretty much know everything else. Given that the supplier is ethically prevented from providing the one missing piece of information, what value do they add to the collaboration process?

Another example is collaboration on network efficiency to alleviate capacity issues at retail DCs during peak periods. The problem here is that a capacity constraint occurs as a result of a number of straws breaking the camel’s back. Only the retailer has the visibility to all of the straws. How can a collaboration with any single supplier (straw) result in a plan to smooth out the flow for the entire building?

Note that I’m not suggesting that retailers and suppliers shouldn’t be talking to each other when circumstances require it. In the capacity constraint example, the retailer has all the information they need to detect the constraint and figure out the best way to circumvent it. At that point, discussions may need to happen with some suppliers to pull shipments ahead or maybe bypass nodes in the supply chain, but at that point, they’re really just working out execution details rather than ‘collaborating on the plan’.

When you think about it, the supply chain is really not a chain at all – it’s a web. With the exception of private label goods or exclusive supply arrangements, the notion that a retailer and a supplier can ‘act as a single entity in service to the consumer’ is not as easy as it sounds – even with advanced planning processes like Flowcasting. Each retailer offers products from many competing suppliers and each supplier provides their products to many competing retailers.

So if the idea of collaboration is somewhat flawed, then what is better?

Basically, retailers need to get their houses in order and build all of their planning activities around sales at the store shelf (using Flowcasting, of course), incorporating all information they know into the plan – inventories, shipping/receiving schedules, case pack sizes and the like.

Once constructed by the retailer, these plans can be shared directly with suppliers, allowing them to ‘read the retailer’s mind’ without having to second guess or do a lot of ‘collaborating’ back and forth. Discussions between business partners only need to occur when either party foresees difficulty in executing the plan.

Why collaborate when you can integrate?

Collaboration Kool-Aid

Posted on January 7, 2015 by Mike Doherty

Theories come easy. Robust models that work in the real world do not. – Mark Payne, Fahrenheit 212

Recently I was asked by a client to describe myself in one sentence. After pondering it, the client smiled when I answered:

“I’m equal part genius, equal part buffoon”.

And I really believe that – at least the buffoon part.

I’ve never been able to dance very well with conventional wisdom. For some unknown reason, I can’t seem to follow along. I’ve always had a healthy dose of skepticism for conventional wisdom – especially in supply chain planning.

Recently a client of mine challenged me on the conventional wisdom regarding demand planning collaboration. First off, a bit of background about my client – let’s call him Ken.

When it comes to demand planning collaboration, Ken has a significant advantage over me.

He has no experience.

Yup, he’s never designed or implemented anything regarding retail supply chain planning (Flowcasting or otherwise).

However, he does know retail. Cold. Ken is a smart dude and a quick study. He understands Flowcasting and its potential.

When we were talking and designing the demand planning process that will drive Flowcasting, the topic of collaboration came up. I did what any consultant would do and immediately offered Ken a large glass of Collaboration Kool-Aid.

After all, the conventional wisdom from every planning expert is that when it comes to demand planning, collaboration is king. Luckily Ken’s got a little buffoon in him too and he started to ask some pretty specific questions – questions that I’ve been pondering as well.

He pointed out that in a Flowcasting world, there is only one forecast – a time-phased forecast of sales to the consumer, by item, by store.

By his thinking a retail demand planner would be accountable for this forecast. And, of course, Flowcasting technology would generate the math forecast for possibly millions of store/item combinations. By his logic no collaboration would be necessary. I agreed.

But what about promotions and new items, I argued? Surely collaboration would be needed there and would improve the forecast. After all, it’s conventional wisdom. Then he floored me with the following, regarding demand planning collaboration:

Outline the specific steps each person would perform in the demand planning process
Prove that more people improve the process enough to warrant the extra effort

It was a difficult exercise and we both struggled to document, on a white board, actual steps different people would take that we believed would actually improve the process and resulting forecast.

After all, in a Flowcasting world, we are forecasting consumer demand. When it comes to promotions, a demand planner would use history to help predict demand. But, argued Ken, so would anyone else involved in the process (like a category leader or even a supplier).

And would their actual forecast really differ significantly from that of the demand planner, if they were unbiased and just trying to predict the sales? And, would their steps to arrive at the forecast be much different? If so, what would the steps be? I struggled. Started to babble. Then started to sweat. I couldn’t really come up with any significant difference. And you know what they say…”if 2 people in business always agree, then one of them is not necessary”.

After more debate, we ended up in the same place even for new items.

Our conclusion was completely the opposite of conventional wisdom – A single demand planner, accountable for the forecast, would produce as good a forecast as a team collaborating on it, with considerably less effort and a much simpler process.

If the demand planner wanted advice or input on a specific forecast, they would ask (possibly a category manager). But, we both agreed – that would happen very rarely. In terms of proving that having people collaborate on the forecast produces a better consumer demand forecast, there really is no documented proof. Only conventional wisdom, supported by an army of Kool-Aid drinkers.

Now I know what my long time colleagues and fellow self-anointed supply chain experts are thinking – wow, Ken really is a buffoon.

By the way, I happen to agree with him.

Guess that makes me a buffoon as well.

Told you so.