Collaborate, then calculate

“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.

Fossilized thinking

Fossilized

In August 1949 a group of fifteen smokejumpers – elite wild land firefighters – descended from the Montana sky to contain an aggressive fire near the Missouri River.  After hiking for a few minutes the foreman, Wagner Dodge, saw that the fire was raging – flames stretching over 30 feet in the air and blazing forward fast enough to cover two football fields every minute.

The plan was to dig a trench around the fire to contain it and divert it towards an area with little to burn.

Soon it became clear that the fire was out of control and the plan was out the window.  The fire was unstoppable so, instead, they’d try to outrun it, to safer ground.

For the next ten minutes, burdened by their heavy gear and tiring legs, the team raced up an incline, reaching an area that was only a few hundred yards from safety.  But the fire was unflinching, gaining ground like a wolf chasing down a wounded animal.

Suddenly, Dodge stopped.  He threw off his gear and, incredibly, took out some matches, lit them, and tossed them onto the grass.  His crew screamed at him but to no avail – when Dodge didn’t listen, they had no choice and turned and ran as fast as they could, leaving their foreman to what they believed to be certain peril.

But Dodge had quickly devised a different survival strategy: an escape fire.  By torching an area in front of him, he choked off the fuel for the fire to feed on.  Then, he poured water on a rag, put it over his mouth and lay down, face first, on the freshly burnt grass while the fire raged and sped past and over him.  In total, he’d spend close to 15 minutes living off the oxygen close the ground he’d just torched.

Sadly, of the rest of his crew that tried to outrun the blaze, only two would survive.

Wagner Dodge was able to survive not because of his physical fitness, but his mental fitness – the ability to rethink and unlearn.  The prevailing paradigm was that, at some stage for an out-of-control blaze, your only option is to try to out run it.  But Dodge was able to quickly rethink things – believing that, perhaps, by choking off it’s fuel line and providing his own small wasteland area, the fire might avoid him.  The ability to rethink had saved his life.

As it turns out, the ability to rethink and unlearn is also crucial for retails survival and revival.

It’s no secret, many retailers are struggling.  The same is true of many retail supply chains.

Do you ever really wonder why?

Lots of people blame retail’s generally slow adoption of new technologies and business models as the main factor, but I think it’s a deeper, more fundamental and chronic problem.

Technology is not eating retail.  Fossilized thinking is.

What’s fossilized thinking?  It’s people – at all levels in an organization – who are unwilling or unable to challenge their long-held beliefs.  Not only challenge them, but be able to rethink, unlearn and change them often.

As a case in point, many people who work in the retail supply chain don’t include the consumer as part of the supply chain.  Yet, if you think about it, the retail supply chain begins and ends with the consumer.  There are even a number of folks who don’t consider the store part of the supply chain.  Once the product has shipped from the DC to the store, then, incredibly, job done according to them.

Don’t believe me?

I won’t embarrass them, but just recently I read a “thought leadership” article from one of the world’s pre-eminent consulting firms regarding the top trends in retail supply chain management.  At #3, and I kid you not, was the growing view that the store was a key part of the supply chain.

Flowcasting tribe members know better and think differently.  The consumer and store have, and always will be, part of the supply chain.  That’s why we understand that, in retail, there is no such thing as a push supply chain – since you can’t push the product to the consumer.

In my opinion (and I’m not alone), fossilized thinking, not technology adoption, is the real disruptor in retail.

If you want to improve, innovate or disrupt then you must…

Constantly rethink, unlearn and challenge your own thinking!