- To some degree or another, allocation has become a reality for many manufacturers and may continue to be necessary for the near future, at least for some critical components.
- Manufacturers that allocate reactively risk sub optimizing their profits and doing additional unnecessary damage to their businesses.
- Basing allocation decisions on predefined strategy, a holistic view of data, and what-if modeling is the best way to take control of the situation, mitigate the negative impacts, and be ready to respond to future supply chain disruptions.
Allocating to whomever screams the loudest isn’t a sustainable strategy.
Oil. Fabric. Polymers. Resins. Dare we even mention semiconductors? You name it—everything is in short supply these days. And when something (or everything) goes wrong in the global supply chain network, allocation becomes a necessary evil.
While nobody could have been completely ready for the perfect storm we’re experiencing now, companies that haven’t thought about allocation proactively are much more likely to fall into the trap of reactive allocation, assigning their limited inventories to the salesperson with the loudest bark, the customer that does the most volume, or the order that’s most overdue. When the need for allocation stretches on for some time—as it has and will continue to do for many critical components—the flaws with such an approach become painfully obvious.
Without a sound allocation strategy and the ability to analyze and understand the implications those decisions, manufacturers usually end up unintentionally sub optimizing their profits. They fail to strike a balance between what’s best for their customers and their businesses in long run. Take back control with a proactive approach to allocation.
The hits just keep on coming to global supply chains. Manufacturers tell us none of the usual tricks are working to secure needed supplies, their frustration levels are at all-time high, and all they can do is sit and wait for the phone to ring with the news that supplies are on the way. While it’s true that there’s not much to be done about the thousands of containers sitting at the bottom the ocean or the blocked canal complicating an already unfathomable situation, those that have been proactively thinking about allocation are in a much better position to manage the chaos. They are more able to play a bad hand well—or at least play it to the best of their ability to minimize the negative consequences.
Indeed, manufacturers that are finding ways to manage successfully through this current crisis are controlling the things they can control, including the impact of allocation decisions on the bottom line. The ability to do this well requires three essential elements that must work together for the best outcomes: a sound allocation strategy, the right data and the ability to run what-if modeling scenarios.
The 3 Keys to Allocation Success
1. A sound strategy that guides allocation decisions. When there’s not enough to go around, deciding who’s going to get what should be based on sound business strategy that maps back to your overall business objectives. This includes finished products and how you will allocate them to your various orders and customers, as well as how you will allocate your outstanding orders among the limited production resources you have available. Defining the strategy that guides these necessary allotments is one of the biggest decisions companies need to make, and make definitively; ideally well in advance of any situation that requires allocation.
While there are many factors to consider, this can usually be boiled down to two key questions: Is your goal to make the most money. Or is to satisfy your top customers? The answer usually is a mix between both factors. Manufacturers need to find the delicate balance between customer service and profitability, especially since order volume and margin are often not directly correlated. Giving everything you’ve got to your biggest customer could be a grave mistake if the total cost to serve that customer is high. In any case, knowing your ultimate objective and strategy is going to make it much easier to make difficult allocation decisions, and then to explain those decisions to your team and your customers.
2. The right data and a way to analyze it quickly. With strategy in place, you can then dive into your data—from both outside and inside sources where possible— to uncover your best opportunities to realize your goals. Digital manufacturing software, like Dploy Solutions, aggregates customer data from your ERP and other systems to give you a holistic, real-time view of profitably by customer, product, and location over time. We help manufacturers take that data and leverage Dploy Solutions and other predictive planning software applications, such as Vanguard and River Logic, to run advanced analytics and uncover key insights. The insights lead to recommendations that align with strategy, for example, by pointing to the right customers, products, and even locations to prioritize if optimizing profitability is the ultimate goal.
While working in the greeting card business, where some degree of allocation happens around every major holiday, we found that the ability to see and analyze internal customer data as well as external demographic and psychographic data was essential to getting the right cards in the right stores come every major holiday. Should a printer go down or a shipment be delayed, as it inevitably would, this data and insight become all the more invaluable to deciding what to do with our limited stock. Believe me, we did not want Mother’s Day cards sitting on the self in one store on the third Monday in May with moms across town miffed over not receiving a proper tribute just because we got the allocation strategy wrong.
Of course, there’s a lot more at stake than hurt feelings in any business. Being able to quickly assess your data and pinpoint the best opportunities for meeting your strategic objectives is much more reliable than trusting your instincts. And, again, it will give you the factual backup you need to justify the hard choices.
3. What-if modeling capabilities to optimize allocation strategy and quantify the impacts of disruption. The final critical step is to use modeling to uncover your best possible scenarios and fully understand the implications of your decisions. We help customers leverage advanced what-if scenario planning and cost modeling solutions to quickly get to the best answers, based on the rules and strategies they’ve defined, and using real-time data inputs around available supply and current customer needs. We show the bottom-line impact of the decisions. And then we help develop a detailed roadmap for putting those decisions into place.
The modeling solution is the key to defining the specifics for prioritizing customers, products, and locations and determining the right quantities, frequencies, and even packaging configurations for the best possible results based on predefined goals around order fill, revenue, and profitability. And, it allows companies to easily adapt their plans as parameters change, such as new customers being added to the mix or new supplies becoming available. Manufacturers with the ability to model have the confidence of knowing they’re always optimizing their resources and inventory for the best possible business outcomes.
For example: We worked with a North American manufacturer of bricks and architectural stones where production relies not only on access to raw materials, but also on the output dictated by its kiln burning process. Anytime demand exceed that production capability, the company has to manage by allocation. We worked with strategic business leaders to think through their key business drivers—in their case, margin and risk of losing critical customers—and then factored those into an optimized allocation strategy. Now, any time demand spikes above its production capabilities, the business has a game plan for confidently and correctly prioritizing the right customers and products and successfully managing its lead times for the most critical orders.
This isn’t going to be the last crisis.
The recent global supply chain disruptions, one after another, truly have been the epitome of the perfect storm. Things may not get quite so out of hand again, especially as companies have learned and applied lessons for baking risk mitigation into their supply chain strategies. But there will most certainly be times in the future of your business where demand will outstrip supply. That could be the near term as industries continue to get healthy and evolve in a post-COVID-19 world. It could be anytime a natural disaster or even unexpected weather affects your suppliers’ ability to deliver. Or it could just be a matter of a line going doing for a week. Putting your allocation strategy or rules into place and investing in the right technologies to enable execution will position your business to respond proactively and strategically, no matter what comes next.
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