Why internal supply chain alignment is critical -- and how to get it

Alignment is not just for the external supply chain

The same principles apply within the manufacturing organization, where departments and functional areas are the participants. Purchasing cannot focus solely on price, purchase price variance or reducing excess inventory. These objectives must be secondary to meeting the needs of the production floor. Similarly, production's primary focus should be meeting the master schedule, which is tied directly to the demand plan, sales and customers through sales and operations planning (S&OP).

Employees must be tied to supply chain priorities through incentives that are linked to the S&OP and master schedule.

How does an organization create and maintain this internal alignment? In comparison with suppliers and other external companies, internal supply chain alignment should, theoretically, be easier to achieve because internal resources are within the span of control for company executives and managers.

Yet, whereas alignment with external resources can be specified in the terms of the business or contractual relationship, internal alignment can be hampered by legacy incentives and measurements that are not tied to supply chain priorities. Changing this kind of internal ethos can be very challenging. That's why the most critical ingredient in establishing internal supply chain alignment is for the company's leadership to make that alignment an integral part of the operational model, strategy and culture. And, in this, technology can play a key role.

How ERP can support internal supply chain alignment

The fundamental purpose of ERP is to gather, store and distribute information that describes your business. Through the distribution of information, ERP helps to coordinate the activities of the functional business areas, such as inventory, production and purchasing, toward the company's objective -- serving the customer in the most effective and efficient manner.

Here's how it does that: It all starts with the customer. The demand plan anticipates what the customer will want in the foreseeable future and forms the main input to S&OP, where a production plan is developed to best meet that demand, while making the best use of available resources.

The production plan is deconstructed into a more detailed master production schedule, which then drives the complete material requirements plan -- a list of specific tasks and priorities for manufacturing, purchasing and supporting functions.

This top-down planning process, driven from customer demand, keeps all of the individual tasks and priorities fully in alignment with the main supply chain objective of serving the customer through the judicious use of resources.

Incentives critical to supply chain alignment

Those are the technical mechanics of developing a fully aligned plan and instructions, but that's only the first step. The plan must be executed, and that can be a challenge.

Creating internal supply chain alignment typically involves change management efforts, especially if the strategic direction is changing. For example, the organization and the individual functional areas within the organization must be focused, and properly incentivized, to deliver the plan. To do that, company senior management, departmental leadership and first-line supervisors must:

• continually focus on the S&OP plan and master schedule when creating and communicating directions and expectations to the workforce;
• develop and enforce individual incentives and the metrics against which employees are judged that support the plan; that is, they must be incentivized to respect the plan-driven priorities and dates;
• eliminate, or at least de-emphasize, traditional incentives; for example, bonuses tied to traditional performance measurements, such as efficiency, utilization and volume-oriented measures, like number of parts produced per shift or per day.

Executives and managers will likely still want to measure and monitor things like efficiency and production numbers because embedded management structures and accounting processes will likely demand that they remain in place. But this kind of internally focused measurement is not related to supply chain needs, and must not be allowed to take precedence over the supply chain-driven measurements and incentives.

Remember that people react to how they are measured. Someone paid a bonus for achieving a high-efficiency number or for producing more parts per shift will be incentivized to ignore the schedule priorities developed in the aligned plan and to cherry pick the jobs that are most likely to result in a better report card and, therefore, a higher bonus. To develop and maintain internal alignment, employees must be tied to supply chain priorities through incentives that are linked to the S&OP and master schedule.

The manufacturing planning process is designed to keep everyone focused on the same goal: to deliver the right products to the right customers at the right time and place, using available resources effectively. But plans don't execute themselves.

It is up to company management actions, policies and incentives to get people on board and keep them focused on achieving the common goal -- customer service -- which is essential to company success as part of the supply chain.