It has been only a month or so since I joined Steelwedge from Aberdeen Group and I have already had many great opportunities to interact with customers and prospects around Sales and Operations Planning (S&OP) and Integrated Business Planning (IBP). I am planning to share my thoughts and ideas with you in a webcast on Thursday, October 13 on the topic, “Seven Keys to Integrated Business Planning Success.”
A very interesting statistic – the Purchasing Managers Index (PMI) for August 2011 – caught my eye this morning. This metric tracks the financial activity of purchasing managers connected to their acquisition of goods and services. It is calculated on a monthly basis through a survey conducted by the Institute of Supply Management (ISM).
Surprisingly, the statistic concluded:
“Economic activity in the manufacturing sector expanded in August for the 25th consecutive month, and the overall economy grew for the 27th consecutive month,” say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.”
A visual representation of the metric is below. Please note that the way the metric is captured, any value above 50 percent is an improvement and a 100 percent value indicates that everyone in the survey indicates an improvement. The degree of change month-over-month is reflected in the actual value. For instance, 65 percent PMI for a month is a bigger change than 55 percent PMI.
Figure: PMI for 2010-2011
Source: Institute of Supply Management
So what does this mean for the supply chain executive who is looking at S&OP and IBP initiatives?
- Need for Operational Efficiency: According to the ISM survey, the overall sentiment is one of concern and caution. In this sort of a situation, increasing operational efficiency and reducing waste in the end-to-end value chain is the best approach that companies can take. S&OP and Lean are two weapons that companies can adopt in this endeavor. In fact ,we see that these two initiatives dovetail into one another when the S&OP plan needs to be executed.
- Multi-business S&OP: According to the ISM survey, respondents in general are reporting reduced domestic sales and increased international sales. This implies that large multi-national companies need to look carefully at balancing their supply towards demand and look at their S&OP process as more of a multi-enterprise/multi-business process rather than within their silos; for instance, being able to position supply in tax efficient countries and moving it closer to customer when the demand signal arrives (looking at building capacity in Eastern European countries, etc.). IBP processes should allow visibility not just at the divisional level but at the corporate level too .
- Working Capital Management: According to the ISM survey, respondents are reporting that their inventories are in general higher than their customer’s inventories. This is of course a result of network wide inventory reduction efforts that have gone on for many years. What it has really resulted in is pushing out of inventory upstream into the supply chain where every node believes that they are at the receiving end with respect to holding inventory. Companies need to really look at inventory from a working capital standpoint and as part of the IBP process. The working capital is dependent on the customer sales, supplier purchases and inventory – the IBP process is the only process that provides visibility to all three. These three variables have to be looked at holistically and not in silos. So, implement IBP processes that can model supply, demand, finance and inventory in a holistic fashion
Figure. ISM Inventory Index for Manufacturers and their Customers
What are your thoughts? Do you agree with the analysis? Also, more importantly, why are the unemployment numbers so high when manufacturing is apparently growing? I have thoughts on this but would love to get your feedback.