Sales and Operations Planning First of a four part series Unless you're a healthcare product manufacturer or a health system with a very advanced supply-chain management program, you probably haven't heard or paid much attention to a supply-chain management process called Sales & Operations Planning [S&OP]. S&OP, is a planning methodology used across industries by best-in-class supply-chain managers. It is comprised of three distinct planning functions: Demand Planning, Inventory Planning and Supply Planning, and is highly appropriate for, and should seriously be considered for implementation by health systems as it targets (1) supply cost reduction, (2) meeting customer service expectations, and (3) managing demand in increasingly volatile markets.
All of these planning processes attempt to make sense of an uncertain and sometimes unpredictable future. They start with Demand Planning activites, which look forward into the world of your customer and attempts to forecast demand down to a customer/SKU level. Accurately collecting and using this information is a very important but difficult and cumbersome process. Effective Demand Planning is all about reducing the potential for forecasting errors, but never presume you can eliminate forecasting errors - it's just not possible.
In a healthcare provider setting, customer refers to your care givers, and includes all inventory stocking and deployment locations within the institution. With most health systems demand planning is nothing more than using recent usage history and projecting an average daily/weekly/monthly usage into a forward planning period. As many of us know and have experienced, an average is arrived at with some actual demand occurring significantly above and below the averages. In order to protect against actual higher than average demand creating stock out situations, we rely on a predetermined level of safety or buffer stock. In the end, we end up with too much inventory - as much as 30 percent too much. Of course this statistic is an average as well. With that said, simple extrapolations have a useful role related to demand planning and we'll go into them in more detail in Part 2 of this series.
An Inventory Plan, sometimes referred to as a Stocking Plan is derived from the Demand plan. As indicated above, if the Demand Plan is based on a series of errant simple extrapolation process, then the Inventory Plan will contain these same errors and will carry them forward to the Supply Plan, which is used to communicate future needs with your supplier community. The Inventory Plan takes the Demand Plan and calculates stocking levels at all inventory deployment locations. This Inventory Plan addresses Cycle stock (inventory quantities needed to meet expected demand) and Buffer/Safety stock (inventory quantities needed to meet unexpected demand). Another factor is whether or not you use an aggregated or distributed planning approach. With multiple stocking locations in each hospital, and with multiple hospitals in a network, and possibly with one or more off-site inventory asset location, this planning process can get incredibly complex real fast. This type of model is referred to as a multi-echelon inventory organization that requires best-in-class planning at an aggregated level with discrete execution down to the individual deployment level. Deployment policies, Buffer stock criteria and planning algorithms will differ based onthe unique needs of each customer segments. When it's all said and done, a good Inventory Plan will produce acceptableservice levels (fill rates - good if high) and inventory investment (inventory carrying costs - not so good if too high). Part 3 of this series will go into much more detail on establishing proper Inventory Plans.
Supply Plans are created from Inventory/Stocking Plans, and are used by the sourcing and procurement department to plan their purchases. As part of a best practice, these plans are shared with your prime suppliers - distributors and direct vendors. The supply-chain circle becomes complete at this point as your Supply Plans, which are consolidated with other customer Supply Plans, in effect become the vendors Demand Plan, who has their own Inventory/Stocking Plan and Supply Plan to manage sourcing and production and maintain optimal finished goods inventory. This 4 part series will be completed with a thorough discussion on supply planning and its inherit benefits for all healthcare trading partners. This component is one of the untapped wells of supply cost reduction opportunities available in healthcare (for all), if done in a collaborative, non-adversarial manner.
Each of these planning functions has their own value attributes, which in total, is what helped reduce the supply-chain cost in other industries by as much as 40 percent.
National Medical Logistics, with its multi-industry and manufacturing experience, can address any questions you may have on this and other advanced supply-chain management concepts. Please stay tuned for the remainder of this series on Sales & Operations Planning. Visit us at
www.natmedlog.com.
