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Sales and operations planning is a well-established practice within many organizations. But the number of companies to have applied the concept to logistics is far smaller.
A pioneer of that approach is the Dow Chemical Company. It has deployed what it calls Executive Sales & Operations Planning (ES&OP) to help forecast the need for transportation services months, if not years, in advance.
Dow oversees an immense universe of providers. With sales of around $60bn in 2011, the chemicals giant generates some 2.5 million shipments, totaling 57 million tons of product, to 45,000 destinations annually. To make it all flow smoothly, the company relies on 400 distribution centers and carriers, according to Lawrence M. Schwenk, who carries the title of global supply chain breakthrough improvement associate director for Dow.
The idea behind logistics ES&OP at Dow is to balance transportation demand and supply "to meet customer-service requirements in the most efficient, right-cost fashion," Schwenk says. The success of that effort depends on a cross-functional approach, melding technology and business processes in a bid to gain visibility over the company's complex logistics activities.
At the heart of Dow's ES&OP is a "Balance Supply Demand Work Process," which links strategic planning with tactical, short-term needs for carrier capacity and distribution space, and also integrates business financials into the mix. It's deployed at all levels of the organization, including marketing, sales, finance, supply chain and manufacturing. Planners work from a time horizon that stretches from two to 36 months.
A Four-Step Cycle
Four steps, undertaken in strict order, make up the monthly ES&OP cycle. First is development of an unconstrained demand plan, based on expectations of market growth, market share, trends in product application and variances from historical product mixes. Then comes determination of available supply, drawing on a combination of historical capacity levels and future asset needs. According to senior strategic logistics specialist Steven H. Starks, Dow takes the average of the two highest months of shipped volume over a 24-month period, less one standard deviation for each carrier or 3PL that will be assigned future forecasted volume.
Step three involves the use of metrics to balance demand and supply. At this stage, Dow takes pains to reconcile any gaps between the two figures, employing key operating metrics to ensure that high-level business objectives are being met. Finally, the company holds monthly ES&OP meetings, at which business and supply-chain leaders review the numbers and make final recommendations.
Forecasting is carried out through use of an Executive Logistics Demand Planning (ELDP) tool. Originally developed as an Excel spreadsheet, the module has been refined over the past year and a half, says Schwenk. It allows the company to calculate unconstrained demand for multiple business units and modes, identify supply capabilities, pin down forecast accuracy and give carriers and third-party logistics providers monthly forecasts of logistics requirements.
As with any major business initiative, ES&OP was applied to Dow's logistics function in stages. It began in the third quarter of 2010, with the company's North American over-the-road carrier base. First up were bulk liquid tank trucks, followed by bulk hopper, flatbed and full-package truckload vans. Subsequently, Dow broadened the process to include trucking in other regions, as well as marine-packed cargo (MPC), rail and tanker providers.
The multimodal approach allows the company to obtain a complete, global view of its logistics needs, which are communicated to Dow's vice president of supply chain for final resolution. In the process, the company can identify potential imbalances between supply and demand "early enough to meet business requirements and maximize efficient options," says Starks.
Suppliers have welcomed the program. They are required to review Dow's data and respond with any capacity constraints or other issues that might bar them from handling the forecasted volumes. "We need to know when history is not a good indication of the future," says Schwenk. This "early-warning" capability allows Dow to take curative steps well ahead of any crisis in supply, while avoiding the kind of price spikes that typically occur in logistics emergencies.
Schwenk says the logistics ES&OP initiative has "significantly contributed to Dow's transformation and growth strategy by providing visibility to business strategies." In 2011, the company says, it realized more than $25m in freight-related value on the spend side in North America alone. The reduced need for dedicated equipment - Dow cut its dedicated fleet from 80 to five units - contributed savings of around $8m. Another $1m was saved by exchanges, swaps, lower tolls, use of intermodal services and other by-products of optimizing transportation.
Service has improved as well. The on-time record of road deliveries has improved by 12 percent, demand forecasting variability has plunged 20 percent, and the service-failure rate has shrunk by 0.5 percent.
Dow predicts further benefits as the program matures. Given a three-year planning horizon, road carriers will be able to make better use of their existing equipment. In return, Dow expects to become a shipper of choice, rewarded by its carriers with improved service coverage and pricing. Similar results will likely be seen in other modes as the initiative expands beyond North American trucking.
All because Dow took a familiar concept and applied it to unfamiliar territory. "S&OP is not just some additional process you tack on," says Schwenk. "It becomes the core of how we're performing as a business."
Dow Chemical Co.
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