I was recently working with a leading steel company where one of the discussion topics was about their order fulfillment and planning processes. I asked how they approached delivery promises to their customers. After conferring for several minutes, they answered, “To give a delivery date, we look at:
Point of delivery (e.g., warehouse, or customer location)
Production limits (i.e., our technical capability to produce the product)
Available production capacity in mills
Cost of production
Then, the sales department decides!”
I was not particularly shocked by this answer. But is this the right approach? Shouldn’t the planning department be managing delivery promises—using a due-date checklist based on the status of the production plan?
While it may seem obvious that production planners should own delivery promises, at many steel companies this decision is still driven, or at least greatly influenced, by those in sales.
Why is this the case? One answer lies in the historical evolution of business processes and supporting IT solutions used in the steel industry over the past decade. Another key reason lies in the organizational alignment and power structure within the company. Here’s a closer look at these aspects:
Traditionally, companies have managed delivery promises for sales orders by utilizing sales quotas, based on monthly buckets, using a monthly planning process. This has allowed them to pre-allocate future production capacity to different product groups and customer/market segments. As long as there is an open quota for a given product or customer segment, sales can book the order.
Clearly this an oversimplification since managing quotas depends on several additional factors, like the lead-time of production, the company’s business model (e.g., usage of production decoupling points or make-to-stock strategies) and the willingness of customers to accept partial deliveries. There are also challenges with using this quota-based approach, namely dealing with reallocation of quotas across segments and overbooking of capacity.
In addition, this brings up a related question: Is this sales quota confirmation sufficient to confirm a customer order delivery date? The answer requires looking at further decision criteria. For example, how sensitive are customers to having precise deliveries on a given date? How reliable are a company’s production facilities? What type of customer segmentation model is employed? Depending on the answers, a monthly level of order confirmation may be a reasonable approach while providing a steel company with more flexibility to react. However, the risk is that competitors providing a more consistent, reliable promise could take customers away.
Coupled with the above points, the organizational alignment of commercial aspects of sales and order promising and planning is becoming more important. Many companies are beginning to adopt a clear separation of roles and responsibilities between the sales and planning departments to manage process ownership. Sales is responsible for commercial aspects of order taking; planning is responsible for deciding how and when the order can be produced.
Adopting a daily planning process
Given the ongoing volatility of the steel industry (see my previous blog, “A strategy for steel company survival”), companies must strive to become “living businesses”—ones that can react to market changes in near real time. Basing order delivery and related decisions on sales quotas and plans established days or weeks in the past is no longer adequate. Decisions need to be made based on the best available view of the current and future business situation.
Achieving this view requires a more detailed level of accurate production planning, meaning a daily planning process that looks at the balance of material and production capacity of the current sales order book across all resources and product routings. This process should consider the main constraints such as machine bottlenecks, campaigns and order combination. From this method, planning can produce a capable-to-promise (CTP) check for each sales order, which can be used to confirm (positively or negatively) the initial delivery estimate made based on a sales quota.
In cases where production planning is correctly designed and implemented as part of an overall order fulfillment approach, the additional benefits of a CTP check for sales orders and their subsequent daily planning can play a key role in transforming a steel company’s commercial excellence.
In summary, deciding delivery promises requires a carefully considered approach linking processes, software, organization and business policies—coupled with an understanding of the target business model and market requirements needed for competitive advantage. Steel companies can improve their response to the continual acceleration of change by managing delivery promises more accurately.