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Develop a Proactive Plan for Tight Supply Situations

An increased number of companies in the semiconductor area are seeking to hire “Allocation Managers” for their supply chain ranks. Many of the job descriptions include simple requirements such as “Allocation management in case of tight supply situations.” But what types of skills are they really seeking in these managers and what does it take to most efficiently manage changing conditions?

These postings are an indication of how supply chains are becoming increasingly complex and an integral source of added value. With a diverse product mix and customers in the hundreds, a strategic supply chain provides a delicate balance of trade-offs between expanding inventories and containing cost – maintaining the right level of operational flexibility and managing risk. Some important questions are constantly being evaluated:

  • Do I invest in additional capacity in order to support short term demand spikes?
  • Can I take the risk to pre-build material for future demand?
  • How confident am I that my customer forecasts will materialize?

Image courtesy: Pixabay

Image courtesy: Pixabay

While many of our supply chain key performance indicators (such as forecast accuracy measurement, delivery reliability measurement (DRM), confirmed/requested line-item performance (CLIP/RLIP), etc.) and our lead-time concepts help with the decision-making processes, in many cases these are insufficient to avoid supply shortage situations. So, either by design or to address these short-term demand and supply swings, many companies end up in tight supply situations. 

Monthly joint review meetings between sales, marketing, finance and the operations teams as part of the overall sales and operations planning (S&OP) process are key in achieving an overall alignment on revenue targets, factory loading, capital spending, and operating parameters.  While these review meetings are typically on a monthly or even quarterly basis, tight supply situations require that other organizations meet weekly or even daily to review supply plans, stock availability and minimum order fulfillment as a key part of these processes. This communication is an integral part of the alignment between sales, marketing, the supply chain organization and the management team.

For example, in the semiconductor DRAM business, the allocation process is a well-oiled machine that is designed into the overall process out of necessity given the industry’s boom and bust cycles. Monthly joint review meetings between sales, marketing and the operations teams achieve an alignment between in-line capacity and allocation to each customer or customer group. Allocating materials in weekly buckets to key customers and into regional buckets (to serve the smaller accounts) builds the core of this planning process.

Part of the tactical process, which mostly involves the regional allocation managers, is then to execute against the defined plan and to handle the variations in supply or demand. In many cases this requires re-allocating volumes between different customers, different products or different weekly buckets.

This should all be tightly controlled as the overall management directive to achieve a given revenue number and to provide excellent customer service should be considered. Releasing allocated volume to another customer or releasing into a standard pool, needs to be agreed on by both owners.

When you set up your enterprise resource planning (ERP) system, you would consider the frequency of these changes in defining how rigid or flexible the system should be. For example, “Will you allow your system to confirm a customer order automatically if your customer runs out of allocation within that week?”

Many ERP systems today offer the system support needed to manage these allocation decisions.  Defining some of these system parameters, such as customer rankings, upside flexibilities, product mix flexibilities and planning horizons can be relatively easily, however, parameters such as allocation release frequencies and accountabilities require a more robust business process. 

While allocation planning tools with a real-time link to the order management available to promise (ATP) function are used by DRAM firms at the one extreme, many companies manage tight supply situations in a more ad-hoc manner. For some companies, discussion of allocation situations is something they would not broach with their customers. However, it is possible that such discussions can lead to a greater transparency, a better understanding of the customer needs and flexibilities and to process improvements going forward.  In a high product mix, dynamic industry, short supply situations are inevitable, so a well-planned short supply strategy with various contingencies can only help when the situation arises.

Let us know how you have dealt with short supply situations. What's been your experience? Let's discuss in the comments section below.

1 comment on “Develop a Proactive Plan for Tight Supply Situations

  1. Meredith L at EDX Electronics & Partstat
    August 2, 2018

    Such a timely and insightful article. Thank you, Mike, for sharing this piece with us. At Partstat, we completely agree with the importance of proactive allocation management. In fact, we offer the only BOM Monitoring Solution that predicts allocation, to keep our customers ahead of obstacles that occur in a component shortage climate, such as the one we are in today, to meet production and service commitments. 

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