Definition

Supply Chain Planning (SCP)

Contributor(s): Sarah Lewis and David Essex

Supply chain planning (SCP) is the process of anticipating the demand for products and planning their materials and components, production, marketing, distribution and sale. Its overall goal is to balance supply and demand so sales revenue opportunities are fully exploited in a timely manner and at the lowest possible cost. Supply chain planning is one of the two main categories of supply chain management (SCM), along with supply chain execution (SCE).

Supply chain planning steps

The supply chain planning process almost always begins with demand planning, in which a team consisting of people from sales, marketing and production creates a sales forecast based on historical data and other information, such as data arriving from point-of-sale (POS) terminals. It then analyzes the data in spreadsheets or specialized demand planning software or data repositories to identify patterns that provide clues to future demand.  

Demand planning often includes an attempt not just to forecast demand, but to influence it to some degree, through such mechanisms as price cuts, product substitutions and special promotions. This demand shaping is another tool that companies have available to more closely match demand with the actual supply.

Once the demand plan is approved, it is translated into a corresponding production plan and, eventually, carried out in the various steps of supply chain execution, such as distribution and order fulfillment.

Key supply chain planning elements

At most companies, supply chain planning is accomplished with a collection of planning and forecasting processes and software. There is usually no single supply chain planning software system, though many applications and SCM suites are designed to facilitate end-to-end supply chain planning by helping trading partners to collaborate.

Integration between different vendors' SCM systems and online procurement networks also facilitates supply chain planning across geographic and corporate boundaries.

The main supply chain planning processes include the following:

  • Sales and operations planning (S&OP) is an effort to match a manufacturer's supply with customer demand by having the sales department work with operations departments, such as manufacturing, marketing and procurement, to develop a single production plan. The S&OP team starts by gathering information, such as recent forecasts and sales and inventory data, develops a demand plan and builds a production plan based on available manufacturing and distribution capacity. The team then reconciles the demand and production plans with resource constraints, such as finances, before meeting with executives to adjust the plan and obtain their final approval.

    Some companies employ S&OP in a broader integrated business planning (IBP) process that rolls up the plans of other departments, such as finance and HR, into a single plan. In fact, IBP evolved from S&OP.

  • Material requirements planning (MRP) is a method for calculating and planning the raw materials and components needed to manufacture the products called for in the demand or production plan. It involves taking inventory of materials and components, identifying others that are needed and making plans to produce or buy them. MRP's critical role in the supply chain is obvious, since it affects the supply coming into a manufacturer and leaving it in the form of products continuing along the chain to distributors, retailers and ultimately to consumers.

    Manufacturers have used MRP since it was developed in the '60s, and few manufacturers of any size do without it. Some also use a successor called manufacturing resource planning (MRP II) that includes MRP, but broadens the concept to other operations of a manufacturer, such as shop-floor scheduling, purchasing and financial management. MRP II was broadened in the late '80s to work in industries outside manufacturing, and the Gartner research firm came up with a new name -- enterprise resource planning (ERP) -- in 1990 to capture its appeal to any type of enterprise.

    S&OP, IBP, MRP and MRP II all were processes before software vendors developed specialized modules for them. Today, most vendors of ERP suites, especially those expressly serving the manufacturing sector, have MRP modules, and a handful have S&OP software, and fewer still sell IBP tools. There are dozens of niche MRP vendors.

  • Production planning addresses the details of manufacturing products, including the number and types of products, their components, who will make them and which plants and machinery will be involved. Production scheduling is a key part of production planning and the term is sometimes used as a synonym for the entire process.
  • Advanced planning and scheduling (APS) goes beyond simple production planning in an attempt to optimize more of the factors that can affect supply, especially materials, labor and plant capacity. It can also incorporate demand management and, in theory, provides a much finer-tuned mechanism for matching supply with demand. Major ERP vendors, including Oracle and SAP, sell dedicated APS modules.

Importance of supply chain planning

Supply chain planning is a tactical approach that, when done well, helps optimize the manufacture and delivery of products. It can lower production costs, increase sales and help manage relationships with suppliers.

Supply chain planning provides other advantages, including the following:

  • Data collection. Having access to precise, real-time data can improve decision-making and facilitate time-sensitive processes, such as just-in-time manufacturing.
  • Inventory management. Up-to-date inventory data can enable lean production and lower overhead.
  • Efficiency. Accurate demand and production plans can help companies identify inefficiencies, including raw materials waste and excess inventory.
  • Improved customer satisfaction. Tracking customer sentiment and product demand can improve profit margins.
  • Product lifecycle management (PLM). Demand planning can help align product development with consumer demand.
This was last updated in October 2019

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