Building a Service-Driven Supply Chain-Part 2

In our previous newsletter, we built a case for service-driven supply chains and proposed that this should be an underlying theme for any Sales and Operations Planning (S&OP) process. Unfortunately, most S&OP processes or tools, regardless of their stage of maturity, lack the capability to simulate service levels for a demand-supply scenario. They often assume that enabling each planning process and achieving alignment among them will automatically translate into service levels.

This is a significant misconception and the primary reason why most S&OP processes are constantly in firefighting mode, leading to wasted investments in S&OP tools. From our experience, most businesses lack the capability to simulate service levels both before (ex-ante) and after (ex-post) their monthly or weekly sales cycle. They claim to achieve high service levels, but in reality, they often fall below 85%. They come up with their numbers from a monthly and basing on volume or revenue metrics, rather than on customer order-line level fulfillment, which is the true measure of ultimate customer satisfaction. (If you are interested in accessing such a "simulation as a service", please feel free to contact us.)

In contrast, service-driven solutions are found to achieve service levels in excess of 96% consistently, while fulfilling orders with a double-digit reduction in working capital, primarily inventory, compared to their deterministic counterparts. Below, let’s take a look at what it takes to make the leap and build a service-driven supply chain.

Stage 6: Service-Driven Value Networks

The final stage of evolution in supply chain planning isn’t just about feasibility, matching demand with supply, profit, demand-driven, or market-driven supply chains—it’s about service to customers at the least cost. In all the previous stages, the assumption is that once various planning processes are enabled, order fulfillment or service is automatically achieved. In contrast, a Service-Driven Supply Chain actively plans for service levels, ensuring that the right product is available at the right place, at the right time—without excess inventory or lost sales—while achieving market alignment.

Why Traditional Approaches Might Fail

1. Single-Number Planning (Deterministic) Falls Short

Despite their professed maturity levels, deterministic planning methods fail to align demand-side drivers with supply-side constraints. No matter how much you refine your demand forecast, it will always have errors. Relying solely on forecasting leads to either stockouts or excessive inventory—both of which harm profitability.

2. Long-Tail Demand is a Nightmare

With SKU proliferation and frequent replenishment cycles, demand has become more intermittent and unpredictable. Traditional planning tools aren’t built to handle this complexity, leading to frequent firefighting and reactive decision-making. Their statistical models are weak and cannot handle intermittent demand

3. Mismatch Between Inventory and Service Levels

Many companies blindly trust forecasts, apply rigid ABC inventory classification and use DRP-type single-echelon replenishment, which results in either too much or too little inventory—hurting service levels and increasing costs.

What is Service-Driven Planning?

A Service-Driven approach shifts the focus to probability-based decision-making. Instead of chasing a “perfect” planning number, businesses optimize service by considering the range of possible demand-supply outcomes and actively aligning inventory strategies accordingly.

Key Elements of Service-Driven Planning

• Probability-Based Planning: Understand uncertainty rather than relying on single-number planning.
• Demand Sensing at the Order-Line Level: Traditional solutions aggregate order lines, losing valuable granular insights.
• Smarter Inventory Mix with Item-Location Granularity: Balance high service levels with lean inventory, reducing obsolescence and carrying costs.
• Machine Learning & AI: Continuously learn from demand patterns, promotions, and external factors.
• End-to-End Optimization through Multi-Echelon Planning: Align demand, inventory, replenishment, production, and procurement planning with service level goals with an end-to-end tunnel vision.

The advantage of the service-driven concept is that a business could be in any of the previous five stages and still can transition into a service-driven supply chain easily. Every company has the relevant data to be service-driven and can make the jump. In contrast, a market-driven stage, to a great extent, would require building expansive data models and automation, often demanding disproportionate investments relative to the benefits.

In conclusion, by focusing on service-driven strategies, companies can drastically improve their supply chain planning and execution, ultimately achieving greater success in today’s dynamic market environment. Let's make the most of the available resources and data instead of chasing an unrealistic vision like market-driven supply chains.

Are you ready to move beyond traditional S&OP and embrace a service-driven approach? Let’s discuss how your organization can make this transition!