Hard versus Soft allocation. What is the difference?
One of the most debated topics in supply chain discussions is the concept of allocation. It is the point where the supply meets the demand. It is critical for the efficiency of the overall supply chain. It determines your customer service, inventory levels, sales coverage, etc. Unfortunately, we use different terminology to explain what allocation is and confuse each other along the way. Here is my take on the distinction between what I refer to as soft versus hard allocation.
Let’s start with the difference between hard and soft. Hard means locked, firm, committed, not subject to change. Soft means flexible, not firm, not committed, and subject to change. Thus, hard allocation means the supply is firmly committed to the demand and not subject to change as it is locked in. Soft allocation, on the other hand, means the supply is pegged to the demand but subject to change as conditions change. Things first start as soft and get harder as time passes. Both hard and soft allocation plays an important part in supply chain management. They can even be tied to each other for a certain time period.
At the early stages in planning, neither demand nor supply is firm. You start with a forecast first. As time goes by, sales orders are placed against this forecast. In some
businesses, you may even find a semi-firm demand such as a bulk or a blanket sales order in between. This is mostly applicable to wholesale businesses where customers gradually firm their demand over time. If you are in retail or e-commerce businesses, your demand never really firms up until the order is placed by the end consumer. Thus, companies serving multiple channels find themselves planning supply against different types of demand from forecast to bulk to actual sales orders across different channels.
On the supply side, you start with planned supplies such as planned purchase orders or planned production orders. These planned orders are then firmed up to generate actual purchase and production orders. When the goods are received or produced, they turn into inventory. Thus, a typical company can have multiple types of supply at any given time from planned orders to real orders to inventory. In summary, most companies need to account for varying types of demand (forecast, bulk sales orders, sales orders) and supply (planned purchase or production orders, purchase or production orders, inventory) during their supply chain planning.
In the early stages, things change constantly. Forecasts go up and down. Orders are placed but can be canceled or adjusted. Supply plans change accordingly. Purchase and production orders move around and get adjusted. Once you are in the middle of this constant change, the last thing you should do is to hard allocate your supply against the demand. Since demand changes, this will certainly create not only inventory problems but also customer service issues as well. What you want at this stage is soft allocation. You still need to peg the supply against the plan but let it re-peg itself to higher priority demand as your environment changes. You should still be able to see the supply-demand balance and report by channel, customer, product, vendor, etc., and make proactive decisions to manage your supply chain.
As you approach the delivery dates, allocations should get harder. You have reliable demand. You need to make hard commitments and release your allocation to the execution layer. This is hard allocation. Note that you work with the firmest supply (inventory) and demand (sales orders) at this stage within a short time period. At this granularity, other constraints may become relevant - such as customer fulfillment rules (can’t ship partial, need to satisfy at least 50% at line level, etc.).
In short, the soft allocation has a long-time horizon (months), covers both planned and firm entities, is open to change, and is more planning oriented. The hard allocation has a short time horizon (days), covers only firm entities, is committed, and is more execution-oriented.
If you are interested to learn more, please connect with me on LinkedIn, follow me on Twitter, or watch me on YouTube.
My name is Cem and this has been another gem.
