Posts Tagged ‘Scenario management’

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In his white paper entitled Four Steps to Take Now to Prepare for the Recovery:  Strategic Supply Chain Management Strategies to Maximize Operations Performance Over the Long-Term, John Sicard talked about the need to empower people to collaborate.  He quotes Stephen Haeckel, ‘Adaptive Enterprise’; “Human skill in recognizing patterns and thinking creatively about unanticipated challenges will continue to mark the difference between successful firms and unsuccessful ones.”

I couldn’t agree more.  In virtually every one of my consulting engagements, whether in electronics or semiconductor manufacturing, aerospace, industrial equipment, or most recently, pharmaceuticals, I’ve found one (and sometimes more) key individuals in the supply chain planning function who really understand the business, think creatively, and see opportunities for improvement.  These are the Local Heroes in the organization.  As well as understanding the products and customers, they seem to know everyone, and they have a pretty clear picture of whom to go to for help with any issue. They’re usually the ones entrusted with the task of creating that monster spreadsheet that the head of Operations just can’t live without.  You know the one: that report that’s usually named after the VP himself or has some other catchy name— everyone’s go-to report.  Just look at the detail in one of these, as well as the number of exceptions flagged, and you’ll begin to understand the number of complex factors they’re weighing as they try to pin down the supply plan: ever-changing demand, supply disruption issues, increasing costs, and supplier problems.

These key individuals will never be replaced by planning systems. The real challenge is to make them more efficient at what they already do well.  How do we do that?  What’s really needed?

First of all, I think they need to be spared the task of assembling all of the raw data on the current situation. How often is a creative idea shot down now because someone points to a single incorrect number manually entered on a spreadsheet, and assumes that all conclusions are therefore suspect? Everyone needs to see the same base numbers and have confidence that they’re right.  This has to be easy.

And I think they need visibility of the whole supply chain in this raw data, not just their own local plant.  Outsourcing is so very prevalent now, that it’s a given that data must be shared with all partners.

Then they need tools to help them document their ideas for change in a structured way. The ability to simulate various scenarios so that they can share probable impacts with everyone involved–whether internal or external to their own organization—is critical.  One of my customers broadly categorizes these as “What-Is” and “What-If” simulations.  He uses the term “What-Is” for everyday events that need analysis on a regular basis. What do we do when that demand comes in later than forecasted? What happens when we move those two orders out to provide capacity for this new high runner?  The list goes on and on.  But then there are the “What-if” questions that are perhaps longer-term and more strategic in nature; they must also be analyzed proactively to have potential strategies in place.  What if this supplier goes out of business?  What if we close these three plants and outsource some of this production?  What if we add a new production line?

And lastly I think they need the tools to share the results of these simulations, to let others know what their assumptions are, what alternatives are being considered, how the alternatives are being evaluated.

I’m sure all you Local Heroes can relate to some of these issues.  Your role as front-line planners is not a simple one.  I’d love to hear more about what kinds of systems support you need to help you do your job better.  What capabilities would bring you the most benefit?  What gaps should we be working to fill?

I found Duncan’s whitepaper on Demand Planning and Forecast collaboration to be very enlightening and informative. This has been important for years but is now a mission critical process as demand becomes more volatile, product life cycles shrink and global competition drives margin erosion.

We all know inherently that forecasts change and ‘just in case’ inventory is bad and there must be a better way. Duncan does a great job of providing guidance on how you can improve your current processes and more importantly the financial impact of the improvements. 

I work with many companies from $50M in revenue to $20B. Everyone is struggling with forecast accuracy. The leaders have already accepted the fact that the forecast will always be wrong.  Others continue to struggle to create the perfect forecast by relying in many cases on only statistical measures. The world has changed.

Duncan talks about response cycles. Moving closer to actual demand, and forecasting and aligning supply more frequently should reduce the bull whip effect and improve the forecast correct? What Duncan then explains is the financial impact of this process improvement. When you reduce your forecast standard deviation your service levels and your inventory metrics improve. He provides an example where moving from a monthly to weekly cycle can result in a 50% inventory reduction!

When I meet with organizations I talk about demand/supply balancing ‘on demand’ or Sales and Operations Planning ‘on demand’ where consensus forecasts are generated, supply is considered during the process, and demand and supply is synchronized instantaneously. Some look at me as if I had two heads…others are cautiously optimistic. It is possible. We need to start thinking out of the box when it comes to demand planning and there are certainly some companies that are doing that. They are the leaders. You probably know who they are.

I used the word ‘consensus’ which Duncan describes very well and references other sources for definitions. There are so many stakeholders in the demand planning decision today. They all need to be involved. They all need to contribute and may do so at different levels. By that I mean product family versus SKU or dollars versus units. The owner of the demand plan needs to see all inputs in one view. Scenario analysis is key to this process. ‘What if we increase this forecast by 20% next quarter?’ ‘ What is the risk if this customer demand doesn’t materialize?’ Iterate, analyze, decide…Iterate, analyze, decide…Fast but accurate! Many companies are supporting these processes today using Excel.  People are resourceful. They will find a way to get their jobs done and Excel has been their only option but they have had to make compromises. Duncan talks about the compromises, for example, the lack of collaboration,  and he suggests improvement considerations.

I highly recommend that you place Duncan’s whitepaper in your ‘to read’ list. Follow Duncan’s advice and you will save your company money. Whenever you are considering operational improvements it is beneficial to understand why the changes are necessary but the bottom line results are all that really matters….especially in today’s economy.

We recently produced a white paper focused on response to supply chain risk situations (you can get the white paper here: Essential characteristics of a supply chain risk management strategy). Too often supply chain risk management focuses primarily on risk identification, with discussion on risk mitigation, but very little discussion of risk response.

John Westerveld, who wrote the white paper, corrects the imbalance by identifying the benefits of being able to respond to unanticipated supply chain risk situations. I suggest that nearly all risk situations are “unanticipated”. Without a doubt risk identification and risk mitigation exercises are extremely valuable. One has only to look at flight simulators to understand the value of studying potential risks and strategies for reducing the potential for harm. To understand fully the value of risk response though, imagine if a pilot has to respond to a loss of cabin pressure in a mountainous area at night that is coupled with a total loss of instrumentation. The hydraulics and other flight controls are working satisfactorily, but the pilot has no idea of the direction, inclination, and speed of the plane.

I contend that this is the equivalent situation most supply chain people face on a daily basis:

• night is the equivalent to the lack of visibility
• loss of instrumentation is the equivalent of having no analytics and what-if analysis capabilities to understand and evaluate the consequence of decisions
• the mountainous region is equivalent to the current lean practices that have greatly reduced inventory levels and therefore the flexibility of the supply chain and increased the risks of making an incorrect decision experienced by most supply chain professionals.

The pilot may have practiced how to respond to a loss of cabin pressure in the simulator, but the chances that the situation in the simulator included responding at night in a mountainous area with a total loss of instrumentation is very low. Therefore the pilot needs to use human judgment to evaluate the limited information at his/her disposal. In addition the pilot will likely need to “collaborate” with a flight control center to gain greater “visibility” into the plane’s speed, direction, elevation, and inclination, as well as the best place to land and the route to get there. Otherwise the consequences are likely to be catastrophic.

While almost no situations we have to deal with as supply chain practitioners would result in loss of life, I think the analogy is very consistent with the day-to-day experiences of supply chain practitioners. Risk identification and mitigation are necessary preparatory steps. Risk response is a daily reality. Being able to respond quickly and effectively requires supply chain visibility and collaboration, and a system to define and evaluate alternative response scenarios.

FYI - for those interested, we just published a new white paper entitled “Enabling sales and operations planning with RapidResponse.”  Here’s an abstract:

Sales and Operations Planning organizations that leverage demand-supply planning, monitoring, and collaborative response solutions are finding themselves better equipped to power a world class S&OP process. Key capabilities include; scenario management, expressing the results of scenarios as financial measures, early alerting to consequences of decisions made elsewhere in the supply chain, and focusing users on the exceptions that require their attention.

I read a very interesting paper by The Economist Intelligence Unit entitled “In search of clarity: Unraveling the complexities of executive decision-making.”

The article included a discussion on the virtues-and limitations-of scenario-building in the context of executive decision-making.  A couple of comments that I found very interesting:

• “Another benefit of using scenarios is that they combine human intuition and hard analysis, two elements which are the bedrock of all good decision-making”
• “Scenarios do not make the decisions; rather they provide a common intellectual background against which choices can be discussed, tested and agreed”
• “In turbulent times, people are looking for ‘flexibility and resilience’ in strategy to meet rapid change–something which scenario-building can be designed to address”

Great observations.  As I’ve commented in the past, every company needs a plan - it serves as the foundation of all actions and provides specific goals and objectives.  But the reality today is that the plan is a set of guidelines.  Increasingly, things are changing so rapidly that manufacturers need to combine demand-supply planning with monitoring and collaborative response capabilities to deal with the pace of change.

The collaborative response capabilities must embrace human judgment–using tools such as scenarios–to figure out how to deal with the realities as they unfold, since reality is increasingly not what was in the plan.

For years companies have  been conditioned to focus on supply chain planning and supply chain execution.  If you could do this better than anyone else, you won the supply chain management game.  But that’s no longer sufficient.  We’ve entered a new era of surprise and compromise that needs to be supported by a new set of tools designed specifically for this new reality.  Traditional demand planning and supply chain planning systems have failed us in this new reality.

The appropriate scenario management capabilities into the hands of the key people within the supply chain management function can provide breakthroughs in dealing with today’s new era of uncertainty.