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Beyond the Supply Chain Plan
Nine Key Questions for Identifying Critical Gaps

Planning in Uncertain Times

Clearly the global economy is experiencing a resurgence in volatility. Businesses worldwide have been affected by turbulence in the prices of commodities and products, currency exchange rates and consequently demand and supply. These events have made it more difficult for businesses to plan accurately for any period; virtually every plan is more fragile today. Volatility also has increased the risk of being unable to adapt quickly and in ways that best meet a company's objectives.

We believe it would be unwise to assume that volatility will decline soon. Indeed, the recent drastic moves in markets point to an ongoing need to anticipate that things will turn out differently than expected. One way to do this is through a formal process of contingency planning. For example, interest rates in all major currencies are at relatively low levels. What would happen if they increased by half or even doubled in a year or two? If the cost of holding inventory increases as a result of this, how would that affect your company's business model, supply chain structure, buy-versus-build decisions and other critical aspects of your business? But contingency planning doesn't cover the "unknown unknowns." Therefore, it's also important that your front-line responders have the tools to quickly make the appropriate decision when unanticipated events occur.

In this environment, just developing a plan is not enough. Nor is basing your plan on a static set of assumptions, which is unlikely to produce optimal results. Instead, companies need to consider the consequences of price and cost changes as well as disruptions in supply and demand. They must be able to adapt quickly to changing environments, and that includes alerting all the people who need to know about any meaningful deviation from the plan and having tools and processes available with which to alter the plan as quickly as possible. Moreover, the changes they select must be based on overall company objectives. Companies therefore need tools that mediate in a pragmatic and consistent fashion the trade-offs that inevitably occur.

In today's business environment, then, the reason for planning is not just to develop a final plan. The process that your company uses to develop that plan, the ways it uses the plan and how it changes its plan when circumstances change are of critical importance to its success and health.

Hope for the Best, Anticipate the Worst

Planning ought to be the process of engaging people across the organization in a structured dialogue – "structured" in that it includes quantifiable objectives and measures of the progress that results from this process. Structured, too, in that the plan should not be based on a single set of assumptions but constructed from several coherent scenarios that all participants review and collaboratively develop the likely outcomes from. (By "coherent" we mean that the elements are logically consistent.)

The effective use of planning can help a company in various ways. For example, it can improve the company's ability to handle better-than-expected demand for a product by understanding revenue and cost trade-offs involved in stockpiling larger volumes of some long-lead items while expecting to pay more to expedite others. Or it can enable a company to take advantage of opportunities that might fall through the cracks. This may be because of better coordination of efforts such as ensuring sufficient inventory by keeping manufacturing abreast of the promotions that marketing has scheduled. If these two are not in sync, marketing dollars may be spent on products of which there are a limited supply while manufacturing continues to build inventories of other products. Profitability suffers as revenues fall short and the cost of excess inventory mounts.

Using scenarios to understand what can go right is important, but it's even more useful to use them to explore what can go wrong, from the obvious to the unlikely game-changer. Working through these worst-case scenarios in a collaborative fashion enables a company to draw on the knowledge, experience and perspective of everyone in the organization to consider in advance how best to respond.

Using the planning process to make possible outcomes explicit helps companies manage risk better. Airline pilots undergo periodic simulator training that mimics in-flight emergency situations – not because they happen frequently but because when the (thankfully) rare event happens, they know how to respond and are able to act quickly and with conviction. Put simply, anticipating what can go wrong – from a mild disappointment to a serious failure – and developing contingency plans to deal with these outcomes enables a company to improve its performance.

Early Warning Systems

Planning well also means developing the metrics that will be used to alert your organization when reality begins to diverge from the plan whether in a positive or negative way. These measures should include leading indicators, which can provide more time to take advantage of favorable trends or mitigate the impact of unfavorable ones.

It's not enough to be able to collect data and provide information. Companies must put in place an automated process for detecting when situations diverge from the plan and sounding the alarm when conditions warrant it. Ideally, such alerts will be directed to specific individuals based on their area of responsibility. Moreover, the system doing the alerting must enable individuals to understand the underlying reasons why the situation exists and provide them with analytical tools to determine what they can do about it.

Ideally, you or the users should be able to define the thresholds for generating an alert, one that factors in the lead time needed to make the decision. Also, you should be able to create alerts for the unplanned events that can have a negative impact on the company's performance. Not all of them will, so your system should have the flexibility to add and remove them.

Choosing the Right Path

Planning does not stop with creating a plan; it also requires being ready to change it. Since the only constant in business is change, your organization must be able to adapt quickly to these changes. To do that, you have to understand what has changed and why, and the implications of each. You have to evaluate the new set of options and trade-offs to make choices that best support your corporate strategy, rather than allow individual decision-makers within your company to make silo-based choices.

In choosing the best course of action, beware the pitfalls of "optimization" (that is, believing in a single best result and/or the course of action needed to get to that result). Although it's true that you can arrive at an optimum solution based on a set of known factors, in today's business climate these factors rarely remain fixed for long, and an "optimal" plan can be in reality merely a big bet. The volatility of commodity prices, exchange rates and risk premiums means that within relatively short periods of time changes can render such an optimized plan much less advantageous. So it's important to have tools that help your company explore the implications of changes in these factors to arrive at a plan that takes into account volatility and uncertainty. You need a plan that gives you the ability, in effect, to hedge your bet.

Information technology has evolved to the point where it provides useful decision-support tools for executives and managers, so much so that it's easy to overlook the importance of human judgment. Indeed, we believe planning tools, while indispensable, are useless by themselves. Planning tools enable good managers to make better decisions faster and more consistently. To ensure that an organization can respond well to today's dynamic business environment, updating a plan is not just revising a couple of numbers and rerunning it. Once alerted that conditions have changed enough to warrant changes, the replanning process should take advantage of the experience and judgment of individuals to select the right course corrections.

Manage More Intelligently

To get a sense of the opportunity your company has for improving its planning process, we think it useful to ask the following questions, perhaps in a high-level corporate discussion of planning.

Have your planning issues become more challenging?

Odds are, they have. The high levels of volatility in the world's markets have caused company plans to become obsolete within days or weeks and dangerously out-of-date within months. While it used to be plausible to work around relatively minor fluctuations, the magnitude of recent changes now is too great for that. While it might have seemed sufficient in the past to propose upside and downside cases, today's volatility illustrates why such naïve scenario-building is not the best approach to uncovering opportunities and vulnerabilities or for creating contingency plans to address potential changes in circumstances. In today's business climate, planning must become a more rigorous process because the success of your business depends on it.

Does your planning process enable effective, cross-functional what-if analysis?

It probably does not. Our research shows relatively few companies achieving a high level of maturity when it comes to planning collaboratively – a level, that is, that encompasses consideration of multiple scenarios. Indeed, most larger organizations have dozens of plans, some of which are at best loosely integrated with each other, while others are not integrated at all. Some of this relates to management of organizational dynamics. If senior executives really want to have a more effective planning process that cuts across traditional departmental lines and facilitates collaboration and communications, it will happen. Some of it relates to the information technology tools that companies use for planning. We assert that companies must have a senior-level focus and the right IT tools to do effective contingency planning.

Do the people executing the planning processes have the right information to understand the situation?

In order to plan well, individuals must be able to look back to understand past patterns (seasonality, cyclicality, product life-cycle trends and the impact of marketing programs, to name just a few) if they are to make informed judgments about future periods. They must be able to compare actual to expected results and drill down into underlying data to be able to revise their projections as accurately as possible. Mature companies have well-developed corporate information systems that enable them to quickly collect a wide array of operating and financial data, analyze it and provide reports to all parties who need this information. In evaluating your planning process, it is important to understand where the gaps are in people's information needs and the root causes of those gaps.

How long does it take to spot deviations from the plan?

Having access to all the right information helps identify deviations from the plan and their sources. It also is important to have a finance organization that is able to close its books within days of the month's or quarter's end and can provide this financial information to users who need it. Having benchmarks and other metrics that define important tolerance bands (the degree of acceptable deviation from plan) and an ongoing monitoring system to create alerts when results diverge sufficiently from the plan can aid both these efforts. If your company has these ingredients in place, it probably can answer this question "right away" or "very quickly." But we find that most companies fall short of this ideal. Some lack an information infrastructure, others collect or analyze critical information in desktop spreadsheets that the creators don't share with the rest of the organization or make available only after a time lag. Many companies monitor only some of the data or have no systematic method for alerting individuals when key metrics are out of whack. And few companies use leading indicators to alert them that issues may pop up in the near future.

How quickly can your organization replan?

The answer to this question depends in part on your answer to the last one. Companies that are slow to spot important deviations fall behind in assessing their next steps. Beyond that, it also is important to be able to execute a plan rapidly and efficiently. What might have been done over a period of weeks or even months in the past must be done faster today.

There are at least three interrelated components that contribute to rapid planning. One is focusing the process on the elements that represent the most important drivers of your business and eliminating the items that are occasionally significant or there "just in case." A second is developing the organization's planning skills – a combination of attitudes (we can do it faster), expectations (we will do it faster) and practices – to facilitate rapid planning. A third is having the right information tools for the job.

A majority of companies use desktop spreadsheets to manage the data collection, analysis and reporting aspects of the plan. While indispensable for many business tasks, spreadsheets are inherently poor at handling collaborative, enterprise-wide tasks such as planning. They are time-consuming and error-prone. One reason why some companies take a long time to execute a plan is that when you use spreadsheets, it almost has to.

How well does a new plan meet overall corporate goals?

If you are revising your plan, those working on it probably are under time pressure to get it done. If your process lacks the ability to collaborate easily and to identify where key trade-offs must be made to achieve strategic objectives, it will be difficult to meet those goals in a reasonable amount of time. And if you don't have specific metrics to assess plan alignment with corporate goals, you have no way to assess this with accuracy.

Are all the right people involved in the planning process?

The degree of a person's involvement is as important as being involved at all. Many companies split up their planning activities, and as a result not everyone who should be engaged in the process is. For example, we find that sales and operations planning (S&OP), which is supposed to be a cross-functional exercise, rarely is. When it comes to five key functional areas (executive management, manufacturing, operations, finance and sales) only 18 percent of companies include members from four or five of these parts of the company, and almost half have representation from only one or two. You're not likely to get all the information you need if you don't ask for it from everyone who has it.

Where are the gaps in your planning and review processes?

Answering all the questions above is a good start to identifying what your company needs to do to make your planning, review and replanning processes effective in today's volatile business climate.

Are you using the right technology tools or systems to manage the process?

By itself, having the right information technology will not improve your planning process. However, we assert that it is difficult if not impossible to address planning issues without having the appropriate applications and infrastructure to support an agile, effective and efficient planning process. As noted above, our research finds that companies that rely largely or completely on desktop spreadsheets to support their planning activities have created a major disadvantage. Replacing spreadsheets with a dedicated planning application is a necessary first step.

Plan for Change

The high degree of volatility in the world economy over the past several years has undercut companies' expectation that their plans will remain intact the way they may have even a few years ago. Although history suggests the turbulence is likely to diminish eventually, it probably will not happen soon. Moreover, the lesson experiencing this period teaches is the importance of understanding that things may well turn out differently than expected.

We assert that companies must have a planning process in place that reflects this reality. Ventana Research believes that having the right software is a critical necessity for being able to plan or replan quickly, effectively and with agility. But planning alone is not enough. The software also must be able to monitor how closely an organization is tracking the plan, alerting and highlighting exceptions as they occur. And when exceptions occur, the software must enable all those who need to be involved in addressing the situation to work collaboratively to make the necessary changes as quickly as possible.

However, simply buying software does not fully address any business issue. When it comes to planning, organizations must ensure they also have addressed the people dimension (training, and very likely changing, attitudes and expectations), have the right processes in place to support better planning outcomes, and have ready access to all the right information. Only by addressing these interconnected needs can your organization be sure it will gain full value from the technology you acquire to support better planning.

About Ventana Research

Ventana Research is the leading benchmark research and advisory services firm. We provide expert guidance to help organizations manage and optimize performance – to become not only more efficient but more effective. Our unparalleled insights and best practices guidance are based on our rigorous, research-based benchmarking of people, processes, information and technology across business and IT functions worldwide. The combination we offer of benchmark research, thorough market coverage and in-depth knowledge of hundreds of technology providers means we can deliver business and technology education and expertise to our clients where and when you need them. Ventana Research provides the most comprehensive analyst coverage in the industry; more than 2.5 million business and IT professionals around the world benefit from Ventana Research's insights. To learn how our benchmark research and assessment and advisory services can improve your organization's performance, visit www.ventanaresearch.com.