What is in this article?:
- Planning in an Uncertain World: Managing Performance Trade-offs in S&OP
- Three Key Steps for Better Planning
Range Forecast: What is the range of our potential future demand?
Range Planning: What is the best way to plan for our range of potential demand?
S&OP Performance Trade-Offs: How much flexibility drives the best operating and financial performance?
Johnson: "Range planning is a common-sense idea. We don't plan our everyday lives around 'best guess' forecasts, so why would we plan our businesses that way?"
Planning systems are increasingly irrelevant. Their outputs gather dust because they’re based on best-guess forecasts that can’t deal with the uncertainties that drive business. At any moment sales can bring in a late order for a strategic customer, or supply chain can lose a vendor because of a storm in Thailand. As a result, most companies spend 20% (or less) of their time planning and the rest reacting.
But the importance of planning hasn’t gone away, as it takes time to build capacity, buy materials and ship products. To fill the gap, the operations team is forced to turn to Excel and offline, manual processes. With these ad hoc tools, management loses visibility and control, and with it the basis for accountability. At the same time, operational performance becomes unpredictable, and takes financial performance with it.
The antidote to today’s “best guess” plans are range plans vetted in sales and operations planning (S&OP). This means:
- Proactively planning for the range (probability distribution) of future demand and supply;
- Quantifying the operational and financial performance of these “range plans” across potential supply and demand outcomes; and
- Securing consensus and commitment on this “range performance” across functions (e.g. sales, manufacturing, procurement, finance) and external partners and customers.
By aligning data, people and processes with range-based S&OP, companies can transform both their sales and supply chain planning processes to deliver the combination of agility and predictability today’s volatile business climate requires.
Successful S&OP Range Planning: Step-by-Step
Critical to effective range planning is determining the cost and value of the ability to deliver to a range of potential demand: How far above or below forecast could sales come in? What would that mean for operational and financial performance? Today, few companies can answer these critical questions.
Providing answers with range-based S&OP enables companies to plan for the level of flexibility that optimizes P&L and customer service. This means quantifying how key metrics are exposed across the range of potential demand outcomes, and choosing flexibility to balance these costs of “too much versus too little supply.” The result is plans that ensure high-margin products get the upside they merit, and lower-margin products are managed to minimize cost and margin risk.
Range planning is a common sense idea. We don’t plan our everyday lives around “best guess” forecasts, so why would we plan our businesses that way? For example, weather forecasts tell us a range of possible outcomes, each with different odds, and we plan in order to balance the performance trade-offs. If the chance of rain is 10% we may leave our umbrella at home, but bring it if the chance is 40%. If we’re wearing our new suit to an important job interview (different performance trade-offs), we may bring an umbrella with only a 5% chance of rain. Just as you need to decide whether to bring an umbrella before you leave home, and before you know what the weather will be later in the day, so do businesses need to commit to supply chain decisions before they know what demand will actually be.
Range planning applies the same approach to business planning:
- What are the potential forecast outcomes? How likely are they? (Rain or shine?)
- What are my planning options? (Bring my umbrella or not?)
- What is the cost and benefit of each planning option across potential forecast outcomes? (Carry umbrella, risk of getting wet)