This Week in SCDigest

Getting Planning in the Supply Chain Right Part 2

Maybe once per year, SCDigest editor takes a week off from his First Thought column and turns over the reigns to a guest columnist. Several times, that has been David Schneider, who runs David K. Schneider & Associates, and prior to that was director of logistics at auto parts retailer Pep Boys, among other accomplishments.

Below, he offers the second half of a two-part column series on what is wrong with the planning process in supply chain and logistics at many if not most companies. Part 1 can be found here: Getting Planning in the Supply Chain Right

Last week, I said that there is a problem with planning in the supply chain at many companies. By that, I do not mean "planning" in the sense of supply chain planning software, such as determining how much inventory I need next month.

Instead I am referring to the general planning process in day to day business operations. Most companies insufficiently considered risk, and develop plans that are not flexible enough in the face of the inevitable deviations from the assumptions upon which the plan rests (stated or unstated).

What Will Keep Our Plan from Succeeding?

When I see a plan that is nothing more than a sequential list of tasks, I know the people who created the plan made no effort to consider the risks. When I see conditional statements in the plan (if this happens, then do this) I know the planners thought about some of what could go wrong. Conditional steps in a plan indicate that the leaders are thinking of the risks.

Throughout the planning process, leaders have to dive deep and identify the strategic risks to the plan. What kinds of strategic risks you need to worry about depends on the scope and scale of the plan. Strategic trends help to define strategic risks, and tactical trends the tactical risks. Strategic trends happen outside of the business while tactical trends happen both inside and outside of the business.

A business can control the tactical trends by working on developing the tactics used in execution and then execution performance. However, even the strongest of businesses has little influence on the strategic trends. Strategic trends are the external forces that present opportunity and peril to the enterprise. The leaders must understand which strategic trends affect the business and the plans for the business.

What kinds of influencing trends should a leader consider? Moreover, where can a leader turn to figure out what the influencing trends are?

Using Scenarios

Perhaps the gold standard for global planning is the work that Shell Oil does developing scenarios. In the early 1970s, the senior executives at Shell asked the planning group to identify what business conditions the company should plan for. These planners, led by Pierre Wack, developed two competing scenarios that predicted the oil shock that followed two years later in 1973.

In one scenario, Wack's team predicted an armed conflict in the Middle East, potentially involving Israel, various Arab states, and the associated allies, triggering an economic response by the major oil producing Arab states.

Such events did happen. Egypt and Syria invaded parts of Israel, starting the Yom Kippur War of 1973. That war and the resulting energy crisis caught the oil producers flatfooted - except for Shell. As the events unfolded, Shell shifted supply points, making trades on commodity exchanges and committing to crude supplies ahead of the change in the market.

Shell's leadership was not caught surprised with the rapidly changing geo-political environment because it imagined what could happen - a profited significantly as a result.

Few other companies create planning scenarios to the depth of the Shell teams. Nor do they take the "long view" the way Shell does. The few examples of companies investing in the long view, dedicating capital, time and money to research and develop an understanding of the future, also include Google, General Electric, Siemens, Honda, DHL,and IBM, each of which invests in research and development that may not have a measurable return in what investment markets consider long term, five years, but which could shape how those companies shape the next decades.

How are We Going to Ensure We Make it?

Moving past the strategic questions, planning includes knowing what tactics we should deploy, and what tactics we can deploy. If strategy provides the why behind our planning, tactics are the what we do in our planning.

In any operation, we are in full control of our tactical options. Again, our defined outcome helps shape the tactics we choose in our planning. However, our tactical capabilities shape our planning. Do we know how to perform the job? What do we need to do to get the skills, knowledge, or tools that we must have to do the job? Asking these questions are all critical to the planning process.

Expect the Unexpected

As I noted above, many planning assumptions inevitably turn out to be wrong.

"Mr. Murphy maintains a shack on site. Our job is to try to keep him in his shack. But when he does walk the site, you better be ready with Plan B."

This is a line that I use whenever I am staring a project, and often in the project. When I serve as a program manager, I send every project manager in the program a poster about Mr. Murphy.

You can't stop Murphy, but you can plan for what he does. No matter the scope or scale of the project, I look hard to identify all the places where Murphy can create havoc, determine the damage that could happen, what I can do to prevent it, and what to do if we can't stop him. The larger the project, the broader the scope, the more likely multiple things can and will go wrong.

Murphy is not only walking our projects. He walks our offices, factories or warehouses. Murphy is in our employee's homes, our suppliers operations, our logistics partner's trucks, ships and aircraft. Going after Murphy is just the first step - the tactical step. Murphy appears in the little things, late deliveries, miss-measured lines, labor not showing up, or a bad batch of materials.

Are you Planning?

Organization leaders want to think that they are planning their futures. Those same leaders believe that their teams plan their work. And while everybody thinks they are planning their work, in most cases they engage in list making, not planning. Lists are a small and necessary part of the planning process, but lists are not planning.

As a leader, (and we all are leaders in some form), are you actually planning, or just making a list? Are you defining the desired outcome, or depending on assumed jargon? Are you thinking of how your plans fit into the greater future picture, or just focused on the next few hours?

Do you agree many companies do not do planning effectively? Why or why not? Do too few companies really plan for the unexpected? Let us know your thoughts at the Feedback section below.

You covered a lot of territory in this article. Here are my thoughts.

1) Reaction to Unilever's perfect network exercise

Based on the article, Unilever US has done an excellent job narrowing down and defining opportunities. While it tends to support the 80/20 factoid that you started with, it is important to recognize the opportunities are both short term and long term.

Locking in a network tends to lock in things as they are at the time, but the environment is dynamic. Things are always changing, so it is entirely possible the network decisions made in the past were the right ones to do at that time and now they don't match the current environment.

So there really are two opportunities to work on moving forward: operational and network design. And it does not surprise me at all that when Unilever applies this approach in other geographies, that they find significant differences.

2) Unilever's recent corporate performance

I looked at Unilever's corporate financials, not just in the US, and found some nice improvements over the past three years. Gross margin is up to 41.3% from 39.9% and distribution costs as a percentage of Sales and Administrative expenses have declined from 25.4% to 24.0%. Inventory turnover increased from 6.3 to 7.0. As a result, GMROI (Gross Margin Return on Inventory Investment) improved from 4.18 to 4.93. And they have a current cash to cash cycle of negative 59.7 days.

David Armstrong
Inventory Curve