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How Wrong Could You Be

By Bradley McCollum | July/August 2011 | 21 | 4

Asking your S&OP team the tough questions

American author Ursula K. Le Guin wrote, “The only thing that makes lifepossible is permanent, intolerable uncertainty: not knowing what comes next.”

Change is inevitable, and uncertainty comes from our inability to predict what changes will occur and how they will affect our business. As I write this, I sit in the rain-soaked Midwest, where flooding is at record high levels. Eight months ago, however, we couldn’t get a drop of rain to save our lives. In the consumer products business, extremes in weather or macroeconomic conditions can affect the demand for our products—just as distribution, promotion, and pricing do. These factors are uncontrollable and difficult to predict over a longer time horizon.

Many professionals look to the sales and operations planning (S&OP) process to eliminate uncertainty, expecting that better demand forecasts can be developed with additional effort. While this may deliver the perception of improved accuracy, it does nothing to help mitigate or prepare for the risks associated with the inevitability of being wrong. Change is unavoidable, and uncertainty continues; so, instead of only aiming for improved forecasts, also focus on your contingency plans.

As always, a reasoned and reasonable forecast is required—everyone must agree on one number. The ultimate forecast needs to be the one your demand team believes carries the highest probability of becoming reality. Of course, that probability never is 100 percent, which is what creates the need for alternate scenarios. One of S&OP’s primary objectives is to ensure alignment across the organization. Contingency planning supports that effort because mitigation plans support organizational priorities instead of departmental priorities.

Once you’ve established demand consensus, it’s time to develop the demand scenarios that could occur on either side of that number. For example, in some of the seasonal businesses in which I work, we consider the usual suspects—distribution opportunities, promotions, and the like—but we also spend a good bit of time discussing uncontrollable factors such as weather and macroeconomic conditions. We ask, “What does our demand look like over the 12-to-18-month horizon if those factors are positive on all counts? What if weather is unfavorable, but economic conditions improve?”

We also consider how wrong we’ve been historically and how various factors ultimately affected our business. Building this kind of causal relationship between demand and different possible scenarios can be challenging, but even a loose model is better than ignoring the impact on demand error. Once you’ve identified the primary drivers and agreed on a model that quantifies their effects on demand, you should be able to deliver a consensus demand and a reasonable range of probable demand scenarios.

Not all demand scenarios will require ongoing supply plans. This will depend on how dynamic your demand scenarios are in relation to the flexibility of your current supply chain. As this becomes a regular part of your S&OP process, it will quickly highlight those areas that constrain your flexibility. It might be a particular facility, manufacturing capacity, or raw material vendor—but something always breaks first. The objective of this exercise is to raise the visibility of those constraints and understand when they become a risk. Then, together as an S&OP team, you can keep a constant eye on them.

The risk matrix

Your risk matrix should drive mitigation options based on where you are willing to take risk and where you want to limit it as a business. Again, focus on overall company objectives, not departmental goals. This almost always requires financial integration, as risk decisions have a financial component that must be understood. Do you want to take on the working capital risk or possibly miss a revenue opportunity? Should you make capital investments today so that you have more capacity tomorrow? How will the plant economics be affected later if you’re wrong?

These are the types of questions that S&OP teams should be asking with every cycle as they look at the 12-to24-month planning horizon. If you’re not taking these steps as part of your S&OP process, it’s time to stop asking for better forecasts and start asking for better contingency plans.

Bradley McCollum is the sales and operations planning manager for Jarden Corporation’s Leisure and Entertainment Group, which manufactures, markets, and distributes a broad line of consumer products. He may be contacted at bmccollum@jardenbc.com.

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