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Thriving and Surviving in a Turbulent World Part Two: Planning and Its Results

Written By: Benoit Montreuil
Published On: December 6 2002

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Introduction

We can aspire to survive and even to thrive in a difficult environment if we are disciplined, bright enough and have the right tools such as a Demand and Supply Chain Planning suite to support and optimize our decisions. Enabled by such a Demand and Supply Chain Planning suite, manufacturing executives can engage in an adaptive management process such as described below:

  1. Recognize that we are in troubled waters;

  2. Decide what we want to become through these troubled times;

  3. Track and sense our environment with greater focus and sharper vision;

  4. React rapidly and cleverly to occurring events and sensed warnings;

  5. Plan for thriving in troubled waters;

  6. Continually train and gear ourselves for forthcoming turbulence;

  7. Honestly and vigilantly monitor our fitness, performance and level of risk.

Each of these activities is leading us toward a higher survival probability, yet the real potential is realized through their synergistic application.

This is Part One of a two-part article. Steps 1 through 4 of the adaptive management process are covered in this part.

Part Two will cover Steps 5 through 7.

5. Plan for thriving in troubled waters

Everyone who has been part of an expedition in a hostile environment understands the importance of planning. This is second nature. An omitted tool, an overly optimistic forecast, or a lack of terrain reconnaissance may all cause the loss of a life. The same goes for a business taking a ride through troubled times. Some would claim that there is so much uncertainty that there is no need for planning. Others believe that maintaining their deterministic forecasts and plans will be sufficient if coupled with basic what-if scenarios. Both attitudes are dangerous.

For example, Figure 3 shows the demand expectations for a product. The company is now at Week 1. It first shows that the level of bookings is around 200 units per week (for the first 4 weeks). The company has also signed a long-term contract that guarantees between 160 and 240 units per week for 54 additional weeks. It is expected that this contract could be renewed at a weekly load between 240 to 380 units at the end of the current contract. The company is also negotiating other contracts that would demand between 80 and 120 units per week for 30 weeks to commence in 20 weeks from now. The company has also non-contract demand that shows a rising seasonal pattern.

The forecast shows increasing uncertainty as time progresses. In the near future it is expected to start between 20 to 50 units per week and grow to a seasonal max between 200 and 300 (around week 43). Next year's peak is expected to be anywhere between 400 and 800 units. Aggregating these forecasts leads to a dynamic global demand expectation with roughly a 150-200 unit of weekly uncertainty through the year, increasing as time progresses, which represents 30-50 % of the total weekly demand expectations.

Figure 3. Uncertain demand coupled with long lead-time decisions

In Figure 3, two lines are depicted above the demand curves. The first line shows the lead times on equipment acquisitions and facilities expansions related to this product family. The second line similarly shows the lead times from suppliers and subcontractors selected for providing parts and outsourcing operations. It clearly shows two aspects: (1) decisions must be taken now that must be based on demand forecasts, not just firm orders, (2) decisions must be taken now based on highly uncertain information. In many companies, a deterministic weekly forecast is entered as a demand forecast, upon which the Materials Requirement Planning engine is run for material supply needs and the Capacity Requirement Planning engine is run for equipment and manpower planning. Even in the not-so-turbulent case of Figure 3, it is evident that this is extremely dangerous.

In turbulent and troubled waters, the example provided in Figure 3 also shows on the one hand that suppliers with reliable short lead times are valuable and that we should be aiming to select and/or to develop such suppliers. On the other hand, when forced to deal with suppliers with long lead times, we should plan for safety stock and develop contingency plans. Most Demand and Supply Chain Planning tools enable such planning.

6. Continually train and gear ourselves for forthcoming turbulence

Offering rapid and reliable delivery service to clients in a troubled environment has a price. Figure 4 illustrates the tradeoffs between delivery lead time and service level commitments on the one hand, and the capacity requirements for producing a given product in a turbulent environment.

The upper part of Figure 4 shows the two-year history of bookings for the product. It shows that demand is highly variable and difficult to predict accurately. The lower part shows the level of increase in capacity necessary to sustain targeted service levels and targeted delivery lead times for the average expected demand.

This is what we mean by the delivery capacity amplification factor in Figure 4. For example, it shows that if the company wants to provide a 2-week 90 %-reliable service level to its clients, then it must plan for 60 % more delivery capacity than the average expectations. This delivery capacity amplification can be achieved through the right mix of production capacity (capable-to-promise) and inventory (available-to-promise). The greater the fluctuation in demand (as in the upper part of the figure), the greater the delivery capacity amplification factor.

Figure 4. Tradeoffs between capacity requirements, delivery lead time and service level in presence of demand uncertainty

(Source: SET Technologies)

We have to be geared to sustain huge surges and decreases in overall demand and large fluctuations in the product mix, with tight time pressures. For example, this means we must be able to survive an 80 % drop in demand for several weeks and have the capability to spot and capture a business opportunity requiring a 200% surge within a few weeks. This requires us to develop (1) each node (center, unit, partner, etc.) in our demand and supply chain network to be robust and agile, (2) each link between these nodes to be fluid and collaborative, and (3) the overall architecture of the demand and supply chain network to be robust and agile. Collaboration must be embedded and cultivated with each partner in our demand and supply chain, gearing us for collaborative planning of demand, production, inventory, and delivery.

7. Honest and vigilant monitoring of our fitness, performance and level of risk

In a troubled environment, among the worst actions to undertake are (1) to assume that we have made it through and then relax, (2) to unknowingly overwork ourselves while attempting to cross through troubled waters, (3) to engage in endeavors for which we are ill prepared, or (4) to rely only on our instinct to make risky decisions. This is why we must thoroughly monitor our business fitness, risk and performance.

Our fitness lies in the capability of our business to sustain tough conditions. Measuring our fitness with a Demand and Supply Chain Planning suite involves assessing our agility and our robustness. Our fitness reveals how well we are prepared for competing in terms of price, quality, speed and reliability in troubled environments. For example, what is the volume and mix flexibility of our production centers? How much time would it take us to double our production capacity, or to cut our throughput by a factor of four? What are the available options when facing an upswing or downswing? How much do we depend on specific clients, suppliers and employees? A Demand and Supply Chain Planning suite enables each of our business units and processes, as well as the overall business, to be subjected to a fitness assessment. In addition, it enables manufacturing executives to evaluate tactics intended to increase the fitness level.

Our performance is the result of having applied our capabilities and capacities in the conditions that have occurred until now. Again, we can measure performance at the global level or at each node in our network and determine profits, market share, revenue per employee, service levels, etc. The measures can be compared with past performance, competitors and best-in-class enterprises.

In addition, using a Demand and Supply Chain Planning suite, we can examine various measures of risk. One such risk is the product starving risk within the next month: the probability that we will have to stop shipping a product within the next month due to combined aspects such as materials shortage, or lack of production capacity. Another risk is knowledge attrition due to employee layoffs. A third risk that can be measured is red ink cash flow, which is the probability that our cash flow will be in such a negative position as to endanger the survival of the company.

Our Demand and Supply Chain Planning technology should enable such a rigorous tracking of our fitness, performance and risk. Yet it is our personal mandate as executive to foster such tracking and to manage accordingly.

Giving It Our Best Shot

We are facing a turbulent environment. It is a fact. Instead of panicking, it is much better to take a deep breath, think how we can make it through, and then face it as best we can. The trek may be long and tough. Applying the seven-activity adaptive process described above provides a roadmap for success, especially when supported by demand and supply chain planning technology. Let us give it our best shot.

About The Author

Benoit Montreuil is founder and chief technology officer of SET Technologies Inc., a leading edge provider of demand and supply chain planning solutions and services for manufacturing business. He has extensive consulting and research experience. He has presented his work at numerous international conferences. He holds a Ph.D. in industrial engineering from Georgia Institute of Technology. He is Professor at Laval University and holds the Canada Research Chair in Enterprise Engineering.

He can be reached at bmontreuil@settechnologies.com.

For more information about SET Technologies, consult: www.settechnologies.com.

 
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