When Your Only Constant Is Change, You Need to Bridge the Reality Gap

The next breakthrough in performance will come from learning to respond to plan variance better

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June 25, 2010 — An important lesson learned as a result of this recession is the recognition of the unavoidable (and growing!) gap between what you plan and what actually happens.

Traditional planning processes and tools did little or nothing at all to provide early warning of a shift in business conditions; the negative side effects this would cause; nor the right course corrections to make in response. And with recent signs of improvement, these traditional processes are failing companies yet again in adequately managing the rebound. Why is that? With the maturity of ERP and the sophistication of many supply chain planning solutions, what makes today's fragile market so challenging? What is missing?

The truth is, there has been a capabilities gap in supply chain management for quite some time, well before the recession even hit. The economic climate simply served to exacerbate, accelerate and expose the problem. Notwithstanding the recession, manufacturers have been hit with an unprecedented number of undeniable trends, each adding to the complexity and volatility of the supply chain: global and pervasive outsourcing, aggressive consumer demands, shortening product lifecycles and new regulations, to name but a few.

The traditional processes and tools in place today were never designed to absorb the degree of volatility companies are now facing, and this is one of the reasons so many were caught off guard and ill-equipped when the recession hit.

Where is the Gap?

To create an effective, comprehensive plan, you must pull together input and information from multiple sources and systems. This can be time-consuming and difficult, and as the plan is based on assumptions and averages, it is ultimately never 100 percent accurate. As a result, once the plan is complete, assumptions are proved wrong and conditions have predictably changed. So from the start, there is an inevitable disconnect between your plan and what your customers actually want. And this disconnect only grows each day as unplanned disruptions hit your supply chain.

If you consider the speed and ferocity at which the recession hit us, we witnessed a perfect storm where the constant stream of unexpected events dramatically expanded the gap between what was planned and what needed to be executed. It is within this black hole where everyone scrambles to determine: what changed, what's the impact, how do we course correct, who needs to be involved, and what are the options?

Frankly, for most, it's chaos. But organizations that have been managing their supply chains by brute force have learned their approach is no longer sustainable. The bold and the brave are hard at work establishing new and innovative ways to operate during and, more importantly, following the recession. For many, the focus is on how to close that gap and eliminate the chaos.

4 Steps to Bridge the Gap

Step 1: Get your Data

A key step in preparing for a breakthrough in supply chain operations performance involves regaining control over the availability and accuracy of supply chain data.

While ERP systems continue to serve as the enterprise system of record, it is well known by now that much of the data required to operate in the "virtualized" supply chain resides in disparate systems often owned and controlled by other partnering enterprises. Integrating demand and synchronizing supply across the extended enterprise and into the one system is the integrator's challenge.

Establishing one version of the truth across a virtual multi-enterprise supply chain is a business imperative today, because you can't control what you don't know.

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Step 2: Establish a Robust Supply Chain Surveillance System

If your company was caught off guard by the impact of the current economic crisis and is still suffering its effects, it is very likely due to the lack of an early warning system — what some executives call "accelerated insight." Knowing sooner of an impending impact to one's business is critical to ensuring adequate runway to course correct. In the late 1990s, several start-up companies made attempts at creating a supply chain event management market, which ultimately failed. At the time, the motivation for this capability was certainly right on the mark; however, the implementation and design would drive most organizations to shut off the alerts. Of primary concern was the lack of the following capabilities:

  • Individuals must be self-empowered (meaning no IT involvement) to identify what they would like "watched" within their prescribed level of tolerance, and how/when they are to be notified.
  • Unexpected events are not all created equal. The same event could be benign one day and critically urgent the next. Establishing a surveillance system that can alert individuals on the impending financial and operational impact of unexpected change (not just the change itself) is what business leaders are starving for.

Such a surveillance system should be capable of monitoring, prioritizing and alerting the right people to the risk conditions that impact them.

Step 3: Empower People to Collaborate

Success in the future will require a greater degree of human involvement and intervention than what we see today. We are emerging from an age where computer software played a leading role governing supply chain activity and people were trained to trust, almost without question, the actions being computed by the software model. Now we are moving into an age where teams of people are trusted and expected to exercise their creativity and judgment in a collaborative fashion based on real-time events. Today, software is still necessary, but is moving to a supporting role rather than a leading one. Becoming increasingly sensitive to the actual day-to-day state of the supply chain, coupled with a dramatic increase in the organization's ability to respond appropriately and consistently to change, is becoming the new competitive advantages.

Step 4: Merge Supply Chain Planning and Execution

The first three steps are foundational to achieving this fourth step — tighter integration between planning and execution. Siloed, successive functions for planning and execution no longer work because too much changes from the time a plan is developed to the time it takes to execute. At the heart of this transformation is a complete rethink of how sales and operations planning (S&OP) processes are designed and executed. Current and traditional methods of running S&OP procedures as governed by the clock and calendar are no longer considered best practice. Leaders are looking for "continuous S&OP" where the type of supply chain surveillance systems previously described can play a key role in automating the involvement of sub-teams to review and repair portions of the S&OP at precisely the time they go out-of-kilter. It is about balancing demand and supply on a daily basis, not as part of a monthly project.

Find That Breakthrough in Performance

Historically, manufacturers managed the gap between supply and demand through the use of "just-in-case" practices such as running excess capacity, expediting orders and carrying inventory buffers or safety stock. These inefficient and expensive measures are no longer viable as a strategy to respond to change — particularly during these tough economic times when inventory risks run particularly high.

Recessions, while painful to live through, often work as a catalyst to conceiving new innovations. I believe, the next breakthrough in performance will come from the understanding that improvement will not only be achieved by learning to plan better/faster, but also by learning to respond to plan variance better. Planning is great; execution is what matters ... and that happens in the gap.

About the Author: Trevor Miles is director of industry and applications marketing at Kinaxis.