It would be an understatement to say we are living in uncertain times. Many business leaders I speak to have abandoned their annual plans and strategies, and are just trying to survive the next few months. What does this mean for our business planning process, and what can we do to better prepare our companies for rapidly changing circumstances in the future?
In the mid-90s I was responsible for a $30M product division of a large telecoms firm. Our clients were in many different parts of the world with different technical standards (namely RF frequency bands and coding) and the components for the products we produced came from various global supplies including Mitsubishi in Japan.
When I was first assigned to the role, the biggest challenge was balancing supply and demand. My team would take input from various regional marketing and distribution teams, create a forecast, and then place orders with the component manufacturers who had 6 to 12 month lead times for manufacturing due to their long supply chains. Countless hours were spent trying to improve the forecasts, but they were never perfect and we had product shortages at some points in some locations, and stock overages in others. Combined, this was costing the company millions of dollars annually.
Making Decisions As Late As Possible
Let’s simplify this to a scenario a little closer to home. Imagine your job requires that you work outside and need to dress appropriately for the weather, and you rely on a typical weather forecasting service for weather predictions. We all know that no matter how good the weather forecasting service is, the forecasts for later today are almost always more accurate than those for two days from now. And, likewise, the forecast for two days from now is more accurate than for two weeks from now.
So when do you commit to what you are going to wear? If you are like most people, you will decide as late as possible because that gives you the best opportunity to be successfully equipped.
In places where there can be broad variations in climate, this is not a problem because most people ‘stock’ clothing for all different types of weather. But what if it wasn’t practical to stock your supplies? And what if your clothing was consumed when you used it and you had to reorder for each day? In this imaginary situation, you’d act on three interrelated factors.
- The accuracy of the predictions.
- The lead time of the supplier.
- The amount of emergency ‘stock’ you can afford to hold as a backup.
So how do you improve your results? Often people think the secret is in improving predictions. But I would suggest that the greatest opportunity lies in #2 – improving flexibility by shortening lead times for the product or service delivery
Better Predictions or Better Flexibility?
Back to my telecom experience; I’m no genius, but it seemed to me that given the volatility in demand, no amount of effort could result in a perfect forecast. Instead of improving forecasting, we set our sights on improving flexibility by shortening lead times. This required significant collaboration with our supply partners to evaluate every step in the value chain and identify areas where we could not only shorten those steps but also move decisions to an ‘as late as possible’ commitment point in the schedule. We also included our customers and their customers in the process since together we were all part of the same value chain.
In the end, we were able to increase flexibility by reducing lead times by 43%. Suddenly instead of having to predict what demand would be 9-12 months in the future, we were placing orders for expected demand 5-6 months out. Those forecasts were closer to the actual requirements with no change in our forecasting methodology and resulted in reducing inventory by millions and improving our ability to meet customer demand in a more timely manner.
How To Improve Flexibility and Shorten Lead Times
A holistic approach to improving flexibility in your business and planning for uncertainty involves these three steps.
1. Appreciate the limitations of forecasting
Every business and industry is different. For example, the utilization of household consumables and some categories of food is quite stable and a factor of population. The demand for large ticket items (vehicles and homes) and luxury goods will vary more based on other factors. Some industries, products, and services are seasonal, like outdoor garden supplies and services. And within industries, there are different factors at play between players offering similar products and services: pricing strategies, brand reputation, availability, and so on.
That said, in all cases, these two rules apply:
- Forecasting has a diminishing return on effort and sophistication. Every incremental hour or dollar spent to improve accuracy will be less valuable than the previous hour or dollar.
- The further out in time a prediction is, the less accurate it will be. This is the law of uncertainty as described with our weather forecasting example above.
All this is to say that yes we do need forecasts and predictions, but the time spent on improving accuracy may be better spent on flexibility.
2. Use process thinking
Process is one of the five pillars we use here at Results to help companies succeed. We have seen many examples of firms that have disrupted industries by re-engineering their core processes.
Dell Computers is a great, albeit an extreme, example of flexibility. Dell engineered a value chain where no forecasting was required. Through negotiations with key suppliers and a highly optimized assembly process, Dell never had to order components for a product until that product was ordered and paid for by a customer.
Similarly, with a process mindset, you can analyze your core business processes and find opportunities to shorten lead times, giving you more flexibility to adapt to demand changes.
3. Collaborate across the value chain
Value chains often involve multiple companies. For example, companies in the industries of mining, material processing, fabrication, assembly, testing, transportation, distribution, and retail are all parts of the auto industry value chain that gets a vehicle to an end-user. Process thinking both inter and intra company will usually find the great lead time gains.
This applies to service companies too. Take an accounting firm for example. If that firm has an increase in demand, how long does it take to adapt? Weeks or months if there are qualified individuals available in the market. If not, it could take years to educate and certify new individuals. Maintaining a virtual bench, employing fractional resources (contractors), or even creating strategic partnerships with educational institutions are all ways to potentially improve flexibility.
4. Risk management and scenario planning
What is the cost of maintaining more inventory of raw materials, supplies or even finished products? How about excess capacity? The answers to these questions need to be known and quantified. Then those costs can be weighed against the cost of lost revenue due to higher-than-expected demand, or oversupply due to lower-than-expected sales.
From there it’s often worthwhile running best, worst, and expected case scenarios across the entire planning model. In all cases, the numbers don’t lie and further clarity of action can be determined.
Why Strategic Business Planning Matters More During This Period Of Uncertainty
How accurate are our annual budgets right now? In the midst of this 2020 global pandemic, most business leaders I talk to have abandoned their annual budgets and forecasts and have shifted to a shorter-term planning approach. Our fidelity in what the future holds is at a lifetime low.
This is further justification to invest in flexibility today. Finding ways to shorten lead times and value chain cycles makes your firm more nimble, and better equipped to face the uncertainty of the future.
If your business is experiencing any hardship due to uncertain and current events, contact Results today. With years of experience in strategic business planning, consulting, business coaching and more, we can offer the advice and solutions that your business needs to navigate these uncertain and unprecedented times.