By Rod Hozack, Partner at Oliver Wight Asia Pacific
Change in the context of Integrated Business Planning is defined as a significant alteration to any of the core plans – causing a knock-on effect to the inventory position and/or financial commitments. The most volatile plan is the demand plan, which has a special term for change; “abnormal demand” defined as actual sales or orders that are over or under the forecast or in the wrong time bucket. Most companies react overtly and speedily to demand coming in that is over forecast because it creates a sense of urgency as well as the feeling that there is a potential upside financially. Underselling, however, tends not to be noticed until the month has passed. It is vitally important that all abnormal demand is formally identified and managed to re-optimize the whole plan.
There are several components to managing change, including:
1. Pro-actively seeking misalignment:
This is primarily done through the customer service function at order entry and promising. There are several levels to this, from comparing orders against forecast to having the system isolate an EDI order that is outside the tolerance of the last several week’s average sales. At a slightly higher level, the ability to “see” inventory and at least promise against current or future inventory is a good start. It is essential, however, to have rules around when to stop promising and check with the demand manager.
2. Reactively managing through exception reports:
In this instance, an exception report is generated at least once a week (sometimes more often) to compare, by SKU, the demand plan (forecast) for that period against the actual sales for the same period. This also needs tolerances set to flag if there is a threat to the safety stock or potential excess load on capacity. Once flagged, a follow-up is required to assess the root cause and for the potential impact to the core plans out to the time fence.
3. Setting up the planning system for ‘Normal Cause’ variation:
This requires an inventory policy to be established that, among other things, calculates a safety position based on past variations in sales. There are as many formulas to do this as there are mathematicians, but the most important thing with setting these up is that it is routinely tested against consumption – it is testing adherence to the ‘use it, or lose it’ principle. Once set up, tolerances can then be set to demand variance reporting and order promising as well as rules around following the exception, action, suggestion, or alert messages generated by the planning system (different Enterprise Resource Planning Systems have different terms for these recommendations).
4. Responding to the planning system recommendations:
The supply planning system requires human intervention to “firm” supply orders inside the planning time fence. This has three primary effects:
- It continues to drive all lower-level planning such as production, purchasing, and capacity planning.
- It prevents automatic changes to supply orders even though after regeneration, the computer system might become out of balance.
- It avoids ‘nervous’ planning because the potential myriad of changes are being controlled by the system and actioned by a person.
This means that, inside the planning time fence, we have supply stability as the default position/assumption. The system stacks up recommendations to rebalance the plan just outside the planning time fence, and the planner then chooses to accept, reject, or modify each recommendation to sensibly rebalance the plan.
5. Ad hoc:
This may seem common sense, but many companies do not deliberately empower their front-line staff to raise peculiarities as they come in, or even request that they “keep an eye out.” It shouldn’t matter whether it is an order entry and promising person, or someone picking and packing in distribution, we should be encouraging people to raise anything that looks wrong and point them to one of the Integrated Tactical Planning quorum to facilitate follow-up and management.
To summarize, the core plans – product, demand, and supply – derive the core dependent plans, inventory, and financial outcomes, and are the focus of attention in managing change inside the nominated time fences.
In Part 5 of our ITP blog series we’ll explore who is managing the ITP process.