Dealing with Uncertainty: Using your S&OP process to improve your capability to respond!

I originally wrote this article under the title: Are You Ready for the Recovery? Using S&OP to take advantage of the economic environment in March of 2010. If you recall, this was just two years after the economic crisis of 2008 and companies were still grappling with forecast uncertainty along with unpredictability within their supply chain. The article outlines 4 specific areas that should be reviewed as part of your S&OP process. Doing these will both improve forecasts, and reduce supply chain uncertainty. Although our overall economic situation has changed, the need to respond to market changes is as real today as it was then. Enjoy!

I’m an economist. Well, at least I studied to be one. There are some interesting challenges in the study of economics. First, it’s about predicting future behavior. We use models to explain the past, but we are really trying to develop one that allows us to look ahead. Secondly, economic predictions are made in an extremely complex environment. The “Economic Crisis” of the past two years is a prime example. Events in one part of the world have far-reaching impact in other parts of the world. Finally, the act of making economic predictions can influence the results themselves. A poor economic prediction affects consumer confidence, which can lead to less spending and increase our aversion to risk.

The truth is that economists, like the rest of us, don’t really know what is going to happen in the future. According to the predictions, we are either at the beginning of the upturn, on a temporary upturn awaiting a second drop, not at the bottom yet, or we are well into the recovery. Take your pick.

Despite the uncertainty, there is one thing that all economists agree on: the economy will improve. The cyclical nature of economics shows that every downturn is followed by an upturn. While we may all want to know when the upturn will happen, the real question is: Are you ready for it?

S&OP = Preparation

We can’t control the timing of economic change, but we can make sure we are prepared for it.

I believe a good S&OP process is fundamental to being prepared for uncertainty because it’s forward looking. It’s about coming up with a single “story” (if you’re not sure what I mean by that you should read Duncan’s article) for our future demand and supply plans.

In the process, you come to agreements on the risks and tradeoffs that are inherent in the future plans. We don’t know what exactly is happening, but we rely on the key players in S&OP: Sales, Operations, Supply Chain, Engineering, and Finance to develop a single set of plans that we can execute. Almost as important, it allows us to measure our performance against those plans and make adjustments as we go into the next month.