Synchronizing with the Marketplace

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Chapter 2
Synchronizing with the Marketplace
The conductor is there…first of all for the oversimplified reason of just being the traffic cop, making sure everyone is playing at the same speed and the same volume.
(André Previn, American conductor)
Sales & Operations Planning is a dynamic process in which the company operating plan is updated on a regular-monthly or more frequent basis. Here’s a capsule description of the process. It starts with the sales and marketing departments comparing actual demand to the sales plan, assessing the marketplace potential and projecting future de, mand. The updated demand plan is then communicated to the manufacturing, engineering, and finance departments, which offer ways to support it. Any difficulties in supporting. the sales plan are worked out, or the sales p7ans are altered in a process that concludes with a formal meeting chaired by the general manager. The final result is a set of “marching orders” for all departments that extends through the current fiscal year and as far beyond that as is necessary to effectively plan resources. Most important. an updated operation plan is being set to satisfy the current market, and the consequences of taking various actions are known ahead of time, minimizing costly and disruptive surprises.
New Englanders are famous for their frugal use of words to make a Succinct point. Two old Yankee proverbs relate well to Sales & Operations Planning. The first, ‘ ‘He sees best who sees the consequences,” means that predicting consequences prior to approving an action plan
is an important ingredient in good decision-making. The second, ‘ ‘Better to be ready and not go than to go and not be ready,” nicely states the value of contingency planning and “what-if” analysis.
The essence of good managing is contained in these proverbs. Every manager should be thinking ahead and evaluating options and alternatives before they are needed. Such thinking does not indicate doubt that the selected plan is the best one, nor does it reflect lack of resolve to make the plan happen. Rather, it characterizes a prudent manager, one who expects changes and is therefore better prepared to handle them.
Another contribution of Sales & Operations Planning is that it enables a company to fine-tune its long-range strategic plan and annual business plan. To understand how this fine-tuning process works, let’s consider the overall business planning process shown in Figure 2. 1.
At the top level of the process is the long-range strategic plan, which is reviewed on an annual basis. The strategy must answer such vital questions as:
What is our business (products and services)?
To whom do we sell (markets, customers)?
What resources are required (people/skills, technology, plant and equipment. distribution, etc.)?
What is the measure by which we compete (quality, delivery. price. service)?
What is our financial strategy (profit, growth, ROA. ROI)?
Any additional strategies (make or buy, market share, flexibility)?
The middle level of the process shown in figure 2.1, the ongoing operating plan, entails developing specific goals and “how tos” through the Sales & Operations Planning process. At the bottom level we encounter the annual business plan, which is used for financial planning and measurement purposes, as well as for communicating with the financial community.
Whereas the long-range strategic and annual business plans are updated on a yearly basis, the ongoing operations plan is continually revised through the Sales & Operations Planning process. This feature, coupled with the fact that the ongoing operating plan often extends well beyond the annual business plan, enables companies to develop business plans that are not only consistent with long-range strategic goals, but realistic in terms of the marketplace.
This approach is radically different from the all-too-traditional view of the strategic and business plans as carved in stone. The drawback to such a one-shot approach is that market conditions and your capabilities constantly change, and static plans can quickly become out. dated. Nevertheless, many businesses still manage to the ‘ ‘original numbers,” sticking to the financial targets regardless of what is actually happening in the outside world and inside the company. As a result, the business battlefield is strewn with the bodies of companies that “hung in there till the end of the year” with unrealistic expectations that somehow the plan would be met. Other companies fail to make ‘ opportunity decisions” when demand shifts to give them a chance for greater market share. In either case, performance is worse than it would have been if the companies had revised their plans and appropriately responded to the ebb and flow of the marketplace.
Sales & Operations Planning offers just such a means for achieving and updating the business plan. As C. Dow Caldwell, director of materials management at Abbott Laboratories, told us, ‘ ‘Looking ahead to plan and avoid problems is vital. In business, that starts with strategic planning. But to be effective, the implementation of the strategic plan must be an ongoing process to adjust to change. Also, it is necessary to review plans in the aggregate to keep management is viewpoint in focus. That’s what Sales & Operations Planning is all about. ” Because it takes place on a regular and frequent basis, Sales & Operations Planning offers a window through which changes in the marketplace and required company actions become quite visible. This enables the company to adjust its production levels to avoid excess inventory and backlog, to gear up its operation so that it can seize new opportunities for greater market share, or to adjust its plans for changes in product mix. In tum, the impact of these changes can be reconciled with the business plan.
Sales & Operations Planning-offers another key benefit to companies striving for the competitive edge: it enables them to operate Manufacturing Resource Planning (MRP Il) at its full potential. Many people assume that MRP Il is primarily a computer-supported approach to scheduling activities within the factory. While hardware, software, and scheduling are critical aspects of MRP Il, the best computer in the world won’t improve your competitive posture unless it’s carrying out the plans approved by the general manager. In fact, without Sales & Operations Planning, MRP isn’t MRP II— it’s little more than a middle-management operating system and will yield only a partial payback. In contrast, when Sales & Operations Planning is the driver in an MRP (l system. the results are likely to be Class A performance, which in tum means better customer service, more reliable performance, reduced costs. and greater profits. How the various plans function at the aggregate and detail level within the context of MRP II is shown in Figure 2.2. While it is beyond the scope of this book to discuss all aspects of MRP Il in depth, Appendix E offers a source for excellent books on the subject.
In the preceding sections, we described some of the general benefits of carrying out Sales & Operations Planning. Now let’s tum our attention to the specific objectives of the process:
Support and measure the business plan. Sales & Operations Planning helps you determine whether your original financial expectations (budget), current sales plan, and operations plan are in sync with each other. It does this through monthly reviews of the marketplace and updates of the company’s operations plans. Companies that do Sales & Operations Planning will hi! or exceed their target business plan more often than companies that don’t. The important thing, however, is that the updated plans for the business are in tune with the marketplace.
Ensure that the plans are realistic. The key players from each department participate in formulating the new plans to make sure that all recommendations can be -realistically supported. Since all of the numbers and assumptions are out on the table throughout the process, each department has more time to evaluate its resources and capabilityties in the context of the company-wide plan. The result is a solid set of department plans that are based on real numbers and capabilities.
Effectively manage change. The ability to carry out Sales & Operations Planning is synonymous with being able to manage change, to substitute controlled and appropriate responses for knee-jerk reactions. As a result, companies that do a good job of performing Sales & Operations Planning take an active role in creating their futures instead of passively suffering through them.
The advantages of managing by the brain rather than the knee are well illustrated by the case of an electronics equipment manufacturer that suddenly found itself swimming in a sea of unexpected orders one quarter. For some reason, the general manager convinced himself that the company could add a shift in thirty days. Rather than call a special Sales & Operations Planning session to discuss the situation, this general manager simply decreed that production would be doubled in a month. The sales force, marching faithfully to the beat of the bass drummer, confidently began promising orders based on product being available because of the new shift. But the hiring and training just. didn’t happen in thirty days. As a result, the company had to go to significant overtime in the hopes of solving the problem. And despite the overtime, promised ship dates were missed, customer service decline, and costs were higher and profits lower.
Equally disastrous, as production struggled the company began accumulating raw materials and mismatched components, which merely tied up cash and misused capacity. The net result? Significant opportunities for sales and profits were lost. And it took six months to dig out from under the one-minute, one-man decision and restore reliable service to customers. As this company painfully learned, when the conductor ups the tempo he had better be sure that all players can keep up with the new speed.
Better manage finished goods inventory and/or backlog to support customer service. Maintaining the right level of finished goods inventory for make-to-stock families is essential for good “off-the-shelf” customer service. Operating at too high an inventory level results in extra costs, while operating at too low a level creates too many back orders. In a similar manner, controlling backlogs for make-to-order products is also essential for good customer service. If actual backlog becomes too large, delivery times stretch out, which eventually will cause customers to go elsewhere. By contrast, insufficient backlog can incur extra operating costs.
The general manager and his staff have the responsibility for establishing targets for what levels of inventory and backlog they believe are necessary to remain competitive. If the general manager and his staff don’t establish targets by families. then by default it will be done by people at lower levels as they make individual decisions. Seldom will the sum of these detailed decisions add up to an aggregate plan that would represent what the general manager would have done himself. The linkage of detailed decisions to aggregate is a vital part of controlling the business, ensuring that each is supporting the other.
Maintaining the desired levels of finished goods inventory and backlog is an ongoing challenge for two reasons. First, it may be difficult to gain consensus on what the future targets should bet and second, it will usually be hard to hit the targets economically. Nevertheless, the process of reviewing the targets, discussing the consequences of changing them, and finally approving (hem is an effective means to meet the challenge.
Measure performance. Sales & Operations Planning incorporates performance measurements to identify whenever actual performance has deviated significantly from the plan. The two main purposes of this are to separate those activities that are in control from those that aren’t, and to quickly bring the out-of-control situation to the surface so that an evaluation can be made and, if necessary, corrective action taken.
Measuring performance against plans is only productive when the plans are valid. This is a very important contribution that Sales & Operations Planning makes to a company. Whenever the targets are challenging but attainable, managers are willing to be held accountable for their performance.
Build teamwork. A key element of Sales & Operations Planning is that it gives each department an opportunity to participate in the overall planning process. Each executive brings his experience and skills, which add insights to the matter of making changes to the current plans. These same talents can respond to proposed changes in terms of consequences and alternatives. This not only ensures that the general manager is receiving the best possible advice before approving the new plans, it also demonstrates that each staff member is an important and valued part of the team. Thus the process not only provides a means of updating the operating plan to bring it into step with changes in the marketplace, it also instills a spirit of teamwork and a shared set of goals in achieving the new company plans, The result of such teamwork, of course, is a better-performing company.
As we stated earlier, any company can effectively use Sales & Operations Planning to improve its performance and become more competitive. Five prerequisites, however, need to be in place:
Each department must gain an understanding of (he Sales & Operations Planning process.
The company must commit the time and resources 10 the process.
The company must define product groupings or families.
The company must establish an adequate planning horizon.
The company must establish and manage lime fences.
These topics are discussed in the following sections.
Understanding Sales & Operations Planning
For Sales & Operations Planning to be effective, there can be no “black boxes” in the process; all participants must understand how it works and what it is designed to achieve. When people understand that sharing information does not mean giving up control and they see that the exchange actually leads to gaining control, they will be more willing to work in concern with their fellow departments toward the larger objectives of the company.
Commitment and People
Once a company embarks on the Sales & Operations Planning process, it is really making a lifetime commitment. Each month, or possibly more frequently, the decision-makers from all departments. along with the general manager, must review and update the company’s sales, production, engineering. and financial plans. nis “core team” is made up of the top executives from sales, marketing, manufacturing, engineering, finance, and human resources.
figure 2.3 suggests the personnel who should participate in the Sales & Operations Planning sessions. Note the general manager at the top of the list; it is mandatory that he attend all Sates & Operations Planning sessions if the process is to be successful. Once the general manager commits fully to the process, the other key people with set aside time to meet regularly, regardless of their other activities. In business, as in shepherding, the flock will follow the leader’s actions.
Once the process becomes part of the routine of the company, people will no longer treat Sales & Operations Planning as a matter of setting aside extra time to attend the meeting, but rather will discover that the meetings are the best use of their time, and to discontinue them
Figure 2.3
Sale & Operations Planning
Typical Participants
General Manager Sates Department Manager Marketing Department Manager Manufacturing Department Manager Materials Manager Engineering Department Manager Finance Department Manager Human Resources Department Manager Programs/Social Projects Appropriate managers
Customer Service Manager Distribution Manager Service Parts Manager Demand Manager Chief Forecaster Product Manager(s) Manufacturing Manager Master Scheduler Purchasing Manager Quality Assurance Manager Drafting Manager Engineering Scheduler Manager. Design Engineering Budget Manager Cost Accounting Manager
would be a guarantee of far more effort on everyone’s part while generating fewer results.
Initially. care must be taken to ensure that dates arc on everyone’s calendar, and that sufficient time is allocated to do justice to the issues raised in the meetings. Of in the event of an emergency that would prevent a member of the core team from attending, a substitute from that department must attend. This person must have (he authority to represent the needs of his department and be empowered to make the important decisions.
Many companies do-not operate the Sales & Operations Planning meeting with only the core team in attendence Rather, they have found it useful to have a number of other people available on a “need for” basis. For example. take a situation that on the surface seems straightforward: the rate of output for one family needs to be increased, while at the same future point in time, another family needs to be decreased by the same amount. Is this a straight trade? Are the skills transferable? Are the equipment and tooling common? Are there any problems with procuring raw materials? [n short. is it a one-for-one exchange?
If the core group has general knowledge and recognizes that there may be a number of aspects of which they aren’t aware, but which could be critical to the execution of the plan, they would either have to make a risky decision or postpone it in order to do further analysis. An alternative would be to have the appropriate people with the expertise give their more detailed advice and recommendations. There are times when the need for the greater amount of detail is known in advance, and in these cases the appropriate people can be invited to attend. Where this happens frequently and/or unexpectedly, it may be more appropriate to have the additional people attend regularly. Where the meetings are lengthy, and some of these extra people are not involved in all aspects, it may be better to have them on call or ask them to sit in for only those sections of the ‘meeting where their experience is penitent. The point is to get the right mix of power and knowledge into the planning and meeting process so that the best possible decisions can be made and executed.
This is particularly crucial when managing through a period of significant change or difficulty, when decisions need to be made about allocating scarce capacity to products, or changes in production must be made within a short lead time. In these circumstances, product managers, factory management, and master schedulers might be the tight people to supply information about which course to follow when the alternatives and decisions are not easy.
Defining Families
Sales & Operations Planning is carried out at the aggregate level. By aggregate” we mean product groupings or families rather than individual products or items. Why manage at the aggregate level? Because it’s just not practical for top management to juggle every item that the company manufactures. The idea is to get effective input and control from management. This comes about by managing families, not items, and managing rates, not specific work orders.
Managing in the aggregate means grouping products into logical families. This may be straightforward if all parties agree what the families should be. Very often, however, sales and marketing view things in aggregate differently than manufacturing does. Sales and marketing naturally look at their products the way customers look at them, from a standpoint of function and applications. Manufacturing, in contrast, tends to look at products in terms of processes.
At first blush, such differences would seem to be an explosive mismatch. And many companies go, in fact. wind up getting ensnared in non-productive debates about “who’s right.” This is precisely what happened at a major flatware manufacturer, which offered a variety of patterns for each of its products. While the marketing department was concerned with styles, the manufacturing department was concerned with machining capacity. Which department was right? Both, the various patterns had tremendous differences in the amount of required capacity. For instance, the more expensive patterns required a great deal more finishing and handwork, and hence more labour. As a result, manufacturing families could almost be cut along value lines—the more valuable the product, the more costly the manufacturing process. Marketing, by contrast, viewed product lines in terms of style, which did not necessarily relate to manufacturing’s family definition.
Although both departments had valid points of view, this company organized its families according to sales and marketing’s perspective, Manufacturing then made conversions from units to capacity, which is how it should be. After all, customers buy products because of what they do, not how they’re made—the marketplace typically doesn’t relate to the manufacturing process. As a result, sales and marketing should establish families that make sense to them, and the means should be in place for converting the plans by family into meaningful terms for other departments.
When departments have differing views of families, a conversion table will be necessary. Such a table can be established by analysing past history to determine what impact each marketing family has on the manufacturing families. This approach can be very effective in planning manufacturing resources. The conversion factors need to be monitored, though, because there will be changes over time due to events in the marketplace and/or the installation of new equipment. Many companies utilize the rough-cut capacity planning capabilities in their standard software to perform the conversions that we’ll discuss in Chapter 4.
Ideally, the families that you select should meet two criteria: size and meaningfulness. The larger the family the better, for two reasons. First, it’s less work, and second, forecasting is always more accurate for broader groupings. For the families to be *’meaningful,” the general manager and his staff should be able to relate to these families in a manner that enables them to respond to requests to change output up or down.
These two characteristics are often in conflict. For example, a company that manufactures office furniture consisting of chairs, file cabinets, and desks would find that combining all three into one family would result in too few, and three may not be enough. Simply stating that sales are to increase by 25 percent in total would not enable manufacturing to respond with confidence as to whether they could quickly handle the increase. Rather, manufacturing would need to know whether each of the product families was to increase evenly, recognizing that a 25 percent total increase in business could originate from a 40 percent change in one product line and flat sales in the Other two, In this case, neither the skills nor equipment necessary to manufacture each product line are transferable. Thus, at the least manufacturing would need to analyse the request to change output rates as a function of the three major processes used to create the products, Moreover, if the company made metal desks and wooden desks, the decision about increasing Output would very likely require a further subdivision of families for the same reasons: lack of interchangeability of operators and equipment.
As an aid to resolving whether you have defined families properly, we recommend the “frown test” Create the minimal number of families, and check the reaction from manufacturing, engineering, and marketing. Can they comfortably deal with the families you’ve selected? If they can’t, you’ll see an element of pain between the eyes. brows, reflecting a problem with your definitions. Subdivide the families, stopping as soon as you get to the level where the operating people can relate with confidence to the divisions. In our experience, the finance group, although equally important as the other members of the general manager’s staff, tends to be more flexible in handling the definition of families. Generally, whatever marketing, manufacturing, and engineering agree to, finance will accept.
Service Parts
Service parts in some companies are included in the product family they support. Ln situations where service parts are dominant or the demand for service pans is significantly different from that for the finished product, it is sometimes necessary to create a sub- or separate family. For products that are no longer produced but are still supported, a service pans family is of course required.
In some companies where service pans are not significant and it may be difficult to relate each part to a family, the solution may be to lump all service parts into one family.
Emergency Business
Many companies offer make-to-order products and base their delivery promises on the availability of capacity and materials. Yet, these same companies typically get a steady stream of “emergency” orders that cannot wait for the normal delivery time, but rather must be rushed through on an expedite basis. These situations create much chaos and extra costs. To satisfy the customer who is in trouble, emergency orders are treated as special, given high priority, and rushed through the process ahead of older orders. In fact, they generally disrupt an equal number of regular orders, causing them to miss their delivery promise, because the expedited orders consume scarce capacity and materials.
On the surface, this situation seems like an impossible dilemma. On the one hand, you want to help any customer who’s in trouble, and recognize that if you can come through, you’ll no doubt be viewed as a good supplier and possibly gain some additional business. On the other hand, you know that it’s unfair to delay the other orders that were promised in good faith; you tun the risk of aggravating part of your customer base and losing future business. The situation is compounded whenever there is little or no repetitiveness to the individual items. If there were a predictable pattern, you could forecast the individual line item that is apt to become an emergency order, so that it would be available when the customer wanted it. What can be forecasted is the volume of traffic for emergency orders. It’s much like absenteeism or scrap. You will not be accurate in predicting who will not show up for work tomorrow, yet there is a pattern as to what percent of the work force will be absent on a day-to-day basis. Likewise, you will not be correct in predicting what item will be scrapped tomorrow, but again good hindsight allows you to predict what volume of material will be rejected on a day-to-day basis,
Companies can analyse their emergency business in a similar manner, treating such orders as a family. Sales and marketing take the responsibility for forecasting emergency orders as they would forecast any other family, while manufacturing and engineering must respond in terms of allocating adequate resources to service the orders in a ‘ ‘fast track” manner when they arrive. Capacity is thus planned ahead of time. Many companies find that their emergency business comes from certain customers as much as (or even more than) it comes from certain products.
As emergency orders arrive, it should ‘be an order entry or customer service responsibility to determine which ones deserve special treatment and which ones don’t. Furthermore, once the capacity set aside for emergency business in a given period has been consumed, sales must recognize that any more promises must be made in a subsequent time period. The other alternative is for marketing and manufacturing to explore a trade-off where an existing order may be bumped to a later time period in order to insert a newer order earlier.
If the amount of time required to service emergency business is less than the cumulative material lead time, then the forecast must also apply to lower-level materials in order to make them available perhaps at a purchase or semifinished level along with the needed capacity. Obviously, capacity without material is as ineffective as having material without capacity.
Ollie Wight demonstrated this when he consulted with a company that was constantly frustrated by their problems with handling emergency business. Their long-range plan was to wait for the phone to ring. When it did, they slapped on their fire-fighting hats and responded to the crisis by knocking aside regular jobs. Ollie commented, “The phone is going to ring, so why not plan ahead before it does? [f you’re in the emergency business, why not be the best at it? And being the best means not only responding quickly, but also means not at the expense of existing orders.
This type of emergency planning, which enables you to offer a fast track through your operation, can be a competitive weapon when used A formal system can enhance such flexibility for emergency service if you think through how it should be set up. Unfortunately, many companies think that by going go a formal system such as MRP they will lose their flexibility, because everything must be done by the numbers. In reality, MRP Il will be as flexible as your operation; you need to reflect on what you can do and need to do, and then use MRP Il as an effective tool for satisfying those needs.
Planning Horizon
The term “planning horizon” refers to how far ahead you need to establish your plans. Everyone recognizes that Sales & Operations Planning is long-term, but the word “long” needs to be quantified. The Sales & Operations plan must extend far enough into the future to ensure the availability of all resources. Thus, whichever resource— material, equipment, people—takes the longest determines the length of the planning horizon.
It’s sometimes difficult to analyse which resources will require the longest planning horizon. Additionally, it is not unusual for lead times to change periodically for a particular company. For example, a company requiring highly skilled operators located in an area where the skills are scarce will likely identify that resource as the main constraint to increased output. If, however, there is a downturn among other companies in the immediate area and the availability of skilled people increases, procuring essential raw materials may become the process requiring the longest lead time. here are also times when unusual reactions are appropriate for taking advantage of unusual opportunities. If a rapid response is required to gain additional and profitable business, the company may change its existing policies and subcontract some of the additional work load, even though it may have to pay premium prices to do so. Extraordinary steps may be necessary even if the cost of them exceeds the revenue. One company, for example, decided it was better to pay a “pound of flesh” to procure material from a competitor in order to temporarily protect its position in the marketplace. The alternative of saving money in the short term was judged as being far outweighed by the long-term consequences.
Each company needs to estimate how long it takes to acquire additional resources in a routine manner, and periodically (perhaps every several months or when triggered by specific events) ensure that an adequate planning horizon is in place. Required resources include: skilled workers in the factory, both direct and indirect; skilled office people (for engineering, marketing, etc.); equipment; facilities; tooling; warehouses; new suppliers; subcontractors; and money. Finally, the need to perform what-if or risk analysis pushes out the planning horizon even further.
The what-if analysis applies to each of the aforementioned resources. If a company waits until it must start the execution process in order to provide the resource economically: there will not be sufficient time to study alternatives. Identifying the choices and evaluating the consequences requires considerable time.
Figure 2.4 shows an example of a company in which there is seasonal demand, and its manufacturing organization is attempting to maintain stability. Even though the longest lead time of any resource for this company is six months, the need to look at alternatives or do What-if analysis may extend the planning horizon well into the next Year. ‘This is necessary in order to plan production and inventory levels.
Regardless of the fact that longer planning horizons provide greater visibility into potential problems in the future, most people resist making the effort to extend their time line. Not only does it take a lot of work to supply the information that far out, but everyone is aware that such long-range analysis is risky; the crystal ball is inaccurate even in the short term, and quickly clouds up beyond. Still, it’s better to go through the effort, expecting some poor guesses, since the process will al so yield good guesses as well. Also, to avoid the risk of sometimes being wrong, many companies unfortunately elect simply to be the victim of what happens. instead of influencing the course of events to
whatever extent is possible. Most companies operating Sales & Operations Planning will have a horizon of at least a year, with a significant number going out two years, and a few with particularly long lead times going out three to five years.
Time Fences
All departments must recognize in their Sales & Operations Planning process that changes in the plan are time-dependent; that is, the closer in the change, the more costly or impossible it may become to make changes in the plan. For every product family, there are “time fences’ ‘— guidelines that demarcate when changes are feasible (see Figure 2.5). The fences reflect the realities of each business. As shown in Figure 2.5, the outer fence, B, represents the point beyond which changes can be most easily made. In the middle area between fences A and B, materials have been ordered, capacity has been established, and changes in rates may consequently be difficult to make. You must, therefore, review rate changes carefully at this point: Changes in priorities, on the other hand, are commonplace, caused by customers changing their demand and forecasts becoming inaccurate. Changes in priorities are easier to implement than changes in output rates. Care is still required to ensure that they can be executed, but generally great flexibility exists as long as the rescheduling is balanced so that as many reschedules out occur as reschedules in, Within the near time fence, even small changes become very expensive as you begin to pay overtime for labour. premium prices for raw materials, and premium shipping charges, Worse still is when you find that you are unable to carry out the change in spite of extraordinary efforts and costs.
For each product family, you therefore need to establish guidelines for determining where changes can be easily made and where change must be evaluated in terms of extra costs. Such lime fences can be arrived at by looking at your constraints in terms of capacity and materials.
Many people balk at the idea of time fences, seeing them as straitjackets or barriers. To the contrary, time fences are merely milestones that identify varying degrees of flexibility. This in tum helps you run your business more effectively. You will occasionally have to make changes even though you are within the time fence, but everyone should understand that such changes are exceptions, and if the exceptions become the rule, the cost of doing business and satisfying customer de. mands will rise sharply. All departments should therefore come to realize that time fences represent the realities of running the company and gear their planning efforts accordingly. When you need to override the guidelines, it must be done knowing the consequences. Ignoring the impact of changes not only could be costly but could result in just the opposite from the improved customer service that you seek.
The need to establish time fences 41so exists at the master schedule level. The thought process is identical, but instead of dealing with changing rates of output, as you are at the Sales & Operations Planning level, at the master schedule-level you’re dealing with changes in priorities. A great deal of flexibility is possible in the midterm range at the master schedule level if there is a reasonable balance. When there are as many de-expedites as there are expedites, the master schedule is usually attainable, since the changes often are offsetting in terms of their impact on capacity. Although a lot of changes present challenges, whenever a balance between the two directions is achieved, it increases the opportunity to handle changes economically.
Rate changes are less flexible than priority changes. Companies need to analyse how quickly they can increase or decrease output rates so that time fence milestones can be an integral part of the decision making process. This is not the same as driving an immovable stake into the ground, but rather represents your best estimate of where reactions to altering the plan differ.
Establishing time fences is not an easy task. Marketing, for example, will press hard to have them as close to today as possible, reflecting their desire to service the customers quickly. Manufacturing, engineering, and purchasing, on the other hand, will be advocating time fences as far out as possible, reflecting the fact that it takes time and money to change, and more time means less money. Without guidance from the general manager, an endless debate among the department managers will likely occur. The general manager needs to be actively involved in order to prevent this.
When George Bevis was the senior vice president at the Tennant Company, he described how he created time fences. Bevis got all of the parties in one room and announced that no one was leaving until they had agreement on where to set the time fences. Each department presented its case and, as expected, marketing and manufacturing were miles apart. After acknowledging that each department had valid reasons, Bevis then agreed with manufacturing’s recommendation, with one important condition. “Initially, I’m going to agree with manufacturing,” he said. “However, once we demonstrate that by sticking to the time fences we can ship product on time economically, then manufacturing will be expected to work with increasingly less time. We don’t know how good we are, but we do know how to figure it out. And no matter how good we become, we’ll continue to strive to get even better. My ultimate goal is to be faster and more economical than anyone we compete with.”
As Bevis well knew, control and change have equal importance when it comes to understanding time fences. Approving changes that cannot be implemented or can only be implemented at exorbitant costs is foolishness. The Keystone Cops are a good “ample: much change with little results. The purpose of identifying time fences is to operate with controlled actions. On the other hand, companies must strive for improvements, Shorter lead times have a tremendous payback to all key measurements of the company. They result in faster deliveries, fewer inventories, less obsolescence, less space, less cost, and higher profits.
The time fence issue deserves to be a high priority in any company. Every department should be expected to have an active program aimed at reducing their throughput time. Also, the general manager needs to know each department’s goals and to have ongoing measurements reflecting their progress. Don’t view time fences as poured in concrete; in fact, they can change as quickly and as easily as the company can. The future of your business is affected by them. If your competition is able to respond faster, it has gained a significant advantage. On the Other hand, if you can reduce your reaction times and thereby improve your response capability, you’re the one who’s gained the upper hand.
A critical aspect of Sales & Operations Planning is that it is an ongoing process. not a one-time event during which production levels are established. For each Sales & operations Planning cycle, the key players from each department compare actual results to plan, evaluate their performance, and prepare updated plans for the current period.
Sales & Operations Planning meetings should take place at least once per month. A month is usually a sufficient period of time to differentiate a trend from a minor variation or “blip.” but it is not so long that corrective action is no longer possible. Still, there are occasions when Sales & Operations Planning meetings must be held more frequently than once a month, depending on the nature of the company and the volatility of the marketplace. Companies that sell seasonal items, for example, might have to meet weekly prior to and during their peak selling periods. Summer comes only once a year; if you manufacture water skis and miscalculate your production needs, you’ve missed the boat,
Another cause for meeting more frequently or on a special basis is abnormal demand. When demand is suddenly noticeably higher or lower than normal, sales and marketing must decide if the demand represents real change or just a temporary anomaly. Perhaps it represents the beginning of a sustained trend, such as a new product’s taking off, or it may represent a temporary situation, as when a competitor experiences difficulty and his customers must look for interim suppliers. In any case. meeting more frequently to analyse the situation will help in understanding the short- and long-term implications of the unusual demand, and it will lead to making an appropriate response. The key point is that decisions about how to handle abnormal situations must be made in a timely fashion at the appropriate management level.
But what about companies that deal in supposedly stable or *’mature” markets, or those that manufacture capital equipment with long lead times (airplanes, power-generating equipment, etc.)? Can’t they realistically meet less frequently, perhaps quarterly, to discuss sales and operations issues? The answer is a flat no.
Consider the case of a heavy-equipment manufacturer that carried out its Sales & Operations Planning every three months. At one of its quarterly meetings the company’s managers were surprised by the bad shape they were in. There had been some small changes in orders for each of the past three months, but by the time three months had passed the changes had become significant, and the required changes in manning levels were severe. Much of this could have been avoided if the process had been performed monthly, because they would have surely noticed that a dangerous trend was emerging and could have taken more appropriate actions to avoid the drastic measures that were ultimately required. The bottom line is that it’s better to have a stand-up meeting with little 10 say than to wait for a meeting in which major surgery must be performed.
A number of companies have paid a hefty price for falling into the trap of believing that long lead times justify long review times. The question is not ‘ ‘How long does it take to make your product?” but “How long does it take to see the need to make changes in your sales and production plans?” Turning a tanker takes longer than turning a small boat, Both skippers. however, need to frequently check their direction to ensure that they are on course and have no obstacles and to initiate appropriate corrections, even though the time required to complete the manerver is radically different for the two boats.
Beginning the Sales & Operations Planning process requires a significant effort on the part of the sales, marketing, manufacturing, engineering, and finance departments. As a result, we often hear a number of general excuses for not getting started with the process. While none of them are valid, they can nevertheless become a major impediment to beginning the process. Here are the reasons commonly given for not moving forward:
We haven’t agreed on the families.
We don’t have all the data GO support the process.
We don’t have the mechanics to support the process.
The general manager doesn’t want to look at that much detail.
We’re a marketing-oriented company, and the general manager expects manufacturing always to say yes.
We can’t work as a team; I can do it but the others won’t,
Sales and marketing are in physically different locations from manufacturing—it’s hard to get together.
What? Another meeting? My calendar is already full!
We encountered a general manager who voiced several of these objections and was as a result extremely leery of beginning the Sales & Operations Planning process. In his opinion, each was a significant barrier and had to be resolved before bringing the group together and conducting formal meetings. We recognized, however, that this would be the same as never getting started. We also recognized that part of his reluctance was fear of the unknown. And even though some of the problems were legitimate, we had to convince him that they could be solved once the group got together.
“Look,” we said. ‘it’s like deciding to have kids—- there’s never a perfect time. If you wait until you’re ‘ready’ to start Sales & Operations Planning, you may never do it. Besides, even if you have every. thing in order, it’s going to take a number of sessions to really refine the process. So get started now!”
He agreed but asked, “What do I do now?” We gave him a rough draft of this book so that he could get the process rolling. He also sent a memo to his staff outlining what needed to be done, Before the first meeting, each Sales & Operations Planning team member was required to review a video session of Sales & Operations Planning I and read the rough draft of the book in order to be prepared.
At the first meeting (which wasn’t really a Sales & Operations Planning was a Sales & Operations Brainstorming meeting), everyone discussed how Sales & Operations Planning would impact their specific departments. The issues were dealt with one by one until all participants had a good sense of what the steps entailed and what kinds of benefits the company and each department could expect to reap, along with what was required to support the planning process.
Also, everyone was to return to the next meeting with specific recommendations for how the process could work most effectively. In addition, the sales and marketing people began compiling data for comparing actual to planned sales and for documenting their assumptions about the marketplace. (As you’ll see in the next chapter. there are standard homework tasks that all departments must complete before the monthly Sales & Operations Planning meeting.)
At the second meeting the Sales & Operations Planning group finalized the families and had sufficient data to step through the process. After the meeting concluded, the general manager expressed a worry to us that the process took too long and involved too much detail. We reassured him by saying, “Sure, we know you’d like to have everything boiled down to one by 8 ” sheet of paper. But to really get control of your business. in the beginning we strongly suggest that you accept the fact that there might be a fair amount of detail. Then, as you get better at the planning process, reduce the detail that gets reviewed at the meeting if it does not contribute to the overall planning effort. Eventually you’ll reach a comfortable level.”
Although the general manager recognized that the process wasn’t going to be perfect for a while, he did feel better about the prospects because the group had generated a lot of good questions and had made some decisions. Moreover, he had implemented the “ready, fire, aim” principle of action described in the best-selling book In Search of Excellence, by Peters and Waterman. We think this is important, because as we’ve seen in countless companies, action is the key to generating results.
By the third meeting, the company was carrying out genuine Sales & Operations Planning. Within a few months, everyone began seeing positive results as the production was better synchronized to customer demand. Within six months, the company had developed the process to the point where it was obtaining substantial benefits. These included a better handle on inventory and more realistic production plans.
Does all (his sound too simplistic? In a way, the process is simple. It does Lake hard work to make Sales & Operations Planning function efficiently, but more than anything else. it’s a matter of attitude. The barriers to performing Sales & Operations Planning can be overcome by the simple resolution that you will overcome them.
A business plan sets forth strategic objectives; Sales & Operations Planning updates the business plan against the realities of the marketplace and the internal workings of the company.
Before doing Sales & Operations manning, you must be willing to commit time and people to an ongoing process, A core group must attend every Sales & Operations Planning meeting with adequate preparation.
At the minimum, Sales & Operations Planning meetings must take place on a monthly basis. Seasonal demand and periods of abnormal demand may require more frequent planning sessions.
Sales and marketing often view families in terms of product lines, while manufacturing typically sees them as a matter of process, Frequently these are the same, but when they do differ. you must have a conversion method.
The only right time to stan Operations Planning is today! No company does a perfect job of Sales & Operations Planning from the Stan; it gets better over time. Be patient with the aging process and you ‘Il taste the rewards of your efforts.
The planning horizon must extend out at least one year and possibly longer depending on lead times, market conditions. competition, and other factors that affect supply and demand.
Establish both material and capacity lime fences for changing rates of output for each product family; make sure everyone understands the implications of introducing rate changes. All departments should make an active effort to reduce them, and should be measured on how well they are accomplishing this goal.
A business plan sets forth strategic objectives; Sales & Operations Planning updates the business plan against the realities of the marketplace and the internal workings of the company.
Before doing Sales & Operations manning, you must be willing to commit time and people to an ongoing process. A core group must attend every Sales & Operations Planning meeting with adequate preparation.
At the minimum, Sales & Operations Planning meetings must take place on a monthly basis. Seasonal demand and periods of abnormal demand may require more frequent planning sessions.
Sales and marketing often view families in terms of product lines, while manufacturing typically sees them as a matter of process. Frequently these are the same, but when they do differ, you must have a conversion method.
The only right time to stan Operations Planning is today! No company does a perfect job of Sales & Operations Planning from the Stan; it gets better over time. Be patient with the aging process and you will taste the rewards of your efforts.
The planning horizon must extend out at least one year and possibly longer depending on lead times, market conditions. competition, and other factors that affect supply and demand.
Establish both material and capacity time fences for changing rates of output for each product family; make sure everyone understands the implications of introducing rate changes. All departments should make an active effort to reduce them, and should be measured on how well they are accomplishing this goal.

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