30K Feet view - Organizations as flow entities
History bears witness that rivers have played a very important role in making and sustaining ancient civilizations. Rivers offered two main advantages to a developing civilization. They provided water to irrigate the fields, and they offered the easiest method of transport for a society without paved roads.
Can this lesson from history be useful for identifying what organizations need to do to be successful?
Can we imagine a similarity here?
The profit potential for various stake holders as water for irrigating the fields and the movement of material as a method of transformation for the society.
Organizations – A flow concept
A satellite image of a river basin depicts how water from various sources (tributaries) combines to form a river which flows some distance and then again gets divided into distributaries. The water flows from origin of river towards the ocean under the force of gravity. Every drop of water that vacates space by dissolving into ocean is replaced by another drop from the source. It is a perfect ‘pull-mechanism’.
If we take a thirty thousand feet view of most manufacturing and distribution organizations, it would resemble the image of the river (Production Operations) with all the tributaries (raw material and component vendors) and the distributaries (supply chain channels) to reach sea ( end customers). Once we take this view, it becomes clear that the organization is well served by making the flow even across the whole system and then finding ways of increasing the flow.
Current practices in planning and execution - overview
An important aspect of this view is that the flow, in case of manufactured products, is decided by the end customers who chose to buy or not buy a particular SKU. What is visible has a chance to be sold. Only when a product is available at the retail shelf, it stands a chance to be in the consideration set for the buyer.
Although, on the surface it might appear that it is various decision makers in the organization who influence what would be sold and what would not be sold, where and when, slightly scratching the surface, we would realize that such a notion is highly delusionary. The known facts of surpluses and shortages, as well as many new products failing to catch the fancy of customers at the retail end, clearly point towards the inevitable conclusion that most of the times the decisions taken are wrong.
We tend to read this phenomenon as an indication that our decision making process is imprecise or the inputs required to arrive at the decisions are incomplete. We continue to refine our decision making models by taking feedback from the variances in what was planned and what actually happened. We also try to increase the variables and the inputs we use in our models to arrive at the right decisions.
We also notice that the two activities of planning and execution are taken as very separate activities and in most of the cases, done by different set of people. The planning functions with their precise looking models hold an upper hand. The plans created for the year or quarter or month are taken as a benchmark and the variance is calculated by comparing how the actual strayed away from the plan due to improper execution. Sometimes, a concession is given to accommodate the fact that there is possibility that the plans are not correct by creating what is known as rolling plan. The rolling quarterly plan would mean that the immediate month plan is fixed and the remaining two month plan is open for change based on new inputs as well as how the actual pans out for the first month.
There are two levels at which exercise of planning and execution goes on.
The first involves regular operations and it involves which SKU in what quantity would be sold in which retail outlet in a particular period of time. This involves regular conversion of raw materials into finished goods and transferring the finished goods closest to the point of planned sale. There is an element of certainty in the plan which guides us to move entire planned quantity to the location closest to point of sale.
The second level involves conversion of ideas into new products and preparing the operations to roll out the new products. Again very precise plans lead to reserving operation capacity and even raw materials based on new product production plans.
The game of catching up between the planning and execution continues month after month, quarter after quarter and year after year. Even when, with lot of hard work and ingenuity execution is close to the plan, we have mechanisms to cover up how the plan did not live up to the actual or in other words “Reality”. We cheer the shortages by labeling them “Sold Out” and the surpluses by labeling them opportunities to get new customers through “Discount Sale”.
It would be worthwhile to step back for a moment and examine the basic premise of any plan as depicted above. We realize that all planning activity is founded on a notion that we can come up with forecasts which are reasonably accurate and also it is possible to make very precise forecast drilling down to the SKU, place, and period etc level.
It seems reasonable that we have to have an overall forecast, based on PESTLE (Political, Economic, Social, Technological, Legal and Environmental) factors, to provide us a direction in which the market as a whole is likely to move in next few quarters.
But taking this larger forecast and breaking it down into precise plans at SKUs level stretches the limit of credulity that we subject ourselves to.
We take these SKU level precise looking plans and inflict them on the people who are responsible for execution, sales and production. It is a given that the actual would always to different from plan. But instead of questioning the planning processes or the planners, it is the people on the field or the shop floor who have to come up with the reasons for ‘variances’ during the regular ‘reviews’ – monthly, quarterly, annual. We throw scarce and costly resources (top management time)in this futile exercise and continue to exert efforts to live up to the plan. We observe in most such review exercises a lot of time is devoted on understanding how the variances have panned out and then arguing on variety of hypothesis on why this has happened. A very little time is then devoted to how best to move forward into future. The moving forward into future is always within the boundary of the plan.
An annual business plan becomes a sacred document and is used to decide various incentives. The linkage of individual rewards based on performance against the plan creates a new level of gaming that goes on in the organization. People know that the plans being asked from them are most likely to be bumped up and converted into targets which they would have to meet. People tend to under project as they know that there will be demand to have stretch target and there will be some increases. At the time to of execution also people tend to be conservative and moment they are closer to achieving the target; they try to limit the actual within 10-20% above the plan. They know that next year’s target would be based on this year’s actual. If they are likely to continue in the same organization in the same role, it would create an difficult situation when they have to achieve even higher target. We find it very rare that someone goes 100% or 200% above plan.
A better way?
Going by the above analysis, it would appear that detailed planning for production, supply chain and procurement based of forecasts, and executing the operations to meet these plans is quite unproductive. We have to find a way if at all it is possible to function without forecasts or with minimal forecast at the broadest possible level.
For that, we need to understand how the practice of generating forecasts came about. We realize that initially forecasts were required when the mode of communication and transportation were primitive and there was a huge distance in terms of space and time between production and consumption. In other words that all the components of lead time – Order Lead Time, Production Lead Time and Transportation Lead Time were large due to the status of the available technology of production, transportation and communication. Practice of forecasting was developed to overcome the limitation that businesses had to operate with i.e. execute for demand for products based on information which was delayed by a long period of time.
Over the period these technologies have improved manifold. But organizations continue to follow the ‘business rule’ created at a particular time when power of technology was limited. This ‘business rule’ is treated almost like a commandment – “There shalt be a forecast and thou shalt strive to achieve the forecast”. With the advent of technological advances, especially those in Information and Communication Technology, it is time to relook at the efficacy of the business rule of forecast.
The limitation need no longer be there. Can the business operations work to meet the reality as it actually unfolds rather than having a fixed notion of forecast based plan? Can we establish a ‘pull-mechanism’ to dictate what the upstream needs to supply?
Does it drastically change the way organizations are run?
A simple reflection will tell us that the nature of transactions will not change at all. Procurement will continue to deal with and place purchase orders on vendors, operations will continue to convert raw materials into finished goods and ship them to market, sales and marketing people will continue to be on the field to improve sales and marketing of the products. Only the decision making criteria for these functions would have to be reworked.
Planning and execution would be perfectly in synch.