Prerequisite #3: Flow-Based Metrics.
The DDAE model uses different metric emphases within each of the operational, tactical and strategic relevant ranges to promote and protect flow today and into the future. Operational metrics emphasize reliability, stability and velocity to determine relevant information and materials in the Operational Relevant Range. Tactical metrics emphasize system improvement, waste reduction, local operating expense control, total system contribution and additional potential (volume and rate) in order to determine relevant information and materials in the Tactical Relevant Range. Strategic metrics emphasize contribution margin, working capital control and customer base control and development.
In each case there is a metric objective and a message behind the metric. This allows companies to build business specific metrics that fit these objective and messages within their unique Demand Driven Operating Model and market circumstances.
Since all of the metric objectives in each relevant range are designed specifically for flow, the relevant ranges directly connect to each other through the iterative connections between the three components of the DDAE model.
Prerequisite #4: Tactical Reconciliation between Relevant Ranges.
Traditionally there has been a disconnect – a missing link – in the Sales and Operations planning process. S&OP has fundamentally tried to manage the portfolio and new activities, demand and supply while reconciling these with the business plan with a management business review. Successful S&OP implementations have provided a robust process where the management examines marketplace information to pass a doable business plan to operations that meet the financial business requirements. However, that connection traditionally has been through a master production schedule – a statement of what can and will be built – a single number – that feeds the formal planning system. This has resulted in an organization that cannot easily sense changes in demand and adapt planning and production because it is tied to that single number.
A good S&OP plan is a range – an expected number with a pessimistic lower range and an optimistic upper range. This range represents the intended strategic direction from the executive team. However, traditional formal planning cannot calculate from a range. The MRP system needs a demand plan that is precise in quantity and timing. This is the chasm that must be crossed and traditionally the MPS is used. However, this is like trying to cross the Grand Canyon on a single wire. If you can balance precisely and nobody disrupts that wire, you may get to the other side rather than falling to your death. The volatile uncertain, variable and complex world we must now manage is like someone shaking that wire and having gale force winds coming through the canyon at the same time.
Now with the DDAE Model, the S&OP strategic range can be coupled to a compatible operational capability – no MPS is required. The S&OP plan by family is translated to the required decoupling positions that are necessary to define the operational capability. This is not simply a disaggregation of the product family forecast to the SKU level schedule. The intended strategy with respect to response time, inventory investment, space utilization is reflected in the DDOM design.
A new bridge is required to cross this canyon – that bridge is DDS&OP. Demand Driven Sales and Operations Planning (DDS&OP) is a bi-directional tactical reconciliation hub in a Demand Driven Adaptive Enterprise (DDAE) Model between the strategic and operational relevant ranges of decision making. DDS&OP sets key parameters of a Demand Driven Operating Model (DDOM) based on the strategic information and requirements output of the Adaptive S&OP process. DDS&OP also projects the DDOM performance based on this strategic information and requirements and various DDOM parameter settings. Additionally, DDS&OP uses variance analysis based on past DDOM performance against critical relevant metrics (reliability, stability and velocity) to adapt the key parameters of the DDOM and/or recommend strategic changes to the business.
DDS&OP has five basic elements:
- Tactical Configuration/Reconciliation – shaping the DDOM to match the evolving business plan.
- Tactical Review – variance analyses of reliability, stability and velocity metrics in the DDOM.
- Tactical Exploitation – short range supplements to flow when/if necessary.
- Tactical Projection – projecting model performance under different scenarios for strategic impact, evaluation or development
- Strategic Recommendation – ideas/innovations for better DDOM performance needing senior–level approval.
The most significant impact of DDS&OP is that now S&OP can realize its intended objective – an adaptive process that effectively manages and embraces change. In addition, DDS&OP makes the success of the demand driven operating model sustainable. This leaves the final component of the DDAE model to address; Adaptive Sales and Operations Planning (Adaptive S&OP).
Adaptive Sales and Operations Planning is the integrated business process that provides management the ability to strategically define, direct and manage relevant information in the strategic relevant range across the enterprise. Market Driven Innovation is combined with Operations Strategy, Go-to-Market Strategy and Financial Strategy to create strategic information and requirements for tactical reconciliation and strategic projection to effectively create the desired future, drive adaptation and manage change.
Adaptive S&OP starts with asking strategic and critical questions. Market Driven Innovation it is about answering one question – how will we innovate to sustain and grow market pull in the future? Those answers are fed to Adaptive S&OP where three basic questions are answered:
- What are we going to sell at the family level over the strategic time frame, where are we going to make it and how do we get it to the market?
- What capabilities do we need over the strategic time frame and how does that compare to our current capabilities?
- What financial performance and factors are relevant over the strategic time frame? How does this change the overall expected company performance?
The answers to these questions are then reconciled strategically by the senior management team. This team would include representation from the Demand Driven S&OP Integrated reconciliation team to assure alignment across the company. The result of this reconciliation produces a realistic business plan and the defined capability that is sent to the DDS&OP process. Demand Driven S&OP also provides validation and simulation capability for the business plan desired parameters scenarios that may lead to adjustments in the business plan.
The senior management team now has a robust process to develop a doable business plan that is responsive to the market. These business plan parameters are then sent to the tactical part of the S&OP process, Demand Driven S&OP, for tactical reconciliation. The Demand Driven S&OP process returns signals about the performance of the operating model, validates the business plan parameters and then suggests validation and suggested innovations needing senior level approval. This can be things like new potential markets, new products or additional capital investment requirements.
Together Demand Driven S&OP and Adaptive S&OP create a robust and complete organizational S&OP process that can exploit the capability of the DDOM and ensure the financial success of the enterprise. In the next blog we will discuss the series of steps necessary to become a demand driven adaptive enterprise.