“Risky Business: Planning and Budgeting Diminish Risk” is part two of a four-part series on the relationship between risk and technology in business supply chain. Miss any previous articles? Get caught up:
- Part 1: Risky Business
- Part 3: Risky Business: Configuration and Estimating Eliminate Risk.
- Part 4: Eliminating the Risk of Supply Chain Disruption and Volatility.
For manufacturers, the planning and budgeting process is really simple. First, figure out what people want to buy. Second, buy all of the supplies and parts. Third, build the products and finally start taking orders.
Piece of cake, right?
No? I bet that first step has you stumped.
Advanced manufacturers know that allowing customer demand to drive their overall business strategy eliminates much of the planning risks associated with product decisions, revenue targets and capacity planning. But, making a mistake in this calculation can be disastrous, especially if you are locked into an annual plan that allows little deviation or mid-course correction.
Wanna buy a Hula Hoop?
Somewhere out there is a warehouse filled with unsold hula hoops. These were made by a company that waited too long to jump into this recreational craze of the late ‘50s. Their planners no doubt had kids of their own twisting away in the living room, on Saturdays in the park or in neighborhood yards after school. As is often the case in business, the money that’s to be generated is made by those who get there first.
Today, company planners would know if the game was over or just warming up. They would know if they have visibility into the supply chain, what supplies are being pulled by the market, the lead time on orders for certain parts or materials and if the prices for certain supply items are stable, dropping or strongly advancing.
Too Little is Just as Bad as Too Much!
The answers to these questions are all indicative of specific trends. If an item is in short supply, subject to long lead times or priced much higher than previous purchases, you can be sure that someone is making those purchases to address an identified demand.
Miscalculations in this area are famous. In 1983, Cabbage Patch Kid dolls were in such short supply in the run-up to Christmas that fights were breaking out in toy stores over the rapidly dwindling stock. Hoarders were buying up advanced inventory and selling way above market list.
Supply Chain Visibility
Supply chain management software can advise manufacturers that materials are nowhere to be found or are available dirt cheap because their competitors are pulling back on orders.
Quality enterprise resource system (ERP) reporting systems provide hard data on costs, throughput and other planning data associated with estimating production cost for different types of products.
Additional data can be provided by customer resource management (CRM) and order management systems to facilitate market sizing estimates and intelligent revenue potentials.
Another element in the planning process is the role that Sales must play in the market estimates. They talk to customers every day, and they know what customers want to buy, what issues are driving their decision-making and even how the provided product/solution will deliver value to the end-user.
Don’t Forget Sales!
Sales must be part of the planning discussion. Their technologies, CRM, Guided Selling, CPQ (configure-price-quote) systems and other front-office tools all maintain useful data for the planning and budgeting process.
Today, most advanced manufacturers embrace a demand model. This means that little or no money is spent until an order is actually received. The order kicks off the process of purchasing supplies and the allocation of production resources. Annual planning is more about general expectations of business activity and building flexibility into the plan for the coming year.
Companies can’t afford to gamble with product decisions. Their systems must give them the visibility they need to discern market trends and directions.
You have to anticipate the future. Technology can help.