Does Your Demand Planning Process Include a “Quantitative Reasonability Range Check”?

There is a process that should be part of both your demand planning and your sales and operations planning.  The concept is simple – how do you find the critical few forecasts that require attention, so that planner brainpower is expended on making a difference and not hunting for a place to make a difference?  I’ll call it a Quantitative Forecast Reasonability Range Check (or maybe QRC, for short).  It may be similar in some ways to analyzing “forecastability” or a “demand curve analysis”, but different in at least one important aspect – the “reasonability range” is calculated through bootstrapping (technically, you would be bootstrapping a confidence interval, but please allow me the liberty of a less technical name – “reasonability range”).  A QRC can be applied across industries, but it’s particularly relevant in consumer products.

At a minimum, a QRC must consider the following components:

1. Every level and combination of the product and geographical hierarchies
2. A quality quantitative forecast
3. A prediction interval over time
4. Metrics for measuring how well a point forecast fits within the prediction interval
5. Tabular and graphical displays that are interactive, intuitive, always available, and current.

If you are going to attempt to establish a QRC, then I would suggest five best practices:

1.  Eliminate duplication.  When designing a QRC process (and supporting tools), it is instructive to consider the principles of Occam’s razor as a guide:

– The principle of plurality – Plurality should not be used without necessity

– The principle of parsimony – It is pointless to do with more what can be done with less

These two principles of Occam’s razor are useful because the goal is simply to flag unreasonable forecasts that do not pass a QRRC, so that planners can focus their energy on asking critical questions only about those cases.

2. Minimize human time and effort by maximizing the power of cloud computing.  Leverage the fast, ubiquitous computing power of the cloud to deliver results that are self-explanatory and always available everywhere, providing an immediately understood context that identifies invalid forecasts. 

3. Eliminate inconsistent judgments.  By following #1 and #2 above, you avoid inconsistent judgments that vary from planner to planner, from product family to product family, or from region to region.

4. Reflect reality.  Calculations of upper and lower bounds of the sanity range should reflect the fact that uncertainty grows with each extension of a forecast into a future time period.  For example, the upper and lower limits of the sanity range for one period into the future should usually be narrower than the limits for two or three periods into the future.  These, in turn, should be narrower than the limits calculated for more distant future periods.  Respecting reality also means capturing seasonality and cyclical demand in addition to month-to-month variations.  A crucial aspect of respecting reality involves calculating the sanity range for future demand from what actually happened in the past so that you do not force assumptions of normality onto the sanity range (this is why bootstrapping is essential).  Among other things, this will allow you to predict the likelihood of over- and under-shipment.

5. Illustrate business performance, not just forecasting performance with sanity ranges.  The range should be applied, not only from time-period to time period, but also cumulatively across periods such as months or quarters in the fiscal year.

If you are engaged in demand planning or sales and operations planning, I welcome to know your thoughts on performing a QRC.

Thanks again for stopping by Supply Chain Action.  As we leave the work week and recharge for the next, I leave you with the words of John Ruskin:

“When skill and love work together, expect a masterpiece.”

Have a wonderful weekend!

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Metrics, Symptoms and Cash Flow

Metrics can tell us if we are moving in the right or wrong direction and that, in itself, is useful.  However, metrics by themselves do not help us assess our competitive position or aid us in prioritizing our efforts to improve.

To understand our competitive position, metrics need to be benchmarked against comparable peers. Benchmarking studies are available, some of them free.  They tell us where we stand relative to others in the industry, provided the study in question has sufficient other data points from your industry (or sub-industry segment).

Many times, getting relevant benchmarks proves challenging.  But once we have the benchmarks, then what?

Does it matter if we do not perform as well as the benchmark of a particular metric?  If that metric affects revenue growth, margins, return on assets, or available capital, it may matter significantly.

But, we are left to determine how to improve the metrics and with which metrics to start.  

Consider an alternative path.  Begin with the undesirable business symptoms that keep you up at night and give you that bad feeling in the pit of your stomach.

Relate business processes to symptoms and map potential root causes within each business process to undesirable business symptoms.

Multiple root causes in multiple business processes can relate to a single symptom.  On the other hand, a single root cause may be causing multiple undesirable symptoms.  Consequently, we must quantify and prioritize the root causes.

“Finding the Value in Your Value Network” outlines a straightforward, systematic approach to prioritizing and accelerating process improvements.  I hope you will take a look at that article and let me know your thoughts.

Thanks for having a read.  Remember that “You cannot do a kindness too soon, for you never know how soon it will be too late.”

Have a wonderful weekend!

Accelerating and Prioritizing Process Improvement Efforts

Process/Symptom/Value Matrix

If the supply chain were (as the term implies) really a linear, sequential relationship of entities exchanging goods, information, and currency in a binary, stepwise flow, it might not be quite so difficult.

However, you know that the supply chain really is a complex network of inter-dependent people, organizations and fixed assets, and that goods, data and currency pulse from node to node in almost any direction following the path of least resistance.

This “value network” contains the money you seek.  But, since the movements of material, data and cash are continuous, dynamic, and interdependent, the benchmarking results that tell you that you have some aggregate potential do not often change, despite your efforts to the contrary.

You don’t have a crystal ball, but you still need to make higher quality (i.e. more profitable/valuable) decisions in less time.

How do you prioritize your efforts to attack undesirable business symptoms with better decision processes so that revenue growth, return on net assets, and profitability are increased?

Let’s start with what we know.

We know the undesirable business symptoms.  These are the measurements that make our sleep fitful, cause our hair to turn gray, churn our stomachs, and make some business meetings uncomfortable.

Undesirable business symptoms directly and negatively impact financial measures that determine the value of the enterprise (e.g. Economic Value Added or EVA^® ).  We want to ameliorate these symptoms.  A symptom that does not significantly inhibit revenue growth, return on net assets, or margins can be addressed as a secondary priority.

The problem is that the undesirable business symptoms are aggregate measures.  They require decomposition in terms of the root cause.  A Process/Symptom/Value Matrix (PSV Matrix) relates business decision processes to symptoms, ultimately allowing us to link potential root causes within each decision process to undesirable business symptoms.

For more on this idea, I’d be honored if you had a look at my short paper, “Finding Value in Your Value Network“.

Something else to ponder about as you head into this weekend is the motto of the State of New Hampshire, “Live free or die,” spoken by General John Stark on July 31, 1809.

Take good care and have a wonderful weekend!

The Opportunity in Health Care

In what industry is the potential to improve results while reducing costs the greatest? 

The title to this blog post gives the answer away, but you might ask yourself, “Seriously, could that be true?”

It’s Friday, and I’m on a plane with the September 2011 Harvard Business Review.  I have a passion for applying the principles of operations management to health care and some of us at e2e have done work in the space, but “How to Solve the Cost Crisis in Health Care,” by Harvard professors Michael Porter (If you haven’t read Competitive Advantage, you need to.) and Robert Kaplan (Think activity-based costing and Balanced Scorecard™) really lays out the contrast in the way operations are managed in healthcare as opposed to other industries.  It isn’t the first time Porter has written on the topic.  I read his 2006 HBR article, and although I always intended to read his related 2006 book (Redefining Health Care:  Creating Value-Based Competition on Results, co-authored with E.O. Teisberg), it is still on my list of books to read.  Ever since then, I have wondered how any debate on healthcare, much less any legislation or regulation could take place without guidance from Porter.  Maybe that dialog with Porter has taken place, but I don’t think you could infer that from the public dialog or the legislative and regulatory results.

If you read my piece on “Finding Value in Your Value Network,” you know about the PSV Matrix and how it can help prioritize and accelerate process improvement.  That can also be useful in healthcare . . . someday, but at the moment, some of the basic building blocks for process improvement are just not there.

Kaplan and Porter argue that there health care organizations have a “complete lack of understanding” of the costs to deliver care and how to compare those costs with outcomes.

WOW!  So, good luck with legislative efforts to control costs and improve outcomes with across the board cuts to reimbursements . . . and I’m not making any comment on any particular legislation, regulation, person or political party.  But charges do not equal costs and reimbursements may equal neither.

If you don’t understand your costs, then you can’t link them to either outcomes or process improvements.  The game is over before you start.

Kaplan and Porter argue that the proper goal of health care delivery is “patient outcomes achieved per dollar expended”.  That means that both costs and outcomes must be measured at the patient level, with outcomes considering survival, ability to function, duration of care, discomfort, and complications.  But, if costs are wrong and outcomes aren’t tracked, you don’t have much hope of improving either.

They propose Time Based Activity Based Costing (TBABC) and walk through an example of how to do it.  With accurate costs and outcome data, you can forecast demand, predict the resources required to meet demand, and plan and manage capacity.  You can also standardize processes and increase quality while at the same time lowering costs.  With this kind of basic foundation, the PSV Matrix can be configured for healthcare and the principles of process improvement rigorously applied.  What’s more, health care policy can focus on fostering competition and value-based reimbursement.  “Those organizations and care-givers that deliver desired health outcomes faster and more efficiently, without unnecessary services, and with proven, simpler treatment models will not be penalized by lower revenues.”

Neither the authors, nor I, are making any political point.  This is about operations and how to improve them in healthcare.  I will say that any policy that is not informed by these insights will not have the desired outcome.

My review of the article here doesn’t do it justice, but if you work in healthcare or are interested in the topic, this article and Porter’s other work in the space is a must read.  The article in the September 2011 HBR is Reprint R1109B.  I plan to order a couple of copies for friends.

I’m still on the plane.  I’m returning from San Francisco where I had the chance to attend the IBF Supply Chain Planning and Forecasting Conference where I heard a terrific presentation by John Brown of The Coca-Cola Company on supply chain risk management.  If you are part of my LinkedIn network or follow me on Twitter, you saw or can see some of the highlights of that presentation.  I also had the opportunity to listen to other great sessions led by leaders within their respective organizations and to network with lots of supply chain professionals.  Well done, IBF.

I won’t be back home until after midnight.  No complaints.  It was my choice, but I hope your Friday wasn’t spent on a plane and that your weekend will be wonderful.

Thanks for reading.

Finding Value in Your Value Network

This is the second week that a piece that I wrote with my good friend and long time manufacturing executive, Mike Okey, is featured in Supply Chain Digest.  We have created an approach for prioritizing and guiding process improvement efforts that we think is straightforward and ties directly to the value of the enterprise.  Mike and I spent a great deal of time working on this concept, and we believe it is not only applicable in manufacturing but that it can also be easily adapted to service industries.  As a consequence, for this Supply Chain Action, I’m simply going to leave you with a link to the complete article.  Please have a look.  I hope that you find it useful.  Mike and I would welcome your feedback.

You can find the entire text of the paper here:  http://arnoldmarkwells.com/images/Finding_the_Value_in_Your_Value_Network_SCD.pdf

You can find the link to Part 1 of the article in Supply Chain Digest here:  http://www.scdigest.com/experts/guest_11-09-13-1_Finding_Value_In_Value_Chain.php?cid=4949

The link to Part 2 is here: http://www.scdigest.com/experts/11-10-13_Finding_Supply_Chain_Value.php?cid=5064&ctype=content#sf

The Process/Value/Symptom Matrix

I’ve been working on a concept and paper for a few years now, off and on.  I’ve collaborated with manufacturing industry veteran, Mike Okey, and we’ve gathered input from other supply chain experts.  We have been fortuntate to have been published by Supply Chain Digest in their “Supply Chain Comment” section. 

Mike and I have devised a Process/Symptom/Value (PSV) Matrix that provides a useful perspective for proritizing process improvement efforts by relating business decision processes to undesirable business symptoms and their impact on the drivers of enterprise value.   

You can read the first installment of the article at the link below, and I hope that you will take a moment to do so.

http://www.scdigest.com/experts/guest_11-09-13-1_Finding_Value_In_Value_Chain.php?cid=4949