ADAPTIVE S&OP: NOT JUST A MEETING!: Integrated reconciliation and new strategic tools for visibility of relevant information and scenario planning

Adapt or Die: the significant need of an adaptive model for a VUCA world

We have been taught to live in a world of discrete and exact numbers: exact amounts by item to sell monthly in a sales plan, static parameters in business plans for this year, precise values in annual budgets, and specific actions that are based on the fulfillment of all those numbers. That's fihttps://www.dhirubhai.net/pulse/new-adaptive-enterprise-mba-ddlp-ddpp-sop-toc-and-lean-expert/ne in stable and predictable environments. But if you read our first article "the new adaptive enterprise", you will see why we need new adaptive business models built for the new normal with volatile, uncertain, complex and ambiguous (VUCA) environments, able to make operational decisions without precise numbers, analyzing multiple tactical and strategic scenarios and avoiding that the variability and complexity that we face that causes damage to the business.

We need to do what the surviving species do in biology: adapt… or die.

In order to face this volatile and complex world, we can deploy an adaptive model designed on the same assumptions that adaptive agents in Biology and other sciences use in order to adapt themselves to their changing environments. These are called complex adaptive systems (CAS). The following figure describes the Demand Driven Adaptive Enterprise (DDAE) model developed by the Demand Driven Institute:

Copyright 2020 Demand Driven Institute, all rights reserved, used with permission

Integrated Reconciliation

Many managers and professionals believe that S&OP is just a meeting or preparing for the meeting and the process is all about the meeting. However, Integrated Reconciliation (IR) is the integration element of the Adaptive S&OP process that interacts bidirectionally with Demand Driven S&OP. DDS&OP is also the tactical reconciliation element of a Demand Driven Adaptive Enterprise (DDAE) model and provides the hub for the two adaptive loops (strategic and tactical). Unlike the pre-meeting of a conventional S&OP process, integrated reconciliation is a continuous process of collaboration, not one single monthly meeting. Integrated reconciliation is fundamentally a collaborative and transversal process of crossfunctional communication between human beings. The objective is to document the underlying assumptions and provide visibility of emerging relevant changes (variability) as early as possible, in order to analyze and agree on the necessary actions to adapt the business plan and the work teams as soon as possible to achieve the results expected. This adaptation process must also mitigate the negative effects produced by these changes and exploit the inherent potential of the opportunities that those changes generate. Integrated reconciliation is not just producing numbers on a spreadsheet for a meeting.

Reconciliation is a continuous process of collaboration, not one single monthly meeting

The general objective of the IR process is to make relevant changes visible, manage variability and ensure that the company remains focused on improving and protecting the flow of relevant materials and information to maximize the return on the investment. The IR process answers questions such as:

ü What will be the relevant changes that the company is likely to face?

ü Do we understand the assumptions that explain these relevant changes?

ü Do we understand the impact of these changes? 

ü What decisions have been or need to be made to adapt the company to these changes?

The general objective of the IR process is to make relevant changes visible...

The Integrated Reconciliation Team (IRT) leads the IR process and interacts and supports the senior management team to provide relevant information. The IRT also interacts with the Demand Driven S&OP team supporting the tactical adaptation loop of the DDAE model. This bi-directional process need was identified by Dick Ling and Andy Coldrick almost 20 years ago in “Breakthrough S&OP” and is now possible leveraging the Demand Driven Adaptive Enterprise model.

Copyright 2020 Demand Driven Institute, all rights reserved, used with permission

The IRT is made up of company′s leaders and executives or good candidates for future executives from the different functional areas required to participate in the IR process. These include finance, new product development, marketing, sales, planning, purchasing, production, logistics and supply chain. These team members will dedicate part of their time to the IR process (usually more than 25% of their time. In large companies this could be a full time job). From these members, it is necessary to appoint a team leader who requires a greater dedication of time. The main IRT task is to synchronize the entire transversal process of communication and crossfunctional consensus.

In order to know more about Integrated reconciliation and its role in a Demand Driven Adaptive Enterprise (DDAE) model, please refer to “Sales & Operations Planning: Integrated Reconciliation”, a white paper written by Dick Ling and the Demand Driven Institute and published at www.demanddriveninstitute.com.

Sources of changes

The IRT must ensure that all relevant information necessary to detect significant changes is collected from each of the defined processes or inputs. Since a properly configured IRT has members that are part of these individual processes, each member must be chartered to meet with their process area in order to research and document the relevant changes that may have been generated in the last cycle from the following possible sources:

copyright 2020 Demand Driven Institute, all rights reserved, used with permission

Documentation of changes and work with key suppliers and customers

From these varied sources, the relevant changes in endogenous or exogenous variables in the next strategic relevant range (starting at one cumulative lead time in the future) should be identified in each area / process. With each identified change, the designated IRT member briefly documents the change′s history, an explanation of the probability of the change occurring, and an explanation of the magnitude of the negative or positive impact to the business, and identifies in what time period (months) the company will experience this impact.

For example, the following table shows an illustration of identified changes in a real business case:

Key suppliers and customers need to be invited into the process at this point, as they are an important source of information and market intelligence. These key stakeholders have information that the company does not have. To this end, the designated members of the IRT for the processes or departments that relate to customers and suppliers must also meet with these key stakeholders to identify relevant changes.

Correlation analysis

At this point in the adaptive S&OP cycle, the IRT has identified changes and scenarios for the business in the next strategic relevant range. However, not all changes necessarily produce a reaction by the company. Analyzing a multitude of related changes will increase the complexity of the analysis and will also increase the ambiguity in the interpretation of these data. Irrelevant information will be mixed with the relevant information, and the generated “smoke screen” could lead to a deterioration of the quality and reliability of management decisions. Therefore, it is necessary to find out what changes will cause a disruption that is systemically significant to the company. In order to dominate this complexity, managerial attention must focus on the few vital points or degrees of freedom that would impact the stability of the company as a system. These are relevant changes and in the field of business strategy, these demonstrate changes in visibility, complementing the Plossl equation below:

Source: Ptak, Carol and Smith, Chad. The Demand Driven Adaptive Enterprise. Page 29. Industrial Press, Inc. 2018

Irrelevant information will be mixed with the relevant information, and the generated “smoke screen” could lead to a deterioration of the quality and reliability of management decisions

Defining the relevant changes is not a trivial issue. Relevant changes are the focus of management attention throughout the strategic adaptive cycle and deserves all the effort required. Making relevant changes visible is one of the weaknesses of conventional S&OP and strategic planning methods and is a differentiating element of adaptive planning models. Adapting to all identified changes is the recipe for generating amplifying effects of variability (such as the nervousness effect, bullwhip effect or the butterfly effect) which destroys the adaptive capability of any system, company or supply chain. This is true not only for management decisions related to business strategy, but also for decisions in the tactical and operational relevant ranges.

Adapting to all identified changes is the recipe for generating amplifying effects of variability

In order to determine what the relevant changes are, the probability of occurrence and the impact of each identified change must be estimated. Changes that have a low probability of occurrence and a low impact would not be relevant. However, the probability of occurrence of the changes identified in a VUCA business environment cannot be analyzed independently. These changes are related: a high probability of occurrence of a change can have a direct or inverse relationship with the probability of occurrence of another one. This makes it necessary to identify the cross relationships between the identified changes, in order to leverage the knowledge, intuition and experience of the IRT and other management leaders of the company.

To carry out this analysis of co-relationship between the identified changes, the proposal matrix by Professor Paul J.H. Shoemaker can be used:

Source: Scenario Planning: A Tool for Strategic Thinking. Shoemaker, Paul J.H., MIT Sloan Management Review, 1995.

To make this matrix, each identified change is titled Un (U, Uncertainty), and the co-relationships between changes are classified as follows:

? +: direct relationship (if the change occurs, then the other change is most likely as well).

? -: direct relationship (if the change occurs, then the other change will most likely NOT occur).

? X: there is no co-relationship between the changes.

? ?: The co-relationship between changes is undetermined.

The conclusions of this analysis will be used in the next step.

Prospective analysis and relevance matrix

Once the IRT identifies relevant changes in the strategic relevant range, then a prospective analysis including the probability of occurrence and the impact of every potential change detected, and internal and external variables with relevant changes (those with significant impact) identified will be used to build scenarios based on these variables.

For this, the following relevance matrix can be used to identify the relevant changes, using a scale from 1 to 5 to rate the probability and impact of every identified change (1: very low, 2: low, 3: medium, 4: high, 5: very high).

To adequately determine the probability of occurrence rating for every relevant change, it is necessary to use the correlation matrix as a validation tool. The probability rating of each change must be consistent with the direct or inverse relationships in relation to the other changes defined in the correlation matrix previously.

The objective of the prospective analysis is to make visible the relevant changes (variability) in the different relevant ranges to make required decisions. The relevance of the change is equal to its probability of occurrence rating multiplied by its impact. The relevant changes will be those whose relevance is equal to or greater than 9 and will be highlighted in red. The changes in yellow will be changes to watch for in the following cycles (warning) and are those where the impact is equal to or greater than 6 and less than 9. The other changes are not relevant and are colored green. Changes that are not relevant will not have managerial visibility or special attention in the AS&OP process.

The objective of the prospective analysis is to make visible the relevant changes (variability) in the different relevant ranges to make required decisions

On the right side of the diagram above, the relevant decision-making ranges and horizons are described in 3 colored stripes: red for operational decisions because they must be made for the short term or operational relevant range, yellow for the tactical relevant range, and green for the strategic relevant range.

Definition of scenarios

Finally, using the possible combinations of the relevant changes, at least 3 possible scenarios are constructed: optimistic, pessimistic and the most probable scenario. In order to build a culture around scenario planning and develop a more intuitive process, each scenario could be called with a code-name that identifies the combination of relevant changes that originate it.

For example: in the impact and relevance matrix described above, the relevant changes (red) in the operational range (red) are supplier E vacation shutdown, exchange rate increase and the promotion of product 2. In order to name each scenario we will take the concept of "vacation": the more probable scenario where supplier E will go on vacation, we will launch the promotion of product 2 and the exchange rate will increase by between 20% and 40% we will call it "Miami" because our money in local currency (this company is located in Colombia) would be enough to pay for a vacation in a good destination but not too far; we will call the optimistic scenario where the exchange rate will increase less than 20% "Paris" since we could pay for a vacation in a distant destination with money in local currency; and to the pessimistic scenario where the increase in the exchange rate will be greater than 40% we will call it "Cartagena" since we could only pay for local vacation, without international tickets.

In the next steps of Adaptive S&OP process, each scenario will be useful to analyze its implications and effects on the demand plan and the business plan to direct the company towards a process that has a range of possibilities and plans, and not a plan based on single discrete numbers.

We need to deploy a process that uses these relevant changes and scenarios in a complex and volatile world for making good managerial decisions. Now, we need an adaptive process in order to define the profile of our future portfolio through the strategic relevant range and build a new adaptive demand planning process! Coming soon…

Summary

In a VUCA world relevant changes must be identified in order to adapt and make good managerial decisions for achieving good results on the bottom line. Unlike the pre-meeting of a conventional S&OP process, integrated reconciliation is a continuous process of collaboration and adaptation and not one single meeting. Integrated reconciliation is about the people because it is fundamentally a collaborative and transversal process of crossfunctional communication between human beings. The objective is to provide visibility of emerging relevant changes (variability) and document the underlying assumptions as early as possible, in order to define potential scenarios to provide the input for the analysis and to gain agreement on the necessary actions required adapt the business plan and the work teams as soon as possible, and achieve the results expected. This adaptation activities must also mitigate the negative effects produced by these changes and exploit the inherent potential of the opportunities that those changes or our teams generate. Integrated reconciliation is not just producing numbers on a spreadsheet, it′s all about improving the flow of relevant materials and information to maximize the return on the investment.

Coming soon, we will teach a S&OP workshop with this new adaptive approach with Dick Ling, father of S&OP. If you want to join us, please fill this form and one member of our team will contact you:

https://lnkd.in/gGeN3Xj

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