Planning in Turbulent Times

In an age of uncertainty, operational, tactical, and strategic planning takes on a heightened sense of importance and urgency.

By Bud La Londe -- Supply Chain Management Review, 9/1/2005

Trying to understand the future has baffled mankind for thousands of years. The seer, shaman, Delphi, and fortune tellers have been both honored and reviled by their adherents and detractors. In the 21st century, chicken bones and tea leaves have given way to sophisticated computer modeling and complex planning scenarios. Some critics would argue that these latter-day planning tools are not much of an improvement over tea leaves, animal entrails, or crystal balls.

Planning still baffles even the most sophisticated executives. Part of the problem with the planning process is that the world is changing at an exponential rate. Witness what has happened in medical science, for instance. In 1900, life expectancy was about 42 years; by 2000, it had doubled. Advances in genetic research could conceivably add another 50 years to the average lifespan in the next three to four decades. What will this do to the Social Security system? To Procter & Gamble's product line?

Consider the advances in technology. Will Moore's Law continue to accurately forecast exponential power to the computer chip? How will this change business processes and consumer behavior? The folks at the Pentagon think that it will change modern warfare. They plan to spend almost one half of their considerable budget over the next decade in reconfiguring current military forces to a more flexible, agile, and information-intensive military capability.

As if these uncertainties were not enough, there's the oil wild card. As of this writing, the price of a barrel of oil hovers around $65. This roughly translates to $2.50-plus a gallon for regular gasoline at the pump. How high does the price of oil have to rise before drivers in the United States switch to small, more fuel-efficient automobiles? Or use carpools or mass transit? How will surging oil prices affect the chemical industry, the aluminum industry, the transportation industry? On a more personal level, how will the high gasoline prices impact the disposable income of the average consumer?

The planning process needs to consider whether the high price of oil is a short-term or a long-term issue. Should you choose a planning scenario that assumes that the oil producing countries will recognize that a $65/barrel oil is a hardship on its best (U.S.) customers and reduce the price to, say, $25 a barrel. Or, should you choose a scenario in which the big producers attempt to maximize their prices and profits while using energy resources as a source of political power? And if you were a member of the U.S. Congress, how would you feel about the energy bill that you just passed? That bill was four years in the making and full of pork. Moreover, it did not seriously address any of the issues we just talked about.

On the global scene, the nominal leader of the House of Saud recently died. The war in Iraq is producing mixed and costly results. Hugo Chavez in Venezuela is on a rant, using new-found profits from his petrodollars to co-opt support to his particular brand of socialism from a wide swath of Cuba and Central and South America. Iran is back playing in its nuclear stockpile. Meanwhile North Korea continues on its path to extort the rest of the world on the basis of its nuclear capability. And that ain't all the uncertainty in the global marketplace by a long shot.

How can a supply chain executive, or any other business executive for that matter, plan in this kind of turbulent environment? The first step is to develop a solid understanding of the planning process itself. Planning usually occurs along three dimensions: (1) operational planning, (2) tactical planning, and (3) strategic planning. Operational planning is a day-to-day activity that keeps the lights on, the factory humming, and the goods moving to the customer. An operating plan can be daily, weekly, monthly, quarterly, or some other traditional time bucket. The auto industry has historically used a 10-day planning report, for example, while the food industry employs a 13-week time bucket. The objective of operational planning is to make certain that all elements of the business process are integrated (that is, raw materials, human resources, factory capacity, shipping capability, customer orders, and so forth) according to plan. Variance analysis is used to fine-tune the operating plan.

Tactical planning is typically short-term (less than one year) in response to some event in the firm's business environment. It could be a price war that develops at the retail level or an unexpected strike at a key supplier factory. A product recall or a compliance problem with the Occupational Safety and Health Administration (OSHA) or the Environmental Protection Agency (EPA) could be another trigger. In any case, the tactical plan changes the operating plan and, depending on the duration, could change the strategic plan. The high price of oil is a good example. If this is viewed as a short-term blip in process, it is handled by a customized tactical plan. On the other hand, if the spike in energy prices is viewed as a more permanent change, its impact is recognized in the strategic plan.

Management typically views strategic planning as the most difficult of the three planning processes. Strategic planning usually deals with scenarios that are at least a year out from the current date. A generally accepted rule is that strategic planning applies to the period in which it is possible to make scale changes in the firm's business environment. That is, factories can be built, production can be outsourced, new products can be developed, acquisitions or divestitures of assets or operating divisions can be made. The typical planning period for the firm's strategic plan is one to five years.

In some industries, however, the strategic plan is based on the lifecycle of an asset or resource. In the paper industry, for example, some long-term planning is pegged to the length of time it takes a tree to grow to maturity. In the oil industry, it might be based on the projected life of proven resources or a specific field or region's reserves.

Typically, the plan is reviewed and updated each year. If a five-year planning horizon is used for your strategic plan, each year you subtract the current year and add a new fifth year to the strategic plan. The net result is a "rolling" five-year strategic plan.

The objective of this discussion is to highlight both the importance and difficulty of developing an effective planning process. The intent is not to offer "one best way" to implement or improve a planning process. Different companies have approached the planning process in different ways—and have been successful. Some prefer a buildup plan, others like the top-down planning process. Some firms have planning departments to structure the process, while others make planning a part of the operating executive's job. Still others leave the operational and tactical planning to operating executives and reserve strategic planning to the planning department. All of these planning approaches can work equally well if they are designed to fit the culture and capability of the specific organization.

Uncertainty is not new to the world. What is new are the number and type of nations with nuclear capability, the growing dependence of the United States on offshore oil, the volatility in many countries, and the speed of change in the global marketplace. Information technology and the Internet have brought these changes both to our living rooms and to our boardrooms. In the face of this uncertainly, firms need to develop a solid approach to operational, tactical, and strategic planning that fits their own set of business circumstances and objectives. (They also need to develop a set of contingency plans, but that's a subject for another column.)

Doing planning right demands a serious investment in time and resources. In today's environment, firms unwilling to make that investment risk some dire consequences.