If you haven’t already, please read Bill Dubois’s blog, “Latest Polls Show We’ve Lost Faith in Polls”. Bill speaks to three factors, unpredictability, high randomness and variability. In my opinion, these are factors that led to the pollsters being so far off on the 2016 US election, and how supply chain practitioners can help these pollsters to improve. Multi-tasking, I was reading Bill’s blog while I was watching the 2014 movie Godzilla.
The general plot, if there ever is one in the Godzilla movies, is that Godzilla is awakened by nature to restore balance, and defeat the MUTO (Massive Unidentified Terrestrial Organism). I have to admit, it was cool to see the MUTO walk down the Las Vegas strip and knock down the casinos. Thinking about Bill’s comments on teaching pollsters, and combining with Godzilla restoring balance, it hit me.
Regardless of where you stand, left or right, agree or disagree, we hope that balance will reset itself, sometimes incrementally and sometimes shockingly. When Godzilla and the MUTO’s final battle occurred, half of San Francisco was destroyed. The results of that ‘ReSetting” was shocking, and cool to see them battle along the Embarcadero. Balance is also critical for supply chains. We must have an ability to monitor the supply chain, and detect when it goes out of balance. This is why mature S&OP’s are needed. I say mature, as most supply chains can detect the cost based – unit demand vs unit supply imbalance. The more difficult, and mature S&OP, is the value based, where, profit, opportunity, risk, and market share, are balanced. See Figure 1.
Figure 1: Cost Based vs Value Based Planning
Source: © 2007 AMR Research, Inc. | Page 5
What is the single biggest challenge to a Value Based plan? The trade-off. Should it be margin for product A or profit for product B. Should it be market share for region A or revenue for region B? The ability to make a trade-off decisions is the most important factor of a mature S&OP. Aside from just getting the CEO/CFO to make the decision, a Supply Chain S&OP will always be faced with Marketing vs Sales, Product Management vs Procurement, or Service vs Finance. The problem with all these views into the S&OP is that each have a different set of priorities. They are, in essence, treating things differently. And this is where the US Election can teach supply chains. To effectively manage the S&OP priorities, supply chains need to treat products/customers differently. If a supply chain is providing the same policies (shipping, fulfillment, safety stock, etc.) to all product and customers that supply chain is either under servicing customers or over spending on the network.
Key Point: Segmenting your customers will lead to best in class Supply Chain
I ask people to look at Figure 2. What does it tell you?
Figure 2: Forecast Accuracy vs Sales Volatility
Source: Gilliland, Michael; Sglavo, Udo; Focus on Forecasting: Worst Practices in Business Forecasting, 2010
a. The dots in the upper left are close together
b. The dots in the lower right are further apart
Seems obvious. But, effective segmentation will show a better picture for supply chain. See Figure 3.
Figure 3: Segmented Supply Chain
I need to break it to you as a supply chain professional, we don’t live in the upper left world, where volatility is low and forecasts are dead on. We live in the lower right! But, the dots in the lower right can be segmented, as these customers want something different. The same can be said about the Election. Assuming all customers want the same thing leads to failure. Segmentation in the US Election showed us that Trump’s victory may not be so shocking. Like S&OP, if we treat every situation the same, we fail to understand the results. Now, I ask people to look at Figure 4. What does it tell you?
Figure 4: US Election Results by County
Source: Glaka, Max; Election Results in the Third Dimension, 2016
a. There's not a lot of blue dots, except in the Northeast coast and California coast.
b. There's a lot of red dots.
This is segmentation. Running polls and media out of only New York and Los Angeles would not tell us what the segmented customers want.
“If your supply chain was set up to service “blue” customers only, how much cash would you lose or revenue would you miss by using “blue” supply chain policies across the entire Figure 4 Map? “
For the Supply Chain, segmenting the customer to know what he/she VALUES is critical to providing the right supply chain policies. Then, managing the BALANCE of that network to know sooner and act faster will lead to best in class. What supply chain lessons did you learn during this election year?