I am doing some research on “Supply Chain Management in Times of Turbulence” and one of my premises is that firms with a robust strategic planning process are better equipped to deal with large, unexpected events, like the current global recession. What does a robust strategic planning process look like? How does strategic planning integrate with supply chain planning processes? In an attempt to answer these questions, I called my contacts at Emerson Process Management, one of our clients and a company with a sterling reputation in planning. This is how they do it.
Emerson sells project-based solutions to clients in a variety of industries. The company is organized into regional business units, and regional leaders have profit and loss responsibility, so they take the time to understand the political and economic drivers of the countries they operate in. Their sales teams are also expected to talk to key customers and learn what sorts of political barriers could prevent them from doing business in specific countries.
Emerson’s strategic planning process consists of a five year look back and a five year look ahead. It is an annual process, so the five-year look back and look ahead are refreshed every year. In the five year look back, the company attempts to learn from history to improve its ongoing strategic planning process. It divides the five year look forward into three scenarios:
- The profit scenario looks at things from the shareholder’s perspective. It asks the question: If we had low growth or no growth, could we still make money? This is the conservative scenario.
- The company also has a growth review. It asks questions like: What if this product introduction really took off? What if a competitor’s weakness in a particular region led us to gain significant market share there? What if this industry grows much faster than we expect? This is the high growth scenario.
- Finally, there is the “complexity review” which asks the following questions: How complex do we have to be? Can we reduce the number of suppliers we deal with or the number of parts we produce? This complexity review incorporates supply chain risk management and can drive the company to more, rather than less, complexity.
For example, Emerson is very concerned about supplier risks and it has developed a three-by-three matrix to analyze supplier risk. On the vertical axis, the company places suppliers in boxes based on total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates. On the horizontal axis, the company assesses the financial robustness of its partners.
If suppliers are placed in the top right hand corner of the matrix (high supply risk/high financial risk), Emerson requires these suppliers to develop and present business continuity plans. The company may also require its product development team to find alternate sources of supply for key components. Finally, Emerson decides how much inventory it needs to store in particular regions of the world, outside hotspots, to protect it from disruptive events like swine flu or the recent political turmoil in Thailand. A complexity risk analysis can lead to multi-year targets for engineering, procurement, supply chain, and other parts of the organization to reduce the risks associated with particular suppliers.
These reviews feed into Emerson’s process of determining where to build new plants, which plants to close, and which ones to expand. Longer term sourcing decisions also come out of this analysis. For example, to expand in Brazil, the company may decide to increase sourcing in Brazil. Year-by-year sourcing targets are then needed. While Emerson also has a one year budgeting process, many of the key targets for the supply chain teams actually emerge from the strategic planning process and are based on the five year plans.
Emerson’s sales and operations planning (S&OP) process is the major point of integration between the strategic plan and the ongoing execution of those plans. The company’s S&OP process provides an ongoing monthly, rolling supply/demand balancing process that looks forward two years and provides “rough cut” capacity plans for its factories. Emerson’s S&OP process is truly global. Dozens of key executives from around the world participate in a highly-structured, four hour decision-making process in which the CEO takes an active role.
Emerson has experienced substantial organic growth in recent years, far more than was predicted in its strategic plans. Key supply chain executives stress they could not have accommodated this growth without a robust and global S&OP process.
There is a price to this type of planning process. The average executive at Emerson spends 40 percent of their time in planning-related activities. However, strong companies get even stronger during times of turbulence. Emerson appears poised, once again, to come out of this recession with more market share than before the recession started.
Emerson’s approach to planning is not necessarily a road map for all companies to follow. The processes described here, for example, may not work as well for consumer goods companies. But for project-based companies, it is hard to imagine a more thorough process.