As if companies don’t have enough challenges on a day-to-day basis, there are natural disasters to deal with, too. After securing immediate safety and ensuring that basic needs are met, business leaders need to take care of their stakeholders’ future livelihoods: their company’s long-term ability to compete and create opportunities. The hurricane season of 2017—the first time two Category 4 storms have ever hit the United States in a single season—will be remembered for many years to come. The negative economic impacts are just unfolding, and they aren’t good. Estimates for Harvey are in the $70-100 billion range, and although early, I saw one for Irma that was a staggering $300 billion.
In the wake of hurricane Harvey, PetroChem Wire reported that 61% of the ethylene production in the United States went offline. Estimates of a return to full production are a lengthy two months. Ethylene is a critical base chemical, and its 2016 worldwide production of over 150 million metric tons was greater than that of any other organic compound produced. It is used in everything from food packaging to diapers to fruit production and countless other chemical processes. Prices are on the rise for this building block of the economy. Some in the US are turning to international supplies, complicating supply chains and decision making.
Meanwhile, Hurricane Irma is estimated to have wiped out up to 30% of the state’s citrus crop, a large component of the $150 billion agriculture industry in the state. On the flip side, demand for building materials will increase or be accelerated.
So how can you prepare your supply chain for a hurricane like Harvey or Irma? You can’t control Mother Nature, but you can be better prepared to deal with the uncertainty and volatility brought about by disasters and other unplanned situations.
Securing your supply chain
When a natural disaster strikes, would you rather react with an all-hands scramble and hope for the best? Or rely on a structured framework for cross-functional planning, decision making, scenario simulation, and quantitative impacts on plans?
In the hurricane situation, here are a few questions companies are working on:
- Which customers do we need to short?
- Should we source internationally? Should we make or buy?
- Do our processes and systems provide adequate visibility for us to keep step with supplier price increases? Is everyone responsible for our pricing using the same information and criteria?
- Should we make more of this or that, now that the costs of raw materials have changed?
- What are we going to do to make up the revenue and earnings shortfall? Wall Street doesn’t care about the weather.
- What am I going to tell the board at the meeting next month?
These aren’t easy questions for the best companies in the best of times, let alone when you’re working in an “all hands on deck” crisis mode.
How S&OP can help
The “structured framework” I described above is called Sales & Operations Planning. The process itself doesn’t provide instant answers to tough questions in a time of crisis, but it does give management a forum to make more effective decisions.
Through monthly S&OP meetings, you force tough questions and continually develop the capabilities to answer them. The revelations that come out of the process are ones that are easy to gloss over in the day-to-day grind of doing business, but that come to the fore in a crisis, like:
- Your customers aren’t segmented effectively, or worse, you have management and behavioral issues and your segments aren’t being followed.
- Your pricing is off, perhaps due to a lack of cost visibility, an uncoordinated approach, or some other reason.
- You don’t know if it’s better to source one way or another.
- You don’t know what your true demand is or have a coordinated way to deal with any variations in it.
S&OP makes these problems visible and gives you an orderly process through which to address them and measure the impact.
Shoring up your S&OP process
Most higher-performing companies have S&OP by now. Companies are in different places in their S&OP maturity journeys, but here are a few things that everyone can work on.
- Define your maturity path. There are many models out there. Define one that fits your company. Put your planned growing capabilities on a time scale and work toward them over time.
- Data and business simulation capabilities are usually gaps. Tools are cheaper and easier to implement now. By the time your staff does some heroic manual study from scratch after the hurricane hits, you’re a dinosaur.
- Figure out why people skip the meetings. Are they too long and detailed? Are the real decisions that run the business being made somewhere else? If so, why should anyone go?
- Make sure results from S&OP and improvements in the underlying processes are measured. Make it visible. A focus on change management, behaviors, and a positive culture are all great (really!), but hard numbers are just difficult to argue with. You fix it and measure the impact!
A robust S&OP process that develops the capabilities of leaders and underlying processes can be a Category 5 weapon for any disaster or business challenge. So don’t wait to ensure that yours is as strong as it can be.
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Eric J. Tinker
Eric J. Tinker is a Sales & Operations Planning expert who has implemented S&OP and supply chain improvements for global corporations across 5 continents. His projects have resulted in documented benefits exceeding $500MM; he is also the author of several articles and the book Sales & Operations Planning RESULTS.