SCM Awareness: Strategic Planning
The Strategic plan is linked to the Business Plan and will have been set by senior management. It is still a very high-level strategic plan for the organisation but this is one you are more likely to encounter especially when annual goals are being set. Those goals are likely to have originated in the strategic plan and been filtered down through the organisation until it reaches you in your targets for the year.
The Strategic Plan looks ahead several years in advance. It could be a 5-year plan set by the board of directors or even the long term vision of the founder. It concerns:
- What products we will make?
- Who do we want to sell to?
- What markets do we want to target?
- Who are the competitors?
- What are our growth plans for capacity, staff etc?
- What are the external factors such as government policies?
It needs to look forward several years as it deals with issues where there will be lengthy processes for internal and external regulation, approval and permissions. These issues include things like
- Buying equipment,
- Building factories,
- Sourcing vendors and suppliers,
- Hiring staff.
- Launching New Product Lines.
This takes quite a long time because some of these elements may play out over many years. Some equipment could have a lead-time of several months from ordering. Buildings could take several years from initial proposal to opening. And in the case of medical devices it can take years of trials and testing to get regulatory approval for new products. Plus, these are all expensive investments and the cost will have to be spread out over several years. If you attempt to charge the full cost in the first year you will have to set the price so high you will not be able to attract customers. You may think the strategic plan will have a limited impact on the day to day planning you will be involved with. But now we will look at two examples of where strategic issues had a direct impact on day to day planning.
An example of a long-term strategic plan I saw involved a company needing to invest in expensive chilled warehouse capacity. One option was to build a new warehouse on its existing site. This was going to cost tens of millions of euros and for the company that size it was a real stretch. However, at the same time a factory became available some 30 miles away that had a chilled warehouse several times bigger than their projected needs. The company was part of a group of companies and a small sister company was located not far from the available site. However, it was far too big for the needs of the sister company.
So, a plan was developed that saw the group purchase the site and move the smaller company to it. The warehouse capacity was made available to the larger company. A plan was developed to expand the business of the smaller company by diversifying the range of products they manufactured. And that plan allowed the group to go to the government and avail of substantial grant aid to fund the project. By having a long term strategic plan, the group was able to solve its capacity issue and grow the overall business quite substantially.
Sometimes these factors will be out of your control. For example, the imposition of tariffs by one country on another could hit your business. In another case a company I worked for supplied products into the United States from Europe. Those products were hit by tariffs under the Trump administration. In advance of those tariffs coming into effect the company built a large amount of stock in the United States as products that had already passed customs were exempt from the tariffs. That had three main knock-on impacts.
- Firstly capacity in production was maxed out for several weeks as the company rushed to build stock ahead of the tariffs.
- Secondly there was a significant investment in warehouse capacity in the US.
- And thirdly once the stock was built the factory went from being maxed out to being under utilised.
All this meant considerable work for the Supply Chain and Planning teams as the lack of a plan to deal with this sort of an event meant the company was reacting to unforeseen consequences rather than proactively adjusting its business to meet the new situation.
Generally, the Strategy and resulting Goals, Objectives and Targets will originate at board or corporate level and will flow down through the organisation until it reaches the individual.
At each level Goals, Objectives and Targets will be set for and agreed with the level below them. The goals of a particular level should be set to support the objectives of the organisation.
Then KPIs, Metrics and Results will be fed back up the pyramid to show how the organisation is performing.
Ideally this should be done via a “Balanced Scorecard” which makes sure the whole organisation is moving in the same direction. An example of where this may impact in planning is in Inventory targets. Inventory is often a key focus of investors as they see it as their money tied up in unproductive waste. So, if the company is about to report disappointing sales a strategy may come down from corporate to cut inventory as much as possible. To achieve that could result in planning having to do things like delaying purchases, minimising safety stock levels, reducing production etc.
So, what is a typical Strategic Planning Process? Well it probably takes many months and can best be represented by a strategy Pyramid. This pyramid starts with corporate at the top but do not think of it as lining up exactly with the previous pyramid. As we move down it does not mean that only the individual will have An Action plan and Key Performance Indicators. Each level will have their own Goals, Tactics, Action Plans and KPIs and will be involved in setting those for the level below them. So what are the component parts of that pyramid.
Values – What do we stand for and what are our beliefs. This could involve issues such as environmentalism, social inclusion, etc,
Vision – Where are we going. What is our ambition. Where do we see ourselves in 5 years
Mission – What do we do? For whom? Why?
Goals – What are the objectives we want to achieve and what are the priorities among those
Tactics – How do we achieve these goals and objectives? When?
Action Plans – What actions will we put in place to achieve this. How do we know? Who owns the actions? What resources do they need, What are the required outcomes
Key Performance Indicators and Measurements – What did we actually achieve? How do we know? What needs to change?
So that is an overview of the process. What are a typical set of steps involved in the Strategic Planning Process. This process works for a corporate entity starting with the board of management. But you can also apply this for setting the targets of a department or even a small company.
- Prepare. Firstly assemble the team (usually your leadership team). Then agree the timeline as to when will you have the plan complete. This is not going to be an easy or quick process. It will most likely take several weeks for most organisations. For Larger corporations it will likely take months.
- Gather data and inputs. There two types of information you need. Internal and External. Internal data are things like KPIs, Company financial data etc. External data is an analysis of eternal factors that are impacting on your company.
- Review this data with your team. Don’t yet start to make changes or set actions. Just understand the data and what it means. Tools to help you do this include a
- SWOT analysis : Strengths Weaknesses, Opportunities Threats.
- PESTEL Analysis: Political, Economic, Social, Technological, Environmental and Legal. Sometimes and increasingly a further E is added for Ethical.
- And Porters 5 Forces. These are Rivalry among existing competitors. Threat of New Entrants. Threat of Substitute Products. Bargaining power of Suppliers. And the Bargaining power of buyers or customers.
- Review and confirm your vision and mission. What do you want to achieve and when. Your mission statement will probably not have a timescale attached to it but your Vision statement will have a time scale.
- Develop a plan containing milestones of what you want to achieve over the timescale of the vision statement. E.g. if part of the Vision is to have offices in 20 countries in 5 years set milestones as to how many you want to have in one year, two years etc.
- Build on that to develop your KPIs, your objectives and any key projects the organisation must work on.
- Develop a balanced scorecard. This is a tool developed by Robert Kaplan and David Norton. IT is broken into 4 main areas. Your Financial Goals, Your Customer Goals, Your Process Goals, And your People Goals. The Balanced Scorecard set at this level will influence the Balanced Scorecard and metrics right down through the organisation.
- Communicate the Strategy. Once you have agreed the overall strategy that needs to be shared both internally across the organisation and externally to investors etc.
- Align the organisation to the strategy. The organisational structure may be based on an old strategy and some reorganization will be needed to make sure you can achieve the new strategy.
- Develop action plans for each level, department, individual etc within the organisation and agree the goals they will work towards and the KPIs they will be measured against. This process will take a long time to filter down through the organisation but it is important that everyone is clear where the work they are doing fits into the overall objectives of the business. In the case of planning many elements of the strategy will impact on how they do business. We have already spoken about inventory targets but other factors such as political tariffs forcing you to change suppliers or environment policy requires the use of carbon neutral logistics options.
- Regular reviews should be held to track progress on the balanced scorecard. These reviews could be quarterly performance reviews, Weekly project reviews or daily KPI meetings. The idea is all that information should flow back up through the organisation so senior management can see how things are progressing towards their mission and vision.
So how does that flow down into the day to day planning. Well there is still a bit to go to get to the daily plan. In fact once the board have set the strategic plan we are possibly still months away from the daily plan (no not in terms of this course, don’t worry. It is long but not that long). As well as setting out the strategy for how the company will proceed over the next few years there will also be projections of expected demand and production in the strategic plan. This will flow down through the plan via the forecast. If the forecast varies considerably from the strategic plans then the company will not hit it’s goals and its investors will be unhappy. Therefore it is likely that the forecast will go through a process to examine it and align it with the strategic plan, or determine why it cannot be achieved and perhaps adjust the plan. However in my experience it is more likely that the forecast will be adjusted than the plan which is not always a good thing. If the sales team are telling you the strategic plan is not achievable then simply adjusting their forecast to match the plan rather than investigating why there is a difference is simply kicking the can down the road to the point where the company will have to explain missed targets in the financial reports for the year. In the next few sections we will start to get into more recognizable production planning activities starting with Distribution and Logistics Strategy and then the S&OP process.