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Permanent Volatility Is Here to Stay

Recently, we've been following corporate earnings more closely. Like most folks, we're interested in seeing where the economy is headed, and we're also interested in assessing how companies are managing the complexities and uncertainties in the market.

The term “permanent volatility” more and more describes the current and future business environment — and it's not only the volatility that is challenging, but also the speed at which these cyclical changes occur. In this new era, organizations and supply chain professionals need capabilities to enable and manage a dynamic supply chain.

Unfortunately, earnings have been mixed, with some notable exceptions such as {complink 379|Apple Inc.}, {complink 2470|IBM Corp.}, and {complink 2657|Intel Corp.}. While revenue numbers appear to be decent across the board, bottom line numbers are inconsistent. Given rising material costs, oil prices, and labor rates around the globe that we’ve discussed previously, the latest numbers from Wall Street shouldn't be a big surprise. (See: Managing Risk in High-Tech Supply Chains.)

With costs of goods sold increasing at higher rates than revenues, some indicators point to the supply chain as a drag on earnings. While we would certainly not suggest that the supply chain function is capable of reducing oil prices or material costs, it can improve its capabilities to manage these variables on behalf of the organizations it serves. Traditionally, sales and operations planning (S&OP) was simply a process to balance supply and demand. Today, S&OP is in a position to be a critical element in helping companies to effectively manage cost and profitability through the uncertainty of a permanently volatile, business environment.

The next generation of S&OP must include financial data, scenario modeling capabilities, and supply and demand analytics. The term Profit, Sales, and Operations Planning (PS&OP) captures this new way of thinking. It still balances supply and demand, but also incorporates the additional financial data and process capabilities needed to make better supply chain decisions. S&OP can serve as the mechanism to better manage the dynamic supply chain and turns what once used to be a simple and basic business process into something much more powerful and strategic.

While many of the capabilities needed to manage this permanent volatility reside in the area of S&OP, enabling a dynamic supply chain is broader than just an enhanced S&OP process. It entails integrated processes, tools, data, and organizations across the entire business. Dynamic supply chains understand and manage risk, are flexible and adaptable to the changing environment, leverage integration and visibility throughout the network, and design their operating model to drive the adaptability needed to be dynamic.

We rarely hear companies tell us how great their S&OP processes are, or how well their supply chains are performing because of S&OP. It's clear, from what we've been seeing recently in the markets, that companies don't yet have a good handle on it. On a scale of 1 to 10, with 10 being exceptional, how would you score your S&OP process? Do you think it can help you manage better in an increasingly uncertain environment?

7 comments on “Permanent Volatility Is Here to Stay

  1. hwong
    May 19, 2011

    While I cannot comment on how I think companies view their S&OP, I do believe that corporate is complex because of the different agenda that different groups have within the supply chain. Mostly the incentives need to be aligned correctly in order for the holistic view for the company to make money.

    Anyway. I digress. Volatility is never new.  Things always change. There was a saying that the only thing that doesn't change is change.  As companies keep having to face presure about cutting cost and increasing profits, the trend will continue to be that quality is going down and that more people are forced to work harder and effectively. Otherwise they'll lose the job. This trend is going to remain this way. The society as a whole though, will become much worse. There will be too many people without a job, the rich people will get richer. There will be more crimes because it's hard for the poor to make a living. In addition, resources are limited but we have more births more than ever for the last few years. How is that going to sustain our future?

  2. Nemos
    May 19, 2011

    “The next generation of S&OP must include financial data, scenario modeling capabilities, and supply and demand analytics.”

    If we concentrate all the above data as you mentioned in the article do the S&OP job very complicated and difficult.

  3. FLYINGSCOT
    May 20, 2011

    Great article.  I would rate my own company's S&OP as mediocre but we are not alone.  Our system has improved slightly in the last 10 years but the present economic and geopolitical situation is making our company financials fluctuate at the mercy of the market and with our customers' ability to control their inventory.  Like any control system expert will tell you we need to measure the system more frequently and have more granular control over all steps in the process to make sure the system stays in control.  Bottom line is better contol over S&OP is always a good thing. 

  4. Taimoor Zubar
    May 20, 2011

    Very interesting article. I think you have highlighted on a great issue. What do you think an ideal link between S&OP and Supply chain should look like? What kind of information should flow between Supply Chain and S&OP dept? And at what intervals?

  5. SunitaT
    May 20, 2011

    The next generation of S&OP must include financial data, scenario modeling capabilities, and supply and demand analytics.

    How can we  rely on the prediction of the scenario modeling capabilities when things are changing so rapid ?

  6. Ms. Daisy
    May 23, 2011

    Tirlapur:

    Adaptabilty to changes in the supply chain enviroment should be based on an organization's ability to integrate effectively, the management of cost and profitability as well as the analysis of the financial data available. It is this in-built operating model that will help in pre-empting or reacting to the changes in the supply chain 

  7. elctrnx_lyf
    May 23, 2011

    The business have become very volatile atleast because of the lifecycle of consumer electronic products like mobile phones and cars have reached to the minimum level. There are too many models all the time. Cetainly this is because of the customers and at the same time companies trying to push new stuff into the maket for business reasons. The trend will settle down in the next couple of years.

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