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  • 1. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - FALL 2003 VOL.45 NO.1 S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - MITSloan Management Review ManMohan S. Sodhi How To Do Strategic Supply-Chain Planning Please note that gray areas reflect artwork that has been intentionally removed. The substantive content of the article appears as originally published. REPRINT NUMBER 45114 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 2. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - How To Do Strategic Supply-Chain Planning Senior managers formulate strategy to A ny company that has a global supply chain should consider introducing its strate- gic left hand to its operational right hand. Strategic supply-chain planning that com- maximize shareholder value; supply-chain bines aspects of business-strategy formulation with aspects of tactical supply-chain planners run optimization planning can make each far more valuable to the planning effort than either would be models to minimize alone. Strategic supply-chain planning is the Pegasus of strategy: It can soar, but it also needs to keep its feet on the ground. Although companies routinely weigh long-term costs. Combining scenario supply-chain-related decisions in light of alternative sources of supply, new geographic planning with supply- markets or new products, various levels of management use different approaches, chain planning achieves often in isolation. Senior managers make such decisions as part of formulating busi- ness strategy; supply-chain planners, as an extension of their tactical supply-chain the best of both worlds, planning. which leads to long-term How should companies ensure that relevant supply-chain details inform the busi- competitive advantage. ness-strategy formulation and that strategic direction and the supply chain are in align- ment? They can do so through early communication between senior managers and supply-chain planners, which shortens strategy-implementation time while letting each ManMohan S. Sodhi group pursue its forte: senior managers formulating strategy to maximize shareholder value; supply-chain planners running optimization models to minimize total supply-chain costs. One Company’s Story Consider a strategic supply-chain planning exercise at a polyvinyl chloride (PVC) manufacturer that we’ll call Acme Vinyl Co. Acme’s North American revenues came from PVC for building (55%), packaging (15%), consumer goods (10%), the electronic industry (10%), the automotive industry (4%) and from non-PVC products (6%). At the end of the 1990s about 4% of those revenues came from Asia. Acme had been seeing revenue growth for several years, mostly as a result of acquiring other PVC manufacturers. With fragmented spare capacity around North America, a falling stock price and a need to rationalize the postacquisition supply chain, Acme’s leaders considered their options. Some ManMohan S. Sodhi is an associate professor of supply-chain management at Cass Business School in London. Contact him at m.sodhi@city.ac.uk. FALL 2003 MIT SLOAN MANAGEMENT REVIEW 69 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 3. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - favored consolidating manufacturing into one or two new mega- optimum route to maximizing shareholder value is rarely obvious. plants; others suggested closing existing plants or lines. Manage- It takes creative thinking and freewheeling negotiations to identify, ment chose to do a strategic supply-chain planning exercise to understand and agree upon possible actions. Computers and assist decision making. spreadsheets support analysis, but they don’t determine strategy. For tactical supply-chain planning, the decision options and The Planning Spectrum the factors affecting them (production capacity, distribution Strategic supply-chain planning falls in the middle of a decision- capacity, variable costs, demand forecast) are clearly defined. The making spectrum that has business-strategy formulation at one goal of minimizing total supply-chain costs — for manufactur- end and tactical supply-chain planning at the other. (See “Strate- ing, storage and handling, and transportation — is narrower. gic Supply-Chain Planning and the Planning Spectrum.”) With a Because tactical planners can identify beforehand possible focus on fundamental changes in manufacturing and distribu- decisions and factors that might affect these decisions — and can tion capacity, it is long-term in scope and impact but can benefit build those elements into the software — they can use optimiza- from detailed optimization models and advanced planning-and- tion models that rely on mathematical techniques. The models scheduling (APS) technology that is more often associated with make recommendations that both minimize costs and help com- medium- and short-term planning. Used in this strategic context, panies meet forecasted demand without exceeding production the tools help determine what would be an appropriate supply- and distribution capacity. Advanced planning-and-scheduling chain configuration for sourcing and which plants or distribu- technologies are available from several companies.1 tion centers should be closed or kept open. Business-strategy planners can’t plug clearly defined factors In contrast, tactical supply-chain planning is short- or into software as supply-chain planners do, because strategy for- medium-term in scope and impact, with supply-chain planners mulation is, in part, about trying to identify just what those fac- using past demand to make forecasts for the near term and tors are. But strategic supply-chain planning can benefit from adjusting these forecasts on the basis of market intelligence or appropriately used optimization models because tactical supply- planned promotions. Used in this context, optimization models chain models can be extended to include strategic decisions and APS technology help determine where and when to produce about closing or opening plants and distribution centers. APS what items and how to distribute them. vendors offer software for that purpose. The factors rarely change — production capacity, distribution capacity and variable costs. Planning Processes and Optimization The goal of minimizing cost is extended to include the fixed costs Although business-strategy formulation also uses tools and frame- of keeping plants and distribution centers open and the one-time works, it requires much more creativity than tactical planning. The costs of opening new ones and closing existing ones. These more Strategic Supply-Chain Planning and the Planning Spectrum Strategic supply-chain planning falls in the middle of a decision-making spectrum that has business strategy formulation at one end and tactical supply-chain planning at the other. Strategy Formulation Strategic Supply-Chain Planning Tactical Supply-Chain Planning Scope of The entire nature of the business; Whether to Determining which plant should pro- decision reevaluating the business model s open or close plants and distribu- duce what product over the coming making tion centers months on the basis of a demand s modify capacity forecast s change product offerings s manufacture in-house s outsource Decision Years Years Months or weeks horizon Flexibility Very high High Medium to act Possible Frameworks; lower-level analysis that Specialized and general-purpose Advanced planning-and-scheduling tools may entail the use of spreadsheets, tools, such as software modeling (APS) tools available from various presentations, system-dynamics tools languages, available through various vendors or other simulation tools vendors 70 MIT SLOAN MANAGEMENT REVIEW FALL 2003 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 4. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - When using a strategic supply-chain model, managers are trying to determine how much the opportunity cost of a particular decision differs from the model’s recommendation. strategic computer models can then guide decision making. business-strategy formulation rarely entails the use of models to Optimization models for tactical supply-chain planning and optimize the supply chain before and after a merger, even though models for strategic supply-chain planning differ only slightly in most operating costs reside in the supply chain. In one study, their design, but markedly in their use. Even if supply-chain plan- researchers surveyed 700 high-value international mergers and ners tweak the production and distribution schedule obtained acquisitions occurring from 1996 to 1998 and found that failure from tactical models to expedite an order to a key customer, they to integrate supply chains was the main reason four out of five largely retain the model’s recommendation. In contrast, when deals “failed to enhance shareholder value.”8 using a strategic supply-chain model, managers are trying to Using an optimization model without a good strategy is sim- determine how much the opportunity cost of a particular deci- ilarly lacking. DEC’s strategic supply-chain planning system of sion differs from the model’s recommendation. the early 1990s improved manufacturing, distribution and serv- At General Motors Corp., for instance, Electronic Data Systems ice, but, without a robust business strategy, the company ulti- Corp. consultants found that 90% of the time, GM managers used mately succumbed to acquisition by Compaq Computer Corp.9 their models’ recommendations to benchmark actions that they As supply chains become increasingly global, managers are were likely to consider.2 The candidate decisions were based on making more strategic decisions about supply-chain design and qualitative criteria not included in the models. Creating bench- reengineering. Thus supply-chain management has evolved from marks in this way is unique to optimization models using linear a function garnering little attention or prestige to a highly visible programming, a method using advanced mathematics to capture and respected one.10 all the constraints, such as capacity, and to find the best possible But improvements in tactical supply-chain planning resulting recommendations that would minimize the total operating cost or from the use of technology from advanced planning-and-sched- some other stated objective. Such models guarantee the lowest uling software vendors has created unwarranted expectations that, possible supply-chain cost. Spreadsheet calculations or simulation with similar software, senior leaders could delegate strategic sup- models cannot provide that sort of benchmarking capability.3 ply-chain planning to supply-chain planners. But senior execu- tives’ aloofness from strategic supply-chain planning tools creates Use of Optimization for Strategic Supply-Chain Planning the same problems as ignorance of tactical advanced planning- A variety of industries have successfully implemented optimiza- and-scheduling tools. DEC likely relied too much on supply-chain tion-based tools, including one called Strategic Analysis of Inte- planners. And after Nike Inc.’s $400 million APS technology grated Logistics Systems (SAILS).4 Baxter International Inc. used implementation, $100 million in inventory got misdirected, ulti- SAILS software to evaluate consolidation approaches following mately triggering a $2.5 billion loss in market capitalization.11 its 1985 acquisition of American Hospital Supply Corp. SAILS The reason that senior managers keep aloof is lack of knowl- also helped Pet Inc. assess supply-chain synergies from two edge, and even suspicion. Managers at Royal Dutch/Shell Group, potential acquisitions. In another case, a personal-computer for example, harbored a distrust of optimization models that manufacturer made successful strategic use of an optimization biased the company against using such models in its scenario- model for its global manufacturing and distribution network.5 planning processes during the early 1980s.12 The extensive detail, GM uses a tool called Production Location Analysis NETwork rigid structure and managers’ lack of familiarity with optimiza- System (PLANETS) to determine what products to produce — tion models aren’t conducive to the freewheeling discussion that and how, when and where to make them.6 The now defunct Dig- strategy development needs. Moreover, because management ital Equipment Corp. (DEC) probably lengthened its life by using education is focusing less on analytical strategic planning and supply-chain models to decrease costs.7 operations research, M.B.A.s rising to the senior ranks since the mid-1980s have shown less and less interest in the technical side The Need for a Combined Process of management.13 Clumsy integration following mergers or acquisitions points to That’s why they need input from supply-chain planners who the dangers of relying on only one type of decision making. M&A are familiar with optimization models. Only through a seamless FALL 2003 MIT SLOAN MANAGEMENT REVIEW 71 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 5. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - Three Approaches to Scenario Planning The idea of strategic supply-chain planning draws mainly on three scenario-planning techniques. Technique 1i Technique 2ii Technique 3iii Phase One: Scenario Building s Identify issues, key driving forces and s Identify focal issue or decision s Define scope of strategy formulation important factors for uncertainty s List key factors influencing success s Identify major stakeholders (those s Sketch out basic scenarios or failure of the decision affected and those able to influence) s Flesh out scenarios s List driving forces in the macro- s Identify current trends environment that influence those s Identify key uncertainties factors s Construct extreme scenarios s Identify two or three factors or s Assess scenarios’ internal consistency trends that are most important and and plausibility most uncertain s Create representative scenarios — s Sketch each scenario using the internally consistent scenarios logical relationships among factors, covering a wide range of outcomes and view each scenario in a graph adjusted to reflect stakeholder that has the previously identified behavior drivers as axes s Identify research needs for each s Flesh out scenarios scenario Phase Two: Scenario Planning s Evaluate policies and strategies s In each scenario, determine the s Develop and apply quantitative mod- within each scenario to see how they implication of decisions being els (for forecasting and optimizing hold up considered decisions when the future is uncer- s Modify the strategies tain; these activities will likely lead s Iterate and reevaluate as many times to scenario refinement) as necessary s Describe decisions for different scenarios, combining managerial judgment with results from previous step Phase Three: Scanning the Business Environment s Identify leading indicators and assign s Select leading indicators and people to monitor changes in the signposts to detect which scenario environment in order to detect in (or combination of scenarios) is advance which scenario or combina- unfolding tion of scenarios is unfolding i. Proponent: Erik Larsen, professor of management and systems, Cass Business School, London. ii. Proponent: Peter Schwartz, chairman, Global Business Network, Emeryville, California. iii. Proponent: Paul J. H. Schoemaker, CEO, Decision Strategies International Inc., West Conshohocken, Pennsylvania, and research director, Mack Center for Technolog- ical Innovation, The Wharton School. process that encompasses those who are developing strategy and needed from managers differs too much from one company to those who are using detailed supply-chain models can companies another for experts to offer more than guidelines.15 (See “Three align their business strategy and their supply chain. Approaches to Scenario Planning.”) Leaders creating business strategy use “what if ” situations based on the plausible interplay Scenarios and Scenario Planning of factors expected to have long-term effects. The only constraint In scenario planning — a flexible process for formulating busi- is plausibility. ness strategy — senior managers build internally consistent, Erik Larsen, professor of management and systems at Lon- alternative views of possible future outcomes, including some don’s Cass Business School, has identified three phases of sce- that are “unthinkable,” as Herman Kahn suggested in his 1950s nario planning. Scenario building involves identifying issues, examination of Cold War scenarios.14 Typically, to keep the focus driving forces and factors that produce uncertainty, then devising on important factors in relation to the long-term future, only a rough scenarios that are further fleshed out. In scenario planning, few business scenarios are developed. managers evaluate possible decisions, policies and strategies to Building scenarios is more art than science. The creative input determine their effects in each scenario, modifying and reevalu- 72 MIT SLOAN MANAGEMENT REVIEW FALL 2003 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 6. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - For each business scenario, supply-chain planners can create multiple scenarios to run with their optimization models. The result: minimized fixed and variable long-term supply-chain costs. ating them as necessary. Scanning the business environment and consumer-goods businesses and growth in Asian demand involves checking early indicators of change in the environment would eventually slow down. to see which scenario or combination of scenarios is actually The Sunrise-Sunset scenario anticipated that events in western unfolding, thus enabling managers to revise and refine the deci- Europe and Japan would lead to a downturn in the U.S. and sions made earlier in Phase Two. Canadian PVC industry. Concerned about dioxin emissions from Consider Acme Vinyl’s scenario planning in light of Larsen’s the burning of PVC, state governments would begin to file law- approach. Acme managers deemed three decisions as likely can- suits against PVC manufacturers and garbage-incineration com- didates: first, the rationalization of existing production capacity panies. Non-PVC polymer production would gain in importance. and the closing of plants or parts of plants, while possibly Meanwhile, a new day would dawn for PVC exports to Asia, where expanding other plants; second, the concentration of production an overwhelming need for buildings, water and sewer lines would at one or two new megaplants; and third, the rationalization of increase demand for 20 years despite environmental issues. The the company’s distribution network, the closing of some distri- total market would expand and Acme would see its market pene- bution centers and the opening of others. tration increase, especially in India, China, Thailand and Indone- They identified four main drivers affecting the company’s sia, where Acme might even need to build or acquire plants. prospects: macroeconomic forces that determine growth in the gross national product (GNP) of the United States and Canada Middle Ground and the growth of demand in most sectors; the efforts of western The ideal process adds a step between business-scenario cre- European governments and the European Union to phase out ation and final decisions: using supply-chain planners’ opti- PVC, partly in response to Greenpeace activism; fluctuating oil mization models. (See “Strategic Supply-Chain Planning Using prices and their impact on the cost of raw material (and the com- Scenario Planning.”) For each of the business scenarios, supply- pany’s margins); and the cycle of prices for PVC goods. chain planners can create multiple detailed model scenarios to The managers also predicted business trends: continued U.S. run with their supply-chain optimization models. The result: a construction growth; slower industrial growth in the United supply-chain configuration that minimizes the total fixed and States, Japan and western Europe; rapid growth from 2000 variable, long-term supply-chain costs for the particular busi- through 2005 in Asia (excluding Japan); a gradual shift from PVC ness scenario. to packaging polymers by major Japanese and western European How do these model scenarios of supply-chain planning dif- producers of household goods, chemicals and construction fer from the more familiar business scenarios of scenario plan- materials; and a reduced use of PVC compounds in the auto ning? Model scenarios feature an array of demand forecasts and industry in western Europe. tactical production configurations (extra shifts, planned mainte- After their analysis, the managers developed two business sce- nance and the like). The underlying factors are built into opti- narios: a so-called “Official Future” and one referred to as “Sun- mization models for use with advanced planning-and-scheduling rise-Sunset.” The Official Future reflected senior managers’ belief software. Creating model scenarios is straightforward and that, for at least four or five years, the company’s business would involves little creativity or discussion. It is similar to a company grow at the same rate as the GNP growth of the United States and taking a macro business scenario and creating micro scenarios Canada (about 2% per year). Some sectors, such as electronics for business units or regions.16 Only convenience and the time it and consumer goods, would continue to grow faster than others. takes to solve a model scenario constrains how many a company Asian demand (excluding Japan) — a small proportion of Acme’s can have for each business scenario. total North American production — would grow as the GNP of Linking each business scenario to multiple model scenarios Asian countries grew and as Acme achieved greater market pen- and uniting the creative work of strategy formulation with the etration. Those trends would continue for 20 years, and U.S. gov- analytical, optimization-model approach results in a powerful ernment policies would remain favorable to the PVC industry synergy with “right brain” strategizing joined to “left brain” regardless of which political party was in power. The electronics planning.17 FALL 2003 MIT SLOAN MANAGEMENT REVIEW 73 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 7. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - Strategic Supply-Chain Planning Using Scenario Planning The senior team, which uses brainstorming and other hard-to-measure approaches to formulate strategies that increase shareholder value, combines its strengths with those of supply-chain planners, who rely on optimization software to reduce supply-chain costs. Strategy Team (senior managers) Supply-Chain Planning Team (planners) Phase One: Scenario Building s Identify issues, key driving forces and important factors for s Develop or modify optimization model for the supply chain uncertainty (including any target acquisitions and locations for new s Sketch out business scenarios plants or distribution centers) s Flesh out business scenarios s Validate model with strategy team Phase Two scenario planning Phase Two: Scenario Planning s Evaluate possible decisions (policies and strategies) against s For each business scenario, create model scenarios and run each scenario to see how they hold up in each case, using optimization model with each model scenario the scenario-specific recommendations of the supply-chain s Determine best decision for the business scenario, taking team as a benchmark into account recommendations of the optimization model s Modify possible decisions for each model scenario s Iterate and reevaluate as many times as necessary s Present this business-specific choice to senior management along with the team’s rationale for recommending it s If the strategy team has provided its list of possible deci- sions, compare each of them against the scenario-specific recommendations as well Phase Three: Scanning the Business Environment s Identify leading indicators and charge people with monitor- s Refine model scenarios to reflect the reality of the ing changes in the business environment for early detection unfolding scenario and determine the best decision recom- of which scenario or combination of scenarios is unfolding mended by the optimization model s Present recommendations to the strategy team Phase One: Scenario Building In Phase One, the strategy team iden- ucts. Then the supply-chain team, focusing on demand for North tifies the candidate decisions and their attendant uncertainties, American production, developed model scenarios. then outlines business scenarios. The supply-chain team develops or modifies its supply-chain model on the basis of input from the Phase Two: Scenario Planning In Phase Two, the supply-chain team strategy team regarding possible decisions. The two teams then runs the model scenarios and makes scenario-specific recom- validate the model. The strategy team garners useful information mendations. Then the strategy team modifies its pool of possible about the supply chain and updates its notions about how long- decisions, finally choosing one that it then shares with other term supply-chain configurations affect total supply-chain cost. managers. Next, the strategy team fleshes out the business scenarios using Acme’s supply-chain team used software from an APS vendor this information and data-on-demand forecasts, plant locations, and ran model scenarios requested by the strategy team. The lat- distribution centers and so on. Finally, the supply-chain team ter group weighed the resulting recommendations with factors develops multiple model scenarios for each business scenario to relating to the long-term profitability of the business. As a result, run through its software. Acme decided to spin off part of the vinyl business as a joint ven- After developing the Official Future and Sunrise-Sunset sce- ture with a supplier; it also chose to merge with a non-PVC poly- narios, Acme’s strategy team met with the supply-chain team. The mer company. teams agreed that the supply-chain group should make recom- mendations for both scenarios to reconfigure the supply chain to Phase Three: Scanning the Business Environment In Phase Three, the minimize the cost of manufacturing, distribution, the closing of strategy team identifies leading indicators (in the case of a com- old plants and the establishment of new ones. They identified pos- pany like Acme, it might be housing starts) that enable early detec- sible locations for megaplants and determined which of the exist- tion of which scenario or combination of scenarios is actually ing plants could be altered or closed; they also identified 14 unfolding. When the strategy team has determined which scenario product families that, in aggregate, totaled several hundred prod- is occurring, it informs the supply-chain team. With the new infor- 74 MIT SLOAN MANAGEMENT REVIEW FALL 2003 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
  • 8. SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - N OT FOR R EPRODUCTION - S UBSCRIBER COPY - mation, that group revises the scenarios and runs the model again 5. M.A.. Cohen and H.L. Lee, “Strategic Analysis of Integrated Produc- to fine-tune its recommendations. The strategy team then revises tion-Distribution Systems: Models and Methods,” Operations Research 36, no. 2 (1988): 216-228; and M. Cohen and H. Lee, “Resource its decisions and shares them widely so they can be acted on. Deployment Analysis of Global Manufacturing and Distribution Net- works,” Journal of Manufacturing and Operations Management 2, no. Upsides and Downsides 2 (1989): 81-104. Acme preserved shareholder interests following the exercise and 6. R. Breitman and J. Lucas, “PLANETS: A Modeling System for Busi- ness Planning,” Interfaces 17 (January-February 1987): 94-106. the merger, its stock price remaining level despite the plunging 7. B. Arntzen, G. Brown, T. P. Harrison and L. Trafton, “Global Supply- prices of other chemical stocks during the same period. Having Chain Management at Digital Equipment Corporation,” Interfaces 25 executives who formulate business strategy participate in sce- (January 1995): 69-93. nario planning was critical to the final decisions, which undoubt- 8. A. Macdonald and D. Beavis, “Seize the Moment — Radical Supply edly would have been different had the company used only Chain Integration as a Means of Increasing Shareholder Value and Enabling Acquisitions To Deliver on Their Promises,” Manufacturing supply-chain optimization modeling. Engineer 80, no. 4 (2001): 175-178; C. Farrell and R. Melcher, “The But even without optimization-based planning, scenario Lofty Price of Getting Hitched,” Business Week, Dec. 7, 1997; and D. planning would have elicited the same decision regarding the Henry, “Mergers: Why Most Big Deals Don’t Pay Off,” Business Week, Oct. 14, 2002, 72-78. merger. The main benefit of optimization lies in refining the 9. B. Arntzen, G. Brown, T.P. Harrison and L. Trafton, “Global Supply- decisions that emerge from scenario planning, including ration- Chain Management at Digital Equipment Corporation,” Interfaces 25 alizing the supply chain. (January 1995): 69-93; J. Muller, “Compaq Will Buy Digital in a Record Whenever a company considers a merger, it must evaluate its $9.6b Deal,” Boston Globe, Jan. 27, 1998, p. A1; and “Compaq To Acquire Digital for $9.6 Billion,” Compaq press release, Jan. 26, 1998, own assets accurately (in addition to its target’s) so that its share- New York, http://h18020.www1.hp.com/newsroom/pr/1998/pr260198c. holders get the best deal. Acme’s main assets were plants and html. long-term customer contracts, and supply-chain modeling and 10. D.J. Frayer and R.M. Monczka, “Enhanced Strategic Competitive- optimization helped senior managers understand which, in a ness Through Global Supply Chain Management,” Annual Confer- ence Proceedings of the Council of Logistics Management (Oak merger, could be spun off to increase Acme’s value. Brook, Illinois: Council of Logistics Management, October 1997): Like any other management tool, however, both scenario plan- 433-441. ning and optimization modeling can have their downside. Some 11. J. Greenbaum, “SCM Is Dead, Long Live SCM,” July 16, 2002, managers become seduced by colorful future possibilities in sce- http://itmanagement.earthweb.com/columns/entad/article.php/ 1407831. nario planning when they should be focusing on the trends, under- 12. A.P. de Geus, “The Living Company” (Harvard Business School lying factors and uncertainties relevant to genuinely possible Press: Boston, 1997), 69. decisions. Others remain aloof, relying first on consultants and 13. H. Mintzberg, “The Rise and Fall of Strategic Planning” (New York: later ignoring the scenarios when making decisions. Similarly, Free Press, 1994). development of a strategic supply-chain planning optimization 14. See M. Porter, “Competitive Advantage: Creating and Sustaining model sometimes serves no practical use, becoming unwieldy or Superior Performance” (Free Press: New York, 1985); B. Melzer, “The Uncertainty Principle,” CIO Insight, June 1, 2001, www.cioinsight.com; taking too long to complete because of multiple motives. and H. Kahn, “Thinking About the Unthinkable” (New York: Horizon Still, the joint use of scenario planning and optimization Press, 1962). models is the better road to shareholder value — more effective 15. E. Larsen, “What Is Scenario Planning?” teaching note, Cass Busi- than using either approach in isolation. Strategic supply-chain ness School, London, 2000; P. Schwarz, “The Art of the Long View: Paths to Strategic Insight for Yourself and Your Company” (New York: planning, like Pegasus, is more than the sum of its parts. Doubleday, 1991); P.J.H. Schoemaker, “Multiple Scenario Develop- ment: Its Conceptual and Behavioral Foundation,” Strategic Manage- REFERENCES ment Journal 14 (March 1993): 193-213; and P.J.H. Schoemaker, “Scenario Planning: A Tool for Strategic Thinking,” Sloan Management 1. Suppliers of APS technologies include SAP, i2 Technologies, Review 36 (winter 1995): 25-40. Manugistics and Logility. 16. T.F. Mandel and I. Wilson, “How Companies Use Scenarios: Prac- 2. R.L. Breitman and J.M. Lucas, “PLANETS: A Modeling System for tices and Prescriptions,” SRI International, Menlo Park, California, Business Planning,” Interfaces 17 (January-February 1987): 94-106. report no. 822, spring 1993. 3. Optimization models can be built into spreadsheets by using the 17. H. Mintzberg, “Planning on the Left Side and Managing on the Solver feature within Excel, for instance, or by using add-on software, Right,” Harvard Business Review 54 (July-August 1976): 49-59. Also but these models are not comprehensive enough to take into account published as H. Mintzberg, “Planning on the Left Side, Managing on the scope and detail needed for a global supply-chain model. For such the Right,” in “Mintzberg on Management: Inside Our Strange World optimization, the cost of APS software, including implementation, may of Organizations” (New York, Free Press, 1989), pp. 43-55. exceed $1 million. 4. A.M. Geoffrion and R.F. Powers, “Twenty Years of Strategic Distrib- ution System Design: An Evolutionary Perspective,” Interfaces 25 Reprint 45114. For ordering information, see page 1. (September-October 1995): 105-127. Copyright  Massachusetts Institute of Technology, 2003. All rights reserved. FALL 2003 MIT SLOAN MANAGEMENT REVIEW 75 SUBSCRIBER COPY - NOT FOR REPRODUCTION - SUBSCRIBER COPY - NOT FOR REPRODUCTION -
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