As a manager you can break up your planning horizons into time frames as broad or narrow as you see fit. Often, these horizons are defined by both the business units and sales. For instance, in the US retail sales world, retailers set ads 4-8 weeks ahead; this means most sellers into that market have a natural delineation of the short-term planning horizon at eight weeks. The mid-term planning horizon is less defined in most cases (and highly variable between companies) but is often thought of as 9-24 weeks, with some 9-52 week exceptions. Finally, the long term planning horizon is usually 1-3 years ahead. For this discussion we will focus on the different needs and challenges of these different time horizons.
Short Term Planning Horizon
The short term planning horizon is the most active, time consuming, and problematic as it is very tactical in nature. From a sales and pricing perspective, the short term horizon is mostly about supply clearing in the most profitable way possible. I find it best to break it up into the first few weeks (the week you are in and following week), and the weeks that are further out, but still within the short term.
Let’s start out with weeks three through eight. Those weeks tend to have much less production planning going on. Critical components of weeks three through eight include getting as detailed as you can with your demand and supply plans so you can tell your sales team what they have left to sell with the greatest accuracy possible. Once your pricing and sales teams have a clear view of product available to sell, they must be realistic about forward pricing.
Here is where so many inexperienced pricing managers get in trouble. They are laser focused on selling for the highest prices, which means they end up not selling enough in this window. That inevitably leads to terrible sales as we get closer to the production date. Yes, there seems to be less risk if you sell closer to the production date, but you must remember that the cheapest, most challenging, and most price-sensitive buyers are all that are left when you sell product during the week of production. Therefore, in most cases the “sell it when you see it” strategy can be a great way to lose money.
If your entire team has done a great job of forward selling, then you should have a great sold position for the two weeks closest to production. This is where things get very tactical. Now is when the actual production planning becomes more important. Watching your actual sales in comparison to the forecast demand is critical; if you have been calculating a product availability based on forecasts and they are severely wrong, you are in either a very long or short position without knowing it. Walking into the office on a Monday morning thinking you are in a great sold position based on the demand plan provided then being asked by a scheduler what they should produce today because they have no orders is a miserable way to start a week.
Short term planning horizon needs: Production planning optimization, demand planning vs actual sales reporting, price lists optimized to reflect target vs actual sold position, and an accurate forecast of product available to sell.
Mid Term Planning Horizon
A well-managed mid-term pricing and sales planning horizon leverages the fact that the more you sell in the mid-term, especially with flexible shipment dates (thus flexible production dates), the less pricing, and volume pressure you will feel as a pricing manager.
In the mid-term you are working on large packages of products that can be shipped over long periods of time. Food service, international and deli sales are fixed volume (and usually fixed price) and tend to be important. Industrial and retail customers require you to focus on weekly formula business (where prices are based on the current market at the time). All of these channels are important and getting as much of your supply allocated here is critical to your profits.
Of particular importance to mid-term sales is risk management, which often, but not always, consists of hedging where there are correlated markets, freezing or drying product for long shelf life, and more accurate forecasting. This last point is not just about forecasting the market, but also forecasting when you will be able to produce within the production window to put the most down at the lowest market while still filling orders. By selling product that has flexible production windows you do two things that are amazing for your margins. First, you have created a buffer, so you don’t need to produce product with no sales if/when markets get weak. Second, when market prices are weak, that inherently means there is limited demand and what better time is there to not have anything to sell because you sold the supply months ago? In short, you insulate your pricing from the lowest points of the market with sales that have flexible production dates, which gives your team pricing courage.
Mid term horizon needs: Robust demand and supply planning software to create an accurate forward picture of product available to sell. Consensus market forecasting and pricing so managers of pricing and sales can sell confidently with an executive approved plan.
Long Term Planning Horizon
The long term planning horizon is where the company sets a strategy to capitalize on their current strengths or to open new avenues. Often you hear terms like Integrated Business Planning (IBP) used which is simply to say, “everyone needs to sit down and come together on a plan based on the best information we have”.
You can read entire books about the details regarding IBP, but based on my years in the trenches, there are some key components to pay attention to. First ,and seemingly most difficult, is that everyone involved needs to tell the truth. There is tremendous pressure felt by everyone involved to exaggerate what can be achieved. Executives often feel compelled to “challenge” their teams, and mid-level managers seem to be stuck between forecasting what they think can be achieved and forecasting what they believe will be “expected” of them, regardless of the viability of those expectations.
This process is terribly counterproductive if it is not undertaken with some guidelines around improvement. For instance, there should be some basic guidelines set around improvement percentages based on maturity of the product line. For instance, if we are talking about a commodity product that all market participants make, then anything over “x” percentage change year over year will need an explanation for the major change. However, there should be places where major changes and improvements are forecast, and those should be backed up by a plan. Things like new equipment, a change in supply, a new brand strategy, product line, customer, etc.
Managers should have guidance on where their management expects them to focus their improvements, and security in understanding that reductions in profits are not always bad. Remember, honesty matters.
Second, the IBP process will be much more successful if there is a software solution not named Excel supporting it. Countless hours of your most important managers’ time will be consumed without a system designed to support this process. However, if you do have a system this process becomes one that can be undertaken much more often and updated with minimal effort.
I have been involved in this process with and without a properly built solution and I can tell you that without it, we made a plan after hundreds of hours of work, then we ignored the plan until it was time to do it again the next year because the work to maintain it and glean useful information from the actual vs forecast was too consuming. With the support of a well-built solution this process can become part of the weekly/monthly/quarterly meetings and further tie the three planning horizons together for greater company cohesion and profit.