Hierarchical planning may not be a headliner everywhere, but it sure gets the job done when the right balance is struck between strategy, tactics and operations.
A couple of months ago, a reporter asked some people what are the biggest challenges in the supply chain today and into the future. As you would expect, trade agreements and technology were at the top of the list.
Further down the list was a quite different but fundamental challenge – planning. Quite simply, companies need to plan for all operations including the global sourcing of all products from raw materials to finished goods. That’s where hierarchical planning enters the picture.
“This is all about the movement of product through the supply chain,” explains Matt Liberatore, the John F. Connelly Chair in Management at Villanova’s School of Business. “As the supply chain gets longer and extends through more countries, managing all that movement requires increased planning and coordination. Hierarchical planning makes that possible with a very positive impact on supply chain efficiencies.”
The trouble is that hierarchical planning is not on the tip of the tongue of most supply chain managers. For instance, other practices such as sales and operations planning (S&OP) get much more coverage at conferences and in the press.
But that is only part of the story of supply chain success today. Hierarchical planning is, in fact, an essential tool for moving products faster and cheaper in a world with uncommon trade uncertainty. Here’s why.
As Liberatore explains, hierarchical planning breaks down into three levels. Up top is strategic planning, usually two years to three, five or ten years out. Below that is tactical planning, usually 12 to 18 months or two years out. And operational planning runs from today to a year out. In other words, hierarchical planning takes you from the tip of the supply chain pyramid to its base.
“Most companies do some hierarchical planning, at least implicitly, but lack a clear link between tactics, operations and strategy,” says Liberatore. “Unfortunately, without the links, it’s tough to make good decisions at all levels, impairing the supply chain.”
That, of course, leads to the toughest challenge of all in supply chains – how much better could they be if all the right steps were taken along the way. Careful execution of hierarchical planning is a powerful solution.
Interestingly enough, the practice is not supply chain specific. Instead, “it fits into a much broader business framework and provides a continuous planning horizon,” explains Tan Miller in this NextGen interview. Miller is professor and director of the Global Supply Chain Management Program at Rider University’s College of Business Administration.
The power of hierarchical planning is its ability to link the business strategy with the supply chain strategy (and other corporate strategies, for that matter). The result is aligned and optimized supply chain planning and management.
To fully understand the power of hierarchical planning, you can read Aligned and Optimized: The power of framework, an article Miller and Liberatore published in the March/April 2017 issue of Supply Chain Management Review. They have also published a book entitled Supply Chain Planning: Practical Frameworks for Superior Performance, published by Business Expert Press.
But for all it has going for it, hierarchical planning is not magical. To be successful, it requires a balancing act between the different planning levels.
For instance, it is very easy to become consumed by the day-to-day details at the operations level. Some companies literally allocate too many resources to getting the day’s orders out the door. That usually results in a disconnect between operations and tactics not to mention strategy. As a result, all that planning does not necessarily translate into costs savings or even satisfied customers.
At the top of the hierarchy, strategic plans can choke operations and limit their ability to get orders out the door. In other words, the strategic plan can create debilitating constraints on operations. It can have a real trickle-down effect – in a negative way.
Take those two together, Liberatore and Miller explain, and the need for feedback loops becomes readily apparent. “There has to be give and take across the levels. There have to be conversations not just a plan,” explains Liberatore.
Natural company events such as new product launches and ensuing changeovers in tactics and operations will have an impact on the efficiency of the original plan. The impact of those changes needs to be taken into account at all levels, and adjustments to the plan made.
As the two are eager to point out, hierarchical planning is a powerful tool if it aligns strategic, tactical and operations planning. But it is not an immutable document. Hierarchical planning works best when it bends with the changes of products and conditions not to mention the supply chain itself.
Gary Forger is special projects editor for Supply Chain Management Review. He can be reached at firstname.lastname@example.org.