During the Cold War, a heated debate broke out about the role of economic planning. Did the “planned” economy of the USSR or the “free market” economy of the USA allocate resources more productively?
Arguments against a planned economy focused on limits of knowledge processing, feasibility of production forecasts and lack of flexibility of centralized plans.
The collapse of the Soviet Union looked as if it would have consigned the concept of economic planning to the dustbin of history. However, the issues raised in these debates are still relevant.
New research shows that 1% of America’s largest firms are on top of things represent 90% of manufacturing-related assets in the US and account for 80% of sales revenues. This implies that a relatively small variety of firms account for the majority of economic activity in the US.
For these firms, planning – particularly the coordination of activities in global supply chains – is a crucial strategic goal. Americans rarely take into consideration the importance of planning, nevertheless it plays a key role not only in the availability of consumer products, but in the economy basically.
Thousands of products, hundreds of thousands of transactions
How professor teaching issues related to the supply chainI worked to grasp the implications of planning.
Supply chain planning refers to a set of repeatable, interconnected decisions designed to repeatedly adjust a company’s performance, inventory, and other assets to maximise profits. It integrates a series of choices revamped different time horizons, from long-term optimization of world supply networks to short-term supply planning.
Planners also resolve how much of a product should be produced or purchased, based on changing consumer demand. Most importantly, they manage the time required to be sure that products arrive at the right time, in the right place and in the right form. They do that not only once, but across hundreds of products and hundreds of thousands of transactions each day.
Consider a typical Walmart store that gives roughly 120,000 different products – technically generally known as stock keeping units or SKUs – Anytime. These products must be available in greater than 10,000 stores worldwide – in addition to online and at home – 24 hours a day, seven days a week.
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And they have to be made available in a range that changes constantly, sometimes radically, depending on consumer preferences and external events. Products must be price competitive, which should motivate the continuous seek for lower production costs. Planners try to coordinate this vast network of individuals, products, and places to profitably match supply and demand.
The best laid plans
Sometimes plans work; sometimes they do not. The most evident signs of scheduling dysfunction are empty shelves and long wait times. There are less obvious ones billions of dollars of excess inventory. Even deeper lie the lag in innovation and large waste throughout the supply chain.
These dysfunctions are pervasive in most firms. But the Covid-19 pandemic has exposed what many planners already knew: outdated planning technologies, talent gaps, and overwhelmed supply chains are stopping firms from delivering goods.
For many years, planners have relied on them enterprise resource planning systems – a type of business management software – integrating the company’s basic business processes, from the purchase of raw materials to the point of sale. Developed in the Nineties but often based on models from the Sixties, these systems can be rigid and have many built-in drawbacks.
Moreover, firms often use dozens, sometimes a whole lot, of various systems to administer workflows and databases. As a result, planners must gather incomplete information from multiple sources to find out dynamic supply and demand requirements.
Automation potential
Automation, especially when it incorporates learning algorithms, has enormous potential in overcoming technological challenges. However, the data requirements are daunting.
Those of us who have a pantry filled with toothpaste because we subscribed to a set-it-and-forget-it delivery service will appreciate the perils of automating decisions based on a forecast. Solving this problem in the global supply chain requires extremely high-quality data combined with advanced analytics. Most firms aren’t there yet.
Even if systems can be found, it will not be clear whether the people needed to operate these systems are ready. Companies are increasingly turning to planners to administer supply chain processes.
However, the knowledge, skills and attitudes that today’s planning professionals need are very different from those needed just a few years ago. Today’s planners have to feel far more comfortable managing ambiguity, leading change and adapting to latest technologies.
The need for talent planning comes at a time when labor shortages and training issues plague the supply chain. While revolutionary educational programs have emerged, it should take time to develop the talent needed.
Challenges and solutions in supply chain management
Finally, the global reach of today’s supply chains creates on a regular basis planning challenges. Even assuming a company has the systems and other people in place to optimize inventory for future demand, it still needs to maneuver that inventory around the world.
So, along with solving the complex problem of matching demand and provide, planners must implement this solution with planes, trains, trucks and ships. Even a passing glance at the headlines gives you a sense of how difficult it may be. Risks include global conflicts and infrastructure breakdown.
Companies are slowly moving their supply chains to lower-risk locations and creating more regional networks. However, creating latest facilities and adding business partners takes time. It also requires systems and talent because planners will be the ones making these decisions.
A brave latest world
The challenges facing businesses today mirror the economic planning debates of the Cold War, with a lot of the same issues recurring. There are clear differences from Soviet-style centralized planning. But an increasingly consolidated set of firms are planning huge swathes of the American economy.
For individual firms, failures in planning can easily result in business failures. At the economic level, planning dysfunctions create each excess and lack. This implies that there are too many things, but not the things that individuals need to enhance their lives.
As the U.S. financial system faces its own challenges, the query may arise whether it is feasible to chart a path to prosperity.