The Annual Operating Wish

As we approach the end of the calendar year, many companies are starting to work on their Annual Operating Plans Wishes for next year.

Why do I say wish? Because all too often these plans dictate what they wish would happen. Throughout the year, performance is “measured” against the plan. Positive variances are rewarded. Negative variances are, well, not rewarded.

To make things more interesting, each department: Sales, Production, Purchasing, etc., is responsible to meet the plan independently of the others. That makes sense, it is the only way they can be “held accountable.”

So when sales fall short in 1st quarter, production keeps producing. They have to. Otherwise they wouldn’t meet their AOP numbers.

To make things more interesting, if the sales mix changes from the original plan, and there is a raw material shortage that prevents shifting the production to match sales, production just makes whatever the can, whether it is selling or not.

It is pretty easy to think this through to a process of running overtime on weekends to build a product that was sold at a discount to “make the numbers” in the AOP.

The hilarious thing is that I have yet to meet a manager, at any level, who does not agree that this is exactly what happens, and that it is a poor way to run the business.

Yet we keep doing it over and over.

OK, so what to do about it?

The most important thing to grasp is that “the plan” is just that. It is not a fact. It is a working hypothesis, a prediction. It is wrong the day it is made. (If you can perfectly predict the future, why are you reading this?)

The purpose of making a plan is to identify the unexpected. If the sales mix and numbers start to depart from the plan, the entire system responds. This isn’t every department for themselves. (or shouldn’t be) This is about running the company to maximize total margins.

That means working together as a team with one plan, not a separate one for everyone.

2 Replies to “The Annual Operating Wish”

    1. Why have the system adjust indeed?
      That is the question.
      But when sales and production are disconnected and measured separately – meaning that production can “make the plan” by pushing the original forecast even when sales are different, then you have a situation where one half of the system can “succeed” even as the entire system breaks down.

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