Sales and Operations Planning (S&OP) as a process was defined more than thirty years ago -- long before the ubiquity of multinational organizations, pervasiveness of outsourcing or the precariousness of the consumer-driven marketplace. Yet most companies’ S&OP processes reflect the history of S&OP instead of the reality of today.
For companies that want to reap S&OP’s potentially significant operational and financial benefits -- and remain competitive in today’s cutthroat business environment -- reassessing the traditional S&OP process is paramount.
Why Traditional S&OP Is Outdated
Consideration #1: It’s not your grandfather’s supply chain anymore
Thirty years ago, most manufacturers owned their own factories and controlled their own production. They had complete, detailed knowledge of the capacity, schedules, and costs of manufacturing. With direct control over all operations, companies could adapt quickly to changes in the marketplace (which were relatively slow to materialize) and restore the supply -- demand balance more easily. In the years since, a fundamental shift has taken place.
The new environment contains three primary dimensions of evolution which have fundamentally changed companies and how they operate:
- Outsourcing of supply and globalization of demand
- Speed of product innovation
- Increasing demand volatility
Today’s supply chains have evolved into multi-faceted and globally distributed relationships that exist across different time zones, cultures, and technologies. With limited visibility into the operations and constraints of third-party partners, it becomes more and more difficult to make decisions or take action, yet the velocity in which one must do so is greater than ever.
Growing supply chain complexity along with unprecedented volatility constantly challenges a company’s operations performance and demands a new S&OP paradigm that acknowledges the blurring of lines between planning and execution.
Consideration #2: It’s not just about planning
Even the best laid plans are out of date to some extent, as soon as you leave the planning meeting. The assumptions that go into the sales and operations plan are being stretched, pulled and threatened every day, and, having been made as long ago as perhaps a month, may already be out of date at the time of the S&OP meeting. Uncertainty in demand and supply inevitably leads to some degree of plan inaccuracy; with greater uncertainty comes greater risk to the plan.
While companies continue to focus on improving the planning process, more and more are putting equal emphasis on how they can enable the organization to deal with the fact that the plan will never play out “as planned.” An organization must be able to quickly sense changes and ensure that people are empowered to respond swiftly and accurately to drive action that is aligned with the goals and objectives defined in the S&OP meeting.
Today’s unforgiving business environment demands more frequent S&OP cycles, continuous plan performance monitoring, and collaborative analysis and decision making.
Consideration #3: The process is enabled by the right technology
Many consultants emphasizes the importance of process over technology; however, many of the industry’s analysts are now promoting technology as a fundamental enabler for S&OP, largely to overcome the limitation of Excel, which has been the predominant tool of choice (or as many would argue, due to lack-of-choice).
None suggest that a process should not be in place, but that new technology is critical to enabling a truly effective process.
The dimensions of change mentioned above (outsourcing, product innovation and demand volatility) have exposed serious limitations in the ability of legacy tools’ to keep pace with the activities of the company and the market. To try to accomplish the same level of visibility and rapid analysis manually using spreadsheets is next to impossible.
Outsourcing and globalization places key operational data that influences the S&OP decisions outside of the direct control of the brand owner, and is therefore more difficult to access, integrate and analyze. The speed of product innovation requires greater operational visibility and precision in the timing of new product release to gain market share while avoiding unnecessary excess and obsolete inventory on older products. Demand volatility driven by the purchasing habits of today’s fickle consumers requires flexibility in demand management like never before.
Most companies struggle to manage all of this within their formal, monthly S&OP processes. The problem is that with inadequate tools, the process can take longer than a month to complete, and when it comes to making decisions, the primary input data is out of date. Within this process, it is extremely difficult to detect significant change, and never time to respond to it.
There is clear indication that the adoption of technology solutions that enable all the necessary capabilities is still in the early stages.
Modernizing The S&OP Process To Reflect Today’s Business Realities -- Four Capabilities You Need:
1. Scenario Management: “What-if” simulations are your best friend
S&OP is an exploratory process based upon many unknowns and assumptions. A key inhibitor to effective S&OP is a lack of the capability in which multiple “what-if” scenarios can be created and evaluated quickly and effectively.
Scenario Management is important in two distinct areas of the S&OP process -- consensus planning and response to plan deviations occurring inside the planning horizon.
One of the primary requirements of scenario planning is the ability to provide an environment in which all the people responsible for the respective business areas are able to collaborate in order to reach a compromise solution among all of the scenario options. Human judgment must be brought in to the process to allow competing and contradictory business objectives to be discussed and decided in an open forum.
For example, a supplier may agree to ramp up production of a component for a new product early because the sales numbers are trending above plan, and the inventory manager may need to agree to holding increased inventory of the component even though there is increased risk.
In the second case, scenarios can be used when unexpected events occur that were not part of the S&OP plan.
For example, you can simulate the impact of: a strike that limited production capacity; a supplier that was unable to deliver; demand that suddenly spiked or fell off by 20 percent, etc.
“What-if” scenarios allow supply chain teams to model and analyze data to understand the impact of a change and determine the various course correction options prior to taking any action. Effective scenario management capabilities becomes critical in making adjustments to the plan between planning cycles -- essentially creating a capacity for real-time S&OP.
2. Financial Measurement and Reconciliation: Make it relevant to management
Operational objectives set by executive management are almost always expressed in financial measures (e.g. gross margin, cash-to-cash cycle, economic value-add, etc.), so supply chain managers need to convert the unit-based views of the front line into financial measures that are relevant to their superiors.
For example, the CFO in conjunction with the board may decide that the gross margin needs to be increased in order to meet industry benchmarks and market expectations. This may mean sourcing cheaper components from a more risky supplier with longer lead times and poorer on-time delivery. The supply chain needs to be able to evaluate what this would mean in terms of a balance between increased inventory costs and the potential impact on customer service.
Performance measures, both financial and operational, should be able to be ranked and then compared across scenarios to obtain a balanced scorecard and an objective way of determining the best set of scenarios to include in the executive revue during the S&OP process to understand competing objectives.
Effective S&OP processes provide insight about how the company is performing against key corporate metrics. But the most successful companies take this one step further by arming supply chain managers with the ability to know when such targets won’t be met -- and better yet, determine the root cause of such conditions and understand the course corrections options available through what-if scenarios.
3. Alerting: Find out earlier
The key to the effective adoption of S&OP is the tracking of key performance indicators (KPI’s) within the S&OP cycle to understand how the company is performing according to the financial targets. Early warning to the fact that certain KPI’s are projected to exceed tolerance levels allows the organization to take corrective action before they become a problem. For real value, alerting analytics need to take into account the domino relationship and cumulative effects of multiple events.
For example, while a supply order may arrive only one day late (which may be within tolerance from a supplier management perspective), the consequence could be that a major new order will be delivered later, or even worse, lost. This in turn might mean a downward trend for gross margin. Such an occurrence should cause an alert to be sent to a senior manager, allowing him to take appropriate action.
More importantly, there could be several small changes at the operational level, each of which is within tolerance and therefore does not generate alerts. However, the cumulative effect of these changes could be a five percent drop in revenue for the quarter, large enough to warrant executive attention.
4. Manage by Exception: That’s where it counts
Closely related to alerting is the capability to drill down to these exceptions which cumulatively cause a particular KPI to trend out of tolerance in order to understand the root cause of the out-of-tolerance condition. In the example above, the executive could identify all sales regions in which the projected sales revenue is below target. These can be ranked in order, allowing the executive to rapidly identify the regions on which to focus.
When contrasted to the common approach of performing ad hoc analysis and data extracts using spreadsheets, as adopted by many companies in similar situations, the improvement in productivity and effectiveness afforded by tools with an instant drill-down and data analysis capability is readily apparent.
The key is to enable companies to manage by exception, focusing primarily on the issues and “events” with the potential to negatively impact operational and financial plans and goals.
Think Outside The S&OP Box
So while there is no question that S&OP is a very effective and beneficial management tool, it was initially developed over 30 years ago when calculators were still something of a novelty and personal computers were the domain of hobbyists. We had to wait another decade for personal productivity tools such as Lotus 123 and Excel, nearly 15 years before effective graphical user interfaces were developed, and 20 years before the Internet began to have an effect of the way we conducted business.
Business has changed radically in the same time period. Thirty years ago, multi-national companies were still a relative novelty. They may have had sales organizations around the globe, but very few had operations in other countries. Add to that the pervasive trend of outsourcing that has taken place during this time, and it is clear that decision processes have changed.
Thus, the S&OP process -- which was designed to provide executives a forum for operational decision making in the absence of modern computing tools -- needs to be reassessed and updated to take advantage of more modern technology concepts and capabilities.
Still this is easier said than done. Organizational thinking is often inherently bound by the dimensions of the “box” it is currently in because people don’t question working assumptions strongly enough. It takes a lot of energy and political skills to overcome “process inertia” built up over the years within companies especially when the processes involve cross-functional teams and individuals at different levels of the organization.
Popular business press and sales and operations planning (S&OP) consultants will tend to advocate what has worked in the past (i.e. conventional tools and processes). Taken together, this results in organizations likely short-changing themselves when investing in S&OP.
Interest in S&OP tends to get hot when a crisis occurs because the organization understands that fundamental changes are occurring and S&OP is a tool to help them “get out of the mess.” The economic downturn is serving as a reality-check for organizations -- driving home the urgent need for re-assessing S&OP processes.
As a silver lining to the cloudy business climate, out of necessity can come great progress for survival and future prosperity for companies who take this opportunity to adapt their S&OP processes to the 21st century realities.
Kinaxis provides an on-demand supply chain management service that provides tools for supply chain visibility, demand management, S&OP, and supply chain risk management. For more information, visit http://www.kinaxis.com