Improving S&OP Processes
October 30, 2012
“Everybody does it,” writes the editorial staff at SupplyChainBrain, “but few really understand it.” What is “it”? The answer is: Sales & Operations Planning (S&OP). [“Divulging the ‘Secret Sauce’ of S&OP,” 9 October 2012] The article continues, “That could be an appropriate tagline for sales and operations planning, a valuable concept in modern-day supply-chain management that is nevertheless difficult to define. Is it a process? A management philosophy? A piece of software?” Lori Smith insists, “S&OP, by its very nature and purpose, is a cross-functional activity.” [“The three C’s of S&OP,” The 21st Century Supply Chain, 16 February 2012] Jon Kierkegaard, president of DCRA Inc., told the SCB staff, “The reality of S&OP is that everybody does it. If you run a business, sometime in the month or year you match demand and supply.” He continued:
“What’s evolving in S&OP is the ability to reduce the cycle time it takes to scientifically net demand and supply – particularly when it comes to global, long-lead supply chains. Oftentimes you can use S&OP to sell things before you have to pay for them – which is almost a perfect economic model.”
Clearly, any business could benefit from an “almost perfect economic model.” The question is: How do you implement an S&OP process that provides maximum benefit for your business. Rikka Kaipia and Jan Holmström believe that a cookie cutter approach to planning is inappropriate for most businesses. They write:
“Matching demand characteristics to supply chain capabilities in order to capture sales opportunities and to satisfy customer needs in terms of speed, location and product variability is the purpose of supply chain planning. … The goal is to plan how the supply network is to respond to future demand. The time horizon is several months in to the future. The plan is then communicated to suppliers, manufacturers, sales and customers. Based on the plan, suppliers can ensure that they have adequate capacity for fulfilling expected future demand. … The required planned processes consist of forecasting sales, demand planning, supply planning, and matching demand information and supply capabilities.” [“Selecting the right planning approach for a product,” Supply Chain Management: An International Journal, 2007]
Kaipia and Holmström provide a framework for helping select the proper planning processes for various types of products (be they functional or innovative) and the nature of demand (continuous or seasonal). Those factors determine whether you need a supply chain whose primary characteristic is efficiency or one whose primary characteristic is responsiveness. For suppliers, answers to those questions determine whether they need to have continuous or flexible production schedules. Kaipia and Holmström provide the following decision tree for selecting the right planning approach for your company (click image to enlarge).
Andrew McCall, S&OP Solution Leader for Plan4Demand, agrees with Kaipia and Holmström that S&OP processes need to be tailored for each organization. “An ‘off the shelf’ Sales and Operations Planning (S&OP) process is a good start to your business’s plan of attack,” he writes, “but tailoring the process to your company is how to really drive value.” [“Tailor your S&OP Process to Your Business,” Supply & Demand Chain Executive, 7 September 2012] He continues:
“The key characteristics of an effective S&OP process are to establish your operating goals; drive measurement and improvement of those goals; and help make critical, mid- and long-range decisions to guide your operations. Thus, customizing that process to fit your business is an important step.”
Jon Kierkegaard is also in agreement that tailoring is necessary. “Don’t let some software company or consultant come in and say, ‘You know nothing about your business – follow my process,'” he states. “What sales and operations planning really can do is let you use less working capital to accomplish more sales. That’s the magic behind S&OP.” McCall offers ten tips to consider as you tailor S&OP processes to your business. They are:
- “Match key reporting elements and data presentation with decision making at the operating company or regional level in mind to drive accountability.
- “Brand/Line of Business Management: just like your operating company or regional structure, driving brand or business unit visibility helps create ownership of the number.
- “Determine where you are in your maturity journey and create ownership for the S&OP process appropriately. It’s ok for this to move as the process matures.
- “Tailor the supply review process to match your supply footprint. A standard ‘off the shelf’ S&OP process will lean heavily towards production and manufacturing. It is important to match this critical process step with your needs—including procurement, contract manufacturing, distribution and co-packers—to provide visibility into your constraints decision-making levers.
- “Develop a demand planning hierarchy that supports a forecast of your direct sales, as well as a hierarchy that can provide insight into consumer trends.
- “Identify what specific operational levers that your organization needs to make key decisions based on. These can be related to your production footprint, lead times or seasonality.
- “Align the process metrics and overall key performance indicators (KPI’s) to provide visibility and monitor performance of these operational levers.
- “Establish a planning horizon that matches your key decision-making requirements in both the mid- and long-term spaces. This could be a level of granularity for the first 12 months to support operational decision making, and a different level for 12 to 36 months to support your strategic growth plans.
- “Create linkage right away to other key business planning processes such as the development of the annual budget; external financial reporting; managing the strategic plan; and product roadmap. This allows the ‘one number’ process to begin to develop and provide both methodology and assumptions that can be leveraged across all these areas.”
It’s clear from McCall’s list that he sees S&OP processes as helping businesses align themselves behind common goals. The editorial staff at SupplyChainBrain write, “More and more companies are turning to sales and operations planning (S&OP) to align different areas of a business around the same goals, while those already experienced in S&OP are shifting to a more advanced version of the process known as integrated business planning (IBP).” [“Keys to Successful SOP Implementation,” 28 November 2011] One obstacle to alignment is corporate silos. Kierkegaard told the SCB staff that the implementation of good S&OP processes is a great way to tear down silos in an organization. He also told the staff:
“S&OP is a process. It’s a philosophy of how to make things profitably. If you use technology the right way, you can dramatically reduce the cycle time to net that demand and supply. It’s a workflow, and there are so many thousands of permutations of how your company interacts in demand/supply, let alone your suppliers, that you need to have a very flexible process. Then you can pull in tools to actually do the calculations and share them back out.”
Kierkegaard explained to the SCB staff that the most important thing about a good S&OP system is that it lets a company steer by looking out of the windscreen instead of trying to steer by looking in the rearview mirror (which is all that ERP systems allow you to do). He stated, “If you have the right kind of tools, you need to be looking out the front windshield. And when that turn comes up, you can make it.” Asked to identify the “secret sauce” of a good S&OP process, Kierkegaard answered:
“Production-planning guys in the fifties and sixties invented MRP [material requirements planning], and the algorithms aren’t black boxes. They’re time-phase netting algorithms that synchronize the flow of material based on lead time. However you want to weave them into your business, those algorithms are a secret sauce. You can’t look at just the four walls of your business. You’ve got to look outside, pick up demand signals early at the customer, and as far back as your supply chain goes. I don’t know of too many products or companies these days who don’t have at least a component of their product that isn’t heavily dependent on some third party back in their supply chain.”
Joe Shedlawski of JSF Associates agrees with Kierkegaard that “S&OP gets companies thinking ahead and longer term, rather than being stuck in the daily ‘burning crisis’ issues. It gets them looking at trends in demand patterns so they can project future imbalances in supply and demand, analyze gaps and take proactive measures to solve problems before they become acute.” [“Building an S&OP Program that Delivers on Expectations,” SupplyChainBrain, 29 December 2011] The article continues:
“Companies with a longer-term view will have time to make other contractual arrangements or to add capacity and manpower if problems arise, he says. Those caught in short-term thinking will have problems sneak up on them, ‘and then the only way to fix them is the expensive way.’ Unfortunately, many companies execute S&OP incorrectly and, as a result, they fail to reap these benefits, Shedlawski says. ‘Often companies view S&OP as a way to get incremental change, but that is not its purpose at all. Its purpose is to change culture and processes and, to a smaller degree, to change technology.’ Rather than focusing on incremental change using existing processes, top management needs to create aspirational goals that the company is not yet able to achieve, then employ S&OP to remove barriers that stand in the way of achieving those goals, says Shedlawski.”
One thing that all of the analysts agree upon is the fact that conducting S&OP is an essential characteristic of successful companies. The fact that you do it is more important than how you do it. You can always change how you do S&OP as your company’s situation changes.