Moving S&OP Forward: Better Tools or Better Questions?
February 20, 2012
“Aligning supply and demand is a core purpose of the supply chain function in an enterprise,” asserts Bill McBeath, “but [it] is rarely done well.” [“Demanding Times: Part Three – Aligning Supply and Demand,” ChainLink Research, 4 October 2011] McBeath continues:
“Far too many companies still lack coordination between those in charge of generating and managing demand and those in charge of ensuring supply. When demand and supply are not coordinated, it leads to ludicrous situations such as the manufacturing plant building more inventory while at the same time marketing is reducing price to get rid of inventory.”
McBeath’s example of a “ludicrous situation” highlights the downside of failing to align corporate resources using an effective Sales and Operations Planning (S&OP) process. He writes:
“Sales and operations planning is meant to break down these walls between operations, sales, marketing and finance in order to align supply and demand, but typically suffers from inaccurate input forecasts and long (monthly) cycles resulting in stale plans that don’t incorporate the latest information. Sales is not held accountable for forecast accuracy and is not incented to help align supply and demand.”
I am all for anything that breaks down walls (or silos) within a company, but supply chain analyst Lora Cecere asserts that too many supply chain professionals want to blame the sales force for placing obstacles in the path of corporate alignment. She claims that supply chain professionals seem to like playing the role of S&OP victim. [“And, the Question is…?” Supply Chain Shaman, 3 February 2012] She explains:
“I feel that many supply chain professionals act like a victim when they talk about sales involvement in S&OP. They are a martyr for the operations cause. Their conversations are centered on these questions:
- How do you get sales to give you a better forecast?
- How do you get sales to come to the S&OP meetings?
- How do you drive ownership of inventory with sales?
“Let me let you in on a little known secret. You don’t. These are the wrong questions. You will never be successful trying to leverage change from the supply chain team; especially if you have a victim mentality trying to make sales “responsible for inventory and forecasts.” You will retire <or get fired> before you MAKE sales do anything.”
I don’t believe that McBeath and Cecere are at fundamental odds on this point, they just offer different solutions for addressing the challenge. I like Cecere’s approach as a starting point. She’s of the basic belief, as am I, that good solutions start with good questions. Since she believes that the supply chain professionals have been asking the wrong questions, not just bad ones, she is not surprised that good solutions that improve S&OP processes have not been forthcoming. She indicates that the first thing you need to do is get the sales department intimately involved in the S&OP process in order to get its attention. She writes:
“How? Start with the fact that S&OP on average drives a 2% increase in sales. <Now you have their attention. This is something that they care about.> Then make it worth their while …
- How do you eliminate sales bias? Apply lean forecasting approaches to the forecasting process to eradicate sales bias and error. Make all people accountable by understanding the value of their contribution to the forecast.
What is the role of sales in the forecasting process? Don’t waste their time. Do not ask sales to forecast. Ask them for input on general trends and apply it to the forecast. Sales should never be asked to forecast at an item level.
How do you get sales to the S&OP meetings? Make it worth their while by making it important to their boss.
How do you make sales responsible for inventory? You don’t. You make the entire team accountable for inventory as part of the S&OP process.
“There are natural tensions between sales and operations. Use the tensions to improve the process. Never wear the cloak of the victim. <No one looks good in that color…>”
McBeath certainly agrees with Cecere when she writes that making it worth the sales team’s time is the key to getting them involved. He believes that consensus planning is one of the best ways to ensure that the sales team cares about the process. He writes:
“Consensus planning tries to reconcile [different forecasting methods] intelligently to produce a more accurate forecast used across the firm to drive planning and execution. Elements of smart reconciliation include:
- Integrate awareness of key demand and supply events, such as a large customer order or a promotion. Measure and incent participants on forecast accuracy. This is critical to change behavior and realize improvements. When there is no penalty for poor forecasts or reward for good ones, salespeople will always over-forecast to make sure they have more than enough to meet, regardless of what combination of demand occurs. As a result, manufacturing never believes the forecasts and creates their own.
- Leverage technologies that factor in the past forecast accuracy of each participation, adjusted each time period. Some of these can do sophisticated weighting in order to produce a more accurate forecast than any of the individual contributors.
- Leverage technology that enables scenario building and analysis. Use tools that let people work in the way they are used to, usually with Excel, while integrated to a shared database for analysis and reconciliation.
“Build in checks and balances. The person scrubbing the forecast should be on the alert for things that don’t make sense, such as a part being forecast before the actual first availability date, perhaps caused by production delays. These conflicts can be resolved; for example the account manager can then go back to the customer to discuss the delay, rather than living with a false expectation, wrong forecast, and ultimately a disappointed customer.”
McBeath and Cecere also agree that good forecasting approaches that help eradicate sales bias and error are important. McBeath insists, “Execution based on stale data and out-of-date plans is pervasive. The best companies have short planning cycles and rapid decision making cultures.” Good processes and consensus planning are combined into what McBeath calls “true one-number planning.” The one thing that many S&OP experts would disagree with McBeath on is his recommendation to rely mainly on Excel to get that “one true number.” Although Excel is an excellent spreadsheet program, it can’t handle all the disparate data that needs to be integrated in order to come up with one version of the truth. For more on this topic, keep reading.
Karin Bursa, vice president of marketing with Logility, is also a strong proponent of good S&OP processes. She insists such processes help “companies to achieve greater visibility and make more intelligent decisions about how to respond to real market demand.” [“The Evolving World of Sales & Operations Planning,” SupplyChainBrain, 22 June 2011] The article continues:
“Why the sudden surge of interest in sales and operations planning (S&OP)? Bursa says it’s because companies are viewing it as a potent tool for breaking down organizational silos, an age-old problem. They see the possibility at last of getting everyone to focus on a common plan, while harmonizing high-level corporate strategy with operational and tactical measures. As a concept, S&OP is far from new. But Bursa says it has evolved ‘significantly’ in recent years. Technology is a major reason. For the first time, companies can get access to clean data, giving them the ability to model various scenarios. Even more important, though, is the changing attitude of executive leadership. Top managers know that S&OP can help teams throughout the organization make ‘the best decisions for the business.'”
Although Bursa claims that S&OP has come a long way, McBeath and Cecere point out that there remains a long way to go. Bursa notes that “S&OP initially came out of the manufacturing sector, but it isn’t just about optimizing a manufacturing plan, she says.” The article explains:
“It can guide companies toward achieving other key goals such as entering new markets, and opening or consolidating distribution centers. The evolution of S&OP tracks the desire of companies to fully understand demand and get closer to end customers. Sometimes, Bursa says, that might mean not producing at 100-percent capacity.”
Bursa believes that it is critical that an empowered executive “be assigned to oversee the S&OP effort.” She calls this executive a “process champion.” The article continues:
“‘It really is 60 percent process, 30 percent data and only 10 percent technology,’ Bursa says. ‘There has to be a process champion, with the goal to drive the best visibility for the business. The discipline from which that individual hails depends on the culture of the company,’ she says. Bursa counters objections that S&OP is a laborious process. ‘If you’re hearing that,’ she says, ‘it’s because it’s disconnected.’ A successful effort entails a streamlining of data gathering ‘in one time-phased plan, to model multiple scenarios.’ Such a goal, she says, ‘cannot be done efficiently and effectively with spreadsheets.'”
As I noted above, Bursa’s last comment is one that I see repeated often. Most analysts agree, when it comes to S&OP, the spreadsheet era is over (or, at least, it should be). John Westerveld, a demo architect for Kinaxis, agrees that a spreadsheet (like Excel) “is not a viable S&OP tool.” [“What’s the “right” S&OP tool?” The 21st Century Supply Chain, 2 February 2012] He has nothing against Excel. In fact, he writes, “[Excel] is a very powerful tool that works best with smaller data sets. Companies managing a complex supply chain soon find that they are stretching Excel’s boundaries to the breaking point.” That’s the real point. So if a spreadsheet isn’t the right tool, what is? Westerveld continues:
“Rather than call out a specific tool, let’s look at some criteria that you need to consider when looking for an S&OP application:
- I mentioned that Excel is not a good tool for S&OP is because it doesn’t support ‘what-if’ analysis. This is obviously something you need to look for in any tool for long range planning. But simply allowing you to hive off a version of the plan and make a change is not enough. The ‘what-if’ analysis must provide detailed analysis as to what the impact of a given change will be throughout the supply chain. A key supplier of low level components was just hit by a flood and won’t be shipping parts for six months – what impact will this have on my production? What-if demand increases on one of my product lines? What impact does this have on a constrained resource?… on my contract manufacturers?… on my suppliers? Only a system with full supply chain analytics can address these questions.”
At Enterra Solutions, we call these ‘what if’ impacts the perturbative effects of a potential disruption. It’s important to know what kind of an effect an upstream event can have on downstream sales. Westerveld continues:
- “A related requirement is integration. If you are going to provide answers to the ‘what-if’ questions above, you will likely need to have detailed information from multiple manufacturing centers around the world. These centers in all likelihood are running a variety of disparate ERP systems, so your tool will need to integrate across all these systems and bring the data in to a single environment.”
There is obviously a lot that could be written on this topic. Integration is at the very heart of Big Data analysis and the three “Vs” commonly associated with it: Volume, Variety, and Velocity. Westerveld’s final important characteristic is monitoring He writes:
- “As mentioned earlier, the ability to monitor performance against the plan and report on exceptions is key. A S&OP plan is good. A S&OP plan that you monitor and react to when underperforming is truly powerful.”
Westerveld concludes, “There are several other factors that can play into your selection of a system for S&OP, but I think these are key ones.” McBeath ends his article the way he began it. He writes, “Aligning supply and demand is a core purpose of the supply chain function in an enterprise. It can make all the difference between profitably building and selling the very items your customers are actually desiring and buying vs. building the wrong items that aren’t really needed, only to be sold at steep discounts.” To achieve that purpose, a company must ask the right questions, field the right team, and deploy the right technologies.