Some Thoughts Concerning Sales & Operations Planning, Part 2
November 17, 2010
In yesterday’s post, I provided a bit of a primer on Sales & Operations Planning (S&OP) by focusing on some thoughts that Lora Cecere wrote in her blog Supply Chain Shaman. Lora concluded that S&OP is only as good as the data that is collected and the use to which that data is put. In this post, I want to continue the discussion about the importance of S&OP and how some other supply chain analysts believe its needs to evolve. I’ll begin with some thoughts provided by Trevor Miles, who works for Kinaxis [“S&OP needs to evolve – I’m frustrated with traditional thinking!” The 21st Century Supply Chain, 6 October 2010]. Miles writes:
“Much has changed in the business environment, let alone the technology environment, since the origins of the term S&OP by Oliver Wight nearly 30 years ago. From a business environment perspective we have only to look at the rise of the BRIC countries – Brazil Russia, China and India – let alone the rest of Asia first as a source of cheap labor for the Western world, but now source of demand that is expanding far more quickly than Western economies. Many of the companies that used to be sources of cheap contract manufacturing have now developed their own brands and market presence, such as Huawei, Lenovo, and Acer, competing against Western brands not only in Asia but also in the Western economies. One of the biggest shake ups in the pharmaceutical industry is the rise of manufacturing of active pharmaceutical ingredients and generics in India in particular. The same is true of many other industries. The greatest change for the Western brand owners is that the majority of their supply chain is external to their organization, and therefore external to their ERP system. And yet they are as dependent on an effective and efficient supply chain for good financial performance as they ever were before outsourcing. The rise of interest in S&OP is largely driven by the need to regain control of these global, multi-tier, multi-enterprise supply chains.”
Not many management practices or terms have lasted 30 years. But, as Lora Cecere pointed out in the post I discussed yesterday, S&OP has lasted as a management term because businesses are still involved with sales, with operations, and with planning. Although I’m sure that Miles would agree that S&OP has evolved over the past three decades, he is obviously frustrated with the pace of that change. He takes us back 30 years to remind us what the business landscape looked like when the term S&OP was first coined.
“Microsoft was incorporated in July 1981, a month before IBM announced its first personal computer. There was no ‘PC industry’ back then, just tools for hobbyists. And because IBM didn’t think the PC was a serious product, it made the biggest blunder of its history: It left control of the operating system to tiny Microsoft and the central processor chip to Intel Corp. While IBM is still a strong and viable company, its business and revenue streams have changed dramatically since the early 1980’s. Microsoft Windows was first released in 1985, but it wasn’t until Windows 4.0 that widespread adoption occurred. Microsoft released the first version of Excel for the Mac in 1985, and the first Windows version in November 1987. The key point is that S&OP predates Excel, which many advocate as the technology of choice to support S&OP.”
It’s always interesting to reflect on how the world has changed over time. I’ve met people who long for “the good old days” when life was simpler. Few of them, however, would really like to rid their lives of most of the technological advances that make them more productive, keep them in better touch with others, and enliven their lives with possibilities. Although the price of a gallon of gasoline was $1.25 in 1981, inflation was a crippling 10.35%. Other interesting events of 1981 included the election of Ronald Reagan, the birth of the first test tube baby, and the discovery of the wreckage of the Titanic. That year was also a turning point for another reason; it saw the first mention of the Internet. Based solely on those limited facts from 30 years ago, it’s easy to see why Miles believes that S&OP hasn’t kept pace with the times. He continues:
“While the history of the internet can be traced back to the 1960’s in terms of communications protocols used by the US military, but in the early 1990’s it was still a niche used by the US military and a few research organizations, with broad adoption only beginning in the mid-1990’s. And yet 10-15 years later we have the rise of cloud computing, the emergence of terms such a social media, and the rise of brands such as Google, Facebook, and Twitter, all of which are changing the manner in which we communicate and exchange data. The FAX was invented because postal services were too slow, but the items exchanged where still paper, only the delivery mechanism changed. Now we exchange not only the details electronically, but increasingly we also exchange the meanings and nuances of the spoken word through electronic means because they are both more efficient and effective. And yet much that is written about Sales and Operations Planning harks back to its origins nearly 30 years ago. Without a doubt the biggest challenges of S&OP are still related to process and people. What I am continually surprised by is that the S&OP process advocated by many of the process consultants is rooted in what was possible 30 years ago, when S&OP was first performed on paper using double-entry concepts borrowed from accounting. Clearly there were strong limitations on the amount of data that could be analyzed in a timely manner, even given that S&OP used to be run on a quarterly basis. But the very sequential process of demand planning, supply planning, pre-S&OP consensus, and executive S&OP meeting reeks of a process that was developed at a time when the technology available to support S&OP was double-entry accounting paper. In case there is any misunderstanding, let me repeat that I have no question that successful adoption of S&OP is about process, people, and technology, in that order. I think it is time to rethink the S&OP process. Actually, let me rephrase that: It’s time to think of the planning process as a continuum across time, product, and functional dimensions. S&OP is the process to drive this ‘unified theory’ of planning.”
It appears to me that Cecere and Miles agree that S&OP is about a unified theory of planning. Planning done in isolation simply fosters the kind of industrial age silo thinking that burdens companies trying to operate successfully in the information age. Miles continues:
“Recently Tom Wallace commented that ‘Cross-functional collaboration is not a pre-requisite for successful S&OP: it’s a result’. I agree, though I imagine that the CEO had more concrete objectives in mind when approving the adoption of an S&OP process. And yet the five step S&OP process being advocated by many process consultants only provides for monthly cross-functional collaboration in ‘consensus’ meetings. No, no, no. How can Marketing decide on a promotion plan without close consultation with Finance, Sales, and Manufacturing early on in the process? What if the drop in revenue for a particular product line being observed by Marketing is due to a capacity shortage leading to customer service issues and consequently a drop in market share? But all too often Marketing will make a decision to run a promotion, not because they are stupid, but because they don’t have ready access to all the information and they have no way of discussing and evaluating the impact of their decisions in a timely and cross-functional manner.”
You can sense Miles emotional connection (mostly frustration) to this subject. He is shouting using the written word. He’s shouting because he doesn’t believe enough people are listening. Miles correctly asserts that monthly meetings are “way too slow for most industries, particularly the high-tech/electronics industry where prices can drop as much as 5% over a month, new products are introduced every 3-6 months, most of the supply chain is external to the brand owner, and supply lead times have been extended because of off-shoring and outsourcing.” Like Cecere, Miles believes that S&OP has to be part of a real-time sense-and-respond supply if it going to succeed in 21st century business environment. The decision speed he thinks is required can only be obtained through technology. He continues:
“Let us use the advances in technology, particularly the Internet, to redefine the S&OP process to be more collaborative, more consensual, more timely, more dynamic. Let’s get to the point of assuming collaboration as a base requirement and drive S&OP to delivering real tangible benefits. As long ago as 2003, Charles Poirier included the following diagram in his book. It is time we put this into practice and make S&OP a truly collaborative process throughout the cycle, not just on select days during the month.”
Frankly, it’s difficult to fathom that a decade into the 21st century people must still be convinced that collaboration, both internally and externally, is a better way to do business than using siloed divisions and silo thinking. It obviously frustrates proponents of collaboration, like Miles and Cecere, that they have to continually mount a soapbox to make their case. Miles asks, “Given that the technology is available, why are [collaborative processes] not carried out on a continual basis?” That question is a good segue to a post written by John Westerveld [“The endless debate: Is S&OP about technology?” The 21st Century Supply Chain, 25 October 2010] Westerveld writes:
“I recently saw [a] twitter post which linked to an article by Steve Banker at Logistics Viewpoints titled ‘S&OP is not about Technology. Wrong!’. This position clearly aligns with my thinking about the place of technology in S&OP. There was once a time when everyone believed that S&OP could be done in Excel. In fact, some S&OP guru’s still believe that S&OP can and should be a process that is detached from the planning and execution system. Proof is starting to accumulate that this thinking is clearly misguided.”
I certainly hope that this 2-day discussion of S&OP has convinced you that the kind of collaboration needed to support today’s supply chain management requires more than a team that can deftly manipulate an Excel spreadsheet. Westerveld continues:
“Once your business grows to any size of consequence, you will need more than basic tools to be effective in S&OP. Steve raises three key points in his post describing why a manufacturer needs technology to achieve a robust S&OP process:
- “A strong S&OP process requires collaboration. This requires that all parties need to be able to see and modify a common set of data. Not an easy process to manage with basic tools like Excel.
- “You need to be able to see potential misalignments between the plan and defined goals. When those misalignments exist, you must be able to try different resolutions like promotions, while ensuring that you have the manufacturing ability to back it up. This means being able to identify and resolve issues at the mix level even when planning at the volume level.
- “Your supply chain operates in units, but your executives operates in dollars. Your S&OP tool must be able to easily move from units to dollars and dollars to units.”
Lora Cecere has used similar arguments to encourage collaboration. She argues that if every corporate division tries to maximize its key performance indicators there are going to be inevitable internal conflicts between division strategies that ultimately hurt the bottom line. Only when division heads collaborate to make trade-offs does the bottom line improve. In today’s fast-paced business environment, a company simply can’t collaborate effectively without the right technology. Westerveld writes, “Traditional S&OP tools simply don’t allow you to react fast enough when you need an S&OP level decision very quickly.” He concludes:
“Now, don’t get me wrong. I’ll never say that technology alone will make for a robust S&OP process. I’ve written on this before in my post Is Excel the right tool for S&OP. In it, I identified the three pillars of S&OP: Process, Executive Commitment and Effective S&OP tools. An S&OP project that ignores any of these pillars will fail. The best tools without process will not work. The best tools and the best process without executive commitment will result in great answers that are ignored. An effective process and executive commitment without proper tools will result in sub-optimal performance and frustration amongst the team. I’ll say it again. You need all three elements for effective S&OP: Process, Executive Commitment and Effective S&OP tools.”
Have you noticed that two terms — collaboration and trade-off — continually assert themselves into the discussion? In another post, Trevor Miles compares his views of where S&OP should be heading to the views of Kevin O’Marah, Group Vice President of Supply Chain Research for Gartner [S&OP: Where’s the technology? Right here!,” The 21st Century Supply Chain, 9 November 2010]. Miles begins by quoting from a post written by O’Marah:
“Kevin writes that:
Good S&OP does a lot more than just reconcile mismatching supply and demand. It allows the business to make conscious trade-offs between customers, financial plans and physical reality.
We are in absolute agreement. S&OP must mature from being a unit based activity localized in operations to a business-driven activity crossing many functions in the organization, particularly Finance, Marketing, Sales, Engineering, and Operations.”
Miles, however, doesn’t agree with everything that O’Marah writes. He continues:
“Where we disagree is when Kevin makes the statement that:
Perhaps this is why the best often do it with nothing more sophisticated than a rigorous process and a raft of spreadsheets.
Wow. Really? Maybe in very early stages of S&OP maturity. I agree about the rigorous process. But a spreadsheet-based approach does not offer proactive analysis, cannot integrate across the business, suffers from poor data integrity and consequently delivers weak reporting. All of this happens alongside the customary issue that spreadsheets, especially a raft of spreadsheets, are notoriously difficult to maintain. How does one have a rigorous process in today’s multi-tier, multi-national, multi-enterprise, outsourced supply chain without at least rudimentary technology support beyond ‘a raft of spreadsheets’? How does one capture and consolidate assumptions made about business drivers and market conditions? Beyond very high level and possibly trivial statements, that is. How does one test alternative risk strategies? Or timing of new product introductions? I’m referring here to feasible plans, not ‘finger in the air’ wishes.”
I’ve got to side with Miles on this one. O’Marah statement seems pretty simplistic; especially coming from a Gartner analyst. Miles goes to note that he is not alone in his thinking. He concludes:
“Don’t take my word for it. Read the article titled ‘Sales and Operations Planning Maturity: What Does It Take to Get and Stay There?‘ published on Nov 1, 2010 by Jane Barrett and Micheal Uskert of Gartner (paid subscription required). In the article they make the 3 statements below (my highlights) about the role of technology in moving from stage 2 … through stage 3 maturity in their 4-stage S&OP maturity model.
- While technology alone will not be the key to maturing the S&OP process, it plays a critical role. To get from Stage 2 to Stage 3 requires good, clean, credible planning and metrics data and a ‘single version of the truth.’ So there is a need for underlying technology and systems to support this. Typical Stage 2 tools are statistical forecasting, supply chain planning and inventory optimization. Foundational elements are data quality, master data management (MDM) and the necessary integration.
- As the culture matures toward Stage 3 and there is more transparency and business owner participation, the process must be supported by the ability to make decisions faster through timely information, and more efficiently through exception and alert-based workflows. Typically, technology is required for this. In Stage 3, the dialogue shifts to what-if and scenario analysis, and to advance these capabilities and get into Stage 4 requires analytics and modeling tools. The term ‘rapid planning,’ as well as the tools to support it, is emerging as a requirement to get through Stage 3.
- Two companies we spoke to said that they focused on the process, not the technology, and now the lack of technology is holding them back from getting beyond early Stage 3. But what got them into Stage 3 was all about change management and the critical cultural shift.
From the description of the key capabilities above I doubt that Jane and Michael had spreadsheets in mind when writing this article. And I think a raft of spreadsheets exacerbates rather than alleviates the problem.”
Technology is what helps an organization discover where division strategies are in conflict and what trade-offs must be made in a collaborative environment to improve the enterprise’s bottom line. But, as noted above, technology is only one of three important parts of an S&OP framework. Although Miles and Westerveld use different labels, they both agree that successful S&OP systems must include process, people (i.e., executive commitment), and technology (i.e., effective S&OP tools). I prefer Miles broader “people” category to Westerveld’s more narrow “executive commitment.” Although Westerveld is correct that “without executive commitment … great answers that are ignored,” those great answers can only be developed when people on the S&OP team use good technology wisely.