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Sales and Operations Planning - A Key Element of Supply Chain Success
Contributed by: Computer Sciences Corporation
Executive Summary
In spite of the fact that most of us are very active and busy these days, we sometimes find ourselves searching for something of value that can be added to our business efforts. When you find yourself in that position, consider a tested and proven technique that can bring significant new value to your firm’s supply chain effort. Consider discussing how a planning tool can improve forecast accuracy, better match supply with demand, and greatly reduce dependence on inventory. That tool is sales and operations planning (S&OP).
S&OP has become a major tool for supply chain leaders tired of accepting the inherent problems with poor sales forecast accuracy, complications with planning and scheduling due to changing customer demand, and the need to build safety stocks into inventory for the inevitable problems introduced by vagaries in the marketplace. This paper addresses the ideas behind S&OP and discusses techniques that have been successfully applied.
At its core, S&OP is about gathering information that’s generally available but not provided or used. Moreover, it’s about balancing supply and demand in a way that overcomes the deficiencies of weak forecasting and results in more optimum performance - from the initial suppliers to the satisfied customers. Several action cases will be used to demonstrate how to apply the tool to cope with the problems and meet business objectives through the solutions it provides.
When deployed across a business enterprise, up to a potential full point of new profits can be attained by:
Ø
Increasing revenues because there are less out-of-stocksØ
Determining more accurately what the real demand is from key customersØ
Reducing inventories closer to what is neededØ
Shortening cycle times from order to cashØ
Improving planning and scheduling due to the greater accuracy createdØ
Eliminating mistakes in the processingØ
Better satisfying customers while reducing supplier frustrationsThese are just a few of the advantages to be gained from application of a key element of supply chain success.
Sales and Operations Planning - Overview
To begin, S&OP is not a new technique. It’s been a management tool for decades. What researchers find, however, is a wide variation in the degree to which it is used and the results of the effort over an extended time frame. An analysis reveals the typical firm has dipped its toe in the water by trying some form of S&OP. It also shows most companies failed to pursue it to best case conditions and as interest waned, dropped it from the high priority activity list. Current studies indicate leading firms have re-discovered the tool and are generally well pleased with the renewed effort. With the help of willing suppliers and customers, they have introduced collaborative techniques that dramatically and favorably impact sales forecast accuracy and the matching of supply with demand - so cycle times and inventories can be significantly reduced, while improving responsiveness.
Let’s consider applying the tool by using this dialogue:
•
You’ve read the articles…•
You’ve convinced management that you need to do something about sales an operations planning•
You may have bought enabling software•
You’ve opened cross-functional communications•
You’re doing a better job of balancing supply with demand•
So, you’re doing Sales & Operations Planning, RIGHT?•
But, has your business significantly improved?When a business goes through this analysis, it generally gets them to draw some interesting conclusions:
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The current S&OP activities do not adhere to a “Best Practice” approach of structured processes, data supported, “What-If” decision-making capability, consensus decision making and understanding of the business direction and potential risks for moving forward
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There is little to no business impact sensitivity analyses performed to support the decision making processes
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Alternative scenarios are not reviewed or considered during the current S&OP process
These conclusions often lead a firm to develop a formal and robust Sales & Operations Planning process. Such an effort will become a vehicle for the communication and integration of the demand and supply planning activities with the financial plans of the company. This move will introduce clear and consensus understanding and communication of the business direction and potentials risks ahead throughout the organization. A pilot approach can also be discussed that allows for a “proof of concept” for a piece of the business - to minimize risk before rolling out S&OP across the entire organization
Exhibit 1 is an illustration of the approach that can be taken, as the firm moves from an initial assessment to design and prototype of the system to be applied. It includes a recommended pilot phase and concludes with a successful roll-out.
Inherent Concepts
Sales & Operations Planning is a core business process which notifies the appropriate functional areas of the business of anticipated demand volume and how the company plans to supply product to meet that demand and best serve the customer at the lowest risk to the enterprise. The basic ingredients accomplish some fundamental business needs, since successful S&OP efforts are characterized by:
•
A top-down and bottoms up approach, linking the firm’s business plan with the current demand and supply plans•
A cross-functional, collaborative process that focuses on improving business performance•
A structured, formal, holistic set of monthly consensus business processesAt the same time, we should understand that S&OP is not:
•
Informal, cross-functional communications around the water cooler (one end of the spectrum)•
Paralysis by meetings (other end)•
A “silver bullet” solution to resolve all business problems•
A near-term business issue resolution processThe characteristics of a successful effort include:
n
Formal high-level process with assigned accountability, executed through cross functional team consensus decision-making (closed-loop system)n
Seeking a 90+% accuracy with sub processes and data sets across the business, realizing there will be nuances by business, mitigated by striving for as much consistency as possiblen
Consistent language and understanding from all functional areas throughout the organizationn
Enhanced decision-making (data-driven, timely and shared functional perspectives)Benefits of such an effort will typically include improvements to performance in:
Ø
Commitment at all levels of the organization including executive and team membersØ
Proper performance measurement system which motivates total supply chain behaviorØ
Appropriate information systems support through accurate, timely, exception- reportingØ
Adherence to the process through discipline and accountabilityAt its heart, S&OP is a business solution which addresses the business processes, metrics, information requirements and the culture of the company. It is applied to ensure that a holistic perspective is brought to the system that matches what the customers really need and what the firm is really capable of supplying through its network of suppliers and its system of manufacturing and delivery. Such a solution mandates the involvement of constituents across that business network.
S&OP Process Overview — What Gets Done
If we proceed to consider what happens when a firm makes the decision to apply S&OP as a process improvement and management tool, we should take a look at exhibit 2, where the planning process is outlined. The technique starts with gathering the projected demand information and compiling it in a usable form by multiple constituents across the supply chain. From that information, a “consensus demand forecast” is generated, typically beginning with the sales forecast originally used for planning purposes, but augmented with inputs from key customers and amended by knowledge of current operating and market conditions.
In the next step, an evaluation is made to match the consensus demand against any known or anticipated manufacturing and logistics constraints. When problems are encountered, the system is used to notify important constituents on either side of the manufacturing firm. Specific conflicts are considered for resolution through a gate that determines whether they can be resolved or need further attention. Where they can be resolved, there is a step in which alternative actions are considered and decisions made to resolve the conflict.
When the conflicts cannot be immediately resolved, the next step is to establish a “consensus execution forecast” or new supply plan that is again communicated to all important constituents. Finally, there is a step to monitor progress versus the altered demand and supply plans. The overall objectives, of course, are the optimal utilization of corporate and enterprise resources and better satisfaction of the customer
S&OP Major Findings
Whenever a firm deploys S&OP, it will find benefits from applying the business diamond illustrated in exhibit 3. The objectives are presented in each segment of the diamond. When an analysis begins with a look at the business processes, we typically find these conditions:
•
Regular Demand Planning meetings held monthly focused on achieving sales volumes and financial targets•
Limited Demand Planning integration activity taking place with supply-side activities•
Regular Supply Planning meetings taking place, however, without any capacity or constraint information/data•
Supply Planning utilizing daily and weekly meetings to satisfy product exceptions•
Little or no formal consensus or executive meetings currently taking placeMoving around the diamond, when we study the management control systems, we find:
•
No forecast accuracy measurement currently being tracked•
No tolerances set for acceptable variation of performance (Supply or Demand)•
Business assumptions and risks are not documented to support the business decisions being made•
Little to no sensitivity analyses being performed to enhance business decisions•
Deviations from plans are not always reconciled and fully understood
When the diagnosis delves into Beliefs, Values, and Norms, it’s not unusual to find:
•
Strong desire across functions to make correct decisions for the company•
A strong belief that the Sales incentive program inserts bias into the process and numbers•
Belief that while the S&OP process is “far from perfect”, the meetings taking place are enabling good decisions to be made•
Current process is person (experience)-based versus process and metric- basedContinuing around the diamond, the Technology and Information Services section will show:
•
An Enterprise Resource Planning (ERP)’s S&OP module currently not being used•
S&OP reporting is mainly supported by Excel, various reports from ERP and supplemented by personal experiences throughout the company and industry•
Tools for “what-if” type analysis do not currently existIn the section devoted to organization, jobs and skills, we discover:
•
No overall and integrated S&OP process from a total company or enterprise perspective•
Lacking total cross-functional representation on teams across Demand, Supply, Consensus and Executive meetings•
Strong personal influence over the S&OP processAs a result of these finding, we can proceed to outline a workable solution that brings the enterprise constituents closer together and aligns them around bringing greater accuracy and efficiency to the processing. We also find the missing ingredients inhibiting better success.
A Best Practice S&OP Solution Requires More than Just Processes
Major challenges to success with S&OP come from two areas - those that we find are traditional across businesses in general and those that have emerged as part of what we term the challenges of the 21st Century. The traditional category will include:
Engaging the Commitment of Sales and Marketing
-
Attendance à Participation à Passion•
Achieving Company-wide Alignment to a “One-Number” Consensus Plan-
Elimination of “localized” plans-
Accountability to achieve defined plans and assigned action items•
Over-Emphasizing Process Rigor Over Business Value-
Excessive forecasting versus key demand intelligence-
Assembling detailed data versus enhancing business decision-making across the organization•
Migrating Back Towards Reactive Crisis Management versus Proactive Strategic PlanningChallenges from the 21st Century include:
•
Globalization of the Supply Chain-
Logistical challenges of physical product flow-
Cross-cultural communications and coordination•
Fragmentation of the Supply Chain-
Coordination among multiple entities (internal and external)-
Competing or conflicting priorities across organizational boundaries-
Overall complexity of alternatives•
Organizational Volatility-
Rapid integration of acquired entities-
Changes to sourcing alternatives and preferences•
Continued Time Compression-
The “supply” side wants more advanced notice-
The “Demand” side will give you less
Calibration Reveals the Performance Gap
A summarized assessment developed with the framework helps establish as-is conditions versus could-be opportunities. These characteristics are then used to format a matrix similar to that described by exhibit 5. Now you can proceed to match solutions with the level of progress and help determine why and how the firm should proceed to the next level. If your company is a basic beginner, you can:
•
Focus on developing a process, and engaging cross-functional participation•
Identify critical information requirements, gather data and put in Excel or Access as a start•
Develop a few key performance indicators, target performance and track actual versus plan results with assigned action items for performance shortfalls•
Recognize and celebrate successes and achievementsFor example, a pharmaceutical manufacturer piloted an integrated Sales & Operations Planning process for its top 25 Product Lines. The objective was to meet marketplace demands at the lowest possible costs with the required service levels. For its approach, this firm developed key S&OP dimensions around the “Business Diamond” and “Maturity Cube” elements, in order to synchronize supply and demand. The results included:
•
Created a new supply chain organization capable of managing a new S&OP process•
Developed and implemented an Excel spreadsheet model to support the pilot and also be used to define the requirements to go into its ERP system•
Developed new metrics to measure the effectiveness of S&OP process
At the next level, if your firm is average or looking to improve, you can:
•
Focus on collaborating across other internal Business Units and entities•
Investigate Best-of-Breed point solutions with enhanced functionality•
Demand executive leadership commitment and guidance•
Design accountability and incentives around the S&OP process and business effectiveness•
Recognize and celebrate successes and achievementsFor example, a major brand name food processor decided to develop a fully integrated supply and demand side business strategy to drive growth and cost savings. The issues for this firm on the demand side included stagnant categories, fragmented sales force, and flat growth. The issues from the supply side included antiquated processes and technology support, bloated inventories, and a large amount of obsolete inventories. The results included:
•
Potential reduction in grocery products finished goods inventory of $13 million-$29 million (38%-50%)•
Reduced SKU count by 25%•
Identified opportunities for a 3%-5% increase in revenueIf your company is driving for a best in class position, you can;
•
Focus on collaborating with key external trading partners/companies•
Integrate information requirements and templates across the internal and external organizations•
Focus executive leadership demands on accountability and responsibility•
Apply emphasis and incentives based on business plan and individual KPI achievement•
Recognize and celebrate successes and achievementsAs an example, a U.S. beverage company and its 600 plus distributors decided to create a better process for the company and its distributors to share weekly forecasts, sales and inventory requirements. The chosen approach was intended to work from an existing forecasting and inventory worksheet. This information is now used to develop replenishment orders and to plan plant capacity utilization. With enhancements, it provides reports and historical sales trend data to assist the distributors in creating more accurate forecasts. Together, these partners utilize a scaleable architecture that can be centrally maintained and will support the wide variety of distributor platforms in place.
An interactive collaborative extranet tool allows the company and its distributors to improve service levels through greater demand visibility and a more balanced inventory investment.
S&OP’s Design and Prototype Description
When we move into deployment and execution, the objective is to design and prototype a formal Sales & Operations Planning process for a piece of the business, in order to enhance the communication and business decision making capability.
The scope would include input from the Demand Planning, Supply Planning and Consensus Meetings for the business and information on the top revenue generating products/product lines. The prototype is typically deployed over a 12 Weeks Duration:
l
1 week project initiationl
1 week to develop high level processesl
3 weeks to develop detailed processesl
3 weeks to prototype key concepts for S&OPl
4 weeks to build and test the pilot model, determine data sources and information flowsPre-requisites would include:
l
An ERP system’s Advanced Planning tool set is chosenl
The Business Warehouse be implemented for use by the Demand Planning toolThe approach includes:
Ø
Definition of a high level S&OP processØ
Identification of detailed processes for demand, supply and consensus buildingØ
Identification of key meeting participants and communicate level of commitment/participation needed for each processØ
Prototype of key concepts for each process and review with design teamØ
Development of the S&OP tool, report formats, key measures and meeting packagesØ
Definition of the necessary data requirements for population of the S&OP tool and reportsØ
Determination of the data collection process, timing and responsibilitiesØ
Establishment and publication of all meetings (Demand, Supply and Consensus) for the remainder of the yearThe deliverables will include:
n
An advanced planning and scheduling-based S&OP tooln
Agendas and meeting package templatesn
Identified roles and responsibilities for each meetingn
Personnel identified and informed of their new roles and responsibilitiesCase Example - An Energy Division of a Major Industrial Manufacturer
To illustrate what can be accomplished with a renewed focus on Sales and Operations Planning, let’s consider a success story. The participant was a division of a large, multinational industrial products and services company. The primary objective of this project was to design and implement a new S&OP solution which addressed process needs, information requirements, metrics and organizational responsibilities. The intention was to enable the Business Unit to improve its ability to proactively plan, in order to meet its financial commitments to the parent organization while satisfying customer needs
The current situation can be describes as one that included:
•
Robust long term strategic planning being absent, and the majority of time being spent on expediting short term issues and action items•
Long term demand is known but not actionably linked to operations-
In many cases, customer demand is known for 12 months-
Operational activities start only a few months prior to confirmed delivery date-
Operations just executes to what’s in the ERP system•
Missing typical key S&OP performance metrics such as Target Inventory Adherence, Production Schedule Adherence, Production Capacity Throughput and accurate Customer Delivery Reliability (customer request and last confirmation date), resulting in unknown Manufacturing Capacity and Capability.•
Communication for the unit’s business is conducted in an informal, ad-hoc manor, lacking the necessary formal communication and clear accountability tenants•
Follow up actions and milestones are not strictly adhered to or executed againstA future state process overview was established such that the Demand, Supply and Consensus Meetings take place within the same week every month, typically before the 10th of each month. The future state design was to have these characteristics:
•
Formally schedule S&OP meetings for the next 3-6 months, same day, time and location•
Participants MUST show up to all meetings, if not, have back up person assigned and prepared•
Review of Key Performance Indicators (KPIs) with corrective action determined and acted upon•
S&OP information requirements completed since start of fiscal year and looking out 12 months•
Business assumptions, logic and rationale documented and meeting consensus agreementThere were some initial successes with the demand meetings, including:
•
Demand Planning Meetings-
Established what “true” demand is and what should drive supply decisions moving forward-
Published overdue order reduction plan for each product family•
Business Impact-
Changed the production schedule quantities and timing, thereby impacting Revenue Realization and Customer Delivery ReliabilityThe initial success of the supply meetings included:
•
Supply Planning Meetings-
Published rough capacity check for each product family to proactively plan resources-
Developed action items to increase capacity to meet future consensus supply plan•
Business Impact-
Opened requisitions to hire 8-12 FTEs in order to meet Supply Plan. Also, identifying internal resources that could be pulled from various work centers was also established, thereby having a realistic chance to make forecast targetsThere were also preliminary successes with the consensus meetings:
•
Consensus Business Meetings-
Identified and quantified the gap between year-to-date performance, the supply plan for the remainder of FY07, and the forecast target•
Business Impact-
Proactively making decisions and executing work activities to positively impact this full year’s performanceAs the effort proceeded, time was taken to record the “Lessons Learned”:
•
Cultural change is the most difficult aspect of the project:-
Everyone still works off their own databases and spreadsheets-
Meeting attendance needs to become mandatory - with back up named and notified-
Action items and milestones need to be executed in a timely manner - new sense of accountability and urgency-
May need to tie follow up activities with annual review processes and procedures•
Attendees see the value of the meetings - face-to-face, real discussions and actions being identified and executed against•
Have Key Performance Indicators (KPIs) review to drive ownership and improved level of performance across the business. Recognize and celebrate successesBased on the results, a list of “Major Considerations for S&OP Roll Out” was developed:
Process
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Every business has unique attributes - the S&OP process must be tailored to account for these attributes. Tailoring is part of acceptance and change management•
Although benefits begin quickly, full realization can take some time. This condition can be estimated as 3 monthly cycles + time to make corrective measures + end to end lead time•
Defining, calculating, base lining, and updating KPIs is time consuming. Gaining acceptance of them requires educationPeople
•
The S&OP Coordinator is critical. These individuals must understand the business and the S&OP process and be dedicated to preparing for the monthly cycles•
Initial monthly cycles must be monitored on sight. Overlapping rollouts will create scheduling conflicts•
Executive Management and team education is important. The former for buy in and credibility, the latter for executionExecution
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S&OP process uncovers shortfalls in other critical processes: Data Quality Forecasting, Capacity Planning, Materials Planning, Vendor Management•
The difficult questions that need raising are not always obvious•
Executing to a schedule is difficultConclusions
S&OP is a proven business improvement tool, and implementation is one of the strengths of a successful supply chain practice. Most businesses might have some form of S&OP within some part of the organization, but most are not reaping the greatest benefits due to a lack of a formalized approach and deployment of the inherent concepts and business objectives. Any firm in virtually any business can apply the tool and its concepts to enhance business performance. The ongoing success factors are important and include:
1. Ongoing, routine S&OP meetings
2. Structured meeting agendas
3. Pre-work to support meeting inputs
4. Cross-functional participation
5. Participants empowered to make decisions
6. An unbiased, responsible organization to run a disciplined process
7. Internal collaborative process leading to consensus and accountability
8. An unbiased baseline forecast to start the process
9. Joint supply and demand planning to ensure balance
10. Measurement of the process
11. Supported by integrated supply-demand planning technology
12. External inputs to the process
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