Improving supply chain performance and reducing risk are top of mind as companies strive to balance supply and with increasingly volatile demand. In this Supply Chain Leader Virtual Roundtable, thought leaders discuss the evolution and future of sales and operations planning (S&OP).
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Aamer Rehman, Vice President, Manufacturing Solutions, i2 |
Nari Viswanathan, Vice President and Principal Analyst, Supply Chain Planning Practice, Aberdeen Group |
Dan Gilmore, Editor, Supply Chain Digest |
SCL: How have S&OP principles and practices evolved over the last few years? What are some examples of S&OP best practices today?
Nari Viswanathan, Aberdeen Group: There have been several factors driving the transformation of S&OP over the past few years, primarily the need to reduce costs, increase top-line revenue, and—most recently—address the high volatility of demand. The strong, recent movement toward more customer-driven supply chain processes has intensified the corporate focus on demand management and demand-supply synchronization, putting increased demands on the S&OP teams to deliver reliable plans and accurate forecasts. In the efforts to synchronize supply with changing demand, however, there is a missing link between supply chain, product management and finance professionals, which has often led to suboptimal decisions.
One of the key recent developments in S&OP (besides an overall increased corporate focus on this topic), has been the emergence of integrated business planning—a best practice implemented by industry leaders, which can be summarized as a collaborative S&OP process with active participation from the finance organization.
Dan Gilmore, Supply Chain Digest: S&OP continues to evolve both as a general concept and as a practice within individual companies. Clearly, more companies are now explicitly targeting inventory levels—so-called "SIOP"—as part of the process. In the past, and still for many companies today, you can reach a consensus forecast and develop a supply plan to support it, but let someone else in the company figure out how to determine specific inventory levels to support those plans. That is changing.
Many companies that have evolved their internal S&OP processes recognize the next challenge will be to better integrate partner data into the planning process. For example, the Voluntary Interindustry Commerce Solutions Association (VICS) organization has undertaken an initiative that looks at process guidelines for integrating collaborative planning, forecasting and replenishment information into S&OP processes—those two efforts often run independently today in many companies.
Last, I would say for leading companies, S&OP is moving from a supply chain-centered process to a true business planning process, with a clear integration of company financial performance into the plan. S&OP isn't just about aligning supply and demand. In the end, it has to be about using supply and demand to achieve the company's financial objectives, and developing plans that will get you there.
But this is a big jump from where most companies really are today.
Aamer Rehman, i2: I agree with my fellow contributors—the level of collaboration across the organization, scope of decision making, frequency of planning, and integration among demand, supply, new product introduction and finance has significantly increased over the last few years. These changes have been driven by product proliferation, demand volatility, working capital pressure and demanding order fulfillment performance. Also, organizations have transformed from being locally focused to globally focused, so the need for global coordination has become a prerequisite to doing business.
As for some of the key S&OP best practices, we have seen an increased emphasis on getting customer and channel input into the S&OP process. While receiving forecasts and inventory information from customers remains a challenge, as part of the S&OP process, companies are renewing their focus on receiving and making use of point-of-sale (POS) and market trend information as well as continuously aligning plan versus actual.
It is also becoming imperative for organizations to place increased emphasis on new product introductions (NPI) and end-of-life (EOL) planning, which has traditionally been disconnected from the S&OP process. A tight alignment between demand and supply execution for NPI and EOL is critical to avoid cannibalization and product launch failures. This particular aspect will continue to gain importance as part of the S&OP process.
To echo Dan and Nari's comments, the traditional S&OP process primarily focused on demand and supply balancing with little or no formal integration with finance. Companies are focusing on bringing the financial and annual operating plan (AOP) view as part of the executive S&OP process, where demand, supply, product mix, inventory policy decisions, etc., are balanced against a company's AOP to make financially feasible decisions.
In addition, we've seen that companies can no longer take months to complete an S&OP cycle with static information—leading organizations are not only reducing the planning cycle but are also trying to incorporate solutions that can improve decision making by quickly assessing the inventory, demand, supply and financial impacts of changes in supply chain dynamics.
SCL: In your opinion, what are some of the key challenges and obstacles in implementing and sustaining an effective S&OP process?
Gilmore: As is usually the case, the biggest challenges relate to people, and that starts at the top. What kind of support and culture has executive management set?
Last year, there was a Harvard Business Review article targeted at CEOs entitled "Are you the weakest link in your supply chain?" There were a number of points made that relate directly to S&OP, such as the CEO's role in "eliminating functional silos" and "adding supply chain insight to business planning"—this is exactly what a strong S&OP program should do.
I do think technology plays a key role here as well. I just don't see how you can do the right sort of scenario planning and "what-if" analysis without a strong set of S&OP tools. If done right, technology can also be used to facilitate a workflow for the entire S&OP process that can serve to institutionalize it in a way that often doesn't happen when the process is purely dependent on people.
Rehman: Dan makes an excellent point about organizational commitment. It's critical to get commitment and compliance from all stakeholders in the S&OP process, and therefore executives must drive the implementation of the S&OP process as a mission-critical process for organizational alignment.
With a distributed supply chain, it is also a challenge to consolidate planning and actual data across the organization to create a demand-supply feasible plan in a timely fashion. The solutions of the past are not able to fulfill the need for speed resulting in latency in decision making, which increased supply chain risk.
I agree with Dan, one of the biggest challenges is the lack of structured process cadence and accountability at all levels of the organization involved in the S&OP process. As individuals make adjustments and changes, the reasons why changes were made are not obvious to others, resulting in lack of confidence and accountability across the organization.
Viswanathan: Companies face a number of key internal challenges in this area. Many lack a formalized S&OP process, or there is no clear owner of the process. The S&OP process may not incorporate inputs from the finance and product development teams. A lack of software technology prevents advanced scenario planning, constrained optimization and financial modeling. An absence of standardization and process integration across the company's complex global supply chain and manufacturing processes creates a significant challenge. And, many companies lack S&OP staff training.
SCL: What specific impact does an S&OP process have on a company's financial metrics such as revenues, margins and cash flows, and on operational metrics such as delivery performance, inventory turns, customer service levels, etc.?
Viswanathan: S&OP impacts a company's metrics in many ways. Revenue and cash flows are impacted every time there is mismatch of the true demand and available supply. If the demand was underestimated, it results in lost sales, as a company is unable to supply the requested product at all. Or, the company is only able to supply it with a delay, thus postponing cash inflows from customers. Margins can also be affected if a company wrongly focuses on a lower-margin product family while underestimating the demand for a more profitable product.
Additionally, operational metrics are affected. For example, if customer requests are not met due to out-of-stocks, this adversely impacts customer service levels; if the demand has been overestimated, it can lead to excessive and sometimes obsolete inventory, and reduced inventory turns.
Rehman: The primary objective of the S&OP process is to create a single, agreed-upon operational plan, which then translates into financial objectives. Therefore, a well-structured S&OP process gives organizations better control over the financial and operational metrics that drive accountability for results. Typical benefits can include: a reduction in overall supply chain costs by 10 percent; improved delivery performance by 10-20 percent; and improved planning productivity by 25 percent.
Gilmore: We need to remember that S&OP by itself is not some silver bullet that solves a company's business challenges. S&OP exists in the context of new product development and innovation, sales and marketing execution, etc., which are often more critical than S&OP itself. As we know from the past year, overall economic conditions can be the dominant factor in a company's performance.
S&OP can ensure that there is alignment in planning and execution and a "single number" to drive downstream processes—maximizing financial success no matter what a company's current business situation is. So, S&OP closes the gap between what a company theoretically can achieve and what it actually does. It can have an important impact on the entire income statement as well as any number of customer-related metrics, especially when inventory is brought into the S&OP process. Companies that plan better and more tightly integrate planning with execution can have a substantial advantage over those less capable in these areas, and that can make a huge difference across a wide range of metrics.
I have no doubt that companies with excellent S&OP processes in any given industry likely suffered less in the economic downturn and will capitalize on the recovery more quickly and profitably as well.
SCL: Can you suggest a roadmap to companies who want to use an S&OP process as an enabler for improving supply chain performance and reducing risk?
Viswanathan: The following steps can help companies implement a more robust S&OP process:
- Implement constrained planning: this capability often hinges on the available software technology, which enables companies to do scenario analysis and rough capacity planning.
- Incorporate inputs of the financial organization and consistently "translate" S&OP plans into revenue and margin terms: the key advantage of best-in-class companies is the ability to perform a gap analysis between the financial plans and S&OP plans and take corrective actions if mismatches are found.
- Consider supply chain risks as part of the S&OP process: Instead of using "rule-of-thumb" approaches, companies should formalize their evaluation of risks and consider the "revenue at risk" if the actual events deviate from S&OP plans.
- Implement event management capabilities to more effectively monitor performance-to-plan and more effectively respond to deviations.
- Invest in S&OP training: Aberdeen research shows that there is a knowledge gap in this area, with best-in-class companies being more proactive about educating and empowering the employees participating in the S&OP process.
Rehman: I agree with Nari, and would suggest that companies take a step-wise approach based on their organization's stage of maturity in the S&OP process. First, focus on getting top executive sponsorship to make sure that S&OP is adopted as a mission-critical, company-wide process for supply chain alignment. Second, assess your current S&OP against an S&OP maturity model to see where you stand compared to best practices. This will help create an understanding of your company's as-is stage and establish a clear target for S&OP process improvement.
Third, focus on S&OP process changes along with the organizational and KPI design required to support the new process. Use a technology/solution enabler to accelerate this stage. Otherwise, the slow pace of benefit entitlement will make stakeholders skeptical of the initiative and lose interest. Last, make sure that the new S&OP process incorporates a consensus planning framework, tight integration with actual POS information and a what-if capability to enable a quick response process required for assessing and managing risk in today's fast-paced and volatile environment.
Gilmore: There are a number of sources out there that have some pretty specific models and roadmaps for getting to S&OP. They are mostly similar, and even where there are differences, I think most any of them can work. I think rigorously adhering to any given approach is more important than the approach you pick.
Someone from the top, maybe the very top, has to support the effort. That's a cliché, but nonetheless especially true for S&OP. That is because of the hugely cross-functional nature of the process. If you don't have that, either the effort will be a waste of time or you should scale back your expectations. You may be able to get something from the process, but not anywhere near the full potential.
I have seen many cases where the initial catalyst came from the supply chain organization, but ownership of the S&OP process was eventually turned over to sales and marketing. I think that is often a very smart move.
Many companies could improve by doing more benchmarking with other companies prior to launching S&OP and as their efforts mature. Many companies will be willing to share their learnings if you ask—that can save your company a lot of time and mistakes.
Interviews were conducted by Laura Sanders, i2 Corporate Marketing.
We want to hear about the issues and opportunities you're facing with regards to S&OP. Please share your thoughts in the comments section.
