An White Paper Written by Noud Gademann, Frans van Helden and Wim Kuijsten
Table of contents Introduction 3 1. The theory: S&OP as a monthly process with different maturity stages 3 2. The road to success 5 3. Where to start: Strategy alignment is the guide 5 4. The practice 6 5. The practice: test your understanding with these real-life examples 7 2
Introduction There s a famous story from the old Soviet Union that only one factory had sufficient demand for its products. Customers from across the country were stood in line and stocks always low. And this factory s product? Enamel signs saying: Lift Defective. 1. The world will never again be as predictable as the former Soviet Union. And beyond Apple, very few companies nowadays are so popular that they can assume everything they produce will actually be sold. Hence the continuing focus on Sales & Operations Planning: it s the ideal way to align a company s supply chain processes with its business objectives. The theory: S&OP as a monthly process with different maturity stages S&OP has been in demand for some years now. Hardly surprising as it s a process ideally suited to helping realize business objectives. S&OP exists in a variety of guises, but the common goal is easy to formulate: ensure sales and operations are aware of each other s plans and that they align their plans. It is important here that these plans are aligned such that they contribute optimally to the business objectives. To achieve these goals, S&OP should address strategy, policies and risks; not tactics and execution. S&OP is about the big picture, not the details. It should consider how much rather than which ones, rates rather than timing and sequence, and product families rather than individual products. An S&OP meeting should bring relevant stakeholders together to identify issues in matching sales and supply so they meet business goals. S&OP meetings should be held on a regular basis, typically once a month. They require careful preparation. The entire S&OP cycle consists of 5 processes. Pre-S&OP Rolling plan Resolve exceptions Resolve issues as much as possible Executive S&OP Escalated items Review executice KPI s Decisions Confirm Supply Chain and Financial Plan Supply Planning Capacity constraints Supply plans Inventories KPI Dashboard S&OP Monthly Cycle Data Gathering Sales actuals Supply actuals Statistical forecast Source: Sales & Operations Planning: The How-To Handbook, Thomas F Wallace, Robert Stahl Demand Planning Management Demand consensus Demand KPI s 3
The starting point is to get insight into sales and supply actuals and statistical forecasts. Subsequently, planning of demand and supply planning is needed. Together with the actuals they provide the required numbers to allow for matching sales and supply. Based on these insights issues and exceptions can be solved as much as possible in the S&OP preparation. Remaining issues and expected performance on KPI s can then be discussed in the S&OP meeting. To assess a company s S&OP maturity, Gartner provides a useful S&OP maturity model. Gartner recognizes five supply chain maturity stages, which can be characterized as follows: Stage 1: React. Sales is leading. The focus is on developing a feasible operational plan to meet sales orders. Stage 2: Anticipate. Focus on matching demand and supply volumes by optimum forecasting and supply response to demand. Stage 3: Integrate. While Stages 1 and 2 have an internal focus on balancing volumes, this stage focuses on enabling the shift to an external focus by integrating information flows. Stage 4: Collaborate. Focus is on profitability. More business functions are involved, looking at both the logistical and financial impact of decisions. Stage 5: Orchestrate. Demand-sensing and even demand-shaping to get optimum alignment of supply chain decision-making with business strategy. Stage 3 has recently been added to the already longer established four-stage model (consisting of the Stages 1, 2, 4 and 5). When implementing S&OP, it is important to set the right ambitions, based on the current maturity level. The main aspects and processes across these maturity stages are: Start a formalized monthly process where stakeholders align their planning. At the very least, sales (demand) and operations (supply) volumes should be aligned. Ensure that in each meeting the discussion is fact-based. Create insight: start with volumes. Discuss whether a plan is a good plan and formulate clearly defined common goals. The ambition is to get beyond Stage 1. Improve the quality of the demand and supply plan, to give people confidence in the numbers and decisions. Often focused on better alignment of supply and demand (Stage 2). Further integrate and optimize the (volume) planning, such that shared plans contribute more effectively to the business objectives. Extend this with a financial planning (Stages 3 and 4). Extend the objectives with other metrics. Examples are marketing, risks and portfolio (Stage 5). 4
2. The road to success S&OP is quite simple in its logic and structure. This can be misleading, as it is not simple to implement. Therefore it is good to know how to turn an S&OP implementation into a success. Acknowledge and set the right priorities: 1. People and leadership: get the right mindset/attitude. A successful S&OP process requires a shared vision amongst stakeholders. And alignment between business and supply chain strategy, and between logistics and finance: one common goal. 2. Data and process: organize a formalized process, get high quality data and ensure that people trust that data. This process should focus on the long-term. An important challenge is to address S&OP at the right level of aggregation. 3. Tools: while a good attitude and process are critical to success, generally speaking appropriate tools are the enabler that will get you there. Or to put it another way, when developing tools we must ensure sufficient attention is paid to people, data and an appropriate process. Given these priorities, you need clarity and consensus about: The right ambitions, ones that match the actual maturity level Clearly defined goals and alignment to business strategy Involvement of top management Reward systems A definition of a good decision Governance The role of the forecast To summarize, making S&OP successful is more than a simple implementation process. S&OP is not doing things better, but doing things differently. 3. Where to start: Strategy alignment is the guide First ensure the right mindset, with one common goal, then design the process and finally use appropriate tools. In theory this might be the way to go, but in practice it s not that rigid. Mindset, process and tools also need to grow in maturity: it is an iterative process rather than a sequential approach. Goals gradually develop over time as maturity increases, and process and tools should support this accordingly. Initially, the common goal is often to get a clear insight into actual sales and supply volumes, and inventory positions. This can form the fact-based starting point of the S&OP, where the current status and impact of anticipated demand and supply are discussed. Typically the focus in Stage 1 will be primarily inside out: deliver a feasible plan for operations to match sales volumes with supply. Note that already during this stage basic tooling will be needed to get the process going and to present data in the S&OP meetings. 5
Once there is a good understanding of and trust in sales and supply actuals, the process can be extended to include demand and supply planning. A logical step is then to keep the focus on volumes and reliability. Sales and supply managers can then anticipate the impact of their plans, since there is a process in place with reliable input on sales and supply actuals. This will allow S&OP to get out of Stage 1 maturity. Once the volume planning process becomes stable, and the S&OP team have trust in data and in the process, it s time to define more mature goals. The central question then becomes: what is a good plan? This is an important maturity step in S&OP. The focus shifts from inside out to outside in. The alignment between business strategy and supply chain strategy is now on the agenda. Not only the feasibility of plans is discussed, but also contribution to logistics and financial targets become part of the S&OP process. The process will mature to become more demand-driven, or even market-driven. 4. Mindset, process and tools need to be aligned with current maturity on a regular basis to achieve a gradual growth in S&OP maturity. Tooling will be important from the beginning. By getting started and discussing facts, you help to design and improve the S&OP process. From which the common goals will also mature. The final goal should always be kept in mind: like any supply chain process, the S&OP process must contribute to the alignment of the supply chain strategy with the business strategy. This is the key to success. The practice S&OP is not an isolated process but part of the company s strategy, and as such should support business goals. We therefore see that most successful companies adopt a threefold approach: 1. Strategy Alignment: setting the right targets and defining what a good plan is. Strategy alignment and segmentation provide clear goals. Here we recommend a tailored approach, since each company has its own strategy and each industry its own requirements. A proper analysis helps define the best approach. 2. A Supply Chain Performance Assessment to provide an accurate insight into current S&OP maturity and related improvement opportunities. 3. Tooling: for every level of maturity, toolsets are available. Visualization tools to provide clarity and actionable insights, basic planning applications for volume planning, and scenario analysis and integrated systems for the most mature S&OP stages. This approach has proven successful across various industries. In our own practice, we have seen the added value it has brought companies like Alliander, Boon Edam, Van Hessen, Airgas and Shell. 6
5. The practice: test your understanding with these real-life examples To make S&OP less abstract and theoretical, here are some examples of discussions we ve had with customers. See if you can work out in which phase these questions arose? Example 1: who is in the lead for the sales forecast? Good data and qualitative forecasts are important, as data must be trustworthy for a successful S&OP implementation. So it should come as no surprise when advice is asked for to help improve the forecast. How do you think you can make a good forecast and who is responsible for it? On the one hand, you can use statistical forecasts of varying complexity. For example, a simple moving average or a sophisticated regression model. On the other hand, these are often people who predict future sales based on their experience. So why not combine the two and use collaborative forecasting? That is, start with a statistical forecast and then improve that forecast with human judgements. This might involve known orders, market trends, new products, etc. Example 2: how to become less dependent on the quality of a forecast Sometimes it is quite difficult to get a high quality forecast. In which case, you can spend time and effort on improving the forecasting method, or alternatively spend the same time and effort on becoming less dependent on the quality of a forecast. This might be achieved through, for example, a shorter planning cycle or by postponement (moving the customer order decoupling point downstream). Example 3: when is a plan a good plan? How do you decide if a plan is a good plan? Do you want to maximize margin, reward customer loyalty or maximize the delivered volume? In the simple example below there are 2 customers with different characteristics in respect of loyalty and average margin. In the plan, supply and demand are balanced and expected margin is about 15%. Two forecasts that differ from the plan require another allocation of volumes to customers. Each allocation causes one or more issues regarding specific metrics. This example shows how different objectives and strategies lead to different plans. And consequently, other issues arise. It is therefore critical important to have a very clear goal if you want to arrive at a good plan that fits with the strategy. 7
Supply Customer A Customer B Overall margin Issue(s) Average margin 17% Average margin 8% Loyalty B Loyalty A Plan 250 200 50 15.2% Forecast 1 250 50 200 Allocation 1 50 200 9.8% Margin Allocation 2 50 50 12.5% Demand (Overage) Margin, Loyalty Forecast 2 250 200 100 Allocation 3 200 50 15.2% Supply (Shortage) Loyalty Allocation 4 150 100 13.4% Supply (Shortage) Margin 8
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