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"SAP® xApp™
Sales and Operations Planning Aligns the Enterprise on Unified Plan to Meet Production Targets, Sales Goals and Customer Demands"
Source : SAP
Sales and Operations Planning : The Key to Continuous Demand Satisfaction
Sales And Operations Planning is also known as:
sales and operations plan,
sales planning software,
manage sales and operations,
participative sales and operations planning,
sop,
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s&op process,
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enterprise sales and operations planning,
business forecasting,
demand planning,
inventory planning,
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demand planning systems,
sales and operations planning resource,
sales and operations planning consortium,
software tools for s&op,
leverage erp for sales,
sales and operations planning software module,
applied optimization sales and operations planning.
Executive Agenda
All companies do some
form of sales and operations planning (S&OP) to synchronize market data
with production output. But most practice a planning process based more on
logistics than strategy. Demand is forecast based on last month's numbers,
and historical performance leads the analysis. Companies rarely solicit a
cross section of perspectives from different functional areas or supply
chain partners. The practice is static and insular, disconnected from the
reality of today's complex supply chains. As a consequence, sales and
operations planning becomes almost dysfunctional, lacking the communication
and the insight into market demands required to carry out business plans
and achieve strategic goals.
Taking a more strategic approach, however, the
sales and operations planning process can be designed to bring a company's
marketing, finance, sales, and operations departments together to
continuously monitor and meet customer demand. As the separate departments
collaborate, they create business plans with the latest and most accurate
data and begin to develop and measure a common set of metrics. With
integrated S&OP processes, companies are better able to synchronize supply
and demand, improve revenue, decrease costs, and increase customer
satisfaction.
The following examples illustrate how three global companies
are putting this strategic process into practice.
- Brown-Forman Corporation
believes its approach to S&OP is a better way to align supply and demand
with the company's business requirements, build better internal
communications, and plan activities to meet customers' needs.
- ExxonMobil
Chemical leverages sales and operations planning to improve customer
service while controlling costs.
- Procter & Gamble credits its own version of
S&OP with creating a single set of sales and supply plans to optimize
resources to support the company's business objectives " assessing the
financial implications of the plan as well as its impact on both supply and
demand.
While companies like these are reaping the benefits of effective
S&OP, many others continue to take a more static approach. By using a
five-step review process, however, companies can review and evaluate new
products in development and future plans in the context of demand, supply,
financial reconciliation, and management analysis. The result is an S&OP
process that begins to follow the model of the companies that are leaders in
this process.
With integrated S&OP processes, companies are better able
to synchronize supply and demand, improve revenue, decrease costs, and
increase customer satisfaction
The best sales and operations planning
process creates the framework for five integrated and interdependent
business reviews to ensure that tactical plans align and support the
company's strategy. This framework helps develop the consensus among
stakeholders necessary to continue the planning process, allows for
management understanding and analysis, and forms the basis for the tactical
plans necessary to satisfy demand with an integrated and responsive supply
chain. Companies perform specific activities within each process as outlined
below:
- New product review. Analyze the potential for new products to
impact the market, considering elements such as rationalization with
channels, pricing and margin implications, ramp-up projections, and both
incremental and cannibalized demand.
- Demand review. Anticipate total
market requirements for all offerings from all perspectives, using sources
such as quantitative forecasts, input from sales and marketing, and
what-if analysis " balancing orders and demand and achieving consensus on
various demand scenarios.
- Supply review. Review the supply chain
capacity, including inventory requirements, procurement policy, and
logistics, to make certain that there is sufficient manufacturing and
distribution capacity. In this step you can identify any potential decision
points such as the need to outsource for additional capacity
- Financial
reconciliation review. Translate the supply and demand plan into financial
terms of revenue, margin, and working capital requirements. Then balance
supply and demand, making decisions with regard to potential supply issues
and contingencies for the range of possible demand scenarios.
- Management evaluation and analysis. Evaluate the results of your
activities to decide how to run the business moving forward. This includes
an evaluation of planned versus actual results, an analysis of profitability
by customer, channel, and product, and a look at perfect order,
cash-to-cash, and asset performance.
While this approach to S&OP creates an
invaluable foundation for clear-sighted decision making, the process adds
the most value when integrated with other core business processes including
inquiry to order, procure to pay, order to cash, and new product
introduction and development. With a full-fledged S&OP program in place and
integrated throughout operations, a company can expect to do the
following:
- Speed up the commercialization of new products and improve time
to value
- Make budgeting less complex and more accurate
- Enhance sales
organization effectiveness
- Create greater supplier effectiveness, reducing
cycle time and procurement costs
- Concentrate more thoroughly on building
customer loyalty and greater satisfaction
- Improve collaboration between the
company and its external partners
- Lower operating costs and reduce order
fulfillment times
- Increase inventory turns and reduce cash-to cash cycle
times
- Improve return on net assets
This SAP Insight discusses the problems
faced by most S&OP programs, how some companies succeed, and the key to
the five-step review process.
The Trouble With Planning When Information Is Not Shared
Most companies
have implemented some form of sales and operations planning for quite some
time, but few are satisfied with the current process. As a result, they
are encountering more and more problems, particularly as their supply chains
become more complex " and can suffer from the "four stages of planning grief" In stage one the status quo seems fine, but symptoms of
future problems begin to show up " such as mounting back orders. In stage
two, the symptoms intensify as the company institutes planned price
increases while introducing new products, effectively cannibalizing its own
market. In stage three, demand increases, but manufacturing capacity can't
keep up " and competitors begin to capture the unmet market demand and
increase their market share. Finally, in stage four, the competitive
trickle becomes a flood of competing products, ultimately depleting working
capital and affecting financial performance.
In addition, many S&OP
processes are incapable of reconciling the perspectives of sales, marketing,
manufacturing, and logistics or extending the supply-chain decision process
to include customers and suppliers. When each part of a company is
operating separately and lacking effective communications that share updated
data, stakeholders make decisions independently without recognizing the
broader impact. Instead, stakeholders need aggregated data presented
according to different dimensions that are meaningful to them: time,
organization, product, geography, unit of measure, and so forth, Thus, the
company's S&OP process can link decisions at the strategic level, align
tactics with strategy and goals, and allow decision makers to adapt to
changing circumstances as they develop.
Inadequate Technology Spells
Doom
Some companies approach the S&OP process using spreadsheets and
simple tools for rudimentary collaboration. The spreadsheet technique, while
a low-cost option in the short term, presents several challenges, including
different versions of the same data and an inability to integrate and
reconcile S&OP with underlying business processes. Data becomes outdated very
quickly, hampering collaboration, while team members get frustrated trying
to piece together the picture of the company from faxed or e-mailed
spreadsheets.
The consequences of this approach can be costly and
far-reaching, for some of the following reasons.
- Product supply and the
market are not reconciled. Repeated stock-outs cause distributors to
switch to other manufacturers for the same product. Distributors show little mercy in making up for any slowdown in getting stock through their pipeline.
- Excess inventory dilutes prices. Excess inventory is the mirror image of the
stock-out. For example, when an electronics manufacturer bet on the wrong
style of MP3 player, production capacity and demand were out of sync for
more than six months. The company wound up with excess capacity that it had
to dump on an unsuspecting market, taking a big financial loss.
- New product introductions fall flat. The successful commercialization
of new products mandates close coordination between research and
development, marketing, sales, production, supply, and logistics. An
information or communications failure between any of these links can
result in lost market share because of a tardy or ineffective commercial
launch of a new product.
- Supply mix does not meet market demand. Many
large companies must support a complex supply web and balance their
multifaceted supply mix with the requirements of diverse customers,
channels, and regions. Without sufficient information, these same companies may have difficulty adapting their supply chains to meet the constantly
shifting demands of their best customers, opening more productive channels, or negotiating for access into new geographic regions.
Learning From The Best S&Op Practices
Companies like Brown-Forman, ExxonMobil
Chemical, and Procter & Gamble are taking sales and operations planning to a
new level where it harnesses the most effective technology, enables
communication, and creates comprehensive business plans based on both
experience and expectations. The best S&OP focuses on demand as much as
supply, differentiates between what is viable and what is not, fosters real
communication between all parts of the value chain, and as a result,
anticipates and avoids unwelcome surprises.
SAP research has found that the
best S&OP process creates an unrestrained demand forecast by accomplishing
the following:
- Accounting for internal factors " The process should
consider elements such as price changes, lead times, sales plans, product
promotions, and new product launches
- Accounting for external factors "
The process should consider elements such as customer input, the
competition's activities, the trajectory of the economy, regulatory
considerations, and market trends.
- Considering a product's complete life
cycle" This begins with introduction and ramp-up and continues through
final phase-out.
The supply side of leading S&OP processes
emphasizes out-of-the-box thinking, and the analysis incorporates the
availability of finished product inventory. More important, the entire
manufacturing process also becomes an integral part of the supply review
process from procurement through production, and including data on
imports, outside purchases, and inputs from contract manufacturers.
Creating Communication Between Departments
A growing understanding of the
importance of S&OP has led to efforts to ensure that the process enables
communication between different departments of the company. Randy Isdahl,
supply planning manager for Brown-Forman, puts it this way: "One of the
biggest benefits is the fact that the process has resulted in an open,
unfettered conversation across all our Brown-Forman functional groups …
the results are astonishing."
As a result of this inclusive conversation,
finance members share their perspective in terms of revenues, margins, and
working capital; marketing members talk in terms of channels and brands;
and the manufacturing and logistics members bring their thinking on products,
sources, capacity, and destinations.
David Sharp, supply
chain process leader at ExxonMobil Chemical, remarks, "Because we're
working with a single [information] systems platform, the same information is
available to everyone, allowing us to better align our supply plans with
ExxonMobil Chemical's worldwide business strategy. Also, the common systems
platform makes it easier to transfer supply chain best practices around the
world."
The architects of these superior S&OP processes recognize that
higher-quality decisions in less time require intelligent leveraging of
today's best information technology. Today, companies want decision
support for scenario planning in addition to industry-specific capabilities
and the capacity to include global market and supply chain requirements.
Looking To The Past And Envisioning The Future
These types of capabilities
also allow a company to compare plan assumptions with actual results, so
that future plans can be revised to be more effective. Procter & Gamble, for
example, uses the results of the S&OP process to create more effective
plans by looking backward and forward. First, a team evaluates a past plan:
where the business went right, where it went wrong, and what needs to
change. The teams compare current plans with historical trends and other data
such as market size and consumption to determine if the assumptions of the
new plan make sense.
Avoiding Risk And Uncertainty
Companies often
experience difficulties in foreseeing uncertainties in their supply chains.
This can be disastrous in the long run. Figure 1 demonstrated how the process
can easily get out of control at the end " creating a real traffic jam
that could have been avoided through an effective S&OP process.
Increasingly, the best S&OP processes rely on software that allows all
stakeholders to see the same data, at the same time, but each in their own
terms. Software that supports S&OP integrates the data and information flow
of the parts of the organization that will be relevant to the company's
need to manage risk and uncertainty. The company has access to the right data
and insights to make smarter decisions across all participating functions
(sales, marketing, procurement, manufacturing, distribution, and finance).
The most sophisticated software applications encompass scenario capabilities
that allow a company's senior executives to test their various assumptions
about demand and supply in a virtual environment. They can also examine the
impact of untried strategic and operational ideas for change. This type of
process provides a global view of the business that allows supply, sales,
marketing, and manufacturing to collaborate on a consistent basis to
maximize customer satisfaction.
Most important, the right information
technology can provide the contextual information necessary to maximize
the impact of decisions on business value creation " to help increase
profitability and achieve strategic goals. The company can adapt its
actions to changing conditions without decreasing performance.
Dick Clark,
the demand planning global process owner for Procter & Gamble, concurs that
the company's S&OP process has helped maximize resources to achieve better
financial results. As he put it, "Our monthly S&OP meetings allocate and
align company resources to a single set of sales and supply plans. Our goal
is to optimize resources to support the company's business objectives. This
includes assessing the financial implications of the plan as well as its
impact on supply and demand."
Defining The Five-Step Review Process
A
five-step review process is an integral part of the best S&OP because it
structures the flow of collaboration and information sharing. It starts at
the highest practical level of management business review, which is then
reconciled with the lower-level product management, supply, and demand
reviews. Brown-Forman, for example, implements both strategic and tactical
supply chain planning processes because of the long time frames associated
with wine and spirit production. The company's S&OP process creates an
18-month consensus forecast (most companies now create a 24-month plan)
for demand planning, near-term inventory planning, and production planning
and scheduling The following outlines in detail each of
the steps in the process.
1. New Product Review
In analyzing the
feasibility of a new product, the company uses inputs from management and
statistical analysis to align new product development and introduction with
corporate financial and strategic goals. The analysis takes into account
product life cycles, seasonal influences, promotions, and rebates and creates
a multiperiod business plan. The best new product review process
rationalizes the information about customer needs with channel potential
and ideas for new product offerings. But the process does not stop there. It
analyzes the structure of supply chain costs and determines the need for
facilities or capacity, facility consolidation or outsourcing, and the right
set of key performance indicators.
2. Demand Review
The purpose of each of
the demand reviews is to lend an aspect of integration to a process that
typically takes place in isolation. The demand review does not simply rely on
quantitative forecasting, for example, but instead balances orders and
demand through what-if analysis, achieving consensus among the various
stakeholders all along the supply chain.
The best demand reviews not only
ensure that the statistical forecast is based on the best data and model,
including marketing assumptions, but also compare and incorporate sales and
customer forecasts and include input from operations. The demand review
also incorporates the results of the new product review, proposed promotions,
and their demand impact. It incorporates real-time demand signals to
monitor the plan assumptions and planning cycle so that demand can be
adjusted accordingly.
3. Supply Review
The supply review includes
manufacturing capacity, inventory, procurement, and logistics planning.
The supply review considers potential material shortages in the supply chain
as well as the capacity for the company to develop excess inventory.
4.
Financial Reconciliation Review
At this point, the strategic S&OP process
diverges from current business practice by creating a forward financial
forecast of the previous three reviews. The supply and demand reviews are
balanced by taking a close look at the product mix, conducting what-if
analysis, filtering it through constraint management, and allocating supply
to demand. Most important, all stakeholders in the process must reach
consensus on the business and financial impact of the assumptions that have
gone into the financial reconciliation.
The best financial reconciliation
optimizes the supply chain to avoid problems down the line, and then
compares the optimized supply chain plan to the demand plan. While the
financial reconciliation makes certain that the S&OP plan hits targets for
revenue and margin, it also considers whether the company's budgets remain
consistent with the assumptions. The process validates potential demand
spikes and supply disruptions, adds in forecasts for future financial
profit and loss statements, and identifies gaps between the current S&OP and
the company's future business plan.
5. Management Evaluation And
Analysis
At this point, management reviews the S&OP results and plans and
compares assumptions, identifying any problems and their root causes.
The
best management evaluation processes use a number of leading practices such
as waterfall analyses of forecasts and supply plans and the precise
measurement of actual demand to the demand plan. The analyses include
profitability by customer, channel, product, and supplier, as well as
backlog and lead-time trends. The management review also addresses any
high-impact exceptions to the plan, such as perfect order, cash-to-cash,
and asset performance.
Taking S&Op To The Next Level
Brown-Forman,
ExxonMobil Chemical, and Procter & Gamble have all changed their approach
to S&OP with world-class results. Perhaps the greatest testimony to the need
for more sophisticated S&OP is a comment by Randy Isdahl of Brown-Forman:
"We will extend [this new approach to] S&OP wherever business value can be
enhanced by leveraging S&OP to maximize our supply chain effectiveness."
David Sharp of ExxonMobil Chemical maintains, "[S&OP] provides us with a
multidimensional view of how the business is doing on a global basis."And
Dick Clark of Procter & Gamble adds, "S&OP is the key process for information
sharing within the business. It's helping us meet our goal of better
business decisions through an improved mutual understanding of demand,
supply, and financial information."
When more companies follow the lead of
these three best-practice corporations, they will take their S&OP process
to the next level " aligning their supply and demand, creating better
internal coordination, and maximizing their global effectiveness.
About The Sources
About Sap
SAP is the world's leading provider of
business software.* Today, more than 38,000 customers in more than 120
countries run SAP® applications " from distinct solutions addressing the
needs of small businesses and midsize companies to suite offerings for
global organizations. Powered by the SAP NetWeaver® platform to drive
innovation and enable business change, SAP software helps enterprises of
all sizes around the world improve customer relationships, enhance partner
collaboration, and create efficiencies across their supply chains and
business operations. SAP solution portfolios support the unique business
processes of more than 25 industries, including high tech, retail, financial
services, healthcare and the public sector. With subsidiaries in more than
50 countries, the company is listed on several exchanges, including the
Frankfurt stock exchange and NYSE under the symbol "SAP." For more
information, please visit www.sap.com.
* SAP defines business software as
comprising enterprise resource planning and related applications such as
supply chain management, customer relationship management, product
life-cycle management, and supplier relationship management.
About Oliver
Wight Americas
Oliver Wight Americas is a global management consulting
firm that specializes in helping manufacturing organizations to work smarter,
faster, and better than their competitors. The firm includes leading business
process improvement specialists who educate, coach, and mentor people to
lead and sustain change on the journey to business excellence and outstanding
business performance.
About The Authors
Arnold Mark Wells is a solution
principal with SAP America Inc. For more than 20 years, he has committed
himself to enhancing the value of organizations through improved business
practices and enabling technologies. He has contributed from within
industry, as a supply chain consultant, and as part of a software development
organization. Wells has worked on supply chain solutions with many companies
across a broad array of industries. He holds memberships in the Council of
Supply Chain Management Professionals and in APICS, which has certified
him since 1989. He holds an MBA from Drexel University.
John Schorr of
Oliver Wight Americas contributed to the executive agenda and the five step
review process content of this SAP Insight. Schorr has been with Oliver Wight
Americas since 1978. He has served as president of Oliver Wight
International and on the Board of Directors of Oliver Wight Americas and is a
principal. He was president of Oliver Wight East, which is now part of
Oliver Wight Americas. As a consultant and educator in the areas of
enterprise resource planning (ERP), manufacturing resource planning II
(MRP II), integrated supply chain management, sales and operations planning,
and demand management, Schorr has assisted many companies in attaining
class A performance. He is recognized as one of the leading experts in the
areas of sales and operations planning and the interface of purchasing
with ERP. Prior to consulting, Schorr served as vice president of operations
at Haworth Inc. and as director of purchasing at Steelcase Inc. He is the
author of two books, Purchasing in the 21st Century and High Performance
Purchasing. He holds a BS in chemistry from the University of Iowa.
by Arnold Mark Wells, SAP America Inc. and John Schorr, Oliver Wight
Americas
Table of Contents
- Executive Agenda
- The Trouble with
Planning When Information Is Not Shared
- Learning from the Best S&OP
Practices
- Defining the Five-Step Review Process
- Taking S&OP to the Next
Level
- About the Sources