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"Supply Chain Consultants (SCC) delivers strategic business solutions that enable clients to gather, process and share information across the extended supply chain. SCC solutions combine years of real world experience in the areas of sales and operations planning (S&OP), collaborative planning, demand management, inventory management, production planning, scheduling and distribution to help manufacturers optimize their supply chain."
Source : Supply Chain Conslutants
Making Your Supply Chain a Competitive Advantage: Implementing S&OP
Supply Chain is also known as :
Supply Chain,
Supply Chain Solutions,
Logistics Solutions,
Manage Your Entire Supply Chain,
Supply Chain Management,
Supply Chain Visibility,
Supply Chain Definition,
Supply Chain Presentation,
Supply Chain Changes,
Resource for Supply Chain Management,
Sales and Operations Planning,
Control of Your Supply Chain,
Value Chain,
Supply Chain Presentation,
Just in Time,
Logistics,
Maximizing Supply Chain Efficiency,
Supply Chain Example,
Supply Chain Model,
Supply Chain Logistics,
Supply Chain Delivers,
Best Supply Chain Planning,
Supply Chain Planning and Execution,
Supply Chain Applications,
Supply Chain RFID,
Financial Supply Chain,
Supply Chain Applications Planning,
Operations of the Supply Chain,
Find Supply Chain Management,
Management Planning,
Information on the Supply Chain,
Green Supply Chain Strategy,
Maximizing Supply Chain,
Bring Logistics and Supply Chain,
Supply Chain Connect,
Achieve Supply Chain,
Easy Inventory Software,
Supply Chain Guide.
The current surge of interest in Sales and Operations Planning ' a discipline which has
been around for years ' is indicative of companies' growing awareness that improving
their supply chain is imperative for gaining or maintaining a competive edge.
Businesses, of course, are at various stages along the path to effective S&OP. Some
are beginning from scratch, with no formal processes or tools in place. Others have
software "pieces" like demand planning and/or supply planning. Such enabling tools are
necessary for all but the simplest of businesses -- necessary, but not sufficient. Tying
these "pieces" together in an effective S&OP process will exponentially increase the
benefit provided by the tools alone and allow your supply chain to truly become a
competitive advantage.
So let's look at answering the basic questions most businesses have about S&OP:
- What, exactly, is S&OP?
- Why should a business implement S&OP?
- Why start with S&OP instead of, for example, with scheduling?
- What has to change for S&OP to work?
- How does one gabout implementing S&OP?
What, exactly, is S&OP?
There are as many definitions of S&OP as there are practitioners and consultants
(maybe more). Here's one we've found applicable across many businesses and
industries:
Sales and Operations Planning is a continuous, structured process for managing
the supply chain so that supply is balanced with demand in accordance with the
business strategy.
It incorporates Demand Planning, Supply/Demand Balancing, and Inventory
Management subprocesses which meet monthly and interact continually to
create and execute a single set of integrated plans.
It provides continuous monitoring of performance vs. plan and a disciplined way
of responding to changes to minimize disruptions and maximize the bottom line.
The process culminates in a monthly meeting at which
- recent performance vs. plan is reviewed, and
- plans and alternatives for future sales and operations are presented to
senior management for decision-making / approval.
The definition is deceptively simple, perhaps, until you examine the details. Let's point
out the most important points, so you can compare with your business' current state:
- Continuous, structured process
- Single set of integrated plans
- Subprocesses&8230;interact continually
- Disciplined way of responding to changes
- Senior management decision making/approval
Continuous, Structured Process
S&OP is not just a monthly meeting. Nor is it something you do sporadically and only
when there's a crisis to address. Occasional flashes of brilliance are great, but you
can't count on them to run a supply chain. S&OP is a way of managing the entire supply
chain for dependable, reliable, reproducible results.
S&OP is also a structured process. The same set of steps and subprocesses are
repeated each month in preparation for the "Executive S&OP Meeting." Meetings are
scheduled a full year in advance, to avoid calendar conflicts. Charts (very similar month
to month) are issued beforehand and minutes afterwards. Action items have both
responsibilities (who) and timetables (when) attached, and are reviewed at the following
meeting.
While entire organizations may be allowed to participate by teleconference, the
speaking roles are clearly defined in order to keep the meeting focused and brief (1 to 1
½ hours). All the hard work either has been done before the meeting (generating plans,
alternatives, pros and cons, assumptions) or will be done afterwards (executing the
plans and monitoring for adherence to plan). Anything unusual or controversial has
already been communicated, so that there are no surprises at the meeting itself.
Single Set of Integrated Plans
Here is the heart of the S&OP process, often referred to as "one set of numbers" or a
"single version of the truth." In businesses without an S&OP process, even those
which may have some sort of demand and/or supply planning in place, all too often
each function has its own set of spreadsheets containing its "version of the truth."
Finance is working off a set of numbers all its own, instead of a dollarized version of the
S&OP plan. Sales may or may not have a forecast. Operations may or may not believe
it and so may decide to "adjust" it to what they think is more realistic. Or perhaps no
sales forecast is provided, so that operations are forced to do the best it can to
outguess demand and produce accordingly.
Pity the poor business (true story) in which the demand planner found out that his plant
was going to be down for three weeks. He was stocking out of product right and left
when, half way through that time, he finally called the plant. He had assumed they
were having mechanical problems ' but learned that they'd decided unilaterally to go
down for inventory control. Obviously, there was no S&OP process in this business.
So how do you get to a single set of integrated plans? That's where the subprocesses
come in.
Subprocesses . . . Interact Continually
The Demand Planning, Supply Planning (also called Supply/Demand Balancing),
Inventory Management, and Financial Planning subprocesses are not strictly sequential
and are definitely not independent of each other. Each has a cross-functional
component.
The Demand Planning meeting, for example, should include a representative from
supply planning. Why? Suppose Sales proposes to double the amount of product X it
sells for next month. The supply planner may be able to say without reference to
anything but the knowledge in his head that supply of product X is very tight, and there's
no way operations can supply double the usual amount next month. Or suppose
Marketing wants to pull the introduction of a new product up two months earlier than
previously planned. The supply planner may be able to say right away that the
equipment required can't be installed within that time frame. By having supply planning
represented in this meeting, we can prevent a lot "looping back" to revisit earlier stages
in the planning cycle. This is why it's so important to have cross functional
representation in each subprocess meeting. In addition, it's important to have each
function hear and understand the discussions to comprehend "where the other side is
coming from" instead of just looking at the final output and wondering, "What in the Sam
Hill were they thinking?"
Similarly, at each step of the way, finance needs to be identifying gaps between plans
and the Annual Budget or other financial commitment to the corporation. Specific plans
to fill these gaps ("hope" is not a plan) must be devised and responsibilities and
timelines assigned.
Once a monthly set of plans is approved, communications among the subprocesses
continue throughout the month as there are fluctuations and variations from plan.
Disciplined Way of Responding to Changes
Having a "single set of integrated plans" doesn't mean blindly following the plan all
month if, for example, expected demand is not materializing, or demand for one product
is much higher than expected. What it does mean is that when the "continuous
monitoring" detects such deviations, there is a structured, defined way for all plans to
change together.
Depending on business policy, this may mean a quick re-cycle of the whole monthly
process in mid-month. More efficiently, it may mean that under pre-defined
circumstances (e.g., deviation of more than X% from plan), the demand planner and
supply planner together, say, may be empowered to collaborate informally with the
other supply chain stakeholders and then change the operational plans. In such a case,
they would also be obligated to inform all other supply chain participants ' sales,
finance, inventory management, top management, etc., of the new plans. The details of
the changes, their causes and outcomes, would be reviewed at the next S&OP meeting.
Senior Management Decision Making/Approval
The S&OP meeting itself is not just (or even mainly) for reporting how you did last
month. Its reason for being is for decision making by top management. The top
business manager, be it CEO or Division Manager or General Manager, is a must-have
attendee. All other top management (sales, finance, operations, etc.) must either attend
or send a delegate empowered to make decisions in his/her place. The meeting
cannot be hamstrung because Joe couldn't make it. Also present, of course, are the
Demand Planner, Supply Planner, Inventory Manager, and Finance representative,
along with the S&OP Coordinator (who may be the same individual as one of the other
roles) who has prepared the slides and made sure all the necessary pre-work and
communications are done.
Each month, the S&OP Coordinator presents the integrated plans decided on by the
team, along with the assumptions behind them. If there are unknowns to be considered
(e.g., there may be a strike four months from now which would idle two of our three
plants), then alternative scenarios and the pros and cons of each should be prepared in
advance. The art of being the S&OP coordinator is guessing in advance what sort of
questions management is likely to ask and being prepared with the answers (How soon
do we need to start building inventory if there is a strike? How much will we have to
build? What will it cost us? How likely is the strike? If we build the inventory and then
there is no strike, how long will it take us to work it off?). Each and every month, top
management has a decision to make, even if it is only to approve the single set of
integrated plans presented by the team.
Why should a business implement S&OP?
Tangible Benefits
Traditionally, S&OP has been seen as a way of reducing costs ' and indeed, it does
that admirably. A study by consulting firm PRTM showed that best-in-class companies
typically run with 50-80% lower inventories than the median, while providing 15% higher
on-time deliveries and 40-64% shorter cash-to-cash cycle times. Sunsweet Growers,
the world's largest producer of dried fruit, reduced its production overruns from 30% to
12% after implementing a full S&OP solution. In addition, they eliminated costly
overtime, improved schedule stability, and decreased changeovers.
Perhaps more importantly, S&OP is now being seen as a way to increase the top line as
well as to cut costs. Rhodia Eco Services, a $230 million dollar division of global
chemicals giant Rhodia, Inc., implemented a full S&OP process which enabled it to
improve its overall capacity availability from 85% to over 90%. The increased capacity
allows Eco Services to respond more quickly to last-minute changes in demand and to
gain market-share.
Aberdeen Group, in its March, 2005 "Investing in S&OP: High Value Opportunities,"
reported that its research indicates that a typical $500 million revenue/year business
investing in upgrading its S&OP processes can gain an average of $25 million/year in
gross margin.
Intangible Benefits
One of the greatest intangible benefits of a well-run S&OP process is the increase in
organizational effectiveness ' and corresponding decrease in unnecessary pressure on
individuals in supply chain functions. Instead of firefighting, these professionals now
have time to think proactively about continuous improvement opportunities.
Crises occur much less frequently than before, because the planning process itself
creates visibility of potential problems far enough out that alternatives can be developed
and contingency plans evaluated and approved.
This is key to the "competitive advantage" we mentioned: it's difficult to put a dollar
value on preventing the train from wrecking, but it's far, far better and cheaper than
cleaning up after it. You didn't disappoint a customer. You didn't miss your numbers
because of out-of-control inventories. As a result, your stock price didn't fall. It's
difficult to put a number on being proactive, but it's not at all difficult to recognize the
benefits.
Sometimes, once things are running very smoothly, someone will ask, "Why do we need
to keep having these monthly meetings?" The answer, of course, is that the process
which culminates in the monthly meeting and the consensus path forward which comes
out of it are precisely what keeps everything running smoothly.
Why start with S&OP instead of,
for example, with scheduling?
Sometimes businesses think that their biggest "pain point" is something very deep in the
supply chain process, such as plant scheduling. Why should such a business begin
with S&OP implementation instead of plunging directly into improving scheduling?
The answer lies in the description above of the nature and benefits of S&OP. A
business needs a coherent plan ' including an agreed upon forecast ' before it can
really benefit from improving execution steps. If, as if often true in businesses without
an S&OP process, manufacturing distrusts the forecast and schedules based on its own
guess, an improved scheduling process could result in simply making more of the wrong
stuff. Solving the underlying problem of agreeing upon a "single version of the truth" to
be used throughout the supply chain must precede improving execution steps if the
business is truly to optimize its supply chain.
What has to change for S&OP to work?
For most companies, effective S&OP means an entirely new way of managing the
supply chain. It means that jobs are going to change ' everyone's job. Here are just a
few of the key areas that must change.
Data Visibility
One of the necessary prerequisites for a robust S&OP process is the visibility of data.
In many businesses, even a single inventory planner, for example, may not be able to
easily view his worldwide inventories. With S&OP, many people in many locations can
view these inventories, in order to promise orders, plan production, monitor warehouse
capacity, etc. Just the data visibility itself tends to allow businesses to improve their
inventory levels.
"Data visibility" also implies usability, meaning that paper reports don't cut it. One
custom film business had twenty-five voluminous paper reports generated daily from its
order entry/inventory system, but no on-line visibility. No one had time even to sift
through all these reports, much less to try to understand and correlate the data.
Organizing this data so that it could be delivered electronically as useful information
gave this business the starting point for developing an effective S&OP process.
Finally, data visibility is necessary for data-cleanup; your decisions can only be as good
as the data on which they are based.
Sharing Data and Decision Making
There is no "need to know" in the supply chain. An effective supply chain requires much
more open, honest communication than before across functions and hierarchical levels.
Decisions have to be made more quickly, using a wider range of data, and considering
a wider range of alternatives ' and the decision-making authority needs to be pushed
as low as possible in the organization. Furthermore, since supply chain personnel are
generally already juggling more data and alternatives than they can possibly analyze,
enabling technology will be necessary to allow such broader-based decisions to be
made.
Re-inventing Reward Systems
Frequently, the incentive systems in functional silos within a supply chain reward
behavior which optimizes the metrics for that silo but suboptimizes the business as a
whole. For example, sales reps are frequently rewarded for exceeding forecast (which
wreaks havoc with supply), while manufacturing is rewarded for maximizing yield,
regardless of whether the pounds they are making are the ones the business needs.
Incentives need to be redesigned to recognize that everyone, regardless of function,
needs to work toward "optimizing the whole, not the parts."
Education on the Big Picture
If everyone is to cooperate on "optimizing the whole," everyone needs to understand the
impact of his/her actions and data on the rest of the supply chain. For example, one
business found that its customer master contained "Rubbermaid" spelled 8 different
ways and "IBM" spelled twelve ways. Obviously, if different customer numbers are
associated with each spelling, and if a computer system is generating a statistical
forecast by customer, there will be 8 or 12 forecasts, respectively, where there should
be one apiece.
Once the CSRs who maintained the customer masters were made aware of the impact
of their entry of "duplicate" records, they were much more careful to search for existing
entries with similar spellings before creating new customer masters.
Business Process and Technology
Business processes are the way people go about accomplishing given tasks within an
organization. Frequently these processes have grown up over time, but no one
remembers anymore why that particular process is done that way: "That's the way it's
always been done." The old process may have been the best one possible at some
point in time with the data and systems available ' but as circumstances changed, in all
probability the processes have not kept up.
As the business has grown and the rate of change in the marketplace has increased
many-fold, the old, manual processes must give way to new ones which leverage "best
practices" and take advantage of newer technologies in order to respond rapidly to
changed circumstances.
Changing technologies without changing the business processes which surround them
is one of the surest ways to get the very least "bang for your buck." The greatest
system in the world is worthless if no one uses it. If business processes are not truly,
deliberately, and openly changed (and documented), people will slip back into their old,
sub-optimal ways of doing things as soon as no one is looking.
How does one go about implementing
S&OP?
The "Big Bang" approach to business change is a sure-fire path to failure. Instead of
changing everything at once, which merely maximizes pain and risk, take smaller steps
with clearly defined benefits so that the organization can absorb each change at its own
pace before moving on to the next. We recommend the following five-step approach:
- Understand Your Demand and Its Variability.
- Analyze Your Inventory and Position It to Support Demand.
- Create a Collaborative Demand Planning Process.
- Build a Quantitative Framework for Balancing Supply and Demand.
- Institutionalize the S&OP Process.
1. Understand Your Demand and Its Variability.
Every business' demand patterns will differ, and every business needs to be aware of
just what its demand pattern is in order to most cost-effectively serve its customers.
Using at least two years of sales history, answer these and similar questions
appropriate for your business:
- Which products/customers are most variable/difficult to forecast, or cause the
most production problems if the forecast is too low?
- Which products have only a few customers?
- Which products would be appropriate for MTO (Make to Order)?
- Which customers provide the shortest lead-times? What problems is this
causing in the supply chain?
- Which customers/products are most profitable? Which are getting the best
customer service? (The answers may surprise you!)
- How can shipment history in the ERP be used most effectively for statistical
forecasting, and at what level of aggregation?
What new business processes do you need to put in place to ensure that analyses such
as these are repeated on a regular basis?
2. Analyze Inventory and Position It to Support Demand.
Step 2 is to ensure full visibility of all finished product, intermediate, and raw material
inventory by SKU by location (by lot or batch if necessary). Visibility alone is often such
a step forward for the business that it immediately uncovers imbalances and errors. One
business discovered that one of its plants was no longer making anything that required
Raw Material A ' but Raw Material A was continuing to be shipped to that plant!
When you have full inventory visibility, a baseline forecast, and historical averages of
shipments by location, you can begin to determine whether your finished product is
ideally positioned to support demand. Are there too many days' supply in some
locations and too few in others?
What safety stocks are appropriate for each product and location? If you have the same
SKUs in multiple levels of warehouses, how can you position inventory so as to reduce
the overall safety stock? (Note: the answer is generally NOT to push all the inventory
out to the distributed warehouses.)
Do you have inventory age or quality problems? Worthless inventory does not improve
with age ' how can you best and most expeditiously dispose of it? What new business
processes need to be put in place to keep such inventory from building up again?
What new processes do you need to put in place to keep inventories at their newly
established target levels, and to re-examine those target levels on a regular basis?
3. Create a Collaborative Demand Planning Process.
You are now positioned to put into place a really effective Demand Planning Process.
Each month, the Demand Planner generates a new statistical forecast as a baseline
and solicits collaborative input, by exception, of real, known changes in demand. To
ensure cooperation, collaboration needs to be limited in scope (only truly value-added
input solicited) and easy to do (each collaborator giving input at a level and in terms
familiar to him).
Each input, including the statistical forecast, should be maintained separately, so that
the accuracy of each can be measured. In addition, there must be a mechanism for
determining a consensus forecast, probably based initially on business rules and then
reviewed at the Demand Planning meeting. Sales must ultimately own the forecast,
since they are the ones who are committing to selling it.
4. Create a Quantitative Framework for Balancing Supply with Demand.
Truly optimizing a complex manufacturing plan requires considering more permutations
and combinations than the human brain could process in 300,000 years.
Manufacturing, inventory, raw material, and transportation costs; selling prices; run
rates by product by facility; sourcing alternatives; contractual minimums or maximums;
trades or swaps; customer segmentation; desired inventory by location, and many,
many more factors may need to be considered. This varies by business, of course,
which is why you will need a model which relatively closely reflects your supply reality.
Only a sophisticated supply planning tool can reach a truly optimal solution.
There may be several alternate scenarios to be considered (such as the potential strike
outlined above), so the ability to save and compare scenarios is a tool requirement.
The final plan needs to be bought into by all affected personnel, including the operations
manager, shop floor supervisor, inventory planner, master scheduler, purchasing
manager, and transportation manager to ensure that no restrictions or constraints in any
of these areas have been overlooked.
5. Institutionalize the S&OP Process
The S&OP meeting, as we have seen, is the culmination of the process but is not the
process itself. As you have implemented the first four steps, you will have been
educating the entire supply chain organization about the new decision making
processes, the need for breaking down functional barriers, and the importance of
continual communication across all areas of the supply chain.
Businesses will make different decisions about when they want to introduce the S&OP
meeting itself into the process. Generally, we recommend that there be at least a
collaborative demand planning solution in place before S&OP meetings are introduced.
The reason is that if you begin S&OP meetings without having at least the demand plan
agreed upon, the task may appear impossible and the participants may become
discouraged. If there is an agreed upon demand plan, then whatever ad-hoc supply
planning mechansim has been in place can continue to be used for a few more weeks
until a truly optimal supply/demand balancing process is developed.
It is critical that top management across the board "buy into" the importance of S&OP.
Otherwise, the change of a few key personnel may result in the business' drifting back
to its old, ineffective way of doing things.
Summary
Although Sales and Operations Planning hadn't even been envisioned in Benjamin
Franklin's day, Franklin captured the gist of S&OP's spirit of cooperation in his famous
saying, "We must all hang together, or most assuredly we shall all hang separately."
"Hanging separately" in this case might be restated as "running our business into the
ground" ' what happens when a business allows the various functions of its supply
chain to operate in pursuit of conflicting objectives.
As long as the pace of market change was slow and inventory mountains could cover a
multitude of inefficiencies and uncertainties, S&OP was a "nice to have." Today, it is a
business imperative. Done well, it is a true competitive advantage.