Posts Tagged ‘sales and operations planning’

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In this video, we sat down with MIT’s demand management research director, Larry Lapide, and discussed his views on sales and operations planning (S&OP). Larry comments that he’s always been a big fan of planning, but acknowledges that a plan can only take you so far. There’s a lot of uncertainty in demand and supply that will lead to some degree of plan inaccuracy or risk that must be managed. Larry also comments on the importance of taking risks to win in the market and how that must be supported by supply chain risk management strategies as a part of the S&OP process.

If you are unable to view the video above, please try this link: Larry Lapide, MIT - Supply chain risk management within the S&OP process.

A new article at IndustryWeek discusses the top 10 demand planning strategies.  It’s a good article with several good recommendations.  I posted a comment at the site and have included it here as well.

** My comment **

I thought the article included several good suggestions.  I would add echo the comments that statistical forecasting in a world of constant change truly does represent just a starting point.  As noted by the author, collaboration with customers is essential to understanding their changing demand requirements and having a chance to meet them.

Beyond demand planning, demand management practices that align demand and supply, both inside and outside the sales and operations planning (S&OP) process, have become increasingly critical to supply chain management success.  Demand planning and supply planning can no longer be sequential, disconnected processes.  The ability to do integrated and collaborative demand-supply planning, to monitor the health of the business and develop rapid and effective response to change is the key to success in light of the volatility facing most businesses today.

Our recent white paper, “Four Capabilities Required for 21st Century Sales and Operations Planning“, does an excellent job of outlining both the current state of sales and operations planning (S&OP) and the benefits companies can derive from ensuring the tools being used to support the process include those key capabilities.   What the article fails to empathize is that the tools that have traditionally been used to support the process by even some of the best companies (primarily Excel but also Access and other point solutions) have failed to meet the challenges of the new business environment.  

That new environment contains three dimensions of change which have changed the shape of most companies fundamentally.  The first dimension is outsourcing which makes key operational data that influences the S&OP decisions outside of the direct control of the brand owner, and is therefore more difficult to access, integrate and analyze.   The second dimension is the speed of product innovation that requires greater precision in the timing of new product release to gain market share while avoiding unnecessary excess and obsolete inventory on older products.   The third dimension is the change in demand volatility driven by the purchasing habits of today’s consumers who leverage the internet to gain product knowledge and access to the global marketplace.    The days of blind product loyalty and the exclusive purchase of goods from local retailers are forever gone.   The bottom line is that these dimensions of change have exposed serious limitations in the legacy tools’ ability to meet the needs of today’s S&OP activity.

Each of the new dimensions of change outlined above have increased the importance of the capabilities outlined in the white paper.  With the increase in demand volatility and shorter product life cycles, a more frequent S&OP cycle helps to drive smaller course corrections and, therefore, reduces risk along several financial dimensions.   The outsourcing dimension demands an effective strategy for data acquisition and collaboration so that liabilities and opportunities are identified accurately and evaluated as part of the process.  In addition, few of the legacy tools being used today provide an ongoing foundation for monitoring S&OP execution and alerting the organization to critical variations.  

While a more frequent S&OP cycle reduces this risk, the very best companies will leverage alert and collaboration capabilities to respond immediately.   Lastly, in the area of creating multiple simulations and evaluating the results, the legacy tools have serious limitations in one or more of the following areas:

• The range of variables that can be considered in the simulation
• The ability to compare the results of the simulations along any performance dimension desired
• The number of simulations that can be evaluated simultaneously
• The depth of the data included in the simulation (does it include all of the supply chain partner data?)

So if companies want to achieve world class results in today’s business environment they must acquire a tool that includes the four key capabilities.

I recently read our new white paper “Enabling Sales and Operations Planning with RapidResponse” that describes four capabilities required for sales and operations planning in the 21st Century.

I found this interesting because in my past life I was responsible for creating and presenting the sales and operations plan for a small division of a large aerospace manufacturer.  Recalling how that process worked, then contrasting it to what is described in the white paper makes me wish I could go back in time to leverage some of the new tools.  At that company, the process would start with pulling information from various sources; customer orders, forecast and supply orders were extracted from the ERP system.  Headcount, sick leave and vacation information was pulled from HR.  Labor allocation was provided from operations management and finally variance data was provided from finance.  All of this information went into individual Excel spreadsheets.  The sales and operations spreadsheet was a large Excel file with complex macros which pulled data from each of the individual files.   Often files were missing or were incorrectly updated.  I’d then need to track down the person(s) responsible.   Other spreadsheets were updated for the purpose of presenting key divisional metrics at the sales and operations meeting.   Once all the data was pulled together and met the sanity test, we would pull a subset of the sales and operations team together for the pre-sales and operations meeting.  The outcome of this meeting was invariably adjustments and a recalculation, often requiring a refresh of data from the ERP system.  Occasionally we required an additional pre-sales and operations meeting to get the numbers right.  Finally we were ready for the full sales and operations meeting.

Does this sound familiar?  If you have a stable sales and operations planning methodology today, you probably follow a similar process.

Total time for this process?  2-3 weeks. From my discussions with our customers, I have found that this is actually a pretty tight timeline.  Some have sales and operations cycles that last 5-6 weeks!

If your world is relatively stable, you might be able to live with 3 weeks to create a sales and operations plan.  After all it’s a monthly plan right?  But what if your world isn’t very stable?  We had a situation where we were preparing for a possible strike at our parent plant.  We had to create several versions of the sales and operations plan looking at different strategies for maintaining our inventory position while also trying to retain our highly skilled workforce.  Each version needed to be reviewed, modified and revised – not fun when the tool is Excel!

This is an aerospace example where demand is fairly constant.  What about other markets where demand is far more volatile?  Long sales and operations cycles are far less effective.  As is pointed out in the white paper, companies are starting to move to weekly sales and operations cycles, with additional meetings as required to address specific problems or opportunities.

Look at your own sales and operations process today.  How long does it take to run a sales and operations cycle?   What would it mean to your business if you could do sales and operations planning on a weekly basis?  What would it mean to your business if you could convene the sales and operations team to evaluate the impact of a significant change within hours of it occurring?  What if the decisions you make at the executive level could be instantly evaluated in terms of revenue, margin, inventory and customer service?

Sales and operations planning is moving into the next generation.  Is your sales and operations tool moving into the next generation as well?

I read the white paper ‘Enabling Sales and Operations Planning with RapidResponse’ with interest. Organizational thinking is often inherently bound by the dimensions of the ‘box’ it is currently in because people don’t question working assumptions strongly enough. It takes a lot of energy and political skills to overcome ‘process inertia’ built up over the years within companies especially when the processes involve cross-functional teams and individuals at different levels of the organization. Popular business press and sales and operations planning (S&OP) consultants will tend to advocate what has worked in the past (i.e. conventional tools and processes). Taken together, this results in organizations likely short-changing themselves when investing in S&OP.

Personally, I’ve found that investment in S&OP is intermittent in many organizations. Interest in S&OP gets hot when a crisis occurs (e.g. the recent housing market collapse) because the organization understands that fundamental changes are occurring and S&OP is a tool to help them ‘get out of this mess’. The result of this is that companies often don’t move cleanly from one stage in the maturity model to another.  They can attain different levels of maturity in different areas and may even fall back because of a change in technology (i.e. the new demand planning system does not talk to the supply planning application) or personnel (i.e. ‘our new CEO doesn’t like to work that way’). S&OP, like any other strategic and tactical planning, takes constant investment and buy-in from senior levels.

I don’t believe that all organizations need to plan more often than monthly. A monthly cycle might be fine for organizations that have slow product turnover and a mature market. I think the key requirement is to be able plan when, and as often as needed; this is, S&OP ‘on-demand’. Recently, I talked to a company that manufactures residential light fixtures. Historically, a monthly S&OP cycle has served them quite well. However, the recent housing market downturn required that they re-evaluate their S&OP five times in two months. Also, many companies are ‘big-deal’ driven. So, what happens when one of those big deals comes in the day after the end of the last S&OP cycle?  They key is that the S&OP process shouldn’t be held back by the technology and this is where many organizations need to make sure they do their homework.

FYI - for those interested, we just published a new white paper entitled “Enabling sales and operations planning with RapidResponse.”  Here’s an abstract:

Sales and Operations Planning organizations that leverage demand-supply planning, monitoring, and collaborative response solutions are finding themselves better equipped to power a world class S&OP process. Key capabilities include; scenario management, expressing the results of scenarios as financial measures, early alerting to consequences of decisions made elsewhere in the supply chain, and focusing users on the exceptions that require their attention.

I recently found this article in InfoWorld talking about supply chain risk management. It’s based on research from Aberdeen that talks about how most companies are lagging in supply chain risk management.  According to Aberdeen “Of 138 companies surveyed, 58% suffered financial loss as a result of supply chain disruptions”  Aberdeen goes on to say that less than 1/3 of companies polled are managing key supply chain risks..   The key question is why?

From my experience, there are two key reasons why companies are lagging in supply chain risk management;

1. Lack of visibility / priority at the executive level.  The focus up to this point has been on growing the global footprint of the company, taking advantage of lower labor costs offshore to improve profits. As we can see from the numerous articles in the press and analyst reports, companies now are starting to look at supply chain risk management.  This is often being integrated into the Sales and Operations processes as Sales and Ops is typically the right level to be looking at this.
2. Another key reason why adoption has been slow is because of a dearth of tools to facilitate the identification and management of supply chain risks.  If I were to ask you to use your current systems to identify your top 5 suppliers in terms of what they contribute to revenue, could you?  Maybe.  If I were to ask you to quantify what the impact would be if one of those suppliers failed, could you tell me?  Not easily. Why?  Because the typical tools are just not able to cope with these types of questions.  ERP systems don’t handle simulations well and the reporting capabilities are not flexible enough to allow you to determine actual impact at various levels of the company.  Also, while companies are consolidating to a single ERP system, there is still are still many cases where companies deal with multiple disparate ERP systems.  Because of this, many companies try to simulate supply chain events in Excel.  Unfortunately, Excel doesn’t have the business logic of your ERP system, so any analysis will be a rough estimation at best.

So what is needed? Supply chain risk management needs to become a part of the sales and operations planning process.  The top risks to the need to be identified and quantified and mitigation strategies need to be put in place. These need to be reviewed on a regular basis because as the business changes overtime, so do the risks.  Don’t just focus on the risks to supply – also look to the risks due to changes in demand.  According to Aberdeen, , “More than 1/3 of companies polled reported unexpected customer demands and shipment demands in the last year” It’s important to remember that supply chain risk includes unexpected changes in demand as well as supply.  While a new large forecast increase is great, if it causes you to  exceed the capacity of your supply chain it can become a liability.

The other key factor needed to move companies forward is a tool that inherently supports supply chain risk management.

• Visibility to supply, demand and inventory across all parts of the enterprise
• The ability to fully model your entire supply chain and emulate your business logic
• The ability to quickly and easily simulate major supply chain events.  “What is the impact to revenue if this supplier can’t deliver parts for 2 months?”
• The ability to report results and impacts of these events.  This includes the impact to the key business metrics and the ability to drill into the details where desired.

Where are you on the road to understanding the risk to your supply chain?  What tools are you using to simulate events and understand potential impacts?  Where do you discuss supply chain risk management issues?  Post back and let us know!

I found a very good article at CFO.com discussing the supply chain management challenges companies are facing today in light of the rising logistics and commodity prices.  I posted a comment, entitled “integrating financial metrics into day-to-day supply chain management processes“ at the site and have included it here as well.

** My comment **

Great article covering the challenges that manufacturers in all verticals face today.  The increase in shipping and commodity prices is hitting everyone and forcing them to re-evaluate all aspects of their supply chain management strategies - from network design, to logistics, to sourcing, etc.

At the heart of the challenge is the reality that volatility is on the rise.  Whether it be customer demand expectations changing rapidly, supply disruptions or volatile costs, the fact is that things are changing at a faster pace.  And, the implications of not being able to adapt are significant.

Too many manufacturers have a disconnect between their business and sales and operations planning (S&OP) processes and day-to-day supply chain management processes.  Plans are put into place, metrics are passed down, but then people have to do their day jobs.

Given the rise in complexity and volatility, there are more and more high impact decisions that need to be made on the spot by your front-line responders.  Taken individually, these decisions may not have a material impact on your financial metrics, but in aggregate, it can be very material.

What manufacturers need are to develop supply chain management processes, supported by the right tools, that integrate financial metrics directly into the supply chain management processes.  The key is to ensure that the necessary high impact judgment calls are always aligned with the financial metrics of the company.  Without clear and immediate visibility to the impact a proposed action would have on these metrics at the point of action, your risk saying yes to the customer and dealing with the ramifications later.  The only way to ensure a profitable response to change, is by integrating financial metrics directly into the realities of today’s supply chain management processes.

Aberdeen recently published a new report entitled Sales and Operations Planning: Aligning Business Goals with Supply Chain Tactics.  Because Kinaxis was a sponsor of this report, we’re able to offer a complimentary copy of the report through the end of August.  You can access the report here.

The report had over 300 respondents across a variety of industries and company sizes.  The goal of this year’s report was to identify how the S&OP process helps corporate executives accomplish their overall business strategy, with the four broad strategies being: product differentiation, customer service differentiation, cost reduction and profitability.

Aberdeen found that the Best-in-Class companies (the top 20% of respondents):

• Increased Return on Net Assets (RONA) over the last two years: 43% of respondents with 5% and above improvement
• Customer service levels (on-time and complete to the customer’s requested date): 97%
• Average cash conversion cycle: 15 days
• Average forecast accuracy at the product family level: 86%

In addition, Best-in-Class companies are:

• Two and a half times as likely to be proactively alerted when they are no longer on track to meet S&OP objectives
• More than twice as likely to have the ability to align the S&OP plan with the company’s financial goals
• Three times as likely to proactively monitor daily performance against S&OP metrics
• Twice as likely to have the ability to respond to unplanned events in a timely manner
• Twice as likely to utilize statistical analysis and fact-based decision-making

There are some really good insights in the report and you can’t beat the price.  Also, I recently wrote about tools to support the S&OP process here.

With growing interest in sales and operations planning (S&OP), it seemed appropriate to discuss the tools required to support S&OP in the midst of today’s market dynamics.

Scenario Management

Tools to make it easy for users to create, evaluate, and compare multiple scenarios. In addition, these tools automatically identify essential participants and invite their input by asking them to either collaborate on the creation of the scenario or agree to the consequences of the proposed action. For example, a supplier may agree to ramp up production of a component for a new product early because the sales numbers are trending above plan, and the inventory manager may need to agree to holding increased inventory of the component even though it increases risk.

Financial Measures

The operational objectives set by executive management are almost always expressed in financial measures such as gross margin, cash-to-cash cycle, economic value-add, or similar categories. The best tools can readily convert the unit-based view of the users into financial measures that are relevant to executive management. If standardized measures do not suffice, the tool should also provide workbook capabilities that allow users to develop additional measures specific to their organizational needs.

In addition, solutions need to offer scorecarding features that enable users to rank financial measures and compare them across various scenarios. This provides an objective way of determining the best set of scenarios to include in the executive review during the S&OP process.

Alerting

The ability to track key performance indicators (KPIs) within the S&OP cycle is critical to effective S&OP adoption. Tools need to provide early warning that certain KPIs are projected to exceed tolerance levels, allowing the organization to take corrective action before problems arise.

In addition, while a supply order may arrive only one day late (which may be within tolerance from a supplier management perspective), the consequence could be that a major new order will be delivered late or, even worse, lost. This in turn might mean a downward trend for gross margin. Through these tools, such an occurrence would cause an alert to be sent to a senior manager, allowing him or her to take appropriate action.

More importantly, there could be several small changes at the operational level, each of which is within tolerance and therefore does not generate alerts. However, the cumulative effect of these changes could be, say, a 5 percent drop in revenue for the quarter—large enough to warrant executive attention. Alerts can help companies better track and effectively respond to such situations by eliciting attention before a crisis occurs.

Management by Exception

Closely related to alerting is the capability to drill down to the exceptions that cumulatively cause a particular KPI to trend out of tolerance. In the example above, the executive could identify all sales regions in which the projected sales revenue is below target. These could easily be ranked in order, allowing the executive to identify rapidly the regions on which to focus.

When contrasted to the common approach adopted by many companies in similar situations—i.e., ad hoc analysis and data extracts using spreadsheets—the increased productivity and effectiveness afforded by tools are readily apparent.

Summary

The diverse capabilities provided by best-in-class tools provide an ideal mechanism to enable far more effective sales and operations planning for virtually any organization.