Posts Tagged ‘Sales & operations planning (S&OP)’

For me one of the pleasures of being on vacation, as I was last week, is to read different newspapers and learn a bit about the local economy and politics.  While not quite as “local” as I would have liked, I happened upon the Caribbean version of the Miami Herald and was fortunate enough to run into an op-ed piece by long-time columnists Thomas L. Friedman of the New York Times titled “Really unusually uncertain”.  Many of you will have heard of Tom Friedman in the context of his book “The World is Flat”.  I stumbled across Tom Friedman in the late 1980’s – I think – and have been reading him avidly since.  Clearly I have completely plagiarized the title of Tom’s article, which in turn refers to US Federal Reserve chairman Ben Bernacke’s use of the term “unusually uncertain” to describe the outlook for the US economy. 

Of course this uncertainty is not restricted to the US economy, which is the point Tom Friedman makes by focusing on the German economy and how it relates to economic recovery in Europe.  In fact he points to three influences that will need to be reversed if the US and EU economies are to recover soon:

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines.

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever.

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first “existential crisis.” For the first time, he noted, the E.U. “saw the possibility of collapse.” Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Commenting on Bernacke’s statements, Jeannine Aversa of Associated Press writes that

Consumers have cut spending. Businesses, uncertain about the strength of their own sales or the economic recovery, are sitting on cash, reluctant to beef up hiring and expand operations. A stalled housing market, near double-digit unemployment and an edgy Wall Street shaken by Europe’s debt crisis are other factors playing into the economic slowdown.

OK, OK, so there is lots of economic uncertainty.  What do we do about it?  During my time as a management consultant I learned a fundamental truth: Analyzing a situation is fairly easy, defining a future state is a lot harder, but the really hard part is defining the path to achieve the future state. Not being an economist I can comment little on the efficacy of Tom Friedman’s suggestions for recovery, nor on Ben Bernacke’s for that matter.  My guess is that most of the readers of this blog fall into this category too.  Clearly we all want the same future state of a revived world economy and we are all too aware of the current state of the economy.  Of course we all have our opinions on the path to recovery, which we can express in elections, but for the most part actually pulling the levers of the economy is not something which is in our control. 

Which leaves us all feeling “really unusually uncertain”.

While we may not be able to effect change to the national or global economy, we do have some level of control over the economic performance of the companies for which we work.  As I commented in a previous blog titled “Why S&OP? Why now?”, this is where I see sales and operations planning (S&OP) playing a big role.  But for S&OP to be effective it must provide ways for people to evaluate and understand uncertainty.  There are 4 fundamental capabilities that are required to achieve this:

1. Capture of assumptions made about the future state for knowledge sharing and control
2. Facilitated collaboration across functional boundaries to get buy-in and inputs from multiple parties
3. Super-fast “what-if” analytics that allow organizations to evaluate and compare multiple scenarios in order to maximize performance and to mitigate any identified risks
4. Continuous plan performance management so that deviations are detected early and course corrections can be made quickly

The last point about performance management is often overlooked.  The more uncertain the future, the less likely it is that your plans will be achieved.  It doesn’t help much if at the end of the month you determine that the plan wasn’t achieved.  In a more stable economy this might have been sufficient.  In today’s volatile economy (which is the root cause of our uncertainty) it is really important to monitor performance continuously and to course correct as quickly as possible when significant deviations are detected.

However, what makes this all possible is super-fast “what-if” analytics.  Uncertainty is risk.  Without a mechanism to evaluate many alternative scenarios, your ability to evaluate and understand risk is reduced greatly.  Do you think Excel is up to this?  Do you think this can be achieved without any technology?

IndustryWeek had an interesting article this morning; “Five things Manufacturers should be able to do with S&OP data”.  I don’t necessarily agree with the focus on data. Companies that have a robust S&OP process have a number of factors that make them successful;

• Excellent data (I agree this is critical, but doesn’t provide for successful S&OP on its own);
• Excellent, repeatable processes;
• Executive commitment and buy-in;
• Communication of the plan to those that must execute.

Now that I have that off my chest, I do agree with the core part of the article which basically outlines the benefits of a successful S&OP process (see the article for an explanation of these points);

• Minimize surprises
• Optimally manage inventories
• Improve margins
• Improve customer satisfaction
• Better resource  utilization

In addition to these benefits, a robust S&OP process will also allow you to respond quicker to the macro events that impact your business.  Worldwide material shortages, changing demand trends (who would have predicted the success of the iPad  besides Apple? ), major world events all can be detected and responded to faster with S&OP.  Those companies that recognize the event first and respond fastest often end up benefiting from the event while their competitors lose business.

What benefits have you seen from S&OP?  Respond back and let us know!

As many of you will know, the AMR Top 25 supply chain lists have been published since 2004.  While undoubtedly improvements could be made in terms of geographical coverage, revenue coverage, industry coverage, and KPI’s used, all of which AMR is working toward expanding, the AMR Top 25 has been a great way of generating discussion and dialog about what constitutes supply chain excellence.  Something I struggle with is the peer voting. 

AMR includes a peer voting to try to capture future potential, but I feel it is, for the most part, a lagging indicator.  While I try to stay abreast of how companies are rethinking their supply chains, I am sure that, for the most part, I only hear of what they have done, rather than what they are doing.  I know this to be true of some of our customers who will not allow us to use their logo in promotional materials because they do not want to make public how they are using their supply chain as a competitive weapon.  I accept that the AMR analysts have a deep and broad knowledge of supply chain initiatives and innovations, but I am not altogether convinced that practitioners do.  However, the peer opinion only accounts for 20% of the score so it may determine which company is No 1, but that company is likely to be in the top 5 anyway because of the other criteria, so this is a fairly minor complaint on my part. 

What I really like about the manner in which AMR analyzes the supply performance is that they include execution excellence but also innovation excellence in terms of both process and product.

So what lessons can we learn from the companies on the AMR Top 25 supply chains list?  In a webinar last week, a replay of which is available on the Gartner website, Kevin O’Marah highlighted a number of tactical initiatives that the Top 25 have undertaken:

• Organization
• Segmentation
• S&OP (Sales & Operations Planning)
• Embedded innovation
• Extended supply chains
• Metrics
• Supply chain talent

According to Kevin the outcome or result of these tactical initiatives is primarily
Supply chains that are

• Predictable and reliable
• Flexible

And have

• Profitable demand response
• Sustainable growth
• Satisfied customers

Kevin covers each of the tactical initiatives in the replay, but the one that caught my eye was S&OP.  At first I thought Kevin meant this to be one of those “Which one doesn’t fit in the group?” multiple choice tests.  It seems to be a more “operational” initiative whereas many of the others seem to be more “structural,” in other words, how the supply chain and the supply chain organization is structured.  S&OP is more about how an existing supply chain is operated, though one could argue that metrics is more operational too.

Even though the survey data used dates from 2009, 63% of respondents are already investing in S&OP and another 15% will invest in S&OP within the next 18 months.  If we look at all the S&OP related initiatives, particularly new product launch, which is 2nd on the list at 68%, there is a lot of S&OP activity in the market.

Perhaps not surprisingly, over 51% of companies are using Microsoft Excel, Access, and/or PowerPoint to support the S&OP process, and 35% do not plan to invest in other technology to support S&OP. The primary reason behind this is that there is a lack of belief in the business benefits or ROI.  I find this really confusing in light of the analysis by Oliver Wight below.

Maybe it is because so many of the companies are doing volume level S&OP only (as I can’t see how it is possible do any level of in-depth analysis at the mix level using Excel) that has led to the low realization of benefits?  Or perhaps it is the lack of “what if” capabilities?  Perhaps this is also related to the Gartner/AMR study that shows that most companies are stuck in stage 2 S&OP maturity?  According the report titled “Conquering the Seven Deadly Challenges of Sales and Operations Planning”, only 18% of companies rate themselves as proficient in S&OP. What the study finds is that in 2007 58% of companies were at stage 1 or 2 of the AMR maturity model.  In 2009 that number has risen to 67% of companies.  (As an aside, I think some of the issue is that people have gained a better understanding over time of what constitutes S&OP proficiency.  I wonder how they would have rated themselves in 2007 given their current understanding of S&OP.)

Undoubtedly, one of the biggest benefits of a good S&OP process is greater revenue and cash flow predictability.  Notice that I did not use the term “stability,” but rather “predictability.”  Having a better S&OP process won’t change the markets or the customers’ willingness to buy, but it allows the company to better predict what the future financial performance will be.  There are also many hard benefits such as those documented by Oliver Wight.  I just don’t think anyone can achieve the level of process efficiency, and therefore process effectiveness, with Excel and Access in order to realize the benefits identified by Oliver Wight.

I think everyone within the supply chain space is well aware of the resurgence of interest in Sales & Operations Planning (S&OP) over the last 5 years, particularly in the last 2 years.  The question is what has caused this to happen?  I believe the root cause to be demand uncertainty and the consequent need for risk mitigation across the supply chain.

Several analysts, including Lora Cecere, are of the opinion that the very steep recession and subsequent rebound are behind the renewed interest.  Lora writes that because of the recession

All that is known is the unknown.  As 2010 winds to a close, three things are certain for supply chain professionals:
- The links of the supply chain are weaker
- Demand is more uncertain
- Supply is more volatile

Nari Viswanathan at Aberdeen wrote a survey report in 2009 titled “S&OP: Integrate with Finance and Improve Revenue” in which he states 

… it has intensified because of the global economic recession that began unfolding a few months ago.  Sales and Operation Planning (S&OP) is the key integrated process that the supply chain organization (specifically the VP of Supply Chain) can leverage to achieve visibility and transformation across the entire organization and the value chain.

I wrote a blog recently which, in retrospect, I realise I titled incorrectly. Originally titled “What’s behind the renewed interest in S&OP planning?”, I should have really titled it “What’s reducing the barriers to adoption of S&OP?”  Though I picked up on the focus on the recession by the analysts, I did not dig deep enough into the business reasons for the renewed interest in S&OP.  It goes deeper than the recession, although I agree that the recession has exacerbated some underlying issues, the most important of which is demand uncertainty.  What about supply uncertainty?  In an article in SupplyChainBrain titled “Multi-Echelon Supply Chains: Multi-Inventory, Multi-Problems” Jean Murphy wrote in February 2007 that

… Cisco places its products on a 2 x 2 matrix, with supply uncertainty on one axis and demand uncertainty on the other, each moving from low to high. “Our products fall all over the place,” [Karl] Braitberg says. “We have lots of product where we have very good demand certainty, but we still have to look at other variables and make sure we understand how reliable the supply chain is in total.

The reason for me choosing this quote is that it was made over 3 years ago, at a time when we all thought increased prosperity was a given.  In February 2007 we were not planning for the recession, yet Karl Braitberg makes a very clear case for two of the themes identified by Lora: demand uncertainty and supply volatility. I think we have to look no further than the “long tail” to discover much of the cause of demand volatility.  Product proliferation, which is a direct result of the “long tail” phenomenon, in turn leads to frequent new product introductions with short periods of margin capture. However, as pointed out by Karl Braitberg in the quote above, not all products are created equal.  Not all supply chains are created equal, and not all industries are created equal.  In the diagram below I try to capture some of the causes of volatility by industry segment, namely demand volume and product life span, both of which are a consequence of the “long tail”.

Clearly the industries on the left side of the chart have greater demand volatility (or lower demand stability).  Notice also for the most part that these same companies have shorter product life cycles and smaller unit sales, both of which contribute further to the difficulty of creating an accurate demand.  It is in these segments where we are seeing a big increase in S&OP interest.

I was struck by Lora’s use of both “uncertain” and “volatile”, rather than either uncertain for both demand or supply, or volatile.  I not sure if this was a conscious choice. I have always considered these to be separate but similar concepts, so I thought it best to investigate the difference.  The descriptions I found on the web are as follows:

vola•tile (väl′ə təl; chiefly Brit, -tīl′)
adjective
1. vaporizing or evaporating quickly, as alcohol
2.
    a) likely to shift quickly and unpredictably; unstable; explosive: a volatile social condition
    b) moving capriciously from one idea, interest, etc. to another; fickle
    c) not lasting long; fleeting

un•cer•tain (un sʉrt′′n)
adjective
1.
    a) not surely or certainly known; questionable; problematic
    b) not sure or certain in knowledge; doubtful
2. not definite or determined; vague
3. liable to vary or change; not dependable or reliable
4. not steady or constant; varying
5. Statistics The estimated amount or percentage by which an observed or calculated value may differ from the true value.

While related these terms are different.  I would argue that volatility is one of the causes, perhaps the primary cause but not the only cause, of uncertainty.  Volatility is what we experience; uncertainty is what we feel about future events based upon our experience of volatility.  Simplistically, volatility is about orders; uncertainty is about the forecast.  What interests me is the order in which Lora used the terms.  I would have used “volatile demand” and “uncertain supply”.  I come from industries in which demand has always been uncertain.  What has changed is that demand has become more volatile. Perhaps Lora’s point is that increased demand volatility had led to increased uncertainty.

Recently, in separate conversations with two mobile phone handset manufacturers, we heard that they have made concerted efforts over the past few years to improve forecast accuracy.  Despite these efforts, in one case their forecast accuracy is a little over 40% whereas in the other case they have never been able to achieve more than 50% accuracy.  One can argue that they are doing a poor job at forecasting.  No, they are not.  These companies have been recognized as leaders in supply chain management.  Demand volatility, and consequent demand uncertainty, is a characteristic of their market.

I wrote a blog a number of months ago titled “I am adamant that an accurate forecast does not reduce demand volatility” in which I refer to volatility is the primary cause of low forecast accuracy.  There was a storm of protest on the Institute of Business Forecasting & Planning LinkedIn group (membership required), mostly from people in a forecasting function in consumer packaged goods companies. Note from the diagram above that CPG companies tend to be in the top right corner of the diagram above, meaning they have more predictable demand. The key point I was making is that demand has indeed become more volatile.  With clever maths and models we may be able to reduce the uncertainty of demand in the sense that our forecast accuracy has improved, but does not reduce the demand volatility, which is still a problem because of the knock on effect on the supply side.  As Lora Cecere points out, outsourcing and off-shoring have increased the supply uncertainty.  The supply uncertainty is further exacerbated by the demand volatility. 

I believe that demand volatility is having an impact on our ability to forecast demand and with decreasing forecast accuracy comes increased demand uncertainty.  It is this demand uncertainty that is key to driving the increased interest in S&OP.  With increased demand uncertainty comes increased risk of not meeting market expectations, of increased excess and obsolete inventories, of reduced margins, etc.  While demand uncertainty is the driver for the increased interest in S&OP, risk mitigation is the goal.

AMR (now Gartner) defined 4 stages of S&OP transformation: 1: Reacting, 2: Anticipating, 3: Collaborating, 4: Orchestrating.  They report that many companies get stuck in stage 2 because it is stage 3 where they really need to go through an organizational transformation.  As a vendor we need to ensure that we have the capabilities to support this transformation and take them on to stage 4. 

What I find unfortunate, is that companies will design processes without first getting an understanding of the business process transformation enabled by the technology available to them.  Many will try to take their existing process, which was supported by Excel and a myriad other tools and manual processes, and try to duplicate it in whatever technology system they select to employ.  The consequence is often a great deal of customization – cost and time – with, more often than not, little added benefit, and in fact, probably less benefit than could have been achieved by deploying the standard service and changing processes to accommodate it. I realize that this is a very vendor-centric perspective, but it does have merit.  (And despite the fact that we are a vendor with this perspective, we too have fallen victim to having done this when deploying some technology solutions – it’s an easy thing to do as it is natural to think that the way you do things is the only and best way.)

Without a doubt, applications can always be improved, but the one-sided perspective of designing the process without consideration of the technology used to support the process has both short term cost consequence – heavy customization – and long term transformational risk – doing it like we always did. 

Current S&OP processes, especially those advocated by some of the traditionalists, were designed when Excel was a novelty, when companies manufactured most of their own product, when China was “very far away”, and when the internet was a military weapon designed for DARPA.  It took a month to collect the data let alone analyze it.  Why can’t an S&OP cycle be run in less than a week?  Why can’t S&OP be a continuous process? 

Anyway, enough of my sermonizing. Let me ask, do you agree?

Often when I am asked to describe the difference between planning and response I use the analogy of going on vacation.  I think the analogy best captures the benefits of planning – cost reduction, work place coverage planning – with spontaneity – waking up and deciding whether to sail or swim, stay in bed or watch the sun rise.  There are also negatives to planning and response that can be applied to vacations.  Planning far ahead to get the cheapest deals could mean that some natural or economic disaster ruins your plans – earthquake in Haiti, oil spill in the Gulf of Mexico, hurricane in xxx.  On the other hand, waiting until the last moment may mean that you can’t find the best deals to get to where you would like to be ideally.  But I have friends who love the serendipity of letting the “fates” decide.  To them this is a lot of the enjoyment of going on vacation, but having a double income and no kids, they can afford to be “spontaneous”.  We have the constraints of 2 university aged kids – sorry, young adults – and another in high school, 1 dog, and 1 cat.  And I have a German wife.  Believe me, going on vacation requires a lot of planning.

So what’s this got to do with supply chain management?  Well, I think a lot.  But I will expand on this later.  Let me first continue with the planning/response duality, and the effect technology has had over the past 20-30 years on one’s ability to be more responsive.

Our 2nd son has gone to Europe for some weeks in the summer.  I was equally fortunate after high school to get a trip to Europe, but that was in 1973.  The available technologies were very different…

                                              His base is an apartment in the south of France and he will be travelling to Turin, Venice, Rome, Paris, Frankfurt, Prague, and Munich.  Lucky guy, huh?!  As you can imagine, this trip has been in the planning stage since before Jan 2010.  Not only does he have an anxious father, he has a German mother, so meticulous planning was required.  This included searching for concerts/events across Europe on the internet and then booking Eurail tickets to get to the different destinations.  And finding youth hostels over the over the internet and pre-booking accommodation.  I, on the other hand, had a well thumbed paper copy of a “Europe on the cheap” guide.  Whenever I got to a new location, the first thing I had to do was to find a youth hostel for the night.  And believe me, English was far less prevalent in 1973.  So a lot of the planning and coordination which we did in 2010 that simply not possible in 1973.

Guess what?  He left the key to the France apartment at home!

He called in a panic from Zurich at 1:30am (parents not amused) using his cell phone.  We were able to find a hotel near the apartment using the internet and to book him a room for a few nights.  When I was travelling, I guess I could have sent my parents a telegram, but that would have only reached them later in the day, long after I would have had to try to sort something out for myself. 

And he has his own credit card.  I had to carry around a thick wad of traveller’s cheques and go to a bank – which were only open Mon-Fri from 10:00am to 3:00pm.  Actually, on Wednesday they closed at 12:00. 

Once he had checked into the hotel, he sent us an email to say that he was well settled, which we had in our inbox’s once we woke up again.

To get the key to him we went on-line to find the quickest (and cheapest) over-night service, and then emailed the concierge with the tracking number and expected delivery date and time.  He now has the key and hopefully the rest of his trip will be filled with as much adventure, but from positive experiences.

The key here is that we take technologies that are available to us for granted.  We forget how these technologies have changed the manner in which we can conduct business, and all too often the manner in which we use technologies in business lags the capabilities available to us.  So I smile when I hear people state that technology has no role in S&OP.  No business process is about the technology, but imagine if we did not use even a rudimentary technology such as EDI?  What about the ubiquitous use of Excel?  Let me tell you that in 1973 we were still using paper punch cards to submit a job to a data center.  The job queue was usually a few hours and when you came back you would discover that you had typed an S instead of a D, meaning the whole job had failed.

As my story about my son’s trip illustrated, technology has allowed us to shrink the time it takes to reach a decision and to include others in the process of compromise required to reach this consensus.  Not only that, we have mechanisms to know much sooner that an issue has occurred, which is of tremendous value.  The sooner you know about something happening and the quicker you can respond, the more likely you will be able to affect the course of events and reduce the risks or take maximum advantage.

In the recent webcast “What S&OP Capabilities Matter Most”, Lora Cecere made the case that S&OP planning is much too complicated and much too detailed to not use technology. With the number of variables we have in such complex analysis, I definitely agree.

I also strongly believe (contrary to some) that technology on its own is not enough. And that was the theme of Bob Ferrari’s blog post as well: The Critical Importance of S&OP Organizational Alignment. Companies need to be aware that having the tools does not guarantee successful planning – even if they pick the right ones, which in some cases is a difficult task.

Over and over we advise that having good, reliable data is essential. I think everyone by now is well familiar with the “garbage in garbage out” motto. But another critically important point that companies need to keep in mind is the impact of their own culture and social capital.

As Lora mentioned, ‘What If’ capabilities need careful thought. To increase the chances of a successful implementation will require training the team not only on using the selected tool but also preparing their mindset for new processes that they will need to put to work. In some cases, the existing skill set can be adjusted through training, but in other cases the lack of flexibility and an open mind from team members can compromise the effort. So to go back to Bob’s view on the importance of organization alignment, senior management must be supportive and provide guidance on how everyone can conciliate the challenges of managing day to day operations and investing time and effort to prepare for the future.

The 21st century supply chain analyst needs to be able to analyze data, build relevant reports on the go, and ultimately make sound decisions.  Technology is necessary, but it is only a facilitator.

I had the pleasure of participating in a webinar which featured Lora Cecere, a preeminent speaker on all matters regarding S&OP. Lora has worked for at a number of CPG companies; Manugistics (a software vendor); was the most read analyst at AMR for a number of years; and is now at the Altimeter Group.  If anyone can claim to have “been there, done that,” it is Lora.  The title of the webinar was “What S&OP capabilities matter most?” (presentation available on-demand here)  There is no question in Lora’s mind that this is fast and effective what-if capabilities.

Lora has arrived at the conclusion that what-if capabilities are key to S&OP based upon a study she is conducting.  As Lora stated,

“2009 was all about Demand.  2010 is all about supply.” 

Of course in 2009 the issue was demand coming to a screeching halt, and 2010 is all about people scrambling to get supply to satisfy what demand there is given the tepid upturn in the economy.  A number of polls were conducted as part of the webinar which not only confirm the growing importance of what-if capabilities, but also confirm demand volatility as a key driver.  Over 70% of attendees indicated that there has been a big increase in the importance of what-if capabilities in S&OP.  (It must be noted that the registrants and attendees covered a wide variety of industries from Retail to Pharma, and a broad range of company sizes too.)

Perhaps more surprisingly is the dominance of demand volatility as a driver for the need for what-if analysis.  Perhaps we would have received a different result if we had used the term “Supply volatility” or “Supply availability” rather than “Supply reliability”.  Most customers and prospects are telling us that they have real problems with supply shortages of both key and commodity items.  Many of our existing customers are running what-if analysis on what could be built or what demand should best be satisfied based upon an available supply of key components, and therefore insufficient supply to meet all demand. 

What was not surprising is that only 12% of respondents state that they have sufficient what-if capabilities, whereas over 40% of respondents state that their company is only just starting to use what-if analysis in the S&OP cycle, and 40% of respondents state that there is a large gap in what-if requirements and capabilities.  While not surprised, I must admit to having been confused by these results because what-if and compromise across functional and organizational boundaries is a key tenet of S&OP.  How are companies running an effective S&OP process without these capabilities? 

As Lora stated during the webinar,

“It’s not enough to connect numbers. You need to know which market drivers have greatest influence and to perform what-if’s on supply/demand using these market drivers.”

Let’s accept for now that demand volatility is the primary driver for the need for what-if capabilities, but dig a bit deeper into what this means.  Much of forecasting is focused on creating a statistical forecast based upon past shipments.  This works fine in a fairly stable market when demand is fairly predictable and everyone can afford finished goods inventories to buffer against demand fluctuations.  What has caught everyone by surprise over the past 2-3 years is the rate of change. Demand volatility is no longer represented by historic demand patterns.  This is a “rear view mirror” perspective of the market.  And S&OP cannot be about the rear view mirror.  It is all about looking far into the future when market drivers are very uncertain, let alone demand. Little is known about competitor activities.  At least governments have to publish plans for recovery, even if the efficacy of their plans can always be questioned.

I can think of no better way of evaluating the effect demand uncertainty has on the supply chain than a robust what-if capability, starting from range forecasting.  Instead of a single number forecast, arrive at a best estimate but also test upside and downside scenarios to evaluate and mitigate against risks to which you company will be exposed.  Which is worse, to be left with excess and obsolete components or to lose market share because demand is not being satisfied?  What if we sourced from a more expensive supplier but they would provide shorter lead times and more flexibility on volumes?  Would this provide us a lower overall inventory liability?

These are the types of decisions you should be making during an S&OP cycle.  I don’t know how they can be performed without what-if capabilities.

Again, check out the recorded webcast presentation to hear Lora’s take on the issue.

This is a follow-up to my post from a few weeks ago: Expediting versus Planning.  I received many comments and recommendations on this subject as to whether much of the expediting that occurs is in fact related to planning deficiencies.   After reading and reflecting on the comments I received, it seems to me that the premise that effective planning by itself will reduce the need to expedite is not necessarily true.  Obviously, effective planning is critical to reduce expediting.  Without a good plan, then what do we execute?  However, no matter how good plan is, it will always change.  Forecasts by definition are not accurate.  As we all know, changes and disruptions can occur in an almost infinite number of ways throughout the supply chain.  The best plan will always be out of date almost immediately after it is published.  (Just to be clear, when I say plan, I am referring to the MRP plan.)

Given the assumption that a plan is crucial, together with the realization that the plan will not be accurate, we are led to the conclusion that we need a stable plan, but be able to adjust the plan as and when needed. We need to be able to adjust the plan only when significant enough factors warrant a change to the plan, and with enough lead time and stakeholder buy-in to execute properly.  To restate, I believe that the following are important:

1. Plan Accuracy and Stability – The MRP plan needs to be stable enough to enable effective execution but we need to be able to detect exceptions that are significant enough to warrant a change
2. Responding to Change – The capability to effectively respond to required changes needs to be in place

How do we effectively accomplish the above?

Plan Accuracy and Stability

• First, the plan needs to start with an effective Sales and Operations (S&OP) process.  The more robust the S&OP process, the better that the high level plan will be.   
• We need to be able to detect or sense the need for changes, and once needed changes are detected, we need to be able to discern which are significant enough to warrant a change to the plan. 
• We also need to be able to prioritize these since there may be more than we can deal with. 

The key is that potential problems such as material shortages and late customer orders need to be detected for the future.  Obviously, once late orders or shortages have occurred, they are easy to detect (maybe even by way of angry calls from customers or buyers getting urgent messages from production regarding shortages.)

Referencing a recent blog post by Kerry Zuber, “Driving performance improvement through exception management“, Kerry states that in some organizations, there can be as many as 30,000 action messages generated by an MRP regeneration.  This exemplifies the complexity of the MRP plan and sheer volumne of exceptions in many organizations.  The organization cannot work all of these recommended actions, but which ones are the right ones to work?  Which ones signal that something in the higher level plan needs to be adjusted?  A second level, automated process needs to be in place in this type of environment to prioritize actions and also alert the responsible parties. 

The capability is required to detect what future demand will be late due to the mis-alignment of supply schedules,  issues with capacity in the supply chain and other issues.  If the future state/impact cannot be detected, then adjustments or contingencies cannot be put in place to avoid or mitigate them.  And as mentioned, we also need to be able to determine which of the detected changes require action and by who.

Responding To Change

Once changes are detected, we need a process to effectively implement these changes. This involves two key process and system capabilities:  simulation and collaboration.

We need to be able to simulate what-if scenarios to determine how best to deal with the change.  For example, it is difficult to calculate what the impact of a supplier changing commitments on a PO schedule will be in many environments without being able to simulate what that change in the commitment does to the overall plan.  In developing a response to the change, we need to be able to simulate multiple action alternatives and assess how well they will solve the problem and also whether they are achievable.

These simulations cannot be done in a silo.  Any significant change needs to be collaborated on with the extended supply chain.  Collaboration is certainly required with other internal organizations and potentially with affected external suppliers.

I realize that the above is very high level and probably over simplified, but I believe the general concepts are necessary in a complex manufacturing environment to optimize planning.  Without an optimized plan, execution cannot be effectively and efficiently accomplished and we have to resort to a lot of brute force exercises, including expediting.  Even the best of plans needs to be monitored for required adjustments and we need to have effective processes and systems in place for responding to these changes.

Has your organization implemented a process for responding to change?

Just a reminder of our webcast next week with Lora Cecere, Partner with Altimeter Group.  

What S&OP Capabilities Matter Most?

Date: June 29, 2010
Time: 1:00 p.m. EST

Register today!

Based on recent research, Lora Cecere outlines optimal practices for S&OP, and what’s required to get there.

As S&OP grows in significance, companies are redefining S&OP and the supporting technological requirements. While the field evolves, everyone has a slightly different take of what the future state of S&OP maturity will look like. Learn the points of differentiation companies like Kinaxis are putting forward.

P R E S E N T E R S
Lora Cecere, partner, Altimeter Group
Trevor Miles, director, industry and applications marketing, Kinaxis

FREE REGISTRATION