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7/27/2019 [SCM] Missing_in_Traditional_SOP_Processes[1].pdf
1/15
2011SmartOpsCorporation 1 www.smartops.com
7/27/2019 [SCM] Missing_in_Traditional_SOP_Processes[1].pdf
2/15
2011SmartOpsCorporation 2 www.smartops.com
WhatisMissinginTraditionalS&OPProcesses?The holy grail of supply chain planning is to perfectly align supply and demand to meet
corporatestrategicobjectives. Overthelasttwodecades,corporationshaveinvestedheavilyin
Salesand
Operations
Planning
(S&OP)
processes
with
the
hope
of
driving
alignment
across
their
supply chains. Unfortunately, traditional S&OP processes have struggled to live up to their
hype,andcompanieswhohaveimplementedS&OPprocessescontinuetostrugglealigningall
aspectsoftheirsupplychainbecausetheylackthecapabilitytoplanfortheuncertaintyintheir
supplychains.
AproperlyappliedS&OPprocesscandeliversignificantvalue,butto realizecompletesupply
chainalignmentwithbusinessobjectives,allfacetsofthebusinessmustbeequallyrepresented
in the S&OP process. Over the years, companies have developed sophisticated demand,
supply, and capacity planning capabilities, but they have lacked the ability to set inventory
targets to buffer for the uncertainty in their supply chains. Without the capability to plan
inventoryfor
real
world
enterprise
supply
chain
complexities
and
uncertainties,
acompany
will
overbufferitsinventoryandstruggletodelivertherequiredcustomerservice.
TodeliveratrulyworldclassS&OPprocess,whichdeliverssustainablecompetitiveadvantage,
companiesrequireanenterpriseinventoryplanningprocesswiththeabilityto:
Appropriatelypoolallformsofsupplychainvariabilitytosetthelowestpossiblesafety
stocklevelsandmeetthedesiredcustomerservice
Provideatotalsupplychainviewandmodelinteractionsbetweenstagesinthesupply
chain
Adjust inventory targetsover time tomatch fluctuations indemand and identify the
needfor
pre
build
inventory
Modelthecomplexitiesoftheenterprisesupplychainprovidingplannerswithvisibility
intothedriversofinventory
Calculate actionable inventory targets at themost granular level, accounting for the
specificcharacteristicsofeveryitemandeverylocationovertime
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Provide a sustainable, integrated process which updates inventory targets as the
plannersviewofthesupplychainchanges
Support all forms of supply chain planning with a common fact base and scenario
analysiscapabilities
SmartOps,which
pioneered
Enterprise
Inventory
Optimization
(EIO),
is
the
only
company
that
offersaninventoryoptimizationsolutionthatuniquelydeliverstherequiredinventoryplanning
capabilitiestodeliverabestinclassS&OPprocess.
S&OPCoordinatestheSupplyChainIn todays dynamic global marketplace, the difficulty of managing modern supply chains is
obvious to even themost casualofobservers. Companies thatdevelop a clear competitive
advantage in operating their supply chain have reaped tremendous rewards while their
competitorsstumble. Successisnoteasy.
Runningasupplychainstartswiththeannualstrategicplan,andultimatelyculminates inthe
weekly/daily
execution
of
each
component
of
the
supply
chain.
In
order
to
align
the
detailed
executionof the supply chainwith thehighlevel strategicplans, companieshavedeveloped
Sales&OperationsPlanning(S&OP)processes.
Figure#1: S&OPCoordinatesSupplyChainPlanningActivities
TheconceptforS&OP isquitesimple. Alignacompanysdemandandsupply,andthesupply
chainwillbecomemorenimbleandprofitable. However,developinga robustS&OPprocess
which facilitates collaboration across the organization and aligns the various supply chain
planners
is
becoming
more
and
more
challenging
as
markets
become
more
volatile
and
supply
chainsgrowincomplexity.
SupplyChainManagementChallengeInrecentyears,thevolatileeconomyhasshakeneventhemoststableofbusinesses. Customer
demandhasgonefromrecordhighsdowntorecordlowsandinsomecasesbacktotheirhighs.
Nooneever trulyknowswheredemand isheading. All that is for sure is thatdemandwill
Execution
Strategic
Tactical
Annual
Quarterly / Month ly
Weekly / Daily
Strategic
Planning
Sales & Operations
Planning (S&OP)
Demand
Planning
Inventory
Planning
Capacity
Planning
Supply
Planning
Focus Frequency
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change. Justasthereisuncertaintyaroundfuturedemand,supplierreliabilityiseverchanging.
Corporatebankruptciesriseandfallascreditavailabilityandeconomicconditionsfluctuate. In
general, supply chains are dealing with ever increasing uncertainty from all aspects of
operations.
If increasingvolatilitywasntenoughforplannerstohandle,theplannersmustalsodealwith
theever
expanding
and
increasing
complexity
of
modern
enterprise
supply
chains.
In
an
attempttogrowrevenue,salesandmarketingdepartmentsareexpanding intonewmarkets,
increasing the number of SKUs, diversifying sales channels, and ramping up marketing
promotions. At the same time, operations are being restructured to drive out costs and
promote efficiency. The use of contract manufacturing, offshore production, and vendor
managedinventorybringmorepartiesintothemixanddrivesupplychaincomplexity.
Figure#2: SupplyChainsGrowingComplexityandPressuretoPerform
On top of the increase in supply chain volatility and complexity, executives also face the
increasingpressurestodrivesupplychainperformance. WallStreetandfinancedepartments
closely monitor revenue growth and supply chain cost structures. New competitors enter
markets,andexistingcompetitorsarecontinuallyimprovingtheirproductsandcoststructures.
Customersliveinaworldofimmediategratificationanddiminishedproductloyalty,drivingthe
need forhigherproduct availability. There ismorepressurenow thaneverbefore todrive
supply chain performance to become more profitable. With the increase in supply chainuncertainties and complexities, it is easy to understand why traditional S&OP processesstruggletoeffectivelycoordinatesupplychainsanddelivertherequiredfinancialresults.WhyDoCurrentS&OPProcessesFallShort?Thereisaninherentconflictattheexecutionlevelofthesupplychain. Ascompaniesgrow,the
roles within the supply chain must be segmented between demand, supply, capacity, and
inventoryplanning. Eachoftheseplanningroleshasitsowngoalsandobjectiveswhichresult
Raw MaterialSuppliers
Packaging
Suppliers
Manufacturing
DistributionCenters
Distributor orWholesaler
Retail
Customers
Consumers
Complexity Drivers
SKU Proliferation
Sales Channel Diversification
Vendor Managed Inventory
Marketing Promotions
Capacity Constraints
Globalization
Off-shoring
Outsourcing
Performance Drivers
Finance / Wall Street desire to improve
working capital Competitive pressures on price
Customer expect improved servicewith less inventory
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inconflicting results. The following figure illustrates the inherent internalconflict thatarises
betweenthevariouspartsofthesupplychainplanningorganization.
Figure#3: InherentSupplyChainPlanningConflict
ThepurposeoftheS&OPprocess istoresolvethe inherentconflictbetweentheplannersby
enablingcommunicationandalignmentofthedemand,supply,capacity,and inventoryplans.
However, the levelofplanning sophistication variesby area, and therefore,not all areasof
supplychainplanningareequallyrepresentedandunderstoodintheS&OPprocess.
Demand,supply,andcapacityplanningarealldeterministicinnature. Deterministicproblems
are discrete in nature and well understood by the scientific / mathematical communities.
OperationsResearch (OR)hasbeen studyingdeterministicproblems since theWorldWar II,
andhas
developed
linear
and
non
linear
programming
techniques
to
optimize
these
problems.
These deterministic optimization techniques are the underlying math behind many of the
supply chain planning solutions in use today for Demand Planning (DP), Material Resource
Planning(MRP),andAdvancedPlanningandScheduling(APS).
Unfortunately,supplychainsare far fromdeterministic. There isuncertainty throughout the
supplychain. Demand forecastsarenever100%accurate,products rarelyarrivepreciselyat
thestated leadtimes,andproductionyieldsandschedulesareconstantlychanging. Inother
words, supply chainsare stochastic, facinguncertaintywhich variesover time. Because the
deterministicmodelsusedtomodeldemand,supply,andcapacityignorethestochasticnature
ofsupplychains,plannershaveusedinventorytobufferfortheirsupplychainuncertainties.
Demand
Supply
Inventory
Capacity
Supply
Chain
Planning
Focus Objectives Potential Results
DemandPlanning
Maximizerevenue
growth
Increase customer service objectives Market / channel expansion to reach new
customers
SKU proliferation andproduct promotions
to drive sales
SupplyPlanning
Minimizetransportation
and
warehousecosts
Warehouses placement andtransportationmode selection may
increase supply chain lead times
Increase in pipeline inventory
CapacityPlanning
Minimizeproduction
costs
Large production batch sizes to minimizechange over and setup costs
Pushing of product into supply chain to
maintain asset utilization and avoidseasonal requirements
InventoryPlanning
Minimizeworking
capitalrequirements
Lowering of inventory levels may result inlower customer service
Push to reduce lead times and batch sizesto decrease inventory requirements
Drive to only produce what is needed
when it is needed
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Figure#4:TraditionalPlanningMethodsOverBufferInventoryforSupplyChainUncertainty
Untilrecently,thescience/mathforstochasticoptimizationdidnotexisttoeffectivelysupport
enterprise inventoryplanning. Inventoryplannershaveattemptedtoapplysimplestochastic
modelstothe inventoryplanningproblem,butthesesimplifiedmodels ignoretherealworld
complexities and uncertainties faced by modern enterprise supply chains. Therefore,
traditional inventory planning techniques and solutions have resulted in companies carrying
excessinventorytobufferforthesesupplychaincomplexitiesanduncertainties.
Without an effective means to plan inventory, the remaining three areas of supply chain
planning (demand, supply, and capacity planning) will always dominate over inventory
planning. ThisdominancecreatesanimbalanceintheS&OPprocess,preventingthecompany
fromaligningitssupplychainandhinderingitsoverallperformance.
WhatIsNeededtoDoEnterpriseInventoryPlanningforS&OP?Relianceon traditionalmethods for setting inventory targets, including rulesofthumb,basic
MRP/APSinventorycalculators,orspreadsheetbasedsafetystockcalculators,inevitablyleads
toexcessinventoryacrosstheboardorunnecessaryservicelevelfailures. Thereasonissimple
these
methods
rely
on
over
simplified
supply
chain
models
that
ignore
the
complexities
and
uncertainties that make inventory a necessity in the first place. Real world supply chain
complexitiesanduncertaintiesincludethefollowing:
Figure#5:RealWorldEnterpriseInventoryPlanningRequirementsforS&OP
The real world is It is not
Stochastic Deterministic
Multistage Isolated Single Stage
Time Varying Stationary
Constrained Unconstrained
Granular Aggregated
Dynamic Static
Integrated (Online) Analysis Offline Analysis
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Stochastic: Traditional inventory targets are based predominantly on safety stock
calculations that incorporate demand variability or forecast error over an exposure
period. These calculations ignore variability from upstream suppliers, transportation
variances,orproductionprocesses, resulting in safety stocks thatare too low for the
actualuncertainty imposedon the supply chain. Aneffective S&OPprocess requires
inventorytargets
that
account
for
all
forms
of
variability
(i.e.
demand,
supply,
service,
andproduction),andappropriatelypoolsthevariabilitytosetthelowestpossiblesafety
stocklevelswhichwilldeliverthedesiredcustomerservice.
Multistage:Setting inventorytargetsateach location independently,assumingperfect
upstreamreliability,ignoresinteractionsamongvarioussupplychainstages,resultingin
overbuffering of safety stocks across the enterprise. An effective S&OP process
requires inventory targets that account for the interactions between stages in the
supply chain. True multistage inventory planning identifies and compensates for
upstreamshortagesdueto less thanperfect internalservice levels,andoptimizesthe
locationofsafetystockacrossthesupplychainsothattotalsupplychaininventorycosts
areminimized
while
maintaining
end
customer
service
needs.
TimeVarying:Tosimplifytheinventoryplanningproblem,traditionalplanningmethodsdisregard the timevarying nature of supply chains by assuming fixed demand and
ignoring capacity constraints. These approaches generate static inventory or days
coveragetargetsovertime,whichleadtoexcessiveinventoryattimesofbelowaverage
demand,andstockoutsat timesofaboveaveragedemand. Timevaryingchanges in
demand influencetheeffectsofdemandvariability,supplyvariability,batchsizes,and
capacity constraints on inventory targets in a nonlinear fashion. An effective S&OP
processrequiresinventorytargetswhichvaryovertimeaccountingfortheseinfluences
inanappropriatemanner.
Constrained:When
inventory
planning
tools
do
not
reflect
the
realities
of
acompanys
supplychain,plannersbecomeskepticaloftheoutputsandstarttoignorethemodels
inventory targets. Withoutacomprehensivedatamodel thataccounts for realworld
constraints, such as production capacities, timevarying bills of material (BOMs),
production frozen windows, service times, or item/locationspecific review periods,
planners often revert to setting inventory levels using rulesofthumb or their own
intuition. In effect, educated guesswork replaces science, often with unpredictable
results. An effective S&OP process requires inventory targets which model the
complexitiesof the enterprise supply chainprovidingplannerswith visibility into the
driversofinventory.
Granular:Inventory
targets
must
be
set
for
each
item,
at
every
location,
for
each
time
periodintheplanninghorizon. Becausethescaleofsolvingforinventorytargetsatthis
level is somassive, traditional approaches reduce the scale by solving for inventory
targetsata lessgranular level,oftenusinganABCclassificationorproduct familiesto
group similar items. Whenplanners fail toconsider the individualcharacteristicsand
service requirements of each individual item and each location, items with higher
variability than thegroupaverage runagreater riskofstockingout,while itemswith
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lowervariabilitythanthegroupcarrytoomuch inventory. AneffectiveS&OPprocess
requiresanenterprisescaleinventoryplanningsolutionwhichcangeneratethemillions
ofinventorytargetsdownattheitemlocationtimeperiodlevelsothatsupplyplanners
haveactionabletargetswhichgeneratesustainableresults.
Dynamic:Standaloneinventoryplanningspreadsheetsordesktopapplicationsrequirea
largeamount
of
time
to
gather,
transfer,
and
enter
data.
This
robs
planners
of
time
they could spend updating inventory targets on a regular basis, causing inventory
targets to go out of sync with the larger supply chain. An effective S&OP process
requires a sustainable inventory target update workflow, which allows planners to
updateinventorytargetsfrequentlyandmanagetargetsonanexceptionbasis.
Integrated (Online)Analysis:Traditional approaches to supply chainplanning relyondisconnectedanalysisbetweenthestrategic,tactical,andexecution levelsofplanning.
Byusing inconsistent assumptions and separate inventorymodels / spreadsheets for
strategicplans,S&OP,andoperational inventorytargets,traditional inventoryanalysis
resultsinoverbufferingofinventory,massagingofinputs/outputs,andscramblingto
deliverexpected
results.
An
effective
S&OP
process
is
supported
by
an
inventory
planning process with powerfulwhatif analysis capabilities that supports consistent
assumptionsandoptimalplanning targetsbetween thevariousstagesofsupplychain
planning. Plannersneed an inventorymodelwith a comprehensivedatamodel that
allows planners to change input variables and see the effect of inventory levels and
budgetshelping them identifyandquantifycontinuous improvementopportunities.
Theinventoryplanningshouldbesyncedfromtheaggregatedstrategicplanalltheway
downtothegranularoperationalinventorytargets,providingeveryonewithacommon
factbase tomake supply chainplanningdecisions. Once strategic analysts choose a
supplychainstrategy,theyneedtohavetheconfidencethattheirinventorymodelsare
supportedby
the
granular
inventory
targets
that
deliver
the
stated
inventory
and
customerserviceobjectives.
SmartOps,whichpioneeredEnterprise InventoryOptimization(EIO), istheonlycompanythat
offersaninventoryoptimizationsolutionthatuniquelydeliverstherequiredinventoryplanning
capabilitiestodeliverabestinclassS&OPprocess. EIOsucceedswheretraditionalapproaches
fail because it addresses the realities of todays global enterprise supply chain it takes a
strategicapproachtoinventorymanagement,automatesprocessestomineandutilizetheright
business data, and offers depth of visibility into supply chains that traditionalmethods and
existing inventory planning cannot match. EIO calculates and maintains the precise item
locationtimeperiod inventorytargets,taking intoaccountthetotalsupplychain interactions,
todeliver
the
lowest
possible
sustainable
inventory
levels
that
meet
acompanys
supply
chain
customer service objectives. By doing so, EIO removes the over buffering of traditional
inventoryplanningprocessestoperfectlysynchronizeinventorywiththedemand,supply,and
capacityplans.
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Figure#6:EIObySmartOpsSynchronizestheS&OPProcess
WhatistheBenefitofEIOtoTraditionalS&OPProcesses?Thesciencerequiredtoaccuratelysetinventorytargetsattheitemandlocationlevelsacrossa
planninghorizonforanentiresupplychainisthesameforeverybusiness,andthechallengesof
properinventoryplanningarefundamentaltoeverysupplychain. Similarly,EIObySmartOps
deliversoutstanding value to all industries. Companies that implement EIO typically realize
inventory reductions greater than 20% and 2040% reductions in inventory carrying and
obsolescencecosts,whilemaintainingorimprovingcustomerserviceandontimedeliveries.
Figure#7:TypicalBenefitsofSupportExistingS&OPProcesswithEIO:
ThebenefitofsupportingexistingS&OPprocesseswithEIOcanbeseen intheexperiencesof
Danfoss,aSmartOpscustomer. Danfossisaglobalindustrialmanufacturerofmechanicaland
Supply Demand
Capacity
Inventory
Enterprise Inventory Optimization
EIO uses a stochastic optimization engine to determine theoptimal, time-phased inventory targets at the item-location-
time period level, allowing you to meet customer demand withthe lowest possible inventory.
Optimize inventory levels to "fix the mix
Analyze and implement planning parametersthat meet longer term service objectives
Improve Customer
Service Levels
Improvement Area Benefit Enabler Benefits
5-10% increase in order fill rates and ontime delivery
30-50% reduction in out of stocks andorder lead time variability
Reduced Inventory and
Working Capital
Reduced Production &
Distribution Costs
Improve Planner
Productivity
Reduce expediting and firefighting
Effectively handle large numbers of low
volume SKUs
20-30% reduction in time used inexpediting
10-20% reduction time spent on manualinventory planning processes
Transition from push to pull strategies
Reduce over production, excessive storagefacilities, and expediting
10-20% reduction in PPE anddepreciation due to excess storagefacilities
Manage inventory by SKU, location, andplanning period
Manage dynamic, integrated demand, supply,production, and inventory analytics andexceptions
15-30% reduction in inventory andworking capital
20-40% reduction in inventory carryingand obsolescence costs
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electroniccomponentsforheating,cooling,andhydraulicequipment. With2009salesof3.4
billion,Danfosssells40,000activeproductsandoperates:
93manufacturingsites
139salescompanies
~450agents
and
distributors
DanfossrunsastandardmonthlyS&OPprocesswhichattemptstobalanceDemandPlanning,
InventoryRequirements,andProductionCapacity.
Figure#8:DanfossS&OPProcess
Prior to implementing EIO, theDanfoss Inventory Requirements processwas singlestage in
nature,didnotaccountforallformsofsupplychainuncertainty,andwasmanually intensive.
DanfosshaddevelopedacustomdatabasetosetReorderPoint(ROP)targetsacrossitssupply
chain. The legacy inventoryplanningprocesscalculatedROPsinastagewisefashion,setting
targetsatcustomerfacinglocationsandthenmovingupthesupplychain,usingasinglestage
logicand
ignoring
the
interactions
between
inventory
at
each
location.
As
the
targets
were
calculated, lead timeswere assumed to be certain, ignoring the lead time variability in the
supply chain. The iterative processwasmanually intensive, and due the complexity of the
Danfosssupplychain,tooktwoweekstodevelopROPsfortheentiresupplychain.
AnevaluationofSmartOpsEIOsolutionillustratedtoDanfossthatitslegacyinventoryplanning
processdidnothandle the realworldcomplexitiesanduncertaintiesof itsenterprise supply
chain. BymodelingaportionoftheDanfosssupplychainandcomparingEIOtargetswiththe
legacy inventory targets, Danfoss saw that its legacy inventory planning process was over
bufferingthesupplychainwithinventorytomaintainservicelevels. TheEIOtargetswereable
tomaintainthesameservicelevelsastheDanfosslegacytargets,with20%lessinventory.
MONTH 1 MONTH 2
12-18monthhorizon
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Figure#9:DanfossEIOImpact InventoryReductionof20%WhileMaintainingServiceLevels
Basedon thisanalysis,Danfossexpanded the implementationofEIO to the restof itsglobal
supplychain. ByintegratingEIOintoitsS&OPprocess,Danfossisnowableto:
AutomaticallycharacterizetheuncertaintyofitsDemandPlanattheitemlocationlevel
sothatinventorytargetsquicklyreflectchangesasforecastsimprove
Modelmultistage interactions,allowingplannerstounderstandhow inventoryatone
location impacts inventory at another location, which will enable a more efficient
operationoftheglobalsupplychain
Gain visibility into the various forms of supply chain uncertainty (including demand
uncertainty,
lead
time
variability,
supplier
reliability,
and
production
variances)
and
set
morerealisticinventorystrategy
Reduce the effort required to calculate inventory targets and evaluate alternate
inventoryscenariosfromtwoweeksdowntoafewdays
TakingS&OPtotheNextLevelSIOPAproperlyappliedS&OPprocesscandeliversignificantvaluetoanorganizationbutdoesnot
guaranteesuccess. Inpractice,manycompanieshavefoundthatlogicallybalancingsupplyand
demandstillleavesthedooropenforamultitudeofbusinessmishaps. Toaddressthis,leading
firms have begun to revise their periodic planning approach by including a broader cross
sectionof
key
decision
makers
and
calling
out
inventory
as
afocal
point.
This
broader
approach, commonly termed SIOP (Sales, Inventory andOperations Planning) represents an
evolutionof the standardS&OPapproachand isproviding competitiveadvantage to todays
supplychainleaders.
In itsmostbasic incarnation,aneffectiveS&OPprocessseeks toappropriatelymatchsupply
anddemand. ThebasicS&OPprocessdoesnotalwaysresultinthedesiredlevelofefficiencyor
competitiveness. Commonly,theconstraintliesinatoonarrowprocessscope. Forexample,in
0 DKK
2,000,000 DKK
4,000,000 DKK
6,000,000 DKK
8,000,000 DKK
10,000,000 DKK
12,000,000 DKK
14,000,000 DKK
2008
.01
2008
.03
2008
.05
2008
.07
2008
.09
2008
.11
2008
.13
2008
.15
2008
.17
2008
.19
2008
.21
2008
.23
2008
.25
2008
.27
2008
.29
2008
.31
2008
.33
2008
.35
2008
.37
2008
.39
2008
.41
2008
.43
2008
.45
OH - Group 1 - Current OH - Group 2 - Smartops
Pre-PilotGroup 1 > Group 2 by 3.7%
Latest six weeksGroup 1 > Group 2 by 24.4%
Long global supply cha ins require som e time
before on-hand inventory is impacted
= SmartOps target upload
Source: Danfosspresentation at SAP Sapphire EMEA, May 2010
InventoryL
evel
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an organization driven by large retail promotions, it would be shortsighted to leave the
Marketing team out of the discussion. Regularly, this issuemanifests itself inmismanaged
inventorylevels,particularlywhentheplanningdiscussionislimitedtoManufacturingandSales
andwherenoKPIs exist forworking capital. Withoutdirect Finance intervention, theeasy
answerbecomesmoreinventory!andaCFOsworstnightmareiscreated.
Toaddress
these
shortfalls,
abroader
process
has
emerged,
expanding
the
periodic
review
process to include awider crosssection of key decision makers and tackling the inventory
challengeheadonbyspecificallycallingoutinventorypolicyasakeyprocessdeliverable. For
thisreasonthisprocesshasbeennamedSIOP,orSales,InventoryandOperationsPlanning. In
contrast to the older S&OP approach, satisfied with a simple balance between supply and
demand,theSIOPapproachseekstodeliverarobustmodelfornearterm,profitablebusiness
planning.
Figure#10:S&OPvs.SIOP
S&OP SIOP
Key Objective Reconcile Supply & DemandDeliver a structural model for planning abusiness to meet corporate goals
Functions Involved
Manufacturing Supply Chain Logistics
Manufacturing Supply Chain Logistics Sales Marketing Finance
Sample DecisionsHow much of Product A should bemanufactured this month?
If there is a capacity shortfall on Product A,is it more economical to run overtime, pre-build inventory, or cancel plannedpromotions?
ThehighlevelworkflowassociatedwithSIOPuses inventoryto focuskeydecisionmakerson
thebroaderbusinessobjectives. ThestepsinvolvedinanSIOPprocessexpandthediscussion
toensurethatacomprehensivebusinessperspectiveisdeveloped. WhileSIOPusesthebroad
inventory dynamic to expand the discussion, SIOP is about more than just making simple
inventorydecisions. LetsconsideranorganizationwhereanSIOPmindsetandworkflowmay
generatebetterresults. Consideramanufacturerfacedwithacapacityshortfallcreatedbya
retailer promotion projected to blow away expectations. A traditional planning process
mightconcludethatexpensiveexpeditingisthepreferredcourseofaction,ensuringthatsupply
is able to support anticipated demand. However, the broader SIOP process may identify
alternatives
that
drive
superior
business
returns.
The
organization
may
opt
to
accept
a
capacity
shortfallifthiswouldenablehighermarketplacepricing,oritmayadjusttheRetaileventitself
to rebalance demand. With a strong, continuous focus on inventory policy, it is also
conceivablethatanSIOPprocessmayidentifythepotentialchallengeinsufficienttimetoallow
foraninventoryprebuild.
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Figure#11:GenericSIOPWorkflow
MakingS&OPorSIOPWorkWhile theSIOPprocess representsaclearadvanceoverearlierapproaches, it still requiresa
supportiveenvironment inordertofunctioneffectively. Specifically,anSIOPprocessrequires
three key catalysts for maximum effectiveness: an accommodating organization, effective
supportsystems,
and
sufficient
data.
Fortunately,
these
are
no
different
from
what
is
required
forabasicS&OPprocessandarewellwithinthereachofmostorganizations. Informationand
technology,inparticular,aremoreavailablethaneverbefore.
Of initialconcerntomostcompanies isorganizationalstructure. Frequentlytheremaybeno
clearinventoryownership,makingitdifficulttoidentifytherightS&OPorSIOPteamcapable
of making rapid, efficient decisions. Rather than attempt to list all possible organizational
challenges,letusconsideranidealorganizationalstructurecapableofefficientlysupportingthe
S&OPorSIOPprocess. Severalkeytraitsareevident:
1. Globaldecisionmakingcapabilityacrossgeographies,divisionsandfunctions
2. Clearinventory
ownership
3. KPIsthatincludecostmetrics(includingcostofcapital)
4. ResponsibilityrollupthatallowsforfullP&Ldecisionmaking
The second catalyst, support systems, is required to deliver relevant data to key decision
makers. S&OPandSIOPbothrequiresupporting infrastructuretomanagesupply&demand.
On thesupplyside,Operationsmustbeabletoadjustproduction levelsandpredictcapacity
shortfallsmayoccur. Fordemand,theremustberigortomanagingfuturedemand,whether
this takes the formofa simple sales forecastor a comprehensive globalAdvancedPlanning
System (APS) solution. When it comes to inventory, an effective SIOPprocess needs to be
capable
of
generating
and
managing
an
effective,
efficient
inventory
policy.
The
core
functionalityprovidedbythissupportsystemisknownasEnterpriseInventoryOptimization.
Similartosupportsystemsdedicatedtodemandplanningandcapacitymanagement,inventory
optimizationsolutionsalsoseektofindanappropriatebalancebetweenbusinessrequirements
and constraints. Thedistinctionbetween these three systems ismerely the setofbusiness
objectivesandconstraintsunderconsideration. Attemptingtomanageanyofthesevariables
withouttheappropriatesupportsystemshouldbearedflagtoanySupplyChainexecutive.
PortfolioReview
NewProductIntro
Endof
Life
Pricing
MTO/MTS
Insource/Outsource
DemandReview
Unconstraineddemand
planActiveconsensusmaking
Agreeonnumber
Revenuereviewwithdemandplancomparison
SupplyReview
624monthsofdemand
planNodetailedscheduling
Capacity,requiredinventoryandsuppliercapability
Createsupplyplans
Reconciliation
Bringallfunctionsback
togetherLedbyFinance
TotalPlan
Allfunctionalleadsparticipate
ExecutiveSummary
BriefPlanpresentation
andapproval
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Figure#12:SIOPSupportSystemsDEMAND INVENTORY SUPPLY CAPACITY
Business Objective Manage OrdersDeliver Customer
ServiceProduct Sourcing Create Inventory
Sample Constraint s Inventory Levels Cost of Inventory Network Design Production Capacity
Supporting Systems Demand PlanningEnterprise Inventory
OptimizationAdvanced Planning
SystemsProduction Planning &Discrete Scheduling
Thefinalcatalyst,data,canbebrokendownintoahierarchyofneedsasshownbelow. These
relationships illustrate the difference between critical, core planning data and helpful (but
supplementary) performance data. Given the state ofmodern enterprise applications, any
organizationrunninganERPsystemshouldnotviewdataasabarriertomovingforwardwitha
S&OPorSIOPprocess. Bothcoreplanningdataandkeysupplychainrelationshipsarerequired
aspartofthebasicfunctioningofanyERPsystem. Thinkofitthisway: Ifanorganizationdoes
notunderstand
its
own
cost
structure,
there
are
bigger
problems
to
be
addressed.
Figure#13:HierarchyofS&OP/SIOPDataNeeds
ConclusionThe lesson? Enterprise Inventory Optimization (EIO) is foundational to any S&OP or SIOP
process. Without the capability to plan inventory for real world enterprise supply chain
complexitiesanduncertainties,acompanywilloverbufferitsinventoryandstruggletodeliver
the required customer service. To deliver a trulyworldclass S&OP or SIOP processwhich
deliverssustainablecompetitiveadvantage,companiesrequirethecapabilitiesofEIO.
SupplierPerformance
ProductionAdheranceFine
PerformanceDetail
Leadtimes
BillsofMaterial
KeySupplyChainRelationships
Costs
FutureForecastCorePlanningData
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2011SmartOpsCorporation 15 www.smartops.com
AboutSmartOpsSmartOps, themarket leader inenterpriseclass supply chainoptimization solutions,enables
companies tomanage theuncertaintyof complex,multistage supply chains toachieve rapid
returnoninvestmentandlongterm,sustainablevalue.
Foundedin
2000
and
headquartered
in
Pittsburgh,
Pennsylvania,
United
States,
SmartOps
createdthemarketforEnterpriseInventoryOptimization(EIO)software. DeployingSmartOps
solutions has dramatically improved supply chain performance at Fortune 1000 and Global
2000companies indiscretemanufacturing,consumerpackagedgoods,chemicals,technology,
lifesciences,anddistribution/retail industries. Typicalvalueachieved isa2030%sustainable
reductionininventorywithinthefirstyear,alongwithimprovedcustomerserviceandreduced
supplychaincost.
SmartOpsmission is tobe thede factostandard forglobal inventoryplanning,optimization,
and governance. SmartOps accomplishes this by providing dynamic key operating targets
acrosstheenterprise,resulting inasustainableandsubstantialreduction (20%+)ofthemore
than$1
trillion
of
inventory
that
exists
in
supply
chains
today,
while
improving
customer
service
andresponsiveness.
InMay,2009,SmartOpsandSAPAGannouncedareselleragreement,throughwhichSAPwill
resell the SmartOpsEnterprise InventoryOptimization solution. SmartOpsEIO is theofficial
SAPsolutionextension for inventorymanagement. ThisagreementprovidesSAPcustomers
withthevalueofSAPjointdevelopment,delivery,andsupportforSmartOpsEIO.
SampleSmartOpsEIOCustomers:
AcklandsGraingerInc.,BayerMaterialScience,CardinalHealth,Caterpillar,Celestica,TheClorox
Company,
ConAgra
Foods,
CSL
Behring,
Danfoss,
Dawn
Foods,
Diageo,
The
DOW
Chemical
Company,DuPont,EastmanChemicalCompany,EsteeLauder,GlaxoSmithKline,Hewlett
Packard,HoneywellInternationalInc.,JabilCircuitInc.,JohnDeere,Johnson&Johnson,Kellogg
Company,KohlerCo.,LexmarkInternational,McCainFoods,MerckandCo.,Molex
Incorporated,Monsanto,Nalco,PPGIndustries,PolarisIndustries,ResearchinMotion,Shaws
Supermarkets,SyscoCorporation,Whirpool,Swagelok,SunChemical,Unilever,Wyeth,and
more.
SmartOpsCorporationwww.smartops.com1251WaterfrontPlace
Suite301
Pittsburgh,PA15222
UnitedStates
ContactInformation+1.412.231.0115
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