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�eSupply Chain Shaman’s

JournalA Focused Look at Sales and Operations Planning

Volume 1 - Issue 1Fall 2013

TM

by Lora Cecere

The Supply Chain Shaman’s

Journal™A Focused Look at Sales and Operations Planning

Volume 1–Issue 1

Fall 2013

by

Lora Cecereauthor of

Bricks Matter – The Role of Supply Chains in Building Market-Driven Differentiation

SUPPLY CHAIN INSIGHTS LLC, BALTIMORE

Copyright 2013All rights reserved. Published September, 2013

ISBN # 978-0-9889376-0-4 PDF version

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Section 1: The Evolution of Sales and Operations Planning . . . . . . . . . . . . . . 6

We Stumble Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Three Truths and a Lie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Why Have We Not Reduced Inventory? . . . . . . . . . . . . . . . . . . . . . 15

Lora’s Top Five of the Top Ten (Top Five Issues in S&OP) . . . . . . . . . . . . . . 17

Sales and Operations Planning: Putting Together the Pieces . . . . . . . . . . . . . 20

Squeezed at Both Ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Section 2: The Evolution of Demand Planning . . . . . . . . . . . . . . . . . . 24Admitting the Mistakes of the Past . . . . . . . . . . . . . . . . . . . . . . . 25

Rethinking Demand Management . . . . . . . . . . . . . . . . . . . . . . . . 28

Seven Sins of Demand Planning . . . . . . . . . . . . . . . . . . . . . . . . 29

Section 3: How Do We Get Good at S&OP? . . . . . . . . . . . . . . . . . . . 31How Can I Move Forward If I Cannot Align? . . . . . . . . . . . . . . . . . . . . 32

How Do You Define a Mature Supply Chain Planning Organization? . . . . . . . . . . 35

What Makes a Mature Planning Organization, Part 2 . . . . . . . . . . . . . . . . 37

Heh? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

What Happens in Vegas Should Not Stay in Vegas . . . . . . . . . . . . . . . . . 43

The Pitfalls and Potholes of Integrated Business Planning . . . . . . . . . . . . . . 46

Are You Only Giving It 40%? . . . . . . . . . . . . . . . . . . . . . . . . . . 50

S&OP: Letter Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Time to Take out the Pen . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

What If: Focus on the “&” with the “End in Mind” . . . . . . . . . . . . . . . . . . 55

And, the Question Is…? . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

A Rose by Any Other Name . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Section 4: Why It Matters to Corporate Performance . . . . . . . . . . . . . . . . 60S&OP Improves Agility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

How Do I Build Reliable and Resilient S&OP Processes? . . . . . . . . . . . . . . 62

Why It Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67About The Supply Chain Shaman . . . . . . . . . . . . . . . . . . . . . . . 68About Supply Chain Insights . . . . . . . . . . . . . . . . . . . . . . . . . 68

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Figures and tables

Table 1 .1 Analysis of Corporate Balance Sheets . . . . . . . . . . . . . . . . . . . . 9

Figure 1.1 Supply Chain Strategy Definition . . . . . . . . . . . . . . . . . . . . . 10

Figure 1 .2 Evolution of Supply Chain Processes . . . . . . . . . . . . . . . . . . . 11

Figure 1 .3 What Drives Collaboration? . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 1 .4 The Supply Chain Effective Frontier . . . . . . . . . . . . . . . . . . . . 14

Figure 1 .5 Industry Results on Inventory . . . . . . . . . . . . . . . . . . . . . . . 15

Figure 1.6 Benefits From S&OP . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Figure 1 .7 Rising Commodity Prices with Unprecdented Volatility . . . . . . . . . . . . . 21

Figure 1 .8 Evolution of S&OP . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Figure 2 .1 Positions of Industries on the Supply Chain Plateau . . . . . . . . . . . . . . 25

Figure 2 .2 Current Satisfaction with IT Systems . . . . . . . . . . . . . . . . . . . . 28

Figure 3 .1 Supply Chain Alignment . . . . . . . . . . . . . . . . . . . . . . . . . 32

Figure 3 .2 Improvement of Alignment through a Mature S&OP Process . . . . . . . . . . 33

Table 3 .1 Maturity Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . 36

Figure 3 .4 Comparison of Kellogg and General Mills . . . . . . . . . . . . . . . . . . 37

Figure 3 .5 View of team Alignment . . . . . . . . . . . . . . . . . . . . . . . . . 38

Figure 3 .6 Performance of Team Alignment . . . . . . . . . . . . . . . . . . . . . 39

Table 3 .2 Form and Function of Inventory . . . . . . . . . . . . . . . . . . . . . . 41

Table 3 .3 Goal Alignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Figure 3 .7 Organizations Are Not Naturally Designed to Collaborate . . . . . . . . . . . . 50

Table 3.4 Definition of the Components of S&OP . . . . . . . . . . . . . . . . . . . 53

Figure 3 .8 Organizational Barriers by Stage of S&OP . . . . . . . . . . . . . . . . . 54

Figure 4 .1 S&OP Improves Alignment and Agility . . . . . . . . . . . . . . . . . . . 61

Figure 4 .2 Agility Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Figure 4 .3 Business Performance of Sonoco Products and Owens Illinois . . . . . . . . . 64

Figure 4 .4 Patterns of Sonoco Products and Owens-Illinois on the Effective Frontier . . . . . 65

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introduCtion

This journal is a select collection of posts written for my blog, Supply Chain Shaman, from January, 2010 through September, 2013 . They are short and to the point, and are organized according to the most common questions I get on the topic of Sales and Operations Planning .

Read, enjoy and share . I want to help companies everywhere in their journey to drive supply chain excellence .

All the best on your journey,

Lora Cecere, a .k .a . the Supply Chain Shaman

Founder of Supply Chain Insights LLC

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seCtion 1: the evolution oF sales and operations planning

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We Stumble ForwardEvery now and then, I have an “Ah-ha!” moment . As I was writing the book Bricks Matter, I came to believe that supply chain failures gave birth to horizontal supply chain processes . I believe that it was failure, not success, that propelled the industry forward .

The most common horizontal processes are revenue management, supplier development, Sales and Operations Planning (S&OP) and Corporate Social Responsibility (CSR) . They give form and purpose to the supply chain . The adoption of these practices did not happen easily . I believe that as supply chain leaders stumbled forward, the industry learned the importance of horizontal processes (albeit the hard way) . If you agree, do you believe that these were the most pivotal case studies of the last 25 years?

Corporate Social Responsibility . Things Don’t Always Go Better with Coca-Cola . Today, when you read the Coca-Cola website, you see a commitment: “We believe that our first responsibility is to manage our own water resources in our operations wisely . Our nearly 900 bottling plants around the world rely on water as it is the most important ingredient in our beverages . Water is also used for beverage manufacturing processes such as rinsing, cleaning, heating and cooling . In 2008, on average we used 2 .43 liters of water to produce a one liter beverage . One liter goes into the beverage itself, and 1 .43 liters are used for manufacturing processes such as rinsing, cleaning, and cooling . We are nearly half way to our 2012 goal of 2 .17 liters per liter which will be a 20 percent improvement .”

However, in March 2004, the $16 million Coca-Cola bottling plant was shut down by local officials in Kerala, India citing a drastic decline in both the quantity and quality of water available to farmers . Was the water decline due to drought or overuse? There was a raging debate in the Indian court systems . It dragged on for years . The brand image was tarnished .

As the case moved through the Indian court systems, the Coca-Cola Company became laser-focused on building Corporate Social Responsibility (CSR) systems . This failure accelerated the adoption of CSR practices for water and energy in food and beverage manufacturing .

S&OP: Cisco Stumbles and Then Builds Strong Supply Chain Processes . The dot .com era was a speculative market bubble over the period of 1995–2000 (with a height on March 10, 2000) . During the mid-to-late 1990s, due to their market capitalizations, Cisco Systems, Dell, Intel, and Microsoft were known as the “Four Horsemen of the NASDAQ” . In this period, a combination of rapidly increasing stock prices, market confidence on future profits, speculation in individual stocks along with widely available capital created a wild-wild west environment where many investors were willing to overlook traditional metrics in favor of confidence in future technological advancements .

Caught in this e-commerce hype, Cisco Systems did not see the bubble getting ready to burst . Buoyed in the draft of the up-market, Cisco Systems built inventory for a booming market, but they did not see the market downturn . As a result, Cisco Systems was forced to write-off $2 .25 billion in inventory charges in April 2001 . Shares fell 6% . They stumbled .

The answer? The Company built strong horizontal process to connect Sales and Operations Planning (S&OP) to contract manufacturing . Based on this process evolution, they were one of the first companies to sense the downturn in December 2007. They were one of the few in their sector to weather the storm of the Great Recession in 2008 with no write-offs . This failure created a demand-driven culture built on horizontal process excellence .

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Supplier Management . A Fire Changes an Industry . Nokia Moves Ahead . In March 2000, a lightning bolt struck a high-voltage electricity line in New Mexico, USA . As power fluctuated across the state, a fire broke out in a fabrication line of the Royal Philips Electronics radio frequency chip manufacturing plant in Albuquerque . The plant was a primary supplier for Nokia and its archrival, Ericsson . The two companies accounted for 40% of the plant’s shipments . Plant personnel reacted quickly and extinguished the fire within ten minutes. However, smoke and water had contaminated the “clean room environment” where millions of chips were stored for shipment .

Four thousand miles away, at a Nokia plant outside Helsinki, a production planner who was following a well-defined process for inbound materials failed to get a routine signal from Philips. He contacted the top component purchasing manager . Recognizing that Philips’ problem could affect the production of several million mobile phones, Nokia took three key steps . They mobilized to help Philips . The company responded by rearranging its manufacturing plans in factories as far away as Shanghai . A second team focused on the redesign of chips to be produced in alternate factories while a third team searched and found two alternate suppliers .

Due to Nokia’s initial sensing of the problem, and its rapid and effective response in the third quarter of 2000, its profits rose 42% as it expanded its share of the global market to 30%. Its quarterly statements and annual report for 2000 did not even mention the fire. In contrast, on July 20, 2000, Ericsson reported that the fire and component shortages had caused a second-quarter operating loss of $200 million in its mobile phone division . Annual earnings were lowered by between $333 million and $445 million .

Six months later, it reported divisional annual losses of $1 .68 billion, a 3% loss of market share, and corporate operating losses of $167 million . It also announced the outsourcing of cell phone manufacturing to Flextronics and the elimination of several thousand jobs; Flextronics took over Ericsson’s plants in Brazil, Malaysia, Sweden, the U .K ., and the U .S . In April 2001, it signed a Memorandum of Understanding to create Sony Ericsson; the informal negotiations that led to this step had started at the height of the crisis in July 2000, though Ericsson had denied it in public . The deal was finalized in October 2001. This failure gave birth to supplier development processes.

I believe that brick by brick, these horizontal processes bridge the gap between customer’s customer and supplier’s supplier . Do you agree that these are the most pivotal stories? Or would you add more?

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Three Truths and a LieWhen new groups come together, the forming process is often awkward . Teams want to know each other, but introductions are strained . So, how can they do it quickly and move on to solving business problems? Ice breakers help . One of my favorites is the game, “Three Truths and a Lie .” In this team activity, people who do not know each other list four statements and ask the group to guess which statement is false . It is usually fun and revealing .

I played a variant of this game with my audience when I spoke at Kinaxis’ #kinexions12 event . I asked attendees to answer the question, “Which of the following statements is true?” I played three lies and a truth with the group . Most were surprised at the answer . Here is the list:

• Supply chain technology implementations have reduced inventory .

• Companies should implement supply chain best practices .

• Companies that have focused on collaboration in the supply chain have built competitive advantage .

• Supply chain excellence matters .

Seemingly, most supply chain leaders that are reading the press, or going to industry conferences, would believe that all four statements are true . However, based on recent research, I now sadly know that only one of these statements is true . Here I share insights on my journey to understand the truth .

Table 1 .1 Analysis of Corporate Balance Sheets

The Lies That I Have Personally ToldAs a supply chain analyst for the last ten years, I have a passion for writing . I have averaged about 100 articles a year . I love the process of research . For some absurd reason, that I don’t quite understand, I have a passion for supply chain . I believe that it is the lingua franca of the business . Unknowingly, I have told three lies . I have discovered the truth through the research for Bricks Matter . Here they are:

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The Lie of Inventory ReductionOver the course of the last decade, I have carefully recorded and reported presentation after presentation, from conference after conference, and interview after interview with supply chain leaders . Repeatedly, I heard that supply chain applications have saved costs, reduced inventory and improved customer service . I wanted to believe, and in fact I do believe, that most projects did have short-term impact . However, as shown in table 1 .1, the results have not been sustained and the impact cannot be seen on the balance sheets .

I think that the answer to this problem is deeper . I believe that most supply chain projects were implemented as discrete projects and not part of a systemic business transformation . Leaders focused on process after process and missed the definition of larger supply chain strategy. Without an overarching strategy, there is no road map for alignment . Today, 85% of companies are not clear on supply chain strategy. It starts, as outlined in figure 1.1, with answering the question, “How does the supply chain strategy tie to the business strategy?”

Figure 1.1 Supply Chain Strategy Definition

I also believe that it is because the organization is not incented to manage cash-to-cash metrics . The strong functional silos focus on their own metrics which seldom include the cycle metrics of inventory turns, working capital or cash-to-cash . When working capital has been reduced, it is usually a story of reducing payables . For many this has increased supply chain risk due to a weakening of the supplier base .

The Lie of Best PracticesAs I have studied the practices of supply chain management, I do not think that we have BEST practices . Instead, I think that they are EVOLVING . I think that any consultant that talks to you about best practices should be nicely escorted to the lobby and shown to the curb .

In the last decade, as shown in figure 1.2, we have moved through the evolution of definitions. It started with the efficient supply chain (lowest cost per case) to the reliable supply chain (right product,

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at the right time at the right cost) to the resilient supply chain. In 2009, the definition of supply chain resiliency was driven by the impact of the Great Recession . In 2011, insurance claims and business continuity amplified the discussion. Last year, $450 million of profits were lost in the Japanese auto industry, and Intel lost $1 billion in revenue due to floods in Thailand and the associated impact on Thai suppliers. In the past five years, supply chain leaders have been focused on the concepts of building demand-driven value networks . The concepts of market-driven value networks carry this concept one step further to enable the linking of the supply chain from market-to-market to sense, learn and orchestrate .

Figure 1 .2 Evolution of Supply Chain Processes

The fastest progress over history has come from failure . This heightened awareness of business continuity has increased the emphasis on supplier development and is changing the processes in procurement to focus from squeezing costs and terms to building relationships . But, it does not stop there .

With the rise of Corporate Social Responsibility, and the discussion of natural capital accounting focused on air, water, land and biodiversity, companies are learning that only a tiny fraction of nonrenewable resources are under their direct control . This measurement of intertwined, nonrenewable resources will push a new definition of supply chain management. It will force the discussion of supply chains to one of value networks . Companies will be forced to own their entire supply chain .

As growth flattens and commodity pressures escalate, market-to-market orchestration and the building of outside-in horizontal processes is the next frontier . The momentum to build market-driven value networks with bidirectional orchestration of demand and supply variability is the aspiration . Today’s supply chains were built assuming that manufacturing is the primary constraint and that oil was $10/barrel . West Texas crude is now selling for 3X the price in the 1990s . Materials and commodities are

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becoming the new supply chain constraint, and there are few technologies to guide direct procurement visualization and optimization .

The definition of the Supply Chain as a Function Is a Barrier. I agree that there are best practices to implement a technology. Industry templates, commonly defined interfaces, and IT standards; but, we cannot confuse the implementation of a technology with the definition and implementation of holistic end-to-end value networks. I think we are a LONG way from having supply chain best practices .

I

Ironically, my observation is that the same thing that got us here will be a barrier in the future . It is the definition of the “supply chain organization.” For many years, the evolution of supply chain practices was slowed by the lack of a supply chain organization . Now, based on the work that I am doing with companies, I am seeing the inverse. The narrow definition of the supply chain organization has become a barrier . When you say building the “end-to-end value chain,” and there is push back that this is not the job of the supply chain, you have problems .

For many companies, the supply chain organization has been defined too narrowly. It is frequently named supply chain, but only has control over logistics or distribution. The definitions in Europe are more constraining than those in the US . The irony is that while these teams state that they want to build the global end-to-end value network, there is no one in the group that is responsible for looking at business decisions from end to end . In fact, in most organizations where I am working today, I struggle to find anyone that has an end-to-end focus.

Unfortunately, the door is not swinging both ways . Our drive for supply chain excellence placed the sign “Supply Chain” over the door . Horizontal processes—Sales and Operations Planning, revenue management, supplier development and Corporate Social Responsibility—are the pathway forward;

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but to do this, the supply chain organization has to be willing to have the spirit to tackle what they feel that they cannot do . Simply put, it is the building of the processes from the outside-in from the customer’s customer to the supplier’s supplier . They have to be comfortable challenging sales-driven and marketing-driven mindsets to drive higher value through market-driven value networks . Most are not ready . The windowless silos are too strong . While the group will say that these are supply chain processes, they do not feel that it is the role of the supply chain organization to drive them. I find this sad .

The Lie of CollaborationThere is probably not a more overhyped and overused word in supply chain management than the term “collaboration .” It is pervasive in the spoken language of every supply chain executive and absent in the results .

I believe that collaboration is a sustainable win-win value proposition that benefits both parties. And, if this is the case, I believe that you should see the total cost of the supply chain decrease and the days of working capital improve. As I analyze and study value chain after value chain, I cannot find one example where supply chain processes have improved total cost and working capital . I really want to believe . I keep on looking .

Instead, what I find is that we have shifted costs and working capital backwards in the supply chain. The waste in the crevices of the supply chain that lies between parties has not declined . The irony is that pushing costs back in the supply chain weakens the supply chain because most suppliers have a higher cost of capital and lower gross margin than their downstream trading partners . One of the ironies of this work has been the discovery that most of the work that we have called “collaboration” has actually put more risk into the supply chain .

Figure 1 .3 What Drives Collaboration?

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My favorite slide on collaboration, shown in figure 1.3, came from a P&G presentation at an Effective Consumer Response (ECR) conference in Europe . The speaker was sharing his experience on “collaboration .” His belief was P&G in Europe experienced a number of failed attempts at collaboration because there was not a shared vision, the right skills, aligned incentives, available resources, a common plan, and leadership to drive the program . It was only when a company could bring all of these elements together that he believed supply chain leaders had the “right stuff” to drive successful collaboration .

Why? Why? Why?So, why have we perpetuated these myths? I believe supply chain professionals are not holding themselves accountable to balance sheet deliverables . The data is hard to get . The peer group analysis is even tougher, and most supply chain teams struggle to speak the language of business . My advice is to cast off the four letter acronyms and forget the “geek-speak” of IT . Instead, learn to talk the language of financial supply chain ratios and hold yourself and your team accountable.

The TruthThe truth is that supply chain excellence matters . You can see it in the resiliency of companies when faced with market shifts, or in the ability of companies to make progress on the supply chain effective frontier of trade-offs .

Let me close with my quote of the week . It comes from Don Gaspari (from NCR) from a recent conference . I had worked with NCR for many years and had helped them develop their S&OP processes . He gave a great presentation . I was proud . He closed with “Supply chain is like marriage . It depends on good communication .” I think that this is true . I don’t think that we can clearly communication unless we can speak the truth, even when it hurts . So, I think that it is time to get honest with ourselves about the progress of supply chain management over the past decade .

Figure 1 .4 The Supply Chain Effective Frontier

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Why Have We Not Reduced Inventory?“If only I had the money that the company was supposed to save from the multiple ERP and supply chain projects . There was a myriad of projects and we are at the same place that we were when we first started. I am a skeptic. I just don’t believe it anymore when I see it on a project justification.” – CFO of a major manufacturer

I want to believe . I really do . This year supply chain leaders will celebrate thirty years of progress in supply chain management . But we have not made progress on one of the fundamentals: inventory management . I think that it is time for us to take the litmus test and ask the hard questions, “Have our practices impacted days of inventory? Have the early adopters of inventory optimization seen a reduction in inventory on their balance sheets?” Sadly, I think that the answer is no . Here I give my logic .

Figure 1 .5 Industry Results on Inventory

How I Draw This ConclusionI have been an industry analyst since 2001 . I have written many articles about Advanced Planning Systems (APS), Enterprise Resource Planning (ERP) and Advanced Inventory Optimization . I want to believe. I am optimistic. However, through this period, I did not have the access to financial balance sheet data to judge if the companies that were deploying the technologies were making an impact on the balance sheet .

What I See in the DataI can only find one industry that has systemically reduced inventory and working capital over the ten-year period . This industry is High-tech . The rest of the industries have the following characteristics:

In the last decade, Days of Inventory are either unchanged or have slightly increased .

If Days of Working Capital have decreased in an industry, it is largely the result of changing payment terms and decreasing Days Payable . We have squeezed suppliers . It is not an improvement in Days Receivable or Days of Inventory .

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There is no pattern between the adoption of advanced technologies for inventory reduction and balance sheet results . There are a few outliers (e .g ., Procter & Gamble and Kimberly-Clark); but for most companies that I have worked with, I see that they have purchased and implemented inventory technologies, but there has not been an impact on future years’ results in either Days of Inventory or Days of Working Capital .

What I Think It MeansI am searching for the answer to this sticky question. I find that it is a “sticky wicket.” Technology vendors have pushed advanced math and new technologies into the market, and early adopters have adopted the tools . I have avidly followed this market for the last ten years . I have attended conference after conference where I have seen the obligatory slide of “We reduced X days of inventory, improved costs and drove XX% improvement in customer service .” I know that you have seen it as well . You see it conference after conference . It is in presentation after presentation . Are these supply chain leaders telling a lie? I think not . Instead, I think that six factors are behind the results:

1 . Bias . Supply chain leaders tend to overstate business results. (I find that it is analogous to asking a woman to put down her “true” weight on her driver’s license . Supply chain leaders tend to overstate results.) The projects are successful when first implemented, but they are usually a piece of the business and the results cannot be sustained over time .

2 . Increased Complexity . The supply chain is a complex system . Business complexity has increased with an impact on inventories . Too few companies understand the impact of sales policies, product proliferation, and the long tail of the supply chain on inventory .

3 . Project-based Focus . Multiple projects have been implemented without an overarching road map and a clear supply chain strategy . Companies cannot achieve supply chain excellence by working discrete projects in isolation .

4 . Ownership of Inventory as a Metric . In High-tech, there is greater ownership of the “inventory metric” across the organization . It matters for all functions . A good example of this is the culture at Samsung. By definition, the culture is inventory adverse. Regions are held accountable for obsolescence . I think that it is because the margin of High-tech products falls so fast as the product ages . So, the longer that it is held, the greater the loss for the company . In High-tech, this margin curve is more extreme than other industries .

5 . True Understanding of Supply Chain as a Leadership Advantage . I believe that the High-tech industry is heads-and-shoulders above the other industries at planning . The stakes are higher . As a result, the executive teams have a greater appreciation of supply chain due to the margin impact of new product launch . These industries paved the way for building supply chain practices . In other industries, the margin curves have not driven similar adoption . (e .g ., Why should a pharmaceutical company get good at inventory if the margins are so high? As they face the “patent cliff” inventory management will matter more . )

6 . Forgetting Inventory Basics . A decade ago the supply chain had two buffers: inventory and manufacturing . With the move to outsource manufacturing, inventory became a more important buffer . The focus shifted from just inventory levels to the form and function of inventory . However, as many companies outsourced manufacturing, they failed to look at the impact on inventory strategies and push/pull boundaries . I was at one company last year that had outsourced manufacturing but forgot to figure out where these outsourced manufacturing locations would “store their inventory .” Many companies have outsourced manufacturing, but have not designed the supply chain to support the outsourcing decision .

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Lora’s Top Five of the Top Ten (Top Five Issues in S&OP)

I hate long flights. Somewhere over Kansas I began wishing that I could click my heels and be home.

I was returning home from a conference where I presented my top ten reasons on why S&OP had failed . So many people wrote me questions on the presentation that I decided to tackle a few here in a blog—Lora’s Top Five of the TOP TEN—in between liftoff and touchdown .

Tackling the Top Five of the Top Ten ListI will never be David Letterman, but I like the concept of a TOP TEN list . So, at a an event in Boston, I decided to liven it up a bit and play David Letterman . I shared my TOP TEN list . It represented the questions most commonly asked over a period of seven years while working with clients on Sales and Operations Planning (S&OP) . (Due to space limitations, I am going to limit this blog post to the Top Five questions .)

During this period, I have shared insights with over 250 supply chain leaders on process, technology, and organizational evolution to improve operational results . As an analyst, the advice comes in the form of inquiry . Companies call you and ask questions . I have logged the questions . Here are the most common:

What Is the ROI?In qualitative interviews, as an analyst, it is hard to get a team to give you a definitive ROI. So, I structure the questions a bit differently:

Where have you seen improvement?

Can you quantify the improvement in your operations?

Surprisingly, for many, the greatest benefit of S&OP is growth, not cost reduction. In figure 1.6, the numbers to the right represent the frequency of mention, and the numbers by the arrow represent the magnitude of improvement. While companies will often start an S&OP project to improve efficiency and reduce costs, a powerful driver of S&OP is GROWTH. It takes two forms: improved fulfillment and better execution of new product launch .

What Is the Best Reporting Structure?The best reporting structure is to have the S&OP team report to the profit center manager. The profit center manager is the natural choice to make decisions between the go-to-market strategies of the “S” and the operational considerations of the “OP .” However, in about half of the organizations that I work with, this answer is not sufficient. Either there is no profit center manager between the team and the CEO, or the complexity of the matrix organization makes it unclear who owns the final decision on profitability.

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So, I then recommend the next best thing: a neutral group that works between the go-to-market groups of sales/marketing and operations. This can be a strategy group, a finance group, or a special team working for the CEO . What is CLEAR to me from the research is that sales and marketing are the WORST places for the teams to report to . The highest bias and error in forecasting happens when the team reports to sales . Likewise, these teams lack the discipline and balance to drive excellence in the process . The next worst team for reporting is marketing, and for similar reasons . The third worst place for S&OP to report is manufacturing. When the team reports to manufacturing, it is difficult for the group to gain enough clout to drive the process .

Figure 1.6 Benefits From S&OP

Do I Need Technology?Yes, spreadsheets are not sufficient. The team needs to start with software that helps to determine a “Feasible Plan,” and realize that these data models are not in the Office Suites of software.

Who Does It Best?The companies that do S&OP best have one of two characteristics: tight margins or a recent market failure. Either can be a rallying cry to get things right. I firmly believe that S&OP is the best process to align the organization horizontally, across silos, to a business strategy . The companies that do it best have a clear strategy and they understand from real-world experience that they cannot mess around . Good examples of this are Cisco and DuPont . Both companies failed to anticipate demand during recessions—Cisco in the 2002 recession and DuPont in the 2008 recession—resulting in

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disappointing earnings and the redefinition of S&OP processes. The fact that the first thing both of these companies fixed when they failed was the S&OP process is a testiment to the strength of the process .

What Does Good Look Like?Companies that do it best have these characteristics:

• A clear strategy

• Alignment on the goal (see the post “Squeezed from Both Ends”)

• A disciplined monthly process

• A focus on continuous improvement

• Clarity on how to make decisions (governance model)

I can determine how good an S&OP process is performing by asking three questions:

1 . Is there balance between sales and operations? Does the organization balance the decisions for sales and marketing with those for operations in the alignment of processes to meet the supply chain strategy? Unfortunately, only 20% of companies have a balanced S&OP .

2 . What do companies measure? There needs to be alignment to a balanced portfolio to five metrics that are measured and rewarded cross-functionally: revenue, profit, customer service, inventory and forecast accuracy .

3 . What is the goal? The most mature processes maximize opportunity and mitigate risk .

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Sales and Operations Planning: Putting Together the PiecesIn qualitative interviews with 60 line-of-business supply chain leaders, when asked “What is your focus for S&OP?” the response was:

• 90% of supply chains are grappling with skyrocketing costs and supply volatility .

• 87% are struggling with the integration of business planning and supply chain planning technologies .

• 85% of supply chains experienced a disruption .

• 62% of companies have multiple S&OP processes .

• Uniform frustration that industry progress on working capital has stalled .

There are several major shifts in the technologies:

• Evolution of an S&OP Platform: Recognition that there is a need for a S&OP platform for demand translation, mix analysis and analysis of differing units for volume (always amazed at how many different definitions of volume there are in an organization). This also is evolving to connect the multiple S&OP processes together .

• Change in How Planning Is Done: Movement from tight integration of demand and supply to the need for iterative analysis between demand, inventory, financial and supply modeling.

• S&OP Execution: Evolution of S&OP execution to tie planning to execution .

• Better Analysis: Deeper modeling and “what-if” capabilities .

• Improved Visualization: Better visualization of S&OP processes for the executive S&OP meetings .

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Squeezed at Both EndsI was interviewing a good friend (who wants to remain nameless) for my book, Bricks Matter, and she summed it up well . She said, “Today, my supply chain is like a tube of toothpaste . We are being squeezed at both ends . In fact, until we got our supply chain under control, we were selling product for less than we could make it .”

My Point of View (POV): The pain is high, and the supply chain processes are not adequate . Today, sourcing is connected through Master Requirements Planning (MRP) and this is not sufficient.

I’ve Been PlayedWhen I moderated a panel on Advanced Sales and Operations Planning, it gave me a wonderful opportunity to meet Pat Bower, Senior Director of Corporate Planning at Combe International . During the panel discussion, Pat made a comment that the change of name of S&OP to IBP stands for “I have been played.” His point was clear. He believes that S&OP has always included financials, and that the change of name only confuses planning . In his view, the push of the name IBP by technology vendors only serves the vendors’ best interest and is detrimental to supply chain management excellence .

My POV: I laughed . Pat, unknowingly, is just as vocal and opinionated on S&OP as I am! I love it when I get someone like Pat on my panels . It livens things up!

Figure 1 .7 Rising Commodity Prices with Unprecdented Volatility

We Can’t Even Afford the PencilsCommodity price pressure is the new normal . For some, the situation is dire . It was summed up well by one panelist when he said, “Today, we are getting squeezed at both ends . We are arguing about who is going to pay for the pencils .” His point was that when commodity pressures are high, and costs

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cannot be passed on in the channel, then there is a scramble to save costs . The discussion on paying for pencils is symbolic of the degree of the issue . The list is long: dairy, wheat, corn, cotton, nickel, oil . In the last six months there were few earnings calls that did not feature it as an issue .

My POV: As margins get thin, supply chain management and trading partner collaboration increases in importance . Companies with great margins are never good at supply chain management . As depicted in figure 1.7, we are in an unprecedented period of commodity volatility. Yet, when I asked audiences at the two S&OP events to hold up their hand if they extend S&OP to their supplier base, I got a response of less than 3% of the audience .

Time for Market-Driven Supply Chains?Each of these comments support my research on the evolution of market-driven value networks . A market-driven value network is one that senses and responds buy-side to sell-side market, bidirectionally, with near-zero latency . Let’s see how a supply chain feeling like a tube of toothpaste could apply these concepts:

Stage 1: Deliver a Feasible Plan .The origins of S&OP were focused on the goal of developing a feasible plan . Early evolution of the Advanced Planning System (APS) market enabled organizations to develop a forecast, visualize operational requirements, and align metrics . The introduction of constraint-based theory in the 1990s and the evolution of constraint-based manufacturing planning enhanced this capability . Note: These models are very industry-specific. A conglomerate composed of process, discrete and apparel manufacturing processes may find that they need multiple modeling systems. Sadly, many have found that the building of a one-size-fits-all model by the ERP expansionists has delivered generic models that do not fit any company very well.

Figure 1 .8 Evolution of S&OP

Stage 2: Match Demand with Supply . As organizations mature, teams want a solution that can model trade-offs . These trade-offs are complex . They balance customer service, asset strategies and inventory plans to best match demand with supply . To meet this requirement, APS vendors introduced “what-if” modeling environments . Planning became deeper and more iterative . These processes were augmented by inventory management specialist capabilities to evaluate multitier inventory analysis .

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Stage 3: Drive the Most Profitable Response. Often in the market, this stage is commonly dubbed “Integrated Business Planning” (IBP) . At this step in process evolution, it is critical to have a clear supply chain strategy and a well-defined meaning of supply chain excellence . For most, this is a stumbling block . The secret to success at this stage is to redesign the technology architecture built in Stages 1 and 2 . To accomplish this modeling, the demand and supply hierarchies must be decoupled to enable volume/mix “what-if” trade-offs iteratively between process steps. The output can then be improved through the use of financial modeling technologies

Understanding this stage of S&OP requires the addition of two new capabilities to the supply chain: demand translation and supply orchestration . The process of modeling demand volume/mix trade-offs between demand and supply is termed demand translation . In supply orchestration, trade-offs are made in commodity markets to determine the most effective formulation or platform design to use in scheduling manufacturing . Sourcing is closely coupled with manufacturing to run optimal formulations . Companies working in this stage are Kimberly-Clark, Newell Rubbermaid, and Sonoco Paper .

Stage 4: Build Demand-Driven Supply Chain Capabilities . At this stage of process refinement, the process is designed from the outside-in. The first step is sensing market conditions based on demand signals, and then shaping demand using technologies like price optimization, trade promotion planning, new product launch plan alignment, and social/digital/mobile convergence . Demand sensing reduces the demand signal’s latency by 70-80% to understand/see true channel demand, while demand shaping combines the techniques of price, promotion, sales and marketing incentives, and new product launch to increase demand lift . Examples of companies working at this stage of S&OP evolution are Procter & Gamble, DuPont, and Samsung .

Stage 5: Orchestrate through Market-Driven Value Networks . The horizontal processes in stages 3 and 4 are foundational for Market-Driven Value Networks . This approach helps companies to sense and shape demand and supply bidirectionally between sell- and buy-side markets . This process of bidirectional trade-offs between demand and a commodity market is termed demand orchestration . This capability allows companies to win in this new world of changing opportunities and constraints . It is especially relevant with the tightening of commodity markets . Cisco Systems, Intel and Del Monte have the most evolved Stage 5 S&OP processes .

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seCtion 2: the evolution oF demand planning

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Admitting the Mistakes of the PastSupply Chain Management (SCM) concepts are now thirty-years old. The first use of the term supply chain management in the commercial sector was in 1982 . Previously, the focus was on a more siloed approach to improving manufacturing, procurement or logistics . When they were lumped together, it gave birth to the concepts of demand planning and integrated supply chain planning .

The first demand planning applications were introduced late in the 1980s. Today, most supply chain professionals believe that the supply chain planning solutions have driven steady progress to reduce costs, improve inventories and speed time to market. In reality, what we find is that we have actually moved backwards over the course of the last ten years on growth, operating margin and inventory turns . The reason? Complexity has increased and companies have not designed their supply chains to absorb complexity . As a knee-jerk reaction, most companies have improved days payable, but this has pushed costs and working capital responsibility backwards in the supply chain, moving the costs to the suppliers .

Figure 2 .1 Positions of Industries on the Supply Chain Plateau

To move forward, we have to admit the mistakes of the past . Here we start with the seven that we see the most often:

1) One-Number Forecasting . It Is a Hoax . Well-intentioned consultants tout the concept of one-number forecasting . Eager executives drink the magic elixir . But, they realize too late that this is overhyped and too simplistic . As a result, the concept adds, does not decrease, forecast error . The reason? It is too simplistic . It needs to be about a COMMON plan, not ONE number . The people who push this concept do not understand demand planning .

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A demand plan is hierarchical around products, time, geographies, channels, and attributes . It is a complex set of role-based time-phased data . As a result, a one-number thought process is naïve . An effective demand plan has MANY numbers that are tied together in an effective data model for role-based planning and “what-if” analysis .

A one-number plan is too constraining for the organization . A forecast is a series of time-phased numbers carefully architected in a data model of products, calendars, channels and regions . The numbers within the plans have different importance to different individuals within the organization . So, instead of one number, the focus needs to be a common plan with marketing, sales, financial and supply chain views, and agreement on market assumptions . This requires the use of an advanced forecasting technology and the design of the system to visualize role-based views that can only be found in the more advanced forecasting systems .

2) Consensus Planning . In the last ten years, the concept of consensus planning was advanced by the industry with the belief that each organization within the company could add insight to make the demand plan better . The concept is correct; but for most, the implementation was flawed. The issue is that most companies did not hold groups within the organization accountable for bias and error . Each group within the company has a natural tendency to inject bias and error based on incentives; and unless the process has discipline around this reporting, the process of consensus forecasting will distort the forecast and add error despite well-intended efforts to improve the forecasting process .

I have worked with one company that has redesigned their collaborative demand planning processes three times . Each time it was to improve the user interface to make data collection easier by sales . Not once did they ever question the value and appropriate use of the sales input or apply discipline on the input that was driving a 40% forecast over-bias . I struggle with why more teams do not apply Lean principles to the consensus planning process through Forecast-Value Add Analysis .

3) Collaborative Planning Forecasting and Replenishment (CPFR) . This process was the most widely adopted in the consumer packaged goods industry . The design of the process was for manufacturers to collaborate with their retail partners on building a demand plan for the extended network . This process, termed Collaborative Planning Forecasting and Replenishment (CPFR), was designed to align the manufacturer’s demand plan to the retailer’s and reduce the bullwhip effect . The assumption was that the retailer’s forecast would provide better insights .

The maturity of the retailer’s forecast was never considered . The issue is that the majority of retailers have poor forecasts, and the process never accounted for the inherent bias and error of the retailer’s forecast . When a consumer product company measures forecast accuracy and holds retailers accountable for bias and error, there is usually only one retailer that measures up to the test and requirements of CPFR . This retailer is Walmart . For the rest, the process of CPFR has increased demand error . Bad input leads to bad output .

4) Data Model Design . Forecasting What to Make Versus Forecasting the Channel Demands . The traditional technique is to forecast what manufacturing should make . This has changed to modeling what is being sold in the channel . This difference, while it may sound trivial, is a major difference . It requires a step for demand translation . Forecasting channel demand reduces demand latency and gives the organization a more current signal . It also allows the augmentation of the forecast with demand insights to improve the quality of the forecast . For most companies, this requires a re-implementation of the demand planning technologies .

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5) Rewarding the Urgent Versus the Important . Time after time, we see companies implement demand planning technologies and improve forecasting processes, but not improve the overall results of the supply chain . The issue is the lack of training on how to “use the better forecast signal .” Most supply-centric teams are not clear . They see it as a set of numbers to be tightly integrated; whereas, the more mature teams see it as probability of demand to be used in their network design and supply planning models . For them, it is not as much about the specific number of demand, it is about the demand pattern and the probability of demand.

6) 80% Is Good Enough . When it comes to a demand planning implementation, the devil is in the details . Seasonality, causal factors, usability, and the depth of predictive analytics are critical . This can only be determined through the use of the software in pilots . Unfortunately, teams rush to implement versus spending time to understand the capabilities of the different packages . The best teams carefully evaluate the pros and cons of forecasting packages through testing in conference room pilots .

7) Focusing on “Sell-Into” the Channel Versus “Sell-Through .” Most organizations are only looking at the modeling of “sell-into the channel” versus “sell-through the channel .” By sensing demand at different channel points, and managing the inventories in the channel, manufacturers can avoid returned products and obsolescence . I was recently speaking at an Institute of Business Forecasting (IBF) conference and a leader of a mature demand-planning process was presenting . One of his comments stayed with me, “I can always get better on demand planning . We can work on this over time; however, time is of the essence to measure the velocity of product movement of every channel buffer point . If we screw up the management of inventories and the sensing of new product launch, it is the difference between success and failure .” So many times, the concepts of demand planning are seen as passive and detached from the organization . In this case, the supply chain leader took ownership of channel demand through the channel, and has gotten promoted three times since I last heard him speak . The shift is invaluable to the organization .

Looking ForwardSo while companies want to move forward, and the desire is to re-implement demand planning, in our opinion, they cannot be successful unless they admit the mistakes of the past .

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Rethinking Demand ManagementWithin an organization, the words “Demand Planning” stir emotions . Usually, it is not a mild reaction . Instead, it’s a series of emotions defined by wild extremes including anger, despair, disillusionment, or hopelessness. Seldom do we find a team excited about demand planning. Supply chain leaders want to improve it, but are not optimistic that they can make improvements .

After two decades of process and technology refinement, excellence in demand management still eludes supply chain teams . It is the supply chain planning application with the greatest gap between performance and satisfaction, and is the area with the greatest planned future spending . For most teams, it is a conundrum . It is a true love-hate relationship . They want to improve demand planning, but they remain skeptical that they can ever be successful in improving the process . As shown in figure 2.2, demand planning is important to supply chain leaders, but also an area with very large gaps in user satisfaction .

Figure 2 .2 Current Satisfaction with IT Systems

In our research at Supply Chain Insights, we find that demand planning is the most misunderstood of any supply chain planning application. Companies are the most satisfied with warehouse and transportation management and the least satisfied with demand planning.

Teams are also confused on the process . What drives excellence in demand planning has changed and well-intentioned consultants give bad advice .

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Seven Sins of Demand PlanningOn the first afternoon, it could be summed up as, “Oh father, we have sinned. Please forgive all of us sinners .”

The conference in Dallas was a good time for me to reflect on the history of demand planning. IBF celebrated their 30th Anniversary in Dallas without even a party . I think that we owe them a debt of thanks for continuing their advancement of demand planning excellence . In my opinion, the greatest sin of all is that we have spent thirty years developing forecasting processes that are largely not used or trusted by the organizations that they serve. Here, in this blog post, I share my reflections on the group’s discussion on sins… .

The Seven SinsThe group discussion included these seven deadly sins:

Sin #1 . Not Using the Statistical Forecast to Drive Continuous Improvement . I have never worked with a company that could not improve its forecasting through better use of statistics. However, most companies are skeptical. Inherent in the DNA of the firm, there are “experts” that believe that they know the business better than any statistical package ever can . Given that a forecast is always wrong, and the forecasting process is fraught with political issues, companies struggle with how to use and gain acceptance for statistical forecasting .

While benchmarking the forecast is difficult (reference my blog post “Trading Places”), measuring continuous improvement through Forecast Value Added (FVA) analysis is a helpful, and easier method, to drive continuous improvement . In most FVA analysis presentations that I have seen lately, the statistical forecast is improving the naive forecast—forecast made based on prior month’s order history—by 3-5% . Similarly, the lack of control of managerial discipline in the consensus forecasting process is reducing forecast accuracy by 2-5% . The technique allows companies to measure, improve and better drive forecast accuracy, and gain business alignment and support for the effort by dollarizing the impact of the forecast error . For example, one of the speakers at the conference shared that a 2% improvement in forecast accuracy was worth two headcount in his business . If the forecast could be improved by 2%, he could reduce the time spent on order expediting . Bottom line: Don’t look at forecast accuracy in isolation .

Sin #2 . Only Owning Part of the Forecast . To use a baseball analogy, most demand planning teams are in the “outfield.” They “catch the forecast” from sales and marketing without owning the entire process . They catch and throw the forecast across functions without value-added analysis . Whereas, best-in-class teams own the entire forecast . They know the baseline forecast and work on driving root-cause analysis to improve demand shaping programs, i .e . price, promotions, marketing events, new product launch, and sales incentives . What does the difference look like? For one company that I worked with over the past two years, this change was worth $5 million dollars in the reduction of obsolescence. Bottom line: Move out of the outfield and back to home plate to throw the ball to ensure that the organization can hit homeruns .

Sin #3 . Misuse of Downstream Data as an Input . When running out a product—to prevent obsolescence—be careful in the use of downstream data . Realize that you are pushing into the channel and that you do not want to drive replenishment . If you don’t have this discipline, you will recreate the Green Volvo Story . Remember that one? Hau Lee tells the story, “Volvo was awash in chartreuse green cars . Despite trying every option at the distributor to push the cars, but the cars were not selling. So the company decided to price them at a significant price reduction to move them and reduce inventory .” However, this strategy was not communicated

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across the organization to demand-planning . As a result, when the green Volvos sold, the sales orders triggered a forecast and the forecast consumption logic triggered replenishment and the factory cranked back up the production lines to make green Volvos .

I was telling this story a couple of years ago to a company that made women’s intimate apparel, and they started laughing incessantly. I finally stopped and asked why? In between uncontrollable laughter, the company shared that their Green Volvos were leopard skin fur thongs . So this sin goes across all industries from cars to lingerie .

When pushing SLOB (Slow and Obsolete Inventory), turn off the knob to use downstream data, and be careful to not let orders drive replenishment . Likewise, downstream data should be used to trigger the completion of promotional replenishment . Sensing when to end a promotion is also essential to eliminating SLOB . Bottom line: Design the forecasting process, and the use of the output of the forecasting process, from the outside-in . In driving accurate replenishment there is no substitute for knowing true channel behavior .

Sin #4 . A Project . Not a Program . A frequent question that I am asked is “How can I implement demand planning faster?” I will answer the question, but then I will ask, “Aren’t you shooting for the wrong goal? Shouldn’t your goal be to implement demand planning well, not fast?” One of the companies that I admire, that has proven year-over-year to be one of the great leaders in the use of SAP APO DP, is General Mills . When I wrote a case study of General Mills’ implementation as an AMR analyst, many companies pushed back and asked why I picked the General Mills case study to showcase . The reason was simple . They did not implement demand planning the fastest, they did it the best . For them, it was a program . It was valued . They wanted to get it right . It was not a project to quickly implement .

Sin #5 . Not All Items Are Created Equally . In the words of one participant in the workshop, “Get to know the DNA of your item .” A few years ago, I was working with a company that made baby formula . Their most important and the lowest volume item was samples sent to the hospitals for new mothers . These samples were distributed on maternity wards at the birth of the baby to promote product trial . A successful trial could drive a couple of years of consumption through the life of the child’s years as a baby . So, a forecast error on these products was worth substantially more than a forecast error on turn volume .

Sin #6 . Forecast with the End in Mind . This may sound simple, but it is a sin that is frequently made . While many companies have set up their forecasting systems to predict what manufacturing needs to make when, the greater opportunity is to model what the channel is going to sell and when . The company then translates these demand requirements to internal and external manufacturing locations . It is not as easy as just modeling the selling unit at the retail chain level. This is usually too low of a level to forecast—insufficient data to be significantly relevant—for the forecasting process. Likewise, with this increased need for transportation forecasting visibility, there is a need to forecast transportation requirements, and to use channel data to determine distribution requirements . It is a proven fact that forecast consumption logic and one number forecasting is not sufficient. Instead, multiple forecasts need to be translated into a demand visibility signal for the corporation .

Sin #7 . Arrogance . Not Serving the Organization . At the conference, the SVP of Radio Shack gave a presentation on what makes a great demand planning group . His words of wisdom were, “Be humble” and “Serve the organization .” In his experience, when the demand planning groups become arrogant—a “know-it-all group” that polices the forecast—everyone loses .

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seCtion 3: how do we get good at s&op?

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How Can I Move Forward If I Cannot Align?For years, as an industry analyst, I have written the statement that “IT and line-of-business teams need to be aligned.” As I finished a report on organizational alignment, I felt a bit silly ever writing this statement . Why? The statement is hogwash . The functions within the line-of-business teams are so misaligned that I cannot imagine IT could ever align to all of them . In fact, as the research shows, alignment happens through leadership in horizontal processes .

Different functions within an organization view functional alignment very differently . For the supply chain team, the largest area of misalignment is between the supply chain and the sales group . The supply chain teams perceive greater gaps between functions than their counterparts in the finance or IT teams .

Why Does It Matter?Today, for most organizations, things are not going well . Demand volatility is escalating, product portfolios are more complex, and supplier networks are harder to manage . Supply teams are being pressured to reduce costs while demand groups are feeling the squeeze to get the “demand plan right .” The technology investments from the last decade are not meeting expectations . Supply chains are not agile enough . Finger-pointing abounds . Understanding and problem solving often falls short . What is an executive team to do?

Figure 3 .1 Supply Chain Alignment

Supply Chains are complex systems, and are often not well-understood in the organization . In prior studies, the executive team’s lack of understanding is a major barrier . As a result, it is incumbent upon supply chain leaders to talk the language of business, hold themselves accountable for corporate performance (versus functional performance), and learn to serve . To align, we have to give up our supply chain geek-speak, stop our three- and four-letter acronym descriptions, and help the organization to better understand the supply chain . In the report i mentioned above, we outline three actions that a team can take today to deploy these skills .

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What Do We Do About It?1) Define a Supply Chain Strategy and Focus on the Definitions of Agility and Orchestration.In this process, be sure that the team members understand that the supply chain is a complex system that must be managed in totality, and that the most efficient supply chain is usually not the most effective supply chain . Use tools like network design optimization and simulation modeling to help people model trade-offs. Force finance and sales teams off of spreadsheets that cannot model the complex relationships of trade-offs . Advance their thinking to use more advanced supply chain modeling tools .

Define what agility is, what it can do for your organization, and show why it matters. Do not talk in abstract terms . Make it real . It is not short cycles . It is more than that . It is the ability to have the same cost, quality and customer service given a level of demand and supply volatility . Design the supply chain to perform at these levels of volatility . Focus the organization on understanding the “probability and patterns of demand” and how to design push/pull decoupling points, supplier networks and inventory buffers to improve agility (focusing on form and function of inventory in the supply chain) . Use modeling tools to help teams to visualize these concepts .

2) Build Strong Horizontal Processes Like S&OP . We have completed two studies now that show Sales and Operations Planning improves both agility and alignment. As shown in figure 3.2, the impacts are profound. Find a champion within the organization and start working the process. Focus on improving corporate performance—profitability, cycles, revenue growth, customer service and forecast accuracy—against the supply chain strategy .

Figure 3 .2 Improvement of Alignment through a Mature S&OP Process

3) Build an Effective Supply Chain Center of Excellence .Unfortunately, only 1-in-2 supply chain centers of excellence are self-assessed in surveys as meeting expectations . The issues abound, but we cannot let the problems with execution blind us . The

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value proposition still holds . Supply chain centers of excellence help with metrics alignment, and product portfolio alignment, between finance and the supply chain team, and the supply chain team and marketing . We can see the impact of an effective center of excellence in the report . Too many companies have let their centers of excellence lose relevancy and become academic . The best supply chain centers of excellence serve the business .

Figure 3 .3 The Role of a Supply Chain Center of Excellence

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How Do You Define a Mature Supply Chain Planning Organization?It was a sultry day in Philadelphia . It felt like August, not May . I found myself counting the street signs to be sure that I was on track for my 8:00 a .m . client meeting . Not being a morning person, my feet mechanically moved my body forward . I was not sure what the discussion was going to be, but I was hoping to be wide-awake by the time I got to the corner of 18th Street to meet my client .

I have worked with this client since 2004 . At that time, they planned on spreadsheets . Their goals were lofty, but their understanding of supply chain planning was hazy . In the last six years, their business has grown three-fold and become very global . In 2006, they made a decision to implement a supply chain planning solution . It was badly implemented by a system integrator . The cost was 60% more than average; but even more unfortunate, they never got a good understanding of how to use the planning system .

The client’s question was a simple one . She asked, “What makes a mature planning organization?” I pulled out a blank sheet of paper and drew the maturity grid outlined in table 3 .1 . I would love your insights . Is this how you would have answered the question? Did I miss anything?

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Table 3 .1 Maturity Characteristics

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What Makes a Mature Planning Organization, Part 2Recently, I finished a post on supply chain planning maturity. A client had asked me, “How do I know if we have a mature supply chain planning organization?” As we talked, and I drew the table, the first question was followed by, “How do I help my executive team understand the importance of planning and their role in the process?” Planning leadership is a problem for most organizations . My focus here is to answer this second question .

Figure 3 .4 Comparison of Kellogg and General Mills

There is no substitute for leadership. Take the General Mills and Kellogg example in figure 3.4. In the cereal industry, General Mills and Kellogg are fierce competitors. With the shift of power to the retailer, both have had to add headcount to manage the increased demands for sales to staff account-specific teams to better manage against retailer expectations . As a result, both organizations saw a decline in revenue/employee .

General Mills is much better at planning than Kellogg . It is one of the primary reasons, as shown in figure 3.4, that General Mills has been able to have a margin advantage over Kellogg for the past four years . Through this period, under the leadership of John Church, they have focused on cross-functional decision making and the maturity of planning processes .

Excellence in supply chain planning is a cultural shift . Most organizations are better at reacting than planning. Reacting is rewarded and planning is not. Firefighting and hero behavior is easier to recognize than good planning .

To be good at planning, the organization needs to know where they are going . Alignment is essential . For most this is a struggle . When they operate in isolation against functional targets, they will not be aligned and supply chain planning can make this worse if there is not clear leadership .

In research study after study, we see that the greatest challenge to achieving supply chain excellence is the leadership team’s understanding (or lack thereof) of the supply chain . Most companies operate

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well within functions, but struggle to build strong horizontal processes . They lack cohesion . For most, as shown in figure 3.5, the gaps between organizational functions are large. Closing the gaps happens when there are aligned metrics, clarity of vision, and aligned planning processes . There has to be an enlightened leader that understands that the supply chain is a complex system with increasing complexity . It must be managed as a system .

Figure 3 .5 View of team Alignment

Understanding PlanningThe journey starts with a clear understanding of the fundamentals of planning . This does not come easily, and requires training . The executive team needs to be clear on the differences between strategic, tactical, operational, and executional planning and the connections between planning systems and the transactional systems of record . Many are not .

For clarity, the definitions (and time frames) are:

Strategic Planning: The frequency is either monthly or quarterly and the focus is on long-term planning . It combines decisions across sell, deliver, make and source processes to drive value-based outcomes . This includes optimization and discrete event simulation . The length of the duration will vary by industry, but is usually at least one year and often three to five. It allows companies to evaluate the design of the network . More advanced supply chain leaders model the role of complexity (product and customer), the impact of risk, and opportunity of innovation as well as product shipping and manufacturing locations, and inventory policies .

Leaders know that they have more than one supply chain and that they need to align the organization around the vision for each. They also are clear that the supply chain is defined outside-in based on the channel requirements and the underlying rhythms and cycles of fulfillment, manufacturing and procurement. The average supply chain leader has five distinct supply chains.

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Figure 3 .6 Performance of Team Alignment

Tactical Planning: This process is usually monthly . Strategic and tactical planning processes are cross-functional and the foundational elements for end-to-end process thinking .

It is important for the executive team to be aligned in the strategic and tactical planning processes to enable seamless planning by functions . Technology applications in this space include demand planning, tactical supply planning, procurement planning, multitier inventory optimization and Sales and Operations Planning (S&OP) .

The executive focus should be on the output of strategic planning into the tactical process of S&OP . When this happens, based on recent research, the company achieves 50% greater agility and 30% better organizational alignment

Operational Planning: Planning done in this short-term duration (often in what is termed the “slush period”) happens where planning assumptions are being “consumed” by open orders, shipments and planning commitments . Applications that operate in this horizon are manufacturing or production planning, demand sensing, Vendor Managed Inventory (VMI), Supplier Managed Inventory (SMI), and Transportation Management Systems (TMS) .

Executional Planning: This planning occurs within the order duration and is characterized by Available-to-Promise (ATP) functionality, warehouse management labor planning, and the routing/scheduling of trucks and shipments .

Executive intervention into the operational and executional planning processes should be focused on improving reliability . When executives intervene in these functional processes there is the danger that these well-intended efforts will throw the organization out of balance .

Other ConsiderationsCareer Progression . Leaders let planners get good at their jobs . One of the major hurdles that organizations face is organizational turnover in the planning function . Many organizations make the

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mistake of having the job as an entry-level position with lots of turnover . In many organizations there is no career planning track that encourages the building of planning skills . Leaders build strong planning organizations with defined career progression and mentoring.

Metrics Alignment . By definition, supply chain planning is based on the use of optimization engines to improve value, but organizations are often not clear on the objective function . When multiple supply chain planning systems are aligned functionally, but the outcomes are not aligned, they can fight themselves .

These leaders are clear that the supply chain is a complex system with increasingly complex systems . As a result, they never look at metrics in isolation of each other, and try to build the overall potential of the system focusing on alignment and balance . These leaders clearly understand that this focus needs to be on value-based outcomes, not inputs, and that measurement needs to based on a portfolio analysis. In assessing the health of the supply chain they look at the elements of growth, profitability, supply chain cycles (working capital, cash-to-cash, and inventory turns), customer service, and complexity together as a system .

Technology Evolution . Leaders invest in new planning systems as part of an effort to drive business process innovation . They have a clear understanding of the differences between the terms integration, synchronization, harmonization and translation of data . The focus of this new investment is outside-in, not inside-out . They understand that the last decade of Advanced Planning Systems (APS) tightly coupled to Enterprise Resource Planning (ERP) is now a legacy concept . The supply chains created were too inflexible and brittle. As a result, they are championing the collection and use of channel data, and the building of outside-in processes based on customer consumption . They are championing the building of sensing/learning supply chains based on new forms of analytics . They will frequently champion cross-functional teams on Big Data, new forms of analytics, Mobility, and Social/e-commerce convergence . The focus is outside-in, cross-functional thinking .

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Heh?Recently, I spoke at a conference . During the presentation, I thought that the speech was going well . While I was not Tina Fey, I got a few laughs, and the audience was responding . However, at the end of my presentation, a man on the third row raised his hand and said, “I did not understand anything that you just said .” (Bummer, I thought to myself .) I sighed and asked him his background . His response was that he worked in finance. Clearly, I thought that I was speaking to a supply chain audience, but I found the lack of understanding by the members from financial teams to be thought provoking.

I mulled over the response on my airplane ride, and smiled when I got a LinkedIn invitation from an attendee . Her email stated, “I loved your presentation today . I have been working hard to help our executives understand the principles of form and function of inventory, but it is difficult because most financial groups do not understand the principles of supply chain. You did a great job.” I passed the note to my speech coach and began thinking more deeply about the issue that I had just observed . A cross-understanding of inventory—the drivers and barriers—is needed before organizations can move forward on supply chain excellence . Most organizations are stuck .

What Is the Form and Function of Inventory?Inventory levels are flat year-over-year in our supply chains. With rising volatility, this is even tough to sustain . While technology and supply chain practices helped us push the levels of inventory down following Y2K, the progress has leveled out . My observation is that while most companies focus on the level of inventory for their supply chain, i .e . how much inventory is the right amount, supply chain leaders go one step further to focus on form and function of inventory . And, as I experienced at the conference, these concepts are not well understood .

The form of inventory is the state in which it is stored . Inventory can be stored as raw materials, semi-finished goods and as a finished good or final assembly. The further back in the supply chain that inventory is stored (e.g., raw materials), the greater the supply chain flexibility.

The function of inventory is the role that the inventory plays in the supply chain . There are many forms—cycle stock, seasonal inventory, event prebuilds—that need to be managed . See table 3 .2 for an overview .

Table 3 .2 Form and Function of Inventory

Form of Inventory Function of InventoryRaw Materials Cycle StockSemi-Finished Goods Seasonal StockFinished Goods Statistical Safety StockReturned Items Promotional Inventory

New Product Launch Builds

Obsolescence

An area of opportunity for most companies that I work with is cycle stock . While most companies talk of safety stock (the decision to hold inventory to buffer supply and demand variability), I find that few companies understand the principles of cycle stock . Cycle stock, the inventory that is necessary to cycle through products or from manufacturing to distribution cycles, is often a missed opportunity . Or decisions are made that increase the need for cycle stock without thinking through the impact . Let me give you recent examples .

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Recently, I visited a client and toured their new manufacturing plant . They were very proud of their new facility, and were surprised when I asked them about the impact of the decision to change the manufacturing hold time from one day to two weeks . In short, they had not thought about the impact on warehousing or inventory carrying costs . Likewise, I visited a client that had implemented a step change improvement in manufacturing line speed, but with long changeovers resulting in longer runs . When I asked them about the impact on cycle stock, they had not thought about it . Similarly, I visited a company that had changed outsourcing strategies from the Caribbean to Mexico . When I asked about the longer shipments and the impact on cycle stock, they were surprised .

Also, like a dysfunctional family, I find very few companies are willing to talk about their SLOW and OBSOLETE inventories (often referred to as SLOB) .

Where Can I Get Help?There are a lot of technology solutions in the market to improve inventory optimization . While some focus on the level of inventory, others help with form and function of inventory . This industry segment, in many ways, is a fruit basket with many variants of deeper optimization to help improve the decision on inventory .

How Do I Sell the Idea?The lasting effect happens when people understand the impact of supply chain decisions on inventory and working capital . The next step is to tie them to incentives .

A successful approach for many is the use of the Beer Game simulation to help ground in the concepts of demand uncertainty, followed by a competitive team activity where network strategy tools are used in a case study . When teams are asked to design a supply chain for excellence and make trade-offs on efficiency, responsiveness and agility, they can see the impacts on working capital. This hands-on experience helps people to see the trade-offs (that often remain elusive in real life), and to discover the nuances of supply chain excellence .

It is a complex system, and I think the concepts are best taught through experimental learning .

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What Happens in Vegas Should Not Stay in VegasEncore . This month, I gave a repeat performance . I gave it again the month before . And, the month before… .

I have a contrarian view . I am swimming upstream against popular analyst opinion . Why, am I doing this? When I was a Gartner analyst in 2002, I gave the market what I feel was bad advice . I wrote an article recommending that companies tightly integrate the S&OP plan to financials. Through subsequent research I found that I was wrong, and I feel bad about it . My goal is to prevent others from incurring the same pain .

So again, why am I pushing a contrarian view? Simply said, it is because it is the right thing to do . I care about my clients and want them to be successful . I have worked now with over 400 clients on S&OP . Here I share my argument . Please let me know what you think .

Getting Past the NuanceTo get started, let’s get beyond the nuance of the debate . This debate is not about the TERM . I REALLY don’t care what term is used or what a process is called . I agree with Shakespeare, “A rose by any other name would smell as sweet .” But, I don’t agree with the conventional views on Integrated Business Planning (IBP) in three areas: focus, emphasis and readiness .

Before we get started with the argument, let me get the obvious out of the way . Yes, of course I believe that we should include financial information in the tactical planning process! And, similarly, I believe that we should include finance input in the S&OP process. To do this does not necessitate a name change. However, to me, it also does not mean tight integration with financials. I find this as a common mistake with customers .

The number one change management issue with S&OP is, and continues to be, the role of the budget . If the company wants to maximize opportunity, the budget should be an input into the process, but not constrain the process. Likewise, the S&OP plan should be an input into the financial forecasting process. Why? The financial budget is usually anything but market-driven. It is outdated the moment that it is published; and, it is not a good basis from which to begin modeling the supply chain’s mix of issues like constraints and variability .

What I think we are talking about is process maturation . As the process matures, both supply chain and financial modeling inputs change to support the goal. Likewise, the modeling technologies for “what-if” analysis mature .

Yes, this is different than the S&OP definition of 25 years ago. And, it is different from most definitions that I see of IBP . However, this is where I see business leaders focused .

Focus: From Demand-Driven to Market-DrivenSupply chain disruption is everywhere: cataclysmic events in Japan, the Great Recession, scarce commodities, and the meteoric price rise of gasoline . The unpredictable, but rising demand in China coupled with the tightening of supply and turmoil in the Middle East . It goes on and on . Supply chains are reeling . Where is the recovery from the worst recession of our lifetime? When will supply chains start to settle down? It is clear that it will not be anytime soon . Successfully managing the supply chain through change will define today’s leader.

When I mention “commodity costs” to supply chain managers, they will often twitch . Their jobs are on the line . Supply is tight, expensive, and unpredictable . The pressure on price is intense . When supply chain management technologies evolved, Advanced Planning Systems (APS) improved visibility for manufacturing constraints and enabled better management and allocation of resources . However, as

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the constraints move from manufacturing to sourcing, there is little—often no—integration between supply chain management and sourcing technologies to better manage commodities .

While the commodity may vary by industry—whether the pressure is coming from aluminum, cotton, corn, gold, oil, or other agricultural products—companies all agree is that in 2011 sourcing strategies matter . Today, it is more about sourcing than transactional procurement . To combat rising pressures, supply chains need to connect horizontally market-to-market to plan to orchestrate the demand signal from the buy-side market to sell-side decisions and to infuse supply chain commodity risk into decisions on go-to-market strategies .

My issue with most definitions of both S&OP and IBP are that they are inside-out, not outside-in. To combat market drivers, there is a need for a horizontal set of processes that can sense demand—variation, market drivers, risk and competitive activity—and translate this demand across the vertical silos of the supply chain (sell, deliver, make and source) .

Likewise, the process needs to sense supply-side risks, commodity price volatility and availability to determine hedging strategies, raw material sourcing strategies and contract manufacturing network design, and translate this risk horizontally and bidirectionally across the supply chain . As companies become demand-driven, they realize that traditional process definitions are not sufficient. They learn that processes need to move from inside-out to be outside-in, connecting market to market . The process needs to be bidirectional to answer questions like:

Marketing/sales: How should a company best shape demand based on market conditions (buy- and sell-side markets)? This is not trivial . Over 50% of promotions are based on history, and 52% of promotions are never evaluated . With commodity uncertainty, a bad decision in this area can be costly . Now is a bad time to promote a product with a high-priced commodity or material constraints . Del Monte, a leader in this type of activity, runs a Monte Carlo simulation each week to determine the risk profile for each product to determine their promotion strategy.

Logistics: Based on what is happening in the market, how should I manage inventory builds? Manage carrier relationships? (for additional insights on transportation reference the blog post “Keep on Truckin”). With rising prices, inventory builds may be necessary to hedge against inflation or to ensure supply . Inventory policy changes abound .

Supply: Based on market conditions, what are the best formulations to use? Where should I source? How should I hedge? Should I prebuy materials to hedge against stagflation?

Emphasis: Tactical PlanningThe hype over which name to use has added to the confusion on how to plan . When I was in London facilitating roundtables on S&OP, the greatest issue for the executives that I was working with was how to pick the right planning horizon. The second largest issue was defining a supply chain strategy given a business strategy . There is a level of granularity required for tactical planning of the value chain that is often missing in organizations . Companies are not clear on what is supply chain excellence and have not clearly defined the planning horizons to enable a successful planning process.

The need is for effective tactical planning across functions to drive alignment and maximize value-based outcomes . The process is tactical (12-18 months based on the decisions that can be affected) . It will vary by industry . However, it is not strategic planning (long range planning of 3-5 years), and it is not operational planning (less than 6 months) . However, there is a need to have a parallel S&OP execution process to take the monthly S&OP decisions and enable them throughout the month .

I find that when many of my clients speak about tight integration with financials, they are talking about operational planning or budget management in the short-term horizon . While there is a need to tie

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tactical planning to execution, there is no substitute—no matter what the given name of the process—for great tactical planning processes .

Readiness: Technologies Evolving .The models for financial data modeling are in their infancy. While there are data models that enable financial modeling, they are not widely used and are poorly understood. Most of these financial modeling tools are also complementary, not competitive to each other . This adds to the confusion . I also find through discussions with clients that there are currently no strong financial modeling tools in the war chests of the major Enterprise Resource Planning (ERP) vendors like Oracle or SAP .

As a result, the ability to drive “what-if” analysis on financial decisions requires multiple technologies and iterative analysis . The modeling has to be iterative between constraint-based supply planning technologies, revenue management planning technologies, inventory optimization analysis and financial data modeling tools requiring the work/collaboration of both finance and supply chain resources .

Getting to this end state requires clarity on supply chain excellence, and availability of data for modeling . There is no one tool or vendor that offers all of these options . Typically, there is a different model and technology to determine the answer to these five financial trade-offs:

1 . The probability of a new item’s success (margin and profitability). Ideal product portfolio mix.

2 . Fixed versus variable accounting options with changing networks

3 . Tax efficient supply chain planning

4 . How to improve cost-to-serve to improve channel management

5 . Value-add analysis on multitier cost of capital

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The Pitfalls and Potholes of Integrated Business Planning I have been an analyst for ten years . I worked at Gartner Group as a supply chain analyst for two years . This was followed by six years at AMR Research, two years at Altimeter, and now I continue my work as the founder of Supply Chain Insights . I have probably spoken to over 300 companies on Sales and Operations Planning .

In the 1990s, I worked for a supply chain planning company and worked closely with a team to write requirements for demand planning software . I had ridden the wave of demand planning . I was a demand planner in three manufacturing companies . As I entered the analyst world, I thought that I knew a lot about forecasting . I was wrong . I knew only my experience .

In 2002, as an analyst at Gartner Group, I partnered with two analysts that I respected to write a note on Integrated Business Planning . In the note, we recommended that companies tightly integrate their sales, financial and manufacturing forecasting plans. I waxed eloquently (at least I thought so then) on why this made sense . Based on experience with clients, and the many years of research, I realize that we got it wrong and gave teams bad advice . So, as I hear people talk about Integrated Business Planning, I get uncomfortable, because I also hear people getting it wrong .

When I first started as an analyst at AMR Research, my first two reports were How Do I Know I Have a Good Forecast?, and The Evolution of Sales and Operations Processes . I was asked by clients to research these topics to understand the “change management” issues and to share insights on how to avoid these potholes . My experience deepened through this research .

Common MistakesSo, I go way back . In this period of time, I saw the writing on the term Integrated Business Planning blossom . But, as the term gains more usage and the citations skyrocket, I have seen the concepts become more confused . I feel that more people say it than know what it means .

There are five common mistakes I see people make:

Mistake #1: Jumping into the Deep End without a Paddle . Integrated Business Planning is the third step of maturity in S&OP process implementation . Each stage has a different goal and requires a different information technology (IT) architecture. I find that company maturity can easily be determined by answering three questions:

• What is the goal of your S&OP Process?

• How do you make decisions?

• What do you measure?

Over 95% of the companies I talk to jump into planning their S&OP processes without answering these three questions that define S&OP success. The goals are progressive within the S&OP process with each step building on the capabilities of the prior. I find that many companies will throw around the terms “IBP,” “SIOP,” and “S&OP” without ever being clear on the goal, or understanding what each individual on the team means when they say the term .

Sometimes, I am called in to be a referee in an almost religious argument about the “best term” to use for the process . I am fascinated about the love affair with terms . I struggle to understand why companies want to talk about the name without ever getting grounded on the process or clear on the goal .

When I ask companies to define their goal, I usually get a pregnant silence. The reason is that most

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companies start the discussion on Integrated Business Planning without first asking, “What is the goal?” And, without realizing that the progression is a set of steps .

Usually, through many failed attempts, they find that they must first be able to build a process to do “what-if” analysis to determine a feasible plan before attempting to match demand with supply . And that mastering the process of matching demand with supply is a prerequisite to successful Integrated Business Planning (IBP) .

Table 3 .3 Goal Alignment

Another common mistake is a failure to look at the definitions of the data models, forecasts and the business requirements . This usually happens because the individuals on a team are very steeped in the definitions of the term “forecast” within their own functions. Let me explain. In the first two levels of the S&OP process, companies are modeling volume . In the third stage, the modeling shifts to trade-off cost and revenue trade-offs for IBP . These are very different architectures, with different processes, and the first two steps need to be mastered before tackling the third. Just think, what good is a spreadsheet modeling financial data if the plan is not feasible?

In this process, teams quickly find that a forecast is not a forecast is not a forecast. As companies attempt to do financial modeling, they quickly find that the data model needs to be able to determine the right trade-offs of mix (changes in products), units (many companies have multiple equivalent units), fixed versus variable cost impacts based on demand and supply variability, and the margin implications of lifecycles in new product launch . It is not as easy as just plugging data into an Excel spreadsheet . They need technologies .

While Integrated Business Planning may be a sexy topic, the basics of constraint-based manufacturing, inventory planning, and distribution requirements planning must be modeled to ensure there is a feasible plan before calculating cost and profitability trade-offs. This requires the use of very industry-specific technologies.

Mistake #2 . Clarify the Role of the Budget . The number one change management issue for IBP is determining the role of the budget . A company immature in the process will attempt to use the S&OP process as a tool to make the budget . They will often constrain the outcome of the process in an attempt to ensure that the budget goals are met .

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A more mature company realizes that the budget is out of date the minute that it is developed . They also realize that to maximize corporate opportunity and mitigate risks, the company will use the S&OP process to drive budget updates, but will never constrain the S&OP process with the original budget .

The role of the budget, and the governance model around making decisions, is a major hurdle to overcome early .

Mistake #3 . Tight Integration of the Forecasts . In short, a forecast is not a forecast is not a forecast . What do I mean? A sales forecast is usually a pipeline view of expected sales . Most often it has a 3-4 month duration . The forecast is usually at the product or family level of expected sales and is often forecast in currency (dollars, euros, pounds) . It is not without problems . It carries a strong bias and error .

Many companies, early into the process, make the mistake of saying “If I want to know what I am really going to sell, I will ask sales .” Unfortunately, it is not that simple . A sales forecast has a high bias and error due to internal reward systems. Sales people by definition are “coin operated.” They are usually paid by commissions . As a result, sales input into consensus forecasting usually carries the highest bias and error of any group in the organization . Companies need to overcome this challenge by weighting the input based on historic bias and error .

In contrast, a supply chain forecast is usually constrained in that it reflects seasonal builds, event plans, new-product launch activities, and price changes . It is built from the bottom-up, using statistical models based on historical shipment and order data . It is a very granular volume forecast . It has a long duration because its primary goal is to plan assets and manage inbound materials . It also has its own set of problems . It is often a rearview mirror look . Since it is based on history, it can quickly get out of date with the market unless it is corrected with channel, often referred to as downstream, data .

A budget forecast is also usually based on history . It is at a high level of granularity and is usually based on the corporate fiscal year. It is also not without its problems. It is hedged to ensure that the organization can make targets .

In short, each forecast has a different unit of measure, time duration, granularity and bias . None of the three have a common data model. And none of the three come close to reflecting what is going to be sold in the actual market . As a result, tight integration of these three forecasts is usually an exercise in futility .

Instead, companies need to invest in a platform to enable synchronization of the three forecasting types while rectifying the differences in data models . This capability is termed demand translation . It allows the translation of data across the three forecasting models . It helps to translate the “ship to” views to the “ship from” forecasting views and allows for the modeling of bias and error of the three organizational forecasting plans . Many companies handle this the old-fashioned way through the sharing of spreadsheets . More sophisticated companies are automating it through technologies . “What-if” capabilities are essential .

For this reason, one number forecasting should not be the goal . Instead, the goal should be a common plan based on shared assumptions and consensus of market drivers . The focus needs to be outside-in . This is MUCH more important than one number . I feel that we have spent too many wasted hours trying to get perfect on imperfect numbers .

Mistake #4. The Efficient Supply Chain Is Usually Not the Most Effective Supply Chain. There is the need for Supply Chain Strategy . Before companies begin the discussion on the integration of business plans, there needs to be agreement on “what good looks like .” For 94% of companies, this is not clear .

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When companies begin to do “what-if” modeling on financial options, a hurdle is how to make the right cross-functional trade-offs between make, source and deliver . This can only be solved by working on a supply chain strategy . Key questions to answer are:

• How many supply chains do I have?

• What is the goal of each supply chain?

• What drives value in the value network? How do I align to maximize value?

• What are the right measurements for alignment between source, make and deliver? And how does this align with the channel strategy?

• What is the impact of product and customer complexity? How do I best design to mitigate the rise in complexity?

At the end of this activity, companies learn that the most effective supply chain is often not the most efficient supply chain. (An efficient supply chain is defined as the lowest cost per case.) As a result, the journey for Integrated Business Planning is rife with issues on how to design the supply chain to drive alignment. I find through research that only 6% of companies have a clear supply chain strategy. As companies drive discussions on how to best make the organizational trade-offs in IBP, they find that these decisions need to be grounded in supply chain strategy . This is hard, but necessary work . A supply chain strategy is needed to translate the business strategy into action .

Mistake #5 . IBP Is Not the Holy Grail . While each step of the S&OP maturity model gives progressive and increasing returns, IBP is in the middle, not the end, of the S&OP maturity model . It is not nirvana .

The issue is that after all this work it is still an inside-out, not outside-in, view . Let me explain . It is an internal view . It is the use of history (orders and shipments) to make decisions . As a result, while companies can achieve excellence at IBP, they are still insulated from sensing and shaping demand or supply based on market shifts . To become demand- or market-driven, the company needs to build the architecture from outside-in, which often requires the redeployment of conventional Advanced Planning (APS) models for demand and supply modeling . As a result, I often see the most advanced companies skip this step. They first built demand-driven or market-driven capabilities and then come back and align business plans .

Wrap-UpIn short, sales-driven is not demand-driven . Demand-driven is not market-driven . A forecast is not a forecast is not a forecast . The best success with S&OP happens when it is designed from the outside-in . But, to get to this goal, companies need to build the competency, ask the right questions, and ensure that they have purchased the right architectures . Goal alignment with IT architectures is essential . Clarity on supply chain strategy is paramount .

It all starts with the answers to three common questions, but often gets tangled by discussions full of acronyms, well-meaning consultants, and internal teams engaging in religious arguments . Break this pattern by getting real clear on the answers to some very basic questions . It is my hope that through this blog I have sensitized you to the issues. I am now on to write and finish the other blog posts.

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Are You Only Giving It 40%?I spoke at an event in Boston, being one of 29 speakers . In the course of two days, 80% of the speakers stated, “For a successful S&OP implementation, start with process, then follow with technology .” I sat on the back row, and I wanted to raise my hand and shout, “STOP! You are missing the obvious .” The largest problem with S&OP is change management . Companies that tackle change management FIRST accelerate results . Their S&OP processes mature 3X faster .

For most companies, change management is the Achilles’ Heel. Not tackling it first will cause S&OP processes to stall, meetings to become dysfunctional, and the loss of process momentum . As a result, S&OP will gradually stall and lose management support . This is why SO many companies struggle .

The reason? A Sales and Operations Planning (S&OP) project is 60% change management, 30% process development and 10% technology . Many are only giving it 40% . Some even try to START with technology . (Don’t get me wrong, I feel that technology is important . I have not seen any mature S&OP process successful without technology .) To get off to a good start, tackle the change management issues FIRST!

Where Do I Start? There are three primary stumbling blocks that need to be tackled:

Goal Alignment: S&OP is a horizontal process that extends from sales to procurement . While leaders want S&OP teams to collaborate, the lack of goal alignment is an impediment . Consider the typical organization in figure 3.7. The sales organization is rewarded for volume, the marketing department is rewarded for market share, and the supply chain/other back office functions are rewarded for lowering costs . As a result, when the team members pull up their chairs to the table to work on S&OP, they are not aligned. Collaboration is difficult at best. To overcome this issue, focus on an overarching set of metrics that align with the operating strategy . Companies with a clear operating strategy, call to action, and corporate mission make progress quicker .

Figure 3 .7 Organizations Are Not Naturally Designed to Collaborate

Recently, I discussed this dilemma with a big pharma company . They heard the concept, but dismissed it . They thought that this would not be a major stumbling block for their project . I said, “We

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will see .” A couple of weeks later, I landed in LAX . My voicemail was full . The company had come to the STARK realization that this lack of goal alignment could not be ignored . They asked for help . We sat down together and answered the hard, but necessary questions . How many value chains do you have? What drives value in each? What is the operating strategy? What are the overarching goals to drive success? I am pleased to report that they are now off to a better start .

Rewarding Planning Efforts: The second barrier is making time to plan and rewarding planning efforts . Supply chain planning is nearing a 25th anniversary . However, organizations naturally reward the URGENT, not the IMPORTANT . Culturally, companies reward REACTION . As a result, planning efforts often get short shrift . Many S&OP processes are hampered by a lack of resources to focus on the IMPORTANT . Ask yourself the question, does your organization reward planning?

A Clear Road Map: Over the course of seven years, I have interviewed over 200 companies on S&OP processes . I can determine S&OP maturity based on the answers to the questions:

• What Is the Goal?

• How Do We Make Decisions?

• What Does Good Look Like?

In the interviews, 90% of companies cannot answer these three questions . However, for the most mature, the answers look like this:

• What Is the Goal? The goal of our S&OP process is to maximize opportunity and mitigate risk .

• How Do We Make Decisions? The S&OP process reports to a profit center manager. We manage a monthly process to only bring critical decisions to the executive S&OP meeting where the profit center manager drives the answers to the critical decisions to balance the opportunity for go-to-market strategies with the risk of the supply plan .

• What Does Good Look Like? We have X number of supply chains . We use the same metrics with different targets for each . The critical metrics are forecast accuracy, inventory turns, margin, revenue, and customer service .

Change Management Matters . Start There First .

There is no substitute for networking with leaders and learning first-hand how they overcame these issues . But, where to start? To network with others that have crossed the great divide look for presentations from supply chain leaders . While there were 29 presentations at the S&OP IE conference, I found it woefully short on stories from REAL supply chain leaders . My favorites are Cisco, DuPont, Intel, and Samsung . In general, the industries that have been forced to focus on tight margins, short product lifecycles, and global coordination have reaped the greatest benefit from S&OP. To accelerate your learnings, network with companies from the chemical and High-tech industries first. The followers are in consumer products and the laggards are in healthcare and retail .

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S&OP: Letter Perfect .Aluminum . Corrugated . Freight . Ocean cargo . Labor in China . The surprise and dismay continues . Supply is tightening, international currency is changing, prices are more volatile, and the future is less certain . Supply chain leaders need to steer the course . As a result, S&OP has risen in importance . If 2009 was about demand, 2010 will be all about supply . Are you ready?

It Matters .Over the past six years, I have spoken to over 150 companies on Sales and Operations Planning (S&OP). When I started this research, less than 10% of companies had a well-defined S&OP organization and a focus on S&OP excellence. This has changed. Today, three out of five projects for Supply Chain Planning (SCP) software are driven by a person with an S&OP-specific title; and in the next three months, I will attend three industry conferences dedicated to S&OP . S&OP has risen in stature .

This important horizontal process makes a major difference in a company’s performance . Companies with strong S&OP processes sensed the recessionary downturn and corrected supply chains five times faster than those with less mature processes . As we wobble through the swings of the recovery, companies are realizing that cross-functional alignment matters more than ever . The greatest opportunity for profit and risk will happen in the economic rebound. The risks and the rewards will be greater . They want to be ready . As a result, S&OP has become mainstream .

Letter Perfect .One week, I counted 52 . A week later it could be over 60 . In the back of a well-worn notebook, I keep track of the different names I hear for S&OP . Company after company feels that they need a UNIQUE name for S&OP .

“Letter perfect” means correct to the last detail . I believe that the term S&OP is letter perfect . The practices are imperfect . The embellishment of the standard S&OP acronym is a current fad . The list of names—SIOP, DDS&OP, DDBS, IDDSP, IBM, and IBP—goes on and on . The danger is that as we rename and embellish S&OP initiatives, we lose the essence and the meaning of this important process . The real issue is that due to bad practices, and the lack of understanding, the term S&OP has become tainted . The letters, when understood, stand strong on their own:

S: The S in S&OP is about selling strategies and market drivers . Effective processes focus on go-to-market strategies . It is often confused to be about sales . What is the difference? Let’s contrast the difference through a case study:

In 2006, Del Monte transitioned from asking sales what they were going to sell to focus on market drivers . They stopped their process of collecting sales data at the item level through laborious spreadsheets to focus on sensing demand, understanding market drivers and using the information to shape how they go to market . The new process focuses on shopper insights: who is buying what, where they are buying and why they are buying . It focuses on how to best shape demand in these sectors (the right combination of assortment, price, promotion, trade deals, and sales incentives) to drive profitable demand. Del Monte found that the right data to collect from sales is clarity on the market drivers: the number of new accounts taking new products, competitive activity in the market, success on past promotions, and retail channel insights .

&: And, what? The “and” in the S&OP process represents the cross-functional coordination/alignment required to meet the strategic goal of the process . For example, if the goal is to be demand-driven, the focus is on outside-in market sensing. The demand plan is an input into the financial plan and the organization is tasked with determining:

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• The best working capital plan: determining the right form and function of inventory versus constraining inventory or focusing on just inventory levels

• Trade-offs: The alignment of the value chain to balance growth initiatives with the trade-offs between sustainability, Corporate Social Responsibility, tax efficiency, speed to market, and costs .

• Network design: Based on demand and supply variability, and market conditions, what is the best network design to minimize risks and maximize the market opportunities?

At Cisco, the supply chain organization is called the Customer Value Chain Management organization (CVCM) for a reason . The company runs a risk management engine of 4300 inputs, with over 1000 simulations, by 10 planners a month . Intel calculates the Effective Frontier between service and costs . Del Monte runs weekly Monte Carlo simulation models to translate demand volatility to orchestrate demand horizontally (promotions and pricing moves are based on the simulation of market demand with commodity market fluctuations.)

To do this, companies need to start with the goal in mind, and work backwards . A starting point is determining how many supply chains you have, the goal of each supply chain against the corporate strategy, the trade-offs for each to make these goals, and how to mitigate the supply chain risks .

Table 3.4 Definition of the Components of S&OP

OP: OP is about operations . It is not just about the factory or the enterprise . It is about the network: making the right trade-offs in the network across the processes of deliver, make, and source . When done right, S&OP planning is also tied to execution . For example, at a recent WAM Systems conference, Celanese spoke on the translation of trade-offs in S&OP to optimize the manufacturing rhythm wheel (product sequencing) for each of their plants .

A common mistake made in S&OP is to focus only on operations . Companies that have fallen into this trap feel the greatest need to embellish .

Yes, here we have it . S&OP: Letter perfect . Practice imperfect .

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Time to Take out the PenWhen you get asked the same question over, and over again, it is time to take out the pen and write a blog post . Here it goes: “How do the change management issues differ by level of S&OP maturity?” Here I answer this question .

There are usually four distinct change management stages as shown in figure 3.8. When companies are early in their infancy in managing an S&OP process, the biggest barrier is typically the role of finance and the integration of the S&OP process to the financial budget. For many organizations, this is a tough obstacle. I have seen financial guys kicked off of the S&OP team. It takes time and education for companies to align. The budget is developed as a planning tool at the first of the fiscal year . It is a guide, but should never be used to constrain the S&OP plan . Instead, the goal becomes maximizing opportunity while mitigating risk . In this process, budget assumptions are aligned to market actuals .

Figure 3 .8 Organizational Barriers by Stage of S&OP

The second barrier is moving from a focus on matching demand and supply (managing volume) to maximizing profitability. The change management issue is that the technologies do not do this well. And, calculating profitability in today’s complicated business environments is not so easy. Only 23% of companies feel that they have systems and processes that enable the translation of volume to profitability analysis. At this stage of the process, which is often called Integrated Business Planning (IBP), companies will usually build something on their own to augment the traditional functionality of Advanced Planning Systems (APS) .

As they get more fluent in profitability analysis there will be a thirst for visualization and “what-if” analysis . Only 11% of companies self-assess as having the ability to complete “what-if” analysis well . Most systems are just too inflexible. Probably the greatest challenge of all lies in the transformation from inside-out to outside-in to become market driven . This usually requires the reimplementation of technologies and processes and the building of demand and supply networks to connect with market data. I find this stage the most exciting and enjoy helping companies to rethink their processes through the training .

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What If: Focus on the “&” with the “End in Mind”It is the longest recession of the last four decades; and economists are gathering to discuss the possibility of a double-dip recession . It will not go away anytime too soon .

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

These three factors make horizontal processes like S&OP more important . In my research of Fortune 500 companies, I found that those with strong horizontal processes sensed the changes in the 2009 downturn and aligned their supply chain 5X faster than the laggards . They were also able to achieve better year-over-year results in Days of Working Capital (DWC) . One of the factors that differentiate leaders in S&OP is the use of “what-if” analysis that focuses on “&” with the “end in mind .” If you are scratching your head, please read on . It will become clear .

It is clear to me, from three months of research, that the gap has grown between the offerings of ERP expansionists and best-of-breed providers; that Software as a Service (SaaS) technologies are now a viable alternative, and Excel has had a rebirth. “What-if” capabilities and industry-specific data models differentiates the providers . Traditionally, S&OP technology selection has been a choice between Business Intelligence vendors (BI), ERP expansionists (ERP), Advanced Planning Solutions (APS) or build-it-yourself. Today, there is a new category of software designed specifically for S&OP that has been largely ignored by the ERP expansionists and is underserved by traditional APS and BI providers .

I asked a group, “Do you have what you need in “what-if” analysis?” The answer was mixed: 45% of the respondents were just beginning to use “what-if” analysis, and 42% said that there was a significant gap in what was available in the market with only 13% stating that they have what they need to perform their jobs today .

The gap for most lies in selecting technologies that can adequately model the “what-if” capabilities of their supply chain, and then agreeing on “what good looks like .”

For most that have been lulled to sleep—like the Lorelei sirens of myths of old that lured the sailors to their shores—by the promise of an integrated end-to-end supply chain, they find themselves on the rocks in these uncertain times. Their first challenge is defining “the end in mind.” As teams focus on solving the problem, they find that have not thought hard enough on what drives value in their supply chain . Today, this is not trivial . It is ever more complex as companies balance goals and trade-offs for corporate growth and costs, customer service and inventories, Corporate Social Responsibility goals and cycle times, and tax efficiency versus sustainability. Once they align on what good looks like for their supply chains, they find that they are stuck. Their IT systems are unable to meet the requirements for “what-if” analysis . As a result, the teams cannot align against trade-offs and improve supply chain outcomes. In this world of uncertainty, they find that the deterministic outcomes of their installed IT systems assume certainty . They are stuck . Fixed integration of an unusable outcome .

They only become unstuck when they focus on the & or “what-if analysis” with the end in mind (e .g ., the right trade-offs that drive the most value in the value chain for that company at that point in time) .

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And, the Question Is…?I volunteered to give up a day of vacation to facilitate a Sales and Operations Planning (S&OP) event in Las Vegas . I like to facilitate groups, so I was looking forward to the day . As the session progressed, I had a realization that the audience was asking the wrong questions . They went on and on, and on, and on .

I did not have the time or the energy to turn the tide, but I write this blog post so that you can ask the right questions . What do I mean? Please read on . . .

Sometimes when I facilitate S&OP sessions, I feel like I am a therapist listening to a group session for people struggling with a victim complex. When you talk to a victim, they always find some way to weave in the fact that they have been victimized into the conversation . They are a martyr for a cause . I feel that many supply chain professions act like a victim when they talk about sales involvement in S&OP . They are a martyr for the operations cause . Their conversations are centered on these questions:

• How do you get sales to give you a better forecast?

• How do you get sales to come to the S&OP meetings?

• How do you drive ownership of inventory with sales?

Let me let you in on a little-known secret . You don’t . These are the wrong questions . You will never be successful trying to leverage change from the supply chain team . This is especially true if you have a victim mentality trying to make sales “responsible for inventory and forecasts .” You will retire (or get fired) before you MAKE sales do anything. Instead, change the conversation. Instead, build a guiding coalition at the profit center level where sales reports. How? Start with the fact that S&OP on average drives a 2% increase in sales . (Now you have their attention . This is something that they care about .) Then make it worth their while .

Here are five places to start:

1 . How do you eliminate sales bias? Apply Lean forecasting approaches to the forecasting process to eradicate sales bias and error . Make all people accountable by understanding the value of their contribution to the forecast .

2 . What is the role of sales in the forecasting process? Don’t waste their time . Do not ask sales to forecast . Ask them for input on general trends and apply it to the forecast . Sales should never be asked to forecast at an item level .

3 . How do you get sales to the S&OP meetings? Make it worth their while by making it important to their boss .

4 . How do you make sales responsible for inventory? You don’t . You make the entire team accountable for inventory as part of the S&OP process .

5 . There are natural tensions between sales and operations . Use the tensions to improve the process . Never wear the cloak of the victim . (No one looks good in that color .)

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A Rose by Any Other NameWarning! A holy war is raging . It is a religious war . It is one of holy factions .

It cannot be won, and it is not worth trying. When you peel back the heat of the battle, you find that it is the battle of acronyms: Integrated Business Planning (IBP) versus Sales and Operations Planning (S&OP) . It is fueled by analyst pundits, and driven largely by software vendors trying to hawk their wares into a mature market . At the center of the battle—as the fury rages over who is right and who is wrong—companies are losing perspective .

What Matters . . .Remember Shakespeare’s wisdom? “What’s in a name? A rose by any other name would smell as sweet .”

I feel that when the focus is on the NAME—versus the OUTCOME—we all lose . No matter what we call it, cross-functional tactical planning matters, and this is at the center of the discussion . However, many are unable to take advantage of the benefits because they are stuck in the holy war. As a result, I see companies losing perspective on what tactical planning is, what it needs to be, and why it matters .

Tactical planning is very different than strategic, operational or executional planning . While strategic planning is focused on long-term outcomes and viewed in aggregate, tactical planning is focused on a more actionable period (6-18 months, where the duration is driven by the time frame of actionable decisions) . It crosses multiple vertical silos . The most mature crosses the end-to-end value network and the least mature deal with the issues silo-by-silo .

The next layer of planning—operational planning—is within the silo . So if you do not get tactical planning right, you cannot align cross-functionally . Strategic planning is at too high of a level and the levels of planning below it do not cross the functions . Getting it right is paramount to drive alignment and organizational balance . To be successful, tactical planning needs to have four attributes:

• Assess . A successful tactical planning process drives balance and aligns the organization cross-functionally with market drivers . In the best processes, tactical planning aligns functions beyond the Enterprise using outside-in thinking through the evaluation of options and deriving the best answers based on market (sell-side) to market (buy-side) insights .

• Actionable . An equal focus on risk and opportunity . To make this happen, the team needs to be knowledgeable and have access to the pulse of the organization . The planning group MUST report to the P&L center . A cultural pitfall can happen when the tactical planning is relegated to a single group like finance that is not directly tied to line management. When this happens, companies overstate opportunities and hide risks . Over and over again, I see that when planning is not directly tied to responsibility for the plan, people tend to shoot the bearer of bad news .

• Accurate . Getting the model right . To do this, companies need to have the right data model, the right time horizons, and the right level of granularity to drive accurate and actionable insights . To get this right, there needs to be a recognition of different value networks and the interdependencies between them that drive value. One model does not fit all supply chains.

• To do this, understand that enterprise data models do not cut the mustard . Modeling the enterprise is not sufficient. The real risks and opportunities are ONLY exposed when we evaluate tactical options for the strategy against MARKET drivers . Additionally, with the swirl of IT options, many companies have forgotten that the data models are very industry specific, and

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granular . As a result, general ERP solution vendors do not understand or deliver well against tactical planning needs . The greatest success in tactical planning is happening with industry-specific best-of-breed providers.

• Timely. To be successful, the analysis needs to happen within a finite window of actionability. Who cares if it is accurate, but too late? Or too quick, but not accurate?

The Definitions:To demonstrate my point, I share below the definitions currently in Wikipedia. While I would argue that neither of these definitions is appropriate, compare them to the points above. I want to show the closeness of the definitions, and why there is confusion.

• Integrated business planning (IBP) refers to the technologies, applications and processes of connecting the planning function across the enterprise to improve organizational alignment and financial performance. IBP accurately represents a holistic model of the company in order to link strategic planning, and operational planning, with financial planning. By deploying a single model across the enterprise and leveraging the organization’s information assets, corporate executives, business unit heads, and planning managers use IBP to evaluate plans and activities based on the true economic impact of each consideration.

• Sales and Operations Planning (S&OP) is an integrated business management process through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization. The S&OP plan includes an updated sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning as steadily consumed products. Done well, the S&OP process also enables effective supply chain management.

See the gaps?

(Pitfall! Avoid a Stumble .)The integration of the financial plan into the tactical operational plan is the number one change management issue for companies in tactical planning processes . The term “budget” is a loaded term. For this reason, tight integration between financial and operational processes is NEVER recommended . It can be an input, but not a constraint .

What Makes Success?To drive success, sidestep the holy wars and answer these three questions:

1 . What Is the Goal? Fundamentally, companies are not aligned on the strategy cross-functionally . It is impossible to drive great tactical outcomes if you are unclear on the goal . Of the 200+ companies that I have interviewed on this topic, most give me an answer of dead silence when I ask the question “What is the goal of tactical planning?” The reason? They don’t know . And, when they do know, less than 1% of companies understand how to align tactical planning to the strategy . And, if the goal is to meet the budget objectives, the organization will never maximize the opportunity within the value chain .

2 . What Does Good Look Like? After getting clarity on the goal, the next step is how to align incentives cross-functionally to achieve the goal . It is myopic to think that companies can be successful rewarding manufacturing for asset utilization, R&D for growth, marketing for market

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share and sales for volume . The incentives need to align cross-functionally to support the strategy .

3 . Where Are Our Risks and Opportunities? This can be achieved through sensitivity analysis, but only by having an understanding of the pulse of the organization and by using a data model that enables the modeling of both the risks and the opportunities . (see above)

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seCtion 4: why it matters to Corporate perFormanCe

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S&OP Improves AgilityFigure 4 .1 S&OP Improves Alignment and Agility

“Why am I focused on the supply chain? The answer is simple . It is a barometer of my business. All the problems show up first in the supply chain….” —Dell Founder, Chairman and CEO, Michael Dell

I love this quote from Michael Dell . Leaders are clear that good planning matters . The rest of the world continues to look for evidence . As a researcher, I am attempting to measure the impact .

S&OP processes have grown more complex in scope and governance over the last decade . The average company over $3 billion in annual revenue has four S&OP processes and maturity matters . As companies mature in S&OP they rate themselves 2X more mature on ability and 46% better on cross-functional alignment . To accomplish this, the goal of the S&OP process needs to move from a focus on volume to evaluate product mix/profitability. Companies the most mature in “what-if” analysis and the use of optimization tend to rate themselves higher in maturity .

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How Do I Build Reliable and Resilient S&OP Processes?Most companies say that they want to be agile, (Or reliable. Or resilient. Or flexible. Or fill in your own adjective .) However, when you ask what this word means, supply chain leaders do not know . Of the 67 supply chain practitioners that joined a table discussion at a recent conference, only one person was confident in his definition of the word resilient.

These words get bandied about, but there is no working industry-standard definition for these terms. Without a definition, it is hard to make it a goal. To help, here are my definitions:

• Resilient or Agile: The ability to have the same cost, quality and customer service in the face of market volatility (a given level of supply and demand variability) .

• Reliable: The ability of a supply chain to deliver the right product, at the right place at the right time and at the right cost day after day .

• Responsive: Short cycles for a quicker response

The group accepted these as working definitions and we then moved on to discuss how to achieve this as a goal . (Note that the supply chain to achieve these three very different responses would look quite different .)

We then moved to discuss what it would take to be resilient. One attendee had a definitive answer. The Chief Financial Officer from Jawbone stated that:

“One of the ways that I check to see if the supply chain is resilient is to watch the rate of change of inventory in each stage of the supply chain . When they are out of sync—one stage moving faster than the other—then you will have resiliency issues .”

One of the goals for him is to align each stage of the supply chain—contract manufacturing inventories, raw materials, inventory in transit, inventory in the enterprise, inventory in the channel—as part of his S&OP process .

The rest of the group was not as certain; but through discussion, the more mature members of the roundtable agreed that:

Reporting Matters . The reporting structure for S&OP should be to someone that had responsibility for both profit and loss. It needs to report to a line-of-business leader. It is preferably the profit center manager. The S&OP process should not report to finance, sales, manufacturing, procurement or supply chain planning . The reporting structure is paramount to hitting the goal of being resilient or reliable .

The Best Look Forward . The mature members of the group also agreed that 80% of the effort should be focused forward . A great discussion ensued about why most groups look backwards, and why they cannot look forward .

Align on Assumptions . Don’t Waste Your Time on Aligning on Numbers . I think that this is an important insight for most companies that I work with . A mistake companies make is getting very precise on imprecise numbers . There is an opportunity cost to the process to try to get to the gnat’s eyebrow of precision . Instead, be sure that the group aligns on assumptions .

Metrics Must Be Balanced . The group agreed that there need to be 5-7 metrics that are cross-functional and support balance. My favorites are forecast accuracy, customer service, inventory, profit and revenue . And, while we can argue on how to best measure forecast accuracy or inventory, the key is that these metrics show the balance and the trade-offs of the supply chain as a complex system .

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As you can see in figure 4.2, the gap in agility is great, and S&OP can help.

Figure 4 .2 Agility Performance

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Why It MattersCase Study: Sonoco Products and Owens IllinoisAs I work with companies, I often contrast the strategies, approaches and outcomes within a peer group. Over the last five years, I have helped two companies, Sonoco Products and Owens Illinois (OI), with their selection of technologies to improve Sales and Operations (S&OP) planning . Both companies provide packaging materials to the food manufacturing industry . Owens Illinois provides glass products and Sonoco Products provides flexible packaging. Here I contrast their results.

Six years ago, Owens Illinois’ primary question wasabout IT standardization versus the choice of best-of-breed vendor . The decision was a political tug of war . Warring factions undermined progress on business process . IT and the business teams were not aligned . They were unclear on their supply chain strategy and the role of supply chain planning . Complexity reigned in the business and they were unsure how to manage it .

Sonoco Products, on the other hand, had a clear objective to maximize asset utilization while improving service for strategic customers . Their goal was to visualize excess capacity and make it available to enable their sales teams to offer upstream opportunities to their clients . It was their way of “shaping demand .”

As a supplier three to four levels back in the supply chain, life as a packaging provider is tough . Demand is volatile, price is competitive and complexity reigns . Food manufacturers, over the course of the last decade, have pushed costs and waste backwards in the supply chain . Products have proliferated by 37% over the last five years, and packaging suppliers are being asked to provide more and more innovation to help the food manufacturers bring new products to the market .

Figure 4 .3 Business Performance of Sonoco Products and Owens Illinois

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The companies are similar in size . Sonoco Products is a $4 .5 billion company, located in the southern portion of the United States . Their journey to be more market driven with a strong focus on Sales and Operations Planning (S&OP) is now seven years old . Owens Illinois (OI), a $6 .3 billion company, manufactures glass containers with headquarters in the Midwest . OI has been more focused on transactional efficiency, procurement and IT standardization.

Figure 4 .4 Patterns of Sonoco Products and Owens-Illinois on the Effective Frontier

While writing the book Metrics That Matter, I studied the patterns of corporate performance based on choices in supply chain program execution . A company that is effectively working a supply chain strategy will have a nice, neat pattern at the intersection of operating margin and inventory turns . A company that is not balanced will tend to have a pattern that oscillates with no real trend towards improvement .

Contrast the patterns of the two companies in figure 4.4. Owens Illinois oscillates with little predictability . While Sonoco Products is losing margin (in large part due to a tough market), they are making improvements in inventory turns . The pattern is much more reliable and they are executing a growth strategy .

So, what can we learn?

A Marathon, Not a Sprint . The story of supply chain excellence cannot be told in one-year snapshots . It cannot be accurately represented by studying two years, or even three . It requires a study of the patterns over a five- to ten-year period. Supply chain leaders deliver reliability and resiliency in the results .

Conscious Choice . The journey is about conscious choice and leadership . It cannot be about singular metrics . Instead, it is about managing the trade-offs and improving supply chain potential . The supply chain needs to be managed as a complex system to drive continuous improvement against the supply chain strategy .

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The Focus Needs to Be End-to-End . I am teaching a number of workshops this month with well-intended clients that have defined supply chain as a limited function of distribution, manufacturing and procurement. They will make limited progress unless they can redefine their initiatives to cross over and define their go-to-market strategies.

S&OP Matters . Sales and Operations planning done right (focusing end-to-end on the supply chain’s management in order to maximize opportunity and mitigate risk) improves organizational alignment and agility, and improves operational resiliency .

Don’t Waste Your Time on the Wrong Battles . The discussion of which system is less important than moving forward with a system . The supply chain as a complex system cannot be effectively modeled on a spreadsheet . The political arguments of IT standardization often result in one function winning the battle while the company loses the war .

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summary

The process of S&OP maturity requires careful design with the end goal in mind . It is a journey of inches, not miles . For the highest success rate, plan for it to be a multiyear journey with a strong focus on change management. Our advice is to stay focused and carefully define the outcomes against a supply chain strategy . We hope that these repurposed entries from the Supply Chain Shaman’s blog can help you and your team .

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about the supply Chain shaman

Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and the author of popular enterprise software blog Supply Chain Shaman currently read by 5,000 supply chain professionals . Her book, Bricks Matter, (co-authored with Charlie Chase) published on December 26th, 2012 . She is currently working on a second book, Metrics That Matter, to publish in September, 2014 .

With over nine years as a research analyst with AMR Research, Altimeter Group, and Gartner Group and now as a Founder of Supply Chain Insights, Lora understands supply chain . She has worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a year on the evolution of supply chain processes and technologies . Her research is designed for the early adopter seeking first mover advantage.

about supply Chain insights

Supply Chain Insights is focused on delivering independent, actionable and objective advice for supply chain leaders . If you need to know which practices and technologies make the biggest difference to corporate performance, turn to us . We are a company dedicated to this research . We help you understand supply chain trends, evolving technologies and which metrics matter .

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