Making Supply Chain Competitive Advantage

8/6/2019 Making Supply Chain Competitive Advantage

1/12


2/12

The current surge of interest in Sales and Operations Planning a discipline which hasbeen around for years is indicative of companies growing awareness that improvingtheir supply chain is imperative for gaining or maintaining a competive edge.

Businesses, of course, are at various stages along the path to effective S&OP. Some

are beginning from scratch, with no formal processes or tools in place. Others havesoftware pieces like demand planning and/or supply planning. Such enabling tools arenecessary for all but the simplest of businesses -- necessary, but not sufficient. Tyingthese pieces together in an effective S&OP process will exponentially increase thebenefit provided by the tools alone and allow your supply chain to truly become acompetitive advantage.

So lets look at answering the basic questions most businesses have about S&OP:

o What, exactly, is S&OP?o Why should a business implement S&OP?o

Why start with S&OP instead of, for example, with scheduling?o What has to change for S&OP to work?o How does one go about implementing S&OP?

What, exactly, is S&OP?

There are as many definitions of S&OP as there are practitioners and consultants(maybe more). Heres one weve found applicable across many businesses andindustries:

Sales and Operations Planning is a continuous, structured process for managingthe supply chain so that supply is balanced with demand in accordance with thebusiness strategy.

It incorporates Demand Planning, Supply/Demand Balancing, and InventoryManagement subprocesses which meet monthly and interact continually tocreate and execute a single set of integrated plans.

It provides continuous monitoring of performance vs. plan and a disciplined way

of responding to changes to minimize disruptions and maximize the bottom line.

The process culminates in a monthly meeting at whicha) recent performance vs. plan is reviewed, andb) plans and alternatives for future sales and operations are presented to

senior management for decision-making / approval.

1


3/12

The definition is deceptively simple, perhaps, until you examine the details. Lets pointout the most important points, so you can compare with your business current state:

o Continuous, structured processo Single set of integrated planso

Subprocessesinteract continuallyo Disciplined way of responding to changeso Senior management decision making/approval

Continuous, Structured Process

S&OP is not just a monthly meeting. Nor is it something you do sporadically and onlywhen theres a crisis to address. Occasional flashes of brilliance are great, but youcant count on them to run a supply chain. S&OP is a way of managing the entire supplychain for dependable, reliable, reproducible results.

S&OP is also a structuredprocess. The same set of steps and subprocesses arerepeated each month in preparation for the Executive S&OP Meeting. Meetings arescheduled a full year in advance, to avoid calendar conflicts. Charts (very similar monthto month) are issued beforehand and minutes afterwards. Action items have bothresponsibilities (who) and timetables (when) attached, and are reviewed at the followingmeeting.

While entire organizations may be allowed to participate by teleconference, thespeaking roles are clearly defined in order to keep the meeting focused and brief (1 to 1 hours). All the hard work either has been done before the meeting (generating plans,

alternatives, pros and cons, assumptions) or will be done afterwards (executing theplans and monitoring for adherence to plan). Anything unusual or controversial hasalready been communicated, so that there are no surprises at the meeting itself.

Single Set of Integrated Plans

Here is the heart of the S&OP process, often referred to as one set of numbers or asingle version of the truth. In businesses without an S&OP process, even thosewhich may have some sort of demand and/or supply planning in place, all too ofteneach function has its own set of spreadsheets containing its version of the truth.

Finance is working off a set of numbers all its own, instead of a dollarized version of theS&OP plan. Sales may or may not have a forecast. Operations may or may not believeit and so may decide to adjust it to what they think is more realistic. Or perhaps nosales forecast is provided, so that operations are forced to do the best it can tooutguess demand and produce accordingly.

2


4/12

Pity the poor business (true story) in which the demand planner found out that his plantwas going to be down for three weeks. He was stocking out of product right and leftwhen, half way through that time, he finally called the plant. He had assumed theywere having mechanical problems but learned that theyd decided unilaterally to godown for inventory control. Obviously, there was no S&OP process in this business.

So how do you get to a single set of integrated plans? Thats where the subprocessescome in.

Subprocesses . . . Interact Continually

The Demand Planning, Supply Planning (also called Supply/Demand Balancing),Inventory Management, and Financial Planning subprocesses are not strictly sequentialand are definitely not independent of each other. Each has a cross-functionalcomponent.

The Demand Planning meeting, for example, should include a representative fromsupply planning. Why? Suppose Sales proposes to double the amount of product X itsells for next month. The supply planner may be able to say without reference toanything but the knowledge in his head that supply of product X is very tight, and theresno way operations can supply double the usual amount next month. Or supposeMarketing wants to pull the introduction of a new product up two months earlier thanpreviously planned. The supply planner may be able to say right away that theequipment required cant be installed within that time frame. By having supply planningrepresented in this meeting, we can prevent a lot looping back to revisit earlier stagesin the planning cycle. This is why its so important to have cross functional

representation in each subprocess meeting. In addition, its important to have eachfunction hear and understand the discussions to comprehend where the other side iscoming from instead of just looking at the final output and wondering, What in the SamHill were they thinking?

Similarly, at each step of the way, finance needs to be identifying gaps between plansand the Annual Budget or other financial commitment to the corporation. Specific plansto fill these gaps (hope is not a plan) must be devised and responsibilities andtimelines assigned.

Once a monthly set of plans is approved, communications among the subprocessescontinue throughout the month as there are fluctuations and variations from plan.

3


5/12

Disciplined Way of Responding to Changes

Having a single set of integrated plans doesnt mean blindly following the plan allmonth if, for example, expected demand is not materializing, or demand for one productis much higher than expected. What it does mean is that when the continuous

monitoring detects such deviations, there is a structured, defined way for all plans tochange together.

Depending on business policy, this may mean a quick re-cycle of the whole monthlyprocess in mid-month. More efficiently, it may mean that under pre-definedcircumstances (e.g., deviation of more than X% from plan), the demand planner andsupply planner together, say, may be empowered to collaborate informally with theother supply chain stakeholders and then change the operational plans. In such a case,they would also be obligated to inform all other supply chain participants sales,finance, inventory management, top management, etc., of the new plans.The details ofthe changes, their causes and outcomes, would be reviewed at the next S&OP meeting.

Senior Management Decision Making/Approval

The S&OP meeting itself is not just (or even mainly) for reporting how you did lastmonth. Its reason for being is for decision making by top management. The topbusiness manager, be it CEO or Division Manager or General Manager, is a must-haveattendee. All other top management (sales, finance, operations, etc.) must either attendor send a delegate empowered to make decisions in his/her place. The meetingcannot be hamstrung because Joe couldnt make it. Also present, of course, are theDemand Planner, Supply Planner, Inventory Manager, and Finance representative,

along with the S&OP Coordinator (who may be the same individual as one of the otherroles) who has prepared the slides and made sure all the necessary pre-work andcommunications are done.

Each month, the S&OP Coordinator presents the integrated plans decided on by theteam, along with the assumptions behind them. If there are unknowns to be considered(e.g., there may be a strike four months from now which would idle two of our threeplants), then alternative scenarios and the pros and cons of each should be prepared inadvance. The art of being the S&OP coordinator is guessing in advance what sort ofquestions management is likely to ask and being prepared with the answers (How soondo we need to start building inventory if there is a strike? How much will we have to

build? What will it cost us? How likely is the strike? If we build the inventory and thenthere is no strike, how long will it take us to work it off?). Each and every month, topmanagement has a decision to make, even if it is only to approve the single set ofintegrated plans presented by the team.

4


6/12

Why should a business implement S&OP?

Tangible Benefits

Traditionally, S&OP has been seen as a way of reducing costs and indeed, it doesthat admirably. A study by consulting firm PRTM showed that best-in-class companiestypically run with 50-80% lower inventories than the median, while providing 15% higheron-time deliveries and 40-64% shorter cash-to-cash cycle times. Sunsweet Growers,the worlds largest producer of dried fruit, reduced its production overruns from 30% to12% after implementing a full S&OP solution. In addition, they eliminated costlyovertime, improved schedule stability, and decreased changeovers.

Perhaps more importantly, S&OP is now being seen as a way to increase the top line as

well as to cut costs. Rhodia Eco Services, a $230 million dollar division of globalchemicals giant Rhodia, Inc., implemented a full S&OP process which enabled it toimprove its overall capacity availability from 85% to over 90%. The increased capacityallows Eco Services to respond more quickly to last-minute changes in demand and togain market-share.

Aberdeen Group, in its March, 2005 Investing in S&OP: High Value Opportunities,reported that its research indicates that a typical $500 million revenue/year businessinvesting in upgrading its S&OP processes can gain an average of $25 million/year ingross margin.

Intangible Benefits

One of the greatest intangible benefits of a well-run S&OP process is the increase inorganizational effectiveness and corresponding decrease in unnecessary pressure onindividuals in supply chain functions. Instead of firefighting, these professionals nowhave time to think proactively about continuous improvement opportunities.

Crises occur much less frequently than before, because the planning process itselfcreates visibility of potential problems far enough out that alternatives can be developedand contingency plans evaluated and approved.

This is key to the competitive advantage we mentioned: its difficult to put a dollarvalue on preventing the train from wrecking, but its far, far better and cheaper thancleaning up after it. You didnt disappoint a customer. You didnt miss your numbersbecause of out-of-control inventories. As a result, your stock price didnt fall. Itsdifficult to put a number on being proactive, but its not at all difficult to recognize thebenefits.

5


7/12

Sometimes, once things are running very smoothly, someone will ask, Why do we needto keep having these monthly meetings? The answer, of course, is that the processwhich culminates in the monthly meeting and the consensus path forward which comesout of it are precisely what keepseverything running smoothly.

Why start with S&OP instead of,for example, with scheduling?

Sometimes businesses think that their biggest pain point is something very deep in thesupply chain process, such as plant scheduling. Why should such a business beginwith S&OP implementation instead of plunging directly into improving scheduling?

The answer lies in the description above of the nature and benefits of S&OP. Abusiness needs a coherent plan including an agreed upon forecast before it canreally benefit from improving execution steps. If, as if often true in businesses withoutan S&OP process, manufacturing distrusts the forecast and schedules based on its ownguess, an improved scheduling process could result in simply making more of the wrongstuff. Solving the underlying problem of agreeing upon a single version of the truth tobe used throughout the supply chain mustprecede improving execution steps if thebusiness is truly to optimize its supply chain.

What has to change for S&OP to work?

For most companies, effective S&OP means an entirely new way of managing thesupply chain. It means that jobs are going to change everyones job. Here are just afew of the key areas that must change.

Data Visibility

One of the necessary prerequisites for a robust S&OP process is the visibility of data.In many businesses, even a single inventory planner, for example, may not be able toeasily view his worldwide inventories. With S&OP, many people in many locations canview these inventories, in order to promise orders, plan production, monitor warehousecapacity, etc. Just the data visibility itself tends to allow businesses to improve theirinventory levels.

6


8/12

Data visibility also implies usability, meaning that paper reports dont cut it. Onecustom film business had twenty-five voluminous paper reports generated daily from itsorder entry/inventory system, but no on-line visibility. No one had time even to siftthrough all these reports, much less to try to understand and correlate the data.Organizing this data so that it could be delivered electronically as useful information

gave this business the starting point for developing an effective S&OP process.

Finally, data visibility is necessary for data-cleanup; your decisions can only be as goodas the data on which they are based.

Sharing Data and Decision Making

There is no need to know in the supply chain. An effective supply chain requires muchmore open, honest communication than before across functions and hierarchical levels.Decisions have to be made more quickly, using a wider range of data, and considering

a wider range of alternatives and the decision-making authority needs to be pushedas low as possible in the organization. Furthermore, since supply chain personnel aregenerally already juggling more data and alternatives than they can possibly analyze,enabling technology will be necessary to allow such broader-based decisions to bemade.

Re-inventing Reward Systems

Frequently, the incentive systems in functional silos within a supply chain rewardbehavior which optimizes the metrics for that silo but suboptimizes the business as a

whole. For example, sales reps are frequently rewarded for exceeding forecast (whichwreaks havoc with supply), while manufacturing is rewarded for maximizing yield,regardless of whether the pounds they are making are the ones the business needs.

Incentives need to be redesigned to recognize that everyone, regardless of function,needs to work toward optimizing the whole, not the parts.

Education on the Big Picture

If everyone is to cooperate on optimizing the whole, everyone needs to understand the

impact of his/her actions and data on the rest of the supply chain. For example, onebusiness found that its customer master contained Rubbermaid spelled 8 differentways and IBM spelled twelve ways. Obviously, if different customer numbers areassociated with each spelling, and if a computer system is generating a statisticalforecast by customer, there will be 8 or 12 forecasts, respectively, where there shouldbe one apiece.

7


9/12

Once the CSRs who maintained the customer masters were made aware of the impactof their entry of duplicate records, they were much more careful to search for existingentries with similar spellings before creating new customer masters.

Business Process and Technology

Business processes are the way people go about accomplishing given tasks within anorganization. Frequently these processes have grown up over time, but no oneremembers anymore why that particular process is done that way: Thats the way itsalways been done. The old process may have been the best one possible at somepoint in time with the data and systems available but as circumstances changed, in allprobability the processes have not kept up.

As the business has grown and the rate of change in the marketplace has increasedmany-fold, the old, manual processes must give way to new ones which leverage best

practices and take advantage of newer technologies in order to respond rapidly tochanged circumstances.

Changing technologies without changing the business processes which surround themis one of the surest ways to get the very least bang for your buck. The greatestsystem in the world is worthless if no one uses it. If business processes are not truly,deliberately, and openly changed (and documented), people will slip back into their old,sub-optimal ways of doing things as soon as no one is looking.

How does one go about implementingS&OP?

The Big Bang approach to business change is a sure-fire path to failure. Instead ofchanging everything at once, which merely maximizes pain and risk, take smaller stepswith clearly defined benefits so that the organization can absorb each change at its ownpace before moving on to the next. We recommend the following five-step approach:

1. Understand Your Demand and Its Variability.

2. Analyze Your Inventory and Position It to Support Demand.3. Create a Collaborative Demand Planning Process.4. Build a Quantitative Framework for Balancing Supply and Demand.5. Institutionalize the S&OP Process.

8


10/12

1. Understand Your Demand and Its Variability.

Every business demand patterns will differ, and every business needs to be aware ofjust what its demand pattern is in order to most cost-effectively serve its customers.Using at least two years of sales history, answer these and similar questions

appropriate for your business:o Which products/customers are most variable/difficult to forecast, or cause the

most production problems if the forecast is too low?o Which products have only a few customers?o Which products would be appropriate for MTO (Make to Order)?o Which customers provide the shortest lead-times? What problems is this

causing in the supply chain?o Which customers/products are most profitable? Which are getting the best

customer service? (The answers may surprise you!)o How can shipment history in the ERP be used most effectively for statistical

forecasting, and at what level of aggregation?

What new business processes do you need to put in place to ensure that analyses suchas these are repeated on a regular basis?

2. Analyze Inventory and Position It to Support Demand.

Step 2 is to ensure full visibility of all finished product, intermediate, and raw materialinventory by SKU by location (by lot or batch if necessary). Visibility alone is often sucha step forward for the business that it immediately uncovers imbalances and errors. Onebusiness discovered that one of its plants was no longer making anything that requiredRaw Material A but Raw Material A was continuing to be shipped to that plant!

When you have full inventory visibility, a baseline forecast, and historical averages ofshipments by location, you can begin to determine whether your finished product isideally positioned to support demand. Are there too many days supply in somelocations and too few in others?

What safety stocks are appropriate for each product and location? If you have the sameSKUs in multiple levels of warehouses, how can you position inventory so as to reducethe overall safety stock? (Note: the answer is generally NOT to push all the inventoryout to the distributed warehouses.)

Do you have inventory age or quality problems? Worthless inventory does not improvewith age how can you best and most expeditiously dispose of it? What new businessprocesses need to be put in place to keep such inventory from building up again?

What new processes do you need to put in place to keep inventories at their newlyestablished target levels, and to re-examine those target levels on a regular basis?

9


11/12

3. Create a Collaborative Demand Planning Process.

You are now positioned to put into place a really effective Demand Planning Process.Each month, the Demand Planner generates a new statistical forecast as a baselineand solicits collaborative input, by exception, of real, known changes in demand. To

ensure cooperation, collaboration needs to be limited in scope (only truly value-addedinput solicited) and easy to do (each collaborator giving input at a level and in termsfamiliar to him).

Each input, including the statistical forecast, should be maintained separately, so thatthe accuracy of each can be measured. In addition, there must be a mechanism fordetermining a consensus forecast, probably based initially on business rules and thenreviewed at the Demand Planning meeting. Sales must ultimately own the forecast,since they are the ones who are committing to selling it.

4. Create a Quantitative Framework for Balancing Supply with Demand.

Truly optimizing a complex manufacturing plan requires considering more permutationsand combinations than the human brain could process in 300,000 years.Manufacturing, inventory, raw material, and transportation costs; selling prices; runrates by product by facility; sourcing alternatives; contractual minimums or maximums;trades or swaps; customer segmentation; desired inventory by location, and many,many more factors may need to be considered. This varies by business, of course,which is why you will need a model which relatively closely reflects your supply reality.Only a sophisticated supply planning tool can reach a truly optimal solution.

There may be several alternate scenarios to be considered (such as the potential strikeoutlined above), so the ability to save and compare scenarios is a tool requirement.

The final plan needs to be bought into by all affected personnel, including the operationsmanager, shop floor supervisor, inventory planner, master scheduler, purchasingmanager, and transportation manager to ensure that no restrictions or constraints in anyof these areas have been overlooked.

5. Institutionalize the S&OP Process

The S&OP meeting, as we have seen, is the culmination of the process but is not theprocess itself. As you have implemented the first four steps, you will have beeneducating the entire supply chain organization about the new decision makingprocesses, the need for breaking down functional barriers, and the importance ofcontinual communication across all areas of the supply chain.

10


12/12

Businesses will make different decisions about when they want to introduce the S&OPmeeting itself into the process. Generally, we recommend that there be at least acollaborative demand planning solution in place before S&OP meetings are introduced.The reason is that if you begin S&OP meetings without having at least the demand planagreed upon, the task may appear impossible and the participants may become

discouraged. If there is an agreed upon demand plan, then whatever ad-hoc supplyplanning mechansim has been in place can continue to be used for a few more weeksuntil a truly optimal supply/demand balancing process is developed.

It is critical that top management across the board buy into the importance of S&OP.Otherwise, the change of a few key personnel may result in the business drifting backto its old, ineffective way of doing things.

Summary

Although Sales and Operations Planning hadnt even been envisioned in BenjaminFranklins day, Franklin captured the gist of S&OPs spirit of cooperation in his famoussaying, We must all hang together, or most assuredly we shall all hang separately.Hanging separately in this case might be restated as running our business into theground what happens when a business allows the various functions of its supplychain to operate in pursuit of conflicting objectives.

As long as the pace of market change was slow and inventory mountains could cover amultitude of inefficiencies and uncertainties, S&OP was a nice to have. Today, it is abusiness imperative. Done well, it is a true competitive advantage.

11

Documents

Making Supply Chain Competitive Advantage