Sales & Operations Planning - GRA Supply Chain … · Sales & Operations Planning keeps ‘Everybody, Somebody, Anybody & Nobody’ accountable. In the context of the organisation

Consulting Service: Sales & Operations Planning

© GRA 2013 C McNabb (Partner) & S Jayasinghe (Senior Consultant)

Competitive Advantage

June 2016

Sales & Operations Planning


© GRA 2016 C McNabb (Partner) & S Jayasinghe (Manager)

General Electric’s well-known boss Jack Welch once famously said that “engineers who can’t add, operatorswho can’t run their equipment, and accountants who can’t foot numbers become supply and purchasingprofessionals.” Jack Welch at the time was simply reflecting on the common perception veiling Supply Chains,that it is a back office function.

It is no surprise then that many companies do not align their business strategy with their respective supplychain strategy and consequently many companies underinvest in supply and purchasing team capability. Thefall out of this is poor decision quality and lagging demand responsiveness – impacting service levels, cashflow, the innovation cycle and profitability.

Today, in the internet era, quality decision making and responsiveness are more critical than ever. Trendssuch as globalisation, product proliferation and channel diversification mean that managing the supply chainis no longer a back office responsibility. In fact, board executives are identifying it as a key pillar in deliveringa sustainable competitive advantage.

Supply chain decisions reverberate across the entire business and the outcomes have immediate and directinfluence on service levels, cash flow and profitability. Leading organisations recognise this and are betterintegrating their supply chains with the strategic goals of their business. Sales & Operations Planning (S&OP),or Integrated Business Planning (IBP), is a proven methodology organisations turn to, or in many casesreinvigorating to execute this. S&OP, through enhancing responsiveness as well as forward visibility is ableto establish sustainable competitive advantage.

S&OP is a framework which enables value to be derived from the ‘planning capability’ of an organisation.Consider the ‘planning capability’ to be an organisation’s people, process, systems and data. At anorganisational level, S&OP aligns this ‘planning capability’ with the business and supply chain strategy. Andat a functional level, S&OP leverages the ‘organisational structure’ encouraging team members to collaborateand work towards the achievement of organisational goals.

Effective S&OP enhances the decision-making quality in a business by providing visibility and agility in portfolio,demand, supply and logistics management. It is a well-established, proven framework; however, many largeorganisations are unable to effectively leverage its benefits – primarily due to poor execution of S&OP meetingsand sub-standard planning practices.

Executive Summary



There were four people named Everybody, Somebody, Anybody and Nobody.

There was an important job to be done and Everybody was asked to do it. Everybody was sure Somebody woulddo it. Anybody could have done it, but Nobody did it. Somebody got angry about that, because it was Everybody’sjob. Everybody knew Anybody could do it but Nobody thought that Nobody would do it. It ended up that Everybodyblamed Somebody when Nobody did what Anybody could have done.

Author: “Nobody” an adaptation of a Charles Osgood poem

Sales & Operations Planning keeps ‘Everybody, Somebody, Anybody & Nobody’ accountable. In the context of theorganisation you lead – consider the goals & incentives amongst the various functions. Effective S&OP cultivatesaccountability, promotes knowledge sharing and provides scope for the understanding of the high level implicationsof functional decision-making.

As it is often the nature of functional groups (Sales, Finance, Marketing, Operations and Supply Chain) to focussolely on their respective areas; S&OP is designed to provide each of these groups with broader perspective fordecision-making on an ongoing basis. In its most basic form, S&OP dictates how the various functions in anorganisation work together through structured and regular meetings. More sophisticated S&OP processes instil aculture of accountability and prompt forward thinking in decision-making.

Key foundations need to be set in order to attain such maturity in S&OP. Planning Capability and OrganisationalStructure are two vital foundations for effective S&OP.

Perspective

Sales & Marketing

Finance

Supply Chain

Operations

Sustainable Competitive Advantage:Accountability and forward-thinking through collaboration

Anybody

Everybody

Nobody

Somebody



BusinessStrategy

Customer ValueProposition

Supply ChainStrategy

Organisational Structure

..

Policy/ KPI’s

Planning

People Systems DataProcess

Sales & Operations Planning Framework

Business Strategy is the gravity for effective S&OP. The functional groups and team members of an organisationshould know the Business Strategy and how this aligns with the value driver of the business, that is, the CustomerValue Proposition. Often, a sign of a successful organisation is every meeting, decision and action stems from BusinessStrategy and Customer Value Proposition.

In addition to this, every executive and supply chain professional should know the Supply Chain Strategy and howthis aligns to the Business Strategy. This cultivates accountability in the supply chain and as such, increases itsdurability and focus toward key business objectives.

The above strategies shape an organisations structure. That is, the reporting hierarchy, policy, incentives & KPI’s ofan organisation. Each of these should complement the above strategies and in doing so, influence ‘bottom-up’decision making that stems from the planning capability of an organisation – its people, process systems and data.Organisational structure and planning capability together underpin Sales & Operations Planning. Thereby, in orderto generate real value from S&OP, the focus initially should be in this space. Lay the foundations and then look toleverage the benefit. The following pages detail these foundations, organisational structure and planning capability.

The Big Picture



Organisational StructureExecutive Engagement, Policy and KPI’s -

From an organisational structure perspective, a difficulty in many S&OP implementations is the lack of executiveengagement and ownership. Without this engagement, the process does not have a crucial link back to thearchitects of the business strategy. The most effective meetings prompt actionable decisions. Keeping this inmind, key trade-off decisions cannot be made without executive sign-off. Their engagement thereby is important.At a minimum, relevant executives should own each of the meetings, driving decisions and actions. They arethere to hold each functional team accountable. Executives must ensure that the plan derived from the S&OPprocess is driving the business towards its strategic goals.

Policy, in a best-in-class environment, covers the whole scope of the integrated planning process – fromprocurement through planning and manufacturing to execution and customer order fulfilment. Policies providea framework to manage trade-offs and decisions that drive optimal outcomes based on your organisation’s supplychain strategy.

This provides clarity and enables team-members to focus on value-adding activities, rather than having toindividually navigate confusing circumstances. For example, is your strategy to be a low-cost provider or acustomer-service focused supplier? Is this cascaded to and understood by your customer service staff when theyare dealing with a customer order requires expediting? How do they go about making this call? Staff should notbe going through the decision-making process every time such a circumstance arises, not only because of variedoutcomes possible, but also because it wastes time. Drive consistency and efficiency by communicatingorganisational principles in your policies.

In addition to executive engagement and Policy, Key Performance Indicators (KPIs) are a primary input into eachS&OP meeting. Utilised effectively, they monitor the health of different business processes and provide measuresof performance. With S&OP it is important that KPIs reflect the horizontal, cross-functional nature of the process.That is, KPIs should be chosen to support collaboration, not to measure a process or performance in functionalisolation. For example, Operations may have a KPI related to plant efficiency. However, if this is not reportedtogether with a measure of inventory turns or cash-to-cash cycle, excellent plant efficiency as measured by thatsingle KPI may disguise a resultant increase in inventory costs.

ExecutiveEngagement

and Ownership

Business &Supply Chain

Strategy

Policy, KPI's &Incentives



People Process

Workload Structure Culture Integration Information Exception Based

Aptitude Attitude KPI’s DecisionMaking(S&OP)

Single set ofNumbers Efficiency

Training Induction Succession Planning Transparency Return on Effort Completeness

Systems Data

Utilisation Configuration Capability Completeness Timeliness Cleanliness

Strategic Fit Skill-level required Internal Expertise Up-to Date Availability Accuracy

Training Development Maintenance Policy Accountability MaintenancePolicy Quality

Planning CapabilityTo execute on business strategy and strong organisational structure, ‘planning capability’ must exist. This is criticalfor competitiveness in any industry. Get this right and you have paved a solid foundation for sustainable, profitablegrowth. Planning capability in the form of people, process, systems and data underpins the S&OP framework. If theS&OP framework is to effectively provide a culture of accountability and collaboration, the capability must first existto ensure the opportunities and risks discussed during S&OP are real. Consider the following:

· Are people capable of effectively utilising the toolsets and resources at their disposal?· Are the systems being utilised to their capability in producing data?· Are the processes surrounding people and systems effective?· Is data reliable? And is the business looking at one set of numbers?

The graphic below is an example of how to look at each of people, process, systems and data individually to identifyareas which require attention in order to implement or improve an S&OP process.

Considering the above ‘People, Process, Systems & Data’ to be the inputs in the detailed day-to-day planningoperations of the business, when we overlay Business Strategy and Organisational Structure, we arrive at the PlanningFoundation. This is where we begin to optimise trade-offs in decision-making.

· Demand PlanningoBase Forecast à Approved Demand Plan

à Promotions à New Items à Item Phase outs

· Inventory Policy/SettingsoManagement parameters developed and utilised

· Supply PlanningoReplenishment methodology àDRP à MPS

Capacity Planning à Production Planning

PlanningFoundation

DemandPlanning

SupplyPlanning

InventoryPolicy



FrameworkMaturity

Stage 1Reacting

Stage 2Traditional S&OP

Stage 3Enterprise S&OP

Stage 4Adaptive S&OP

Formulate anOperational Plan

Balancing Demand &Supply

Collaboration &Transparency Optimised Demand Responsiveness

People

v Poor communicationbetween functionalgroups

v Imbalance spread ofworkloads

v Reliance on heroiceffort of a handful ofemployees

v Responsibilities andkey Demand & Supplytasks are understoodat Middlemanagement levels

v Some Collaborationbetween functionalgroups (Sales,Operations, Finance,Marketing, I.T.)

v Senior Managementunderstand the processand are empowered

v Culture exists with trustand understanding ofthe importance of theprocess

v Functional andindividuals incentivelinked to performance

v Senior Executives communicatealignment of the S&OP strategywith business strategy

v Middle Management empoweredv Culture builds of Enterprise S&OP

environmentv Functional Groups take ownershipv Proactive Collaborationv Functional & individual incentive

linked to outcomes at a businesslevel

Process

v Irregularcommunicationchannels andineffective meetings

v Objectives andresponsibilities notclearly defined

v Lack of ownership forfollow up actions

v Minimal intra-company awarenessdisplayed byfunctional leads

v Plans are alignedalthough incentivesmay not be

v Formal Structuredprocess with regularmeetings with the keyleads from each of thefunctional groups

v Supply Chain tend todrive the process orpurpose of achievingoptimum forecast andsupply response todemand

v Plans and incentivesaligned with BusinessStrategy and SupplyChain Strategy

v Well integrated andcollaborative meetingwith a high levelunderstanding ofdecisions and businessprofitability

v Action items fromprevious meetings arefollowed up promptlyand minutes areconsistently documentedwith any issues beingescalated as required

v Business recognition andownership of S&OP at all levels aswell as strong participationdisplayed from senior executives

v Fully integrated Supply Capabilityand Demand Plan reconciled bothinternally and with Trade Partners

v Collaboration extends beyond theenterprise to realise end-to-endvalue

v Focus on sustainable profitabilityas well as long term businessdevelopment

v Process becomes balanced,dynamic and event-driven with astrong connection to strategicplanning & execution

Systems &Data

v Basic and disparatesystem with multipleduplicate entries andseveral manual/excel-based work-arounds

v Disconnect betweenSupply, Demand &Financial Data

v Individual systems arereliable but may bedifficult toconfigure/utiliseeffectively

v Tools now some levelof forecastingcapability

v Information isavailable but inseparate systems andis not fully visible to allkey S&OPstakeholder’s

v Effective and integratedsystems which isconfigured to businessneeds

v Able to leverage severalforecast model options

v Commencement ofdialogue and utilisationof tools to perform‘what-if’ analysis andassessing financialimplications

v Scoreboards in place tomonitor results offunctional and businessresults

v Tools now support risk-value trade-offs, price and cost optimisationand are capable of multi-variablesimulation, “what-if” planning wellunderway

v Forecast model selected based onleast error

v Management and functional grouphave confidence in the quality andconsistency of the data

v Business dashboards are in placemaking information easilytransferrable and interpretablebetween functional groups

v Visibility and easy, secure access totrading partner information

Planning Capability MaturityThe diagnostic table below is designed to assist in identifying the current maturity of your organisation’s PlanningCapability and S&OP framework. It highlights how sustainable and effective S&OP requires a long-term view. Theexpectations of S&OP should reflect continuous improvement, not instant results. A culture of accountability, forwardthinking and collaboration are outcomes of mature S&OP process, such as Adaptive S&OP (stage 4).



Port

folio

Rev

iew

Opportunities &Threats(Market/Portfolio)

New ProductDevelopment

De-RangingProducts

Dem

and

Revi

ew

IdentifyUnconstrainedDemand

Measure SalesForecast vs.Actual

Identify activitiesto close gaps Su

pply

Rev

iew

IdentifyConstrainedResponse toUnconstrainedDemand

MeasureOperational, Plant& SupplyPerformance

Identify activitiesto close gaps In

terg

rate

d Re

view

ResolveImbalancesbetween Supplyand Demand

Determineagenda items forExecutive S&OP

Exec

utiv

e S&

OP

Review & ApproveDemand andSupply plans,Fnancial plans,Strategic Businessgoals and anyunresolved issues

Set StrategicDirection and filterto functionalgroups

S&OP - FrameworkThe cross-functional nature of S&OP enables decision-makers to explore trade-off scenarios with greater perspective.The structured meetings provide balance between functional groups by aligning incentives and enhancing visibilityof opportunity and risks surrounding demand & supply.

S&OP is a basic framework able to leverage significant value. At its core, there are five distinct S&OP meetings.The first is the Portfolio meeting. This meeting examines the demand and supply effects of the company’sinnovation pipeline, and provides a feed of forecast demand for new products into the Demand meeting.

The Demand meeting takes this information and consolidates it with forecasts of current product demand, toproduce an unconstrained picture of aggregate demand, comparing this to the sales budget. Action is agreed toensure the sales budget is met.

The unconstrained demand plan is then an input into the Supply meeting, where it is tested against capacity andother resource constraints. Any resultant trade-offs are identified, and those that cannot be resolved by the teamare elevated to the Integrated Reconciliation meeting.

The Integrated Reconciliation meeting takes the elevated trade-off decisions from the previous meetings andmakes a call on what action to take. Executive S&OP takes the integrated plan and ensures it delivers on financialoutcomes and is aligned with the business strategy. The meeting cycle is monthly. Each has different participants,inputs, and outputs, and the planning horizon is typically in the intermediate range of 12 to 18 months.

The meetings, the sequence, the cycle, and the planning horizon form the S&OP framework. The outcome of S&OPis a robust sales and operations plan, built up through collaboration between the functions, driving strategic andoperational alignment and coordinated action.

Strategic and operational alignment cannot be delivered by focusing on the above S&OP framework alone. Theframework needs to be constructed upon the foundations described formerly in this paper – organisationalstructure and planning capability. S&OP should be viewed as a vehicle enabling an organisation to leveragesuch foundations to transform a good organisation that gets the basics right, into a leading organisation interms of innovation, service levels, cash-flow and sustainable profitability.



Case Example

The Situation: A primary mobile and data-service provider is challenged with balancing supply and demand dueto the short life cycles of its phone products and additionally, the long order lead times for its mobile accessories.Its business strategy and customer value proposition revolve around service and quality. The organisational structureseems to be relatively in shape; however, unfortunately the company’s current planning capability is sub-par andcausing service-levels to drop due to poor planning execution. There is limited product availability which is translatingto the company losing sales and customers to competitors. Consequently quality, the brand and profits are strugglingdue to excess inventory forcing lower prices and margins.

The Task: The Company needs to better understand its supply & demand channels in order to plan more effectivelyto ensure product availability and minimise excess inventory.

The Action: The Company implements S&OP across the organisation and in the process focuses on getting thebasics right in planning capability – people, process, systems & data. A monthly S&OP meeting is conducted toreview unconstrained demand drivers, constrained demand drivers, supply plans, opportunities and risk.

The S&OP meeting involves senior executives who are engaged and key stakeholders from sales, operations,marketing, and finance. A structured review in each meeting is established to identify the opportunities, risks, andhighlight areas requiring attention such as the current product portfolio. The key stakeholders also take the timeto review the current capabilities of people, process, systems & data. Realising that the existing planning systemis ineffective, management invest in a specialised demand planning software.

This case-study highlights that successful S&OP requires solid foundations in planning capability & organisationalstructure, dedication & consistency and a continuous improvement culture. It also emphasises that S&OP is along-term, strategic investment for sustainable competitiveness.

Visibility &Understanding

Collaboration &ForwardThinking

EnhancedDecision-making



Utilising this new software, the mobile and data-service provider creates an unconstrained demand plan for reviewin the Demand Review meeting. During this meeting, the purchasing & supply chain team work together with sales& marketing to manage changes in the product portfolio whilst also, inputting market intelligence to the salesforecast. The Finance team similarly appreciate the benefits of the software as they now have greater product costvisibility and are able to budget and bucket costs more accurately.

Following the Demand Review, in the Supply Review Meeting the unconstrained plan is converted into a constrainedplan which acknowledges production and labour constraints, supplier shortages and other cost factors. Utilisingthe new demand planning software, the company is able to sustain S&OP best practices by leveraging bottom up,data-intensive planning. A critical success factor for this company’s S&OP process is uniting key stakeholders, bothinternal and external. For this reason, suppliers are even engaged in the Supply Review. The result of this,improvements in cost, product availability, and capability which can be linked to increased visibility in the supplybase.

As the supply chain plan is established during the S&OP process, the sales and marketing functional groups committo ensuring that pricing and promotion strategies consistently support the supply chain strategy.

A culture of forward thinking and accountability in the supply chain is created.

Case Example continued…

The Result: By implementing S&OP, the mobile and data-services company is able to realise substantial benefits.The company triples the number of products offered and over a 3 year period, forecast accuracy is improvedfrom a low 64% to 80-88% and service levels increase from 91.5% to 98%. The improvements find their wayonto the Financial Statements in the form of inventory related working capital and revenue. Profits increasesignificantly, as does the Shareholder value of the organisation.

Sales & Marketing

Finance

Supply Chain

Operations



Industry Leaders - PlanningCapability & Org. Structure S&OP (additional) Primary Driver of

Improvement

Operating Cash-flow Equivalent to Inventory Reduction Indirect Improvement Inventory Reduction

Service-level + 5-10% + 5-10%Improved Planning Accuracy

using OptimisationCapabilities

Increased SalesRevenue + 5-10% + 5-10% Improved Service-levels

Inventory Turns + 50%-400% Indirect Improvement Lower Inventoriesand/orHigher Sales

Excess Stock Reduction + 30-50% + 10-20% Improved Planning Accuracy

Reduced InventoryCarrying Costs

~25% p.a. of Total InventoryReduction Indirect Improvement Inventory Reduction

Reduced ReceiptingCosts 15%-30% Indirect Improvement Cost Optimised

Replenishment Routines

Reduced ExpeditingCosts 40%-80% Indirect Improvement

Improved Planning Accuracyusing Optimisation

Capabilities

Reduced RedistributionCosts 40%-80% Indirect Improvement

Improved Planning Accuracyusing Optimisation

CapabilitiesReduced Procurement

Costs 2%-10% 2-5% Optimised Supplier selection +Vendor Performance visibility

Business Value of S&OPIndustry Benchmarks highlight a strong correlation between those who have an effective S&OP process and thosewho experience business success.

The table below details the benefits experienced by industry leaders in planning capability and organisationalstructure in reference to key metrics from service levels to inventory turns. On top of this, those with S&OP tendto experience amplified improvements – leveraging the benefit of planning capability and organisation structure.

GRA 2013 Benchmarks**

0.00% 100.00%

ServiceLevel

ForecastAccuracy

GrossProfit

Margin

S&OP Opportunities Areas

Mature S&OP BusinessNon-S&OP Business

0

10

20

30

40

50

60

70

80

Cash Conversion Cycle (days)

Cash Conversion Cycle

Non-S&OP BusinessIndustry Average - Middle 50%Mature S&OP Business

The graphics below describes the opportunity available to business in reference to profit, forecast accuracy,service level and cash flow.



“Engineers who can’t add, operators who can’t run their equipment, and accountants who can’t footnumbers become supply and purchasing professionals.”

Jack Welch’s reflection that Supply Chains are a back office responsibility speaks true for too many organisations.However, the tide is turning. Leading organisations are realising the supply chain is core to an organisationssustainable value and are accordingly investing in this space.

Board executives are going back to basics, investing in both organisational capability and organisational structure.They are investing in people. Talented supply chain professionals know the fundamentals of business. Tim Cook,CEO of Apple is such a Supply Chain professional. In 2012, he was the highest paid CEO, with a total compensationpackage of approximately $378 million. This admittedly is extraordinary recognition that the supply chain is nolonger a back office responsibility. However, perceptions of the supply chain and its role in delivering on businessstrategy and customer value is changing, it is now rightfully recognised as core to business.

Particularly in the current economic climate, those who do not recognise the above are finding it difficult to adaptand remain profitable. The lingering downturn in global growth is making it more imperative that businesses "getit right" when it comes to delivering on their value propositions. The margin for error has shrunk enormously.Consider mobile hardware maker RIM. It took a $485m inventory write-off bath on its Blackberry Playbook at theend of 2011. The aftermath was a decline in its cash position of $1.1bn and a stock price slump of almost 40% in2 months. The result was a harsh lesson in the need for integration across business strategy, new productintroduction and operations.

Additionally, there is general acknowledgment among business leaders of the increasingly complex demands of amore-informed, more-demanding consumer. Your customer wants more product variety, expects that productsooner, and has an increasing ability to compare and contrast your value proposition with that of your competitors,which for many businesses are now spread over the globe as a result of online shopping.

Competitive Advantage in testing times

The Competitive Advantage of S&OP is that it prompts leaders to first get the fundamentals right. In doing so,it is a framework that cultivates accountability and forward thinking through collaboration. Not all organisationscan be successful, but chance will favour the connected organisation.

Lost sales due to an inability to respond tochanging requirements and specifications

Promotions leading to stock-outs

Tension between functional groups(finance, marketing, supply, etc.) due tolack of communication/understanding

Inability to maximise market share orprofit from new product introductions

Excess, ageing or deteriorating inventorynot being cleared profitably

Unreliable delivery performance, inabilityto provide reliable delivery dates andcarrying excess inventoryMismatch of supply & demand, resultingin an excess inventory, no/low marginunplanned price reductions or stock-outsLack of sustained focus on the mostprofitable customers, products, channelsand supply sourcing

Inability to effectively manage de-rangedproducts

Strategy is short-term rather than longterm, cannot effectively plan 6-12 monthsfrom todayFailure to quickly identify and leveragemarket opportunities, or mitigateheadwindsProduction constraints causing additionalcosts (overtime, extra raw materials, etc.)to meet demand

S&OP Requirement Symptoms

The list below is useful to identify whether the S&OP framework is able to assist your organisation.



About GRA

GRA is one of Australia's largest, expert consulting firms specialising in supply chain & logistics strategy,planning and execution. We offer consulting, professional services, supply chain systems, training & educationand benchmarking across a broad range of industries. Over the last two decades, we have worked with 200+organisations across multiple industries to turn their supply chains into a competitive advantage and havehelped our clients identify combined savings of more than $10 billion in value. We can define optimal supplychain strategies & structures, design high performance facilities and embed the best- practice operatingprocesses and systems required for superior performance. We are results focussed and have proven approachesfor quickly delivering sustainable improvements in working capital, cost and service level performance. Weprovide our clients with a sustainable competitive advantage by significantly improving margins, asset efficiencyand supply chain responsiveness.

GRA was founded in 1997 and is Australia's premier specialist supply chain consulting firm. Our clients includeWesfarmers, Cadbury, Lion Co, Laminex, Murray Goulburn, Symbion Pharmacy Services, Honda Australia,OneSteel, Officeworks, Nestle Australia, Amcor Fibre Packaging, Fosters Australia, QANTAS, Super CheapAuto, Super Retail Group, Mitre 10, SPCA, Sara Lee Australia, Reece and The Australian Defence Forces.

GRA recognises Sales and Operations Planning as a powerful on-going management and performancemeasurement process that integrates business plans, financial budgets, operational planning and execution.

Planning Capability& Organisational

Structure

S&OP Framework

SustainableCompetitiveAdvantage

Sustainable Competitive Advantage:Accountability and forward-thinking through collaboration


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Sales & Operations Planning - GRA Supply Chain … · Sales & Operations Planning keeps ‘Everybody, Somebody, Anybody & Nobody’ accountable. In the context of the organisation