[SCM] Missing_in_Traditional_SOP_Processes[1].pdf

7/27/2019 [SCM] Missing_in_Traditional_SOP_Processes[1].pdf

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2011SmartOpsCorporation 1 www.smartops.com


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WhatisMissinginTraditionalS&OPProcesses?The holy grail of supply chain planning is to perfectly align supply and demand to meet

corporatestrategicobjectives. Overthelasttwodecades,corporationshaveinvestedheavilyin

Salesand

Operations

Planning

(S&OP)

processes

with

the

hope

of

driving

alignment

across

their

supply chains. Unfortunately, traditional S&OP processes have struggled to live up to their

hype,andcompanieswhohaveimplementedS&OPprocessescontinuetostrugglealigningall

aspectsoftheirsupplychainbecausetheylackthecapabilitytoplanfortheuncertaintyintheir

supplychains.

AproperlyappliedS&OPprocesscandeliversignificantvalue,butto realizecompletesupply

chainalignmentwithbusinessobjectives,allfacetsofthebusinessmustbeequallyrepresented

in the S&OP process. Over the years, companies have developed sophisticated demand,

supply, and capacity planning capabilities, but they have lacked the ability to set inventory

targets to buffer for the uncertainty in their supply chains. Without the capability to plan

inventoryfor

real

world

enterprise

supply

chain

complexities

and

uncertainties,

acompany

will

overbufferitsinventoryandstruggletodelivertherequiredcustomerservice.

TodeliveratrulyworldclassS&OPprocess,whichdeliverssustainablecompetitiveadvantage,

companiesrequireanenterpriseinventoryplanningprocesswiththeabilityto:

Appropriatelypoolallformsofsupplychainvariabilitytosetthelowestpossiblesafety

stocklevelsandmeetthedesiredcustomerservice

Provideatotalsupplychainviewandmodelinteractionsbetweenstagesinthesupply

chain

Adjust inventory targetsover time tomatch fluctuations indemand and identify the

needfor

pre

build

inventory

Modelthecomplexitiesoftheenterprisesupplychainprovidingplannerswithvisibility

intothedriversofinventory

Calculate actionable inventory targets at themost granular level, accounting for the

specificcharacteristicsofeveryitemandeverylocationovertime


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Provide a sustainable, integrated process which updates inventory targets as the

plannersviewofthesupplychainchanges

Support all forms of supply chain planning with a common fact base and scenario

analysiscapabilities

SmartOps,which

pioneered

Enterprise

Inventory

Optimization

(EIO),

is

the

only

company

that

offersaninventoryoptimizationsolutionthatuniquelydeliverstherequiredinventoryplanning

capabilitiestodeliverabestinclassS&OPprocess.

S&OPCoordinatestheSupplyChainIn todays dynamic global marketplace, the difficulty of managing modern supply chains is

obvious to even themost casualofobservers. Companies thatdevelop a clear competitive

advantage in operating their supply chain have reaped tremendous rewards while their

competitorsstumble. Successisnoteasy.

Runningasupplychainstartswiththeannualstrategicplan,andultimatelyculminates inthe

weekly/daily

execution

of

each

component

of

the

supply

chain.

In

order

to

align

the

detailed

executionof the supply chainwith thehighlevel strategicplans, companieshavedeveloped

Sales&OperationsPlanning(S&OP)processes.

Figure#1: S&OPCoordinatesSupplyChainPlanningActivities

TheconceptforS&OP isquitesimple. Alignacompanysdemandandsupply,andthesupply

chainwillbecomemorenimbleandprofitable. However,developinga robustS&OPprocess

which facilitates collaboration across the organization and aligns the various supply chain

planners

is

becoming

more

and

more

challenging

as

markets

become

more

volatile

and

supply

chainsgrowincomplexity.

SupplyChainManagementChallengeInrecentyears,thevolatileeconomyhasshakeneventhemoststableofbusinesses. Customer

demandhasgonefromrecordhighsdowntorecordlowsandinsomecasesbacktotheirhighs.

Nooneever trulyknowswheredemand isheading. All that is for sure is thatdemandwill

Execution

Strategic

Tactical

Annual

Quarterly / Month ly

Weekly / Daily

Strategic

Planning

Sales & Operations

Planning (S&OP)

Demand

Planning

Inventory

Planning

Capacity

Planning

Supply

Planning

Focus Frequency


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change. Justasthereisuncertaintyaroundfuturedemand,supplierreliabilityiseverchanging.

Corporatebankruptciesriseandfallascreditavailabilityandeconomicconditionsfluctuate. In

general, supply chains are dealing with ever increasing uncertainty from all aspects of

operations.

If increasingvolatilitywasntenoughforplannerstohandle,theplannersmustalsodealwith

theever

expanding

and

increasing

complexity

of

modern

enterprise

supply

chains.

In

an

attempttogrowrevenue,salesandmarketingdepartmentsareexpanding intonewmarkets,

increasing the number of SKUs, diversifying sales channels, and ramping up marketing

promotions. At the same time, operations are being restructured to drive out costs and

promote efficiency. The use of contract manufacturing, offshore production, and vendor

managedinventorybringmorepartiesintothemixanddrivesupplychaincomplexity.

Figure#2: SupplyChainsGrowingComplexityandPressuretoPerform

On top of the increase in supply chain volatility and complexity, executives also face the

increasingpressurestodrivesupplychainperformance. WallStreetandfinancedepartments

closely monitor revenue growth and supply chain cost structures. New competitors enter

markets,andexistingcompetitorsarecontinuallyimprovingtheirproductsandcoststructures.

Customersliveinaworldofimmediategratificationanddiminishedproductloyalty,drivingthe

need forhigherproduct availability. There ismorepressurenow thaneverbefore todrive

supply chain performance to become more profitable. With the increase in supply chainuncertainties and complexities, it is easy to understand why traditional S&OP processesstruggletoeffectivelycoordinatesupplychainsanddelivertherequiredfinancialresults.WhyDoCurrentS&OPProcessesFallShort?Thereisaninherentconflictattheexecutionlevelofthesupplychain. Ascompaniesgrow,the

roles within the supply chain must be segmented between demand, supply, capacity, and

inventoryplanning. Eachoftheseplanningroleshasitsowngoalsandobjectiveswhichresult

Raw MaterialSuppliers

Packaging

Suppliers

Manufacturing

DistributionCenters

Distributor orWholesaler

Retail

Customers

Consumers

Complexity Drivers

SKU Proliferation

Sales Channel Diversification

Vendor Managed Inventory

Marketing Promotions

Capacity Constraints

Globalization

Off-shoring

Outsourcing

Performance Drivers

Finance / Wall Street desire to improve

working capital Competitive pressures on price

Customer expect improved servicewith less inventory


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inconflicting results. The following figure illustrates the inherent internalconflict thatarises

betweenthevariouspartsofthesupplychainplanningorganization.

Figure#3: InherentSupplyChainPlanningConflict

ThepurposeoftheS&OPprocess istoresolvethe inherentconflictbetweentheplannersby

enablingcommunicationandalignmentofthedemand,supply,capacity,and inventoryplans.

However, the levelofplanning sophistication variesby area, and therefore,not all areasof

supplychainplanningareequallyrepresentedandunderstoodintheS&OPprocess.

Demand,supply,andcapacityplanningarealldeterministicinnature. Deterministicproblems

are discrete in nature and well understood by the scientific / mathematical communities.

OperationsResearch (OR)hasbeen studyingdeterministicproblems since theWorldWar II,

andhas

developed

linear

and

non

linear

programming

techniques

to

optimize

these

problems.

These deterministic optimization techniques are the underlying math behind many of the

supply chain planning solutions in use today for Demand Planning (DP), Material Resource

Planning(MRP),andAdvancedPlanningandScheduling(APS).

Unfortunately,supplychainsare far fromdeterministic. There isuncertainty throughout the

supplychain. Demand forecastsarenever100%accurate,products rarelyarrivepreciselyat

thestated leadtimes,andproductionyieldsandschedulesareconstantlychanging. Inother

words, supply chainsare stochastic, facinguncertaintywhich variesover time. Because the

deterministicmodelsusedtomodeldemand,supply,andcapacityignorethestochasticnature

ofsupplychains,plannershaveusedinventorytobufferfortheirsupplychainuncertainties.

Demand

Supply

Inventory

Capacity

Supply

Chain

Planning

Focus Objectives Potential Results

DemandPlanning

Maximizerevenue

growth

Increase customer service objectives Market / channel expansion to reach new

customers

SKU proliferation andproduct promotions

to drive sales

SupplyPlanning

Minimizetransportation

and

warehousecosts

Warehouses placement andtransportationmode selection may

increase supply chain lead times

Increase in pipeline inventory

CapacityPlanning

Minimizeproduction

costs

Large production batch sizes to minimizechange over and setup costs

Pushing of product into supply chain to

maintain asset utilization and avoidseasonal requirements

InventoryPlanning

Minimizeworking

capitalrequirements

Lowering of inventory levels may result inlower customer service

Push to reduce lead times and batch sizesto decrease inventory requirements

Drive to only produce what is needed

when it is needed


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Figure#4:TraditionalPlanningMethodsOverBufferInventoryforSupplyChainUncertainty

Untilrecently,thescience/mathforstochasticoptimizationdidnotexisttoeffectivelysupport

enterprise inventoryplanning. Inventoryplannershaveattemptedtoapplysimplestochastic

modelstothe inventoryplanningproblem,butthesesimplifiedmodels ignoretherealworld

complexities and uncertainties faced by modern enterprise supply chains. Therefore,

traditional inventory planning techniques and solutions have resulted in companies carrying

excessinventorytobufferforthesesupplychaincomplexitiesanduncertainties.

Without an effective means to plan inventory, the remaining three areas of supply chain

planning (demand, supply, and capacity planning) will always dominate over inventory

planning. ThisdominancecreatesanimbalanceintheS&OPprocess,preventingthecompany

fromaligningitssupplychainandhinderingitsoverallperformance.

WhatIsNeededtoDoEnterpriseInventoryPlanningforS&OP?Relianceon traditionalmethods for setting inventory targets, including rulesofthumb,basic

MRP/APSinventorycalculators,orspreadsheetbasedsafetystockcalculators,inevitablyleads

toexcessinventoryacrosstheboardorunnecessaryservicelevelfailures. Thereasonissimple

these

methods

rely

on

over

simplified

supply

chain

models

that

ignore

the

complexities

and

uncertainties that make inventory a necessity in the first place. Real world supply chain

complexitiesanduncertaintiesincludethefollowing:

Figure#5:RealWorldEnterpriseInventoryPlanningRequirementsforS&OP

The real world is It is not

Stochastic Deterministic

Multistage Isolated Single Stage

Time Varying Stationary

Constrained Unconstrained

Granular Aggregated

Dynamic Static

Integrated (Online) Analysis Offline Analysis


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Stochastic: Traditional inventory targets are based predominantly on safety stock

calculations that incorporate demand variability or forecast error over an exposure

period. These calculations ignore variability from upstream suppliers, transportation

variances,orproductionprocesses, resulting in safety stocks thatare too low for the

actualuncertainty imposedon the supply chain. Aneffective S&OPprocess requires

inventorytargets

that

account

for

all

forms

of

variability

(i.e.

demand,

supply,

service,

andproduction),andappropriatelypoolsthevariabilitytosetthelowestpossiblesafety

stocklevelswhichwilldeliverthedesiredcustomerservice.

Multistage:Setting inventorytargetsateach location independently,assumingperfect

upstreamreliability,ignoresinteractionsamongvarioussupplychainstages,resultingin

overbuffering of safety stocks across the enterprise. An effective S&OP process

requires inventory targets that account for the interactions between stages in the

supply chain. True multistage inventory planning identifies and compensates for

upstreamshortagesdueto less thanperfect internalservice levels,andoptimizesthe

locationofsafetystockacrossthesupplychainsothattotalsupplychaininventorycosts

areminimized

while

maintaining

end

customer

service

needs.

TimeVarying:Tosimplifytheinventoryplanningproblem,traditionalplanningmethodsdisregard the timevarying nature of supply chains by assuming fixed demand and

ignoring capacity constraints. These approaches generate static inventory or days

coveragetargetsovertime,whichleadtoexcessiveinventoryattimesofbelowaverage

demand,andstockoutsat timesofaboveaveragedemand. Timevaryingchanges in

demand influencetheeffectsofdemandvariability,supplyvariability,batchsizes,and

capacity constraints on inventory targets in a nonlinear fashion. An effective S&OP

processrequiresinventorytargetswhichvaryovertimeaccountingfortheseinfluences

inanappropriatemanner.

Constrained:When

inventory

planning

tools

do

not

reflect

the

realities

of

acompanys

supplychain,plannersbecomeskepticaloftheoutputsandstarttoignorethemodels

inventory targets. Withoutacomprehensivedatamodel thataccounts for realworld

constraints, such as production capacities, timevarying bills of material (BOMs),

production frozen windows, service times, or item/locationspecific review periods,

planners often revert to setting inventory levels using rulesofthumb or their own

intuition. In effect, educated guesswork replaces science, often with unpredictable

results. An effective S&OP process requires inventory targets which model the

complexitiesof the enterprise supply chainprovidingplannerswith visibility into the

driversofinventory.

Granular:Inventory

targets

must

be

set

for

each

item,

at

every

location,

for

each

time

periodintheplanninghorizon. Becausethescaleofsolvingforinventorytargetsatthis

level is somassive, traditional approaches reduce the scale by solving for inventory

targetsata lessgranular level,oftenusinganABCclassificationorproduct familiesto

group similar items. Whenplanners fail toconsider the individualcharacteristicsand

service requirements of each individual item and each location, items with higher

variability than thegroupaverage runagreater riskofstockingout,while itemswith


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lowervariabilitythanthegroupcarrytoomuch inventory. AneffectiveS&OPprocess

requiresanenterprisescaleinventoryplanningsolutionwhichcangeneratethemillions

ofinventorytargetsdownattheitemlocationtimeperiodlevelsothatsupplyplanners

haveactionabletargetswhichgeneratesustainableresults.

Dynamic:Standaloneinventoryplanningspreadsheetsordesktopapplicationsrequirea

largeamount

of

time

to

gather,

transfer,

and

enter

data.

This

robs

planners

of

time

they could spend updating inventory targets on a regular basis, causing inventory

targets to go out of sync with the larger supply chain. An effective S&OP process

requires a sustainable inventory target update workflow, which allows planners to

updateinventorytargetsfrequentlyandmanagetargetsonanexceptionbasis.

Integrated (Online)Analysis:Traditional approaches to supply chainplanning relyondisconnectedanalysisbetweenthestrategic,tactical,andexecution levelsofplanning.

Byusing inconsistent assumptions and separate inventorymodels / spreadsheets for

strategicplans,S&OP,andoperational inventorytargets,traditional inventoryanalysis

resultsinoverbufferingofinventory,massagingofinputs/outputs,andscramblingto

deliverexpected

results.

An

effective

S&OP

process

is

supported

by

an

inventory

planning process with powerfulwhatif analysis capabilities that supports consistent

assumptionsandoptimalplanning targetsbetween thevariousstagesofsupplychain

planning. Plannersneed an inventorymodelwith a comprehensivedatamodel that

allows planners to change input variables and see the effect of inventory levels and

budgetshelping them identifyandquantifycontinuous improvementopportunities.

Theinventoryplanningshouldbesyncedfromtheaggregatedstrategicplanalltheway

downtothegranularoperationalinventorytargets,providingeveryonewithacommon

factbase tomake supply chainplanningdecisions. Once strategic analysts choose a

supplychainstrategy,theyneedtohavetheconfidencethattheirinventorymodelsare

supportedby

the

granular

inventory

targets

that

deliver

the

stated

inventory

and

customerserviceobjectives.

SmartOps,whichpioneeredEnterprise InventoryOptimization(EIO), istheonlycompanythat

offersaninventoryoptimizationsolutionthatuniquelydeliverstherequiredinventoryplanning

capabilitiestodeliverabestinclassS&OPprocess. EIOsucceedswheretraditionalapproaches

fail because it addresses the realities of todays global enterprise supply chain it takes a

strategicapproachtoinventorymanagement,automatesprocessestomineandutilizetheright

business data, and offers depth of visibility into supply chains that traditionalmethods and

existing inventory planning cannot match. EIO calculates and maintains the precise item

locationtimeperiod inventorytargets,taking intoaccountthetotalsupplychain interactions,

todeliver

the

lowest

possible

sustainable

inventory

levels

that

meet

acompanys

supply

chain

customer service objectives. By doing so, EIO removes the over buffering of traditional

inventoryplanningprocessestoperfectlysynchronizeinventorywiththedemand,supply,and

capacityplans.


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Figure#6:EIObySmartOpsSynchronizestheS&OPProcess

WhatistheBenefitofEIOtoTraditionalS&OPProcesses?Thesciencerequiredtoaccuratelysetinventorytargetsattheitemandlocationlevelsacrossa

planninghorizonforanentiresupplychainisthesameforeverybusiness,andthechallengesof

properinventoryplanningarefundamentaltoeverysupplychain. Similarly,EIObySmartOps

deliversoutstanding value to all industries. Companies that implement EIO typically realize

inventory reductions greater than 20% and 2040% reductions in inventory carrying and

obsolescencecosts,whilemaintainingorimprovingcustomerserviceandontimedeliveries.

Figure#7:TypicalBenefitsofSupportExistingS&OPProcesswithEIO:

ThebenefitofsupportingexistingS&OPprocesseswithEIOcanbeseen intheexperiencesof

Danfoss,aSmartOpscustomer. Danfossisaglobalindustrialmanufacturerofmechanicaland

Supply Demand

Capacity

Inventory

Enterprise Inventory Optimization

EIO uses a stochastic optimization engine to determine theoptimal, time-phased inventory targets at the item-location-

time period level, allowing you to meet customer demand withthe lowest possible inventory.

Optimize inventory levels to "fix the mix

Analyze and implement planning parametersthat meet longer term service objectives

Improve Customer

Service Levels

Improvement Area Benefit Enabler Benefits

5-10% increase in order fill rates and ontime delivery

30-50% reduction in out of stocks andorder lead time variability

Reduced Inventory and

Working Capital

Reduced Production &

Distribution Costs

Improve Planner

Productivity

Reduce expediting and firefighting

Effectively handle large numbers of low

volume SKUs

20-30% reduction in time used inexpediting

10-20% reduction time spent on manualinventory planning processes

Transition from push to pull strategies

Reduce over production, excessive storagefacilities, and expediting

10-20% reduction in PPE anddepreciation due to excess storagefacilities

Manage inventory by SKU, location, andplanning period

Manage dynamic, integrated demand, supply,production, and inventory analytics andexceptions

15-30% reduction in inventory andworking capital

20-40% reduction in inventory carryingand obsolescence costs


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electroniccomponentsforheating,cooling,andhydraulicequipment. With2009salesof3.4

billion,Danfosssells40,000activeproductsandoperates:

93manufacturingsites

139salescompanies

~450agents

and

distributors

DanfossrunsastandardmonthlyS&OPprocesswhichattemptstobalanceDemandPlanning,

InventoryRequirements,andProductionCapacity.

Figure#8:DanfossS&OPProcess

Prior to implementing EIO, theDanfoss Inventory Requirements processwas singlestage in

nature,didnotaccountforallformsofsupplychainuncertainty,andwasmanually intensive.

DanfosshaddevelopedacustomdatabasetosetReorderPoint(ROP)targetsacrossitssupply

chain. The legacy inventoryplanningprocesscalculatedROPsinastagewisefashion,setting

targetsatcustomerfacinglocationsandthenmovingupthesupplychain,usingasinglestage

logicand

ignoring

the

interactions

between

inventory

at

each

location.

As

the

targets

were

calculated, lead timeswere assumed to be certain, ignoring the lead time variability in the

supply chain. The iterative processwasmanually intensive, and due the complexity of the

Danfosssupplychain,tooktwoweekstodevelopROPsfortheentiresupplychain.

AnevaluationofSmartOpsEIOsolutionillustratedtoDanfossthatitslegacyinventoryplanning

processdidnothandle the realworldcomplexitiesanduncertaintiesof itsenterprise supply

chain. BymodelingaportionoftheDanfosssupplychainandcomparingEIOtargetswiththe

legacy inventory targets, Danfoss saw that its legacy inventory planning process was over

bufferingthesupplychainwithinventorytomaintainservicelevels. TheEIOtargetswereable

tomaintainthesameservicelevelsastheDanfosslegacytargets,with20%lessinventory.

MONTH 1 MONTH 2

12-18monthhorizon


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Figure#9:DanfossEIOImpact InventoryReductionof20%WhileMaintainingServiceLevels

Basedon thisanalysis,Danfossexpanded the implementationofEIO to the restof itsglobal

supplychain. ByintegratingEIOintoitsS&OPprocess,Danfossisnowableto:

AutomaticallycharacterizetheuncertaintyofitsDemandPlanattheitemlocationlevel

sothatinventorytargetsquicklyreflectchangesasforecastsimprove

Modelmultistage interactions,allowingplannerstounderstandhow inventoryatone

location impacts inventory at another location, which will enable a more efficient

operationoftheglobalsupplychain

Gain visibility into the various forms of supply chain uncertainty (including demand

uncertainty,

lead

time

variability,

supplier

reliability,

and

production

variances)

and

set

morerealisticinventorystrategy

Reduce the effort required to calculate inventory targets and evaluate alternate

inventoryscenariosfromtwoweeksdowntoafewdays

TakingS&OPtotheNextLevelSIOPAproperlyappliedS&OPprocesscandeliversignificantvaluetoanorganizationbutdoesnot

guaranteesuccess. Inpractice,manycompanieshavefoundthatlogicallybalancingsupplyand

demandstillleavesthedooropenforamultitudeofbusinessmishaps. Toaddressthis,leading

firms have begun to revise their periodic planning approach by including a broader cross

sectionof

key

decision

makers

and

calling

out

inventory

as

afocal

point.

This

broader

approach, commonly termed SIOP (Sales, Inventory andOperations Planning) represents an

evolutionof the standardS&OPapproachand isproviding competitiveadvantage to todays

supplychainleaders.

In itsmostbasic incarnation,aneffectiveS&OPprocessseeks toappropriatelymatchsupply

anddemand. ThebasicS&OPprocessdoesnotalwaysresultinthedesiredlevelofefficiencyor

competitiveness. Commonly,theconstraintliesinatoonarrowprocessscope. Forexample,in

0 DKK

2,000,000 DKK

4,000,000 DKK

6,000,000 DKK

8,000,000 DKK

10,000,000 DKK

12,000,000 DKK

14,000,000 DKK

2008

.01

2008

.03

2008

.05

2008

.07

2008

.09

2008

.11

2008

.13

2008

.15

2008

.17

2008

.19

2008

.21

2008

.23

2008

.25

2008

.27

2008

.29

2008

.31

2008

.33

2008

.35

2008

.37

2008

.39

2008

.41

2008

.43

2008

.45

OH - Group 1 - Current OH - Group 2 - Smartops

Pre-PilotGroup 1 > Group 2 by 3.7%

Latest six weeksGroup 1 > Group 2 by 24.4%

Long global supply cha ins require som e time

before on-hand inventory is impacted

= SmartOps target upload

Source: Danfosspresentation at SAP Sapphire EMEA, May 2010

InventoryL

evel


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an organization driven by large retail promotions, it would be shortsighted to leave the

Marketing team out of the discussion. Regularly, this issuemanifests itself inmismanaged

inventorylevels,particularlywhentheplanningdiscussionislimitedtoManufacturingandSales

andwherenoKPIs exist forworking capital. Withoutdirect Finance intervention, theeasy

answerbecomesmoreinventory!andaCFOsworstnightmareiscreated.

Toaddress

these

shortfalls,

abroader

process

has

emerged,

expanding

the

periodic

review

process to include awider crosssection of key decision makers and tackling the inventory

challengeheadonbyspecificallycallingoutinventorypolicyasakeyprocessdeliverable. For

thisreasonthisprocesshasbeennamedSIOP,orSales,InventoryandOperationsPlanning. In

contrast to the older S&OP approach, satisfied with a simple balance between supply and

demand,theSIOPapproachseekstodeliverarobustmodelfornearterm,profitablebusiness

planning.

Figure#10:S&OPvs.SIOP

S&OP SIOP

Key Objective Reconcile Supply & DemandDeliver a structural model for planning abusiness to meet corporate goals

Functions Involved

Manufacturing Supply Chain Logistics

Manufacturing Supply Chain Logistics Sales Marketing Finance

Sample DecisionsHow much of Product A should bemanufactured this month?

If there is a capacity shortfall on Product A,is it more economical to run overtime, pre-build inventory, or cancel plannedpromotions?

ThehighlevelworkflowassociatedwithSIOPuses inventoryto focuskeydecisionmakerson

thebroaderbusinessobjectives. ThestepsinvolvedinanSIOPprocessexpandthediscussion

toensurethatacomprehensivebusinessperspectiveisdeveloped. WhileSIOPusesthebroad

inventory dynamic to expand the discussion, SIOP is about more than just making simple

inventorydecisions. LetsconsideranorganizationwhereanSIOPmindsetandworkflowmay

generatebetterresults. Consideramanufacturerfacedwithacapacityshortfallcreatedbya

retailer promotion projected to blow away expectations. A traditional planning process

mightconcludethatexpensiveexpeditingisthepreferredcourseofaction,ensuringthatsupply

is able to support anticipated demand. However, the broader SIOP process may identify

alternatives

that

drive

superior

business

returns.

The

organization

may

opt

to

accept

a

capacity

shortfallifthiswouldenablehighermarketplacepricing,oritmayadjusttheRetaileventitself

to rebalance demand. With a strong, continuous focus on inventory policy, it is also

conceivablethatanSIOPprocessmayidentifythepotentialchallengeinsufficienttimetoallow

foraninventoryprebuild.


13/15


Figure#11:GenericSIOPWorkflow

MakingS&OPorSIOPWorkWhile theSIOPprocess representsaclearadvanceoverearlierapproaches, it still requiresa

supportiveenvironment inordertofunctioneffectively. Specifically,anSIOPprocessrequires

three key catalysts for maximum effectiveness: an accommodating organization, effective

supportsystems,

and

sufficient

data.

Fortunately,

these

are

no

different

from

what

is

required

forabasicS&OPprocessandarewellwithinthereachofmostorganizations. Informationand

technology,inparticular,aremoreavailablethaneverbefore.

Of initialconcerntomostcompanies isorganizationalstructure. Frequentlytheremaybeno

clearinventoryownership,makingitdifficulttoidentifytherightS&OPorSIOPteamcapable

of making rapid, efficient decisions. Rather than attempt to list all possible organizational

challenges,letusconsideranidealorganizationalstructurecapableofefficientlysupportingthe

S&OPorSIOPprocess. Severalkeytraitsareevident:

1. Globaldecisionmakingcapabilityacrossgeographies,divisionsandfunctions

2. Clearinventory

ownership

3. KPIsthatincludecostmetrics(includingcostofcapital)

4. ResponsibilityrollupthatallowsforfullP&Ldecisionmaking

The second catalyst, support systems, is required to deliver relevant data to key decision

makers. S&OPandSIOPbothrequiresupporting infrastructuretomanagesupply&demand.

On thesupplyside,Operationsmustbeabletoadjustproduction levelsandpredictcapacity

shortfallsmayoccur. Fordemand,theremustberigortomanagingfuturedemand,whether

this takes the formofa simple sales forecastor a comprehensive globalAdvancedPlanning

System (APS) solution. When it comes to inventory, an effective SIOPprocess needs to be

capable

of

generating

and

managing

an

effective,

efficient

inventory

policy.

The

core

functionalityprovidedbythissupportsystemisknownasEnterpriseInventoryOptimization.

Similartosupportsystemsdedicatedtodemandplanningandcapacitymanagement,inventory

optimizationsolutionsalsoseektofindanappropriatebalancebetweenbusinessrequirements

and constraints. Thedistinctionbetween these three systems ismerely the setofbusiness

objectivesandconstraintsunderconsideration. Attemptingtomanageanyofthesevariables

withouttheappropriatesupportsystemshouldbearedflagtoanySupplyChainexecutive.

PortfolioReview

NewProductIntro

Endof

Life

Pricing

MTO/MTS

Insource/Outsource

DemandReview

Unconstraineddemand

planActiveconsensusmaking

Agreeonnumber

Revenuereviewwithdemandplancomparison

SupplyReview

624monthsofdemand

planNodetailedscheduling

Capacity,requiredinventoryandsuppliercapability

Createsupplyplans

Reconciliation

Bringallfunctionsback

togetherLedbyFinance

TotalPlan

Allfunctionalleadsparticipate

ExecutiveSummary

BriefPlanpresentation

andapproval


14/15


Figure#12:SIOPSupportSystemsDEMAND INVENTORY SUPPLY CAPACITY

Business Objective Manage OrdersDeliver Customer

ServiceProduct Sourcing Create Inventory

Sample Constraint s Inventory Levels Cost of Inventory Network Design Production Capacity

Supporting Systems Demand PlanningEnterprise Inventory

OptimizationAdvanced Planning

SystemsProduction Planning &Discrete Scheduling

Thefinalcatalyst,data,canbebrokendownintoahierarchyofneedsasshownbelow. These

relationships illustrate the difference between critical, core planning data and helpful (but

supplementary) performance data. Given the state ofmodern enterprise applications, any

organizationrunninganERPsystemshouldnotviewdataasabarriertomovingforwardwitha

S&OPorSIOPprocess. Bothcoreplanningdataandkeysupplychainrelationshipsarerequired

aspartofthebasicfunctioningofanyERPsystem. Thinkofitthisway: Ifanorganizationdoes

notunderstand

its

own

cost

structure,

there

are

bigger

problems

to

be

addressed.

Figure#13:HierarchyofS&OP/SIOPDataNeeds

ConclusionThe lesson? Enterprise Inventory Optimization (EIO) is foundational to any S&OP or SIOP

process. Without the capability to plan inventory for real world enterprise supply chain

complexitiesanduncertainties,acompanywilloverbufferitsinventoryandstruggletodeliver

the required customer service. To deliver a trulyworldclass S&OP or SIOP processwhich

deliverssustainablecompetitiveadvantage,companiesrequirethecapabilitiesofEIO.

SupplierPerformance

ProductionAdheranceFine

PerformanceDetail

Leadtimes

BillsofMaterial

KeySupplyChainRelationships

Costs

FutureForecastCorePlanningData


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AboutSmartOpsSmartOps, themarket leader inenterpriseclass supply chainoptimization solutions,enables

companies tomanage theuncertaintyof complex,multistage supply chains toachieve rapid

returnoninvestmentandlongterm,sustainablevalue.

Foundedin

2000

and

headquartered

in

Pittsburgh,

Pennsylvania,

United

States,

SmartOps

createdthemarketforEnterpriseInventoryOptimization(EIO)software. DeployingSmartOps

solutions has dramatically improved supply chain performance at Fortune 1000 and Global

2000companies indiscretemanufacturing,consumerpackagedgoods,chemicals,technology,

lifesciences,anddistribution/retail industries. Typicalvalueachieved isa2030%sustainable

reductionininventorywithinthefirstyear,alongwithimprovedcustomerserviceandreduced

supplychaincost.

SmartOpsmission is tobe thede factostandard forglobal inventoryplanning,optimization,

and governance. SmartOps accomplishes this by providing dynamic key operating targets

acrosstheenterprise,resulting inasustainableandsubstantialreduction (20%+)ofthemore

than$1

trillion

of

inventory

that

exists

in

supply

chains

today,

while

improving

customer

service

andresponsiveness.

InMay,2009,SmartOpsandSAPAGannouncedareselleragreement,throughwhichSAPwill

resell the SmartOpsEnterprise InventoryOptimization solution. SmartOpsEIO is theofficial

SAPsolutionextension for inventorymanagement. ThisagreementprovidesSAPcustomers

withthevalueofSAPjointdevelopment,delivery,andsupportforSmartOpsEIO.

SampleSmartOpsEIOCustomers:

AcklandsGraingerInc.,BayerMaterialScience,CardinalHealth,Caterpillar,Celestica,TheClorox

Company,

ConAgra

Foods,

CSL

Behring,

Danfoss,

Dawn

Foods,

Diageo,

The

DOW

Chemical

Company,DuPont,EastmanChemicalCompany,EsteeLauder,GlaxoSmithKline,Hewlett

Packard,HoneywellInternationalInc.,JabilCircuitInc.,JohnDeere,Johnson&Johnson,Kellogg

Company,KohlerCo.,LexmarkInternational,McCainFoods,MerckandCo.,Molex

Incorporated,Monsanto,Nalco,PPGIndustries,PolarisIndustries,ResearchinMotion,Shaws

Supermarkets,SyscoCorporation,Whirpool,Swagelok,SunChemical,Unilever,Wyeth,and

more.

SmartOpsCorporationwww.smartops.com1251WaterfrontPlace

Suite301

Pittsburgh,PA15222

UnitedStates

ContactInformation+1.412.231.0115

Documents

[SCM] Missing_in_Traditional_SOP_Processes[1].pdf