SCMI White Paper-SOP-0415_FINAL

April, 2015

From S&OP To True Business Integration

From the SCMI 2015 Spring Symposium Addressing:

Achieving Real-World Supply Chain Solutions to Achieve Breakthrough Improvements

Mark A. Moon, Ph.DAssociate Professor of Marketing and Department HeadDepartment of Marketing and Supply Chain Management

University of Tennessee

Dave MinerDirector, Global Supply Chain Practice

Gold Coast Global Consulting, LLC

SCMI White Paper #W1501

University of San Diego Supply Chain Management Institute www.sandiego.edu/business/centers/supply_chain_management

True Business Integration, or what I like to call Demand and Supply Integration, lies at the nexus of the three drivers of integration within any business; the Business Processes, the Organizational Structure, and the Company Culture.

Introduction:S&OP, as it’s currently executed in many companies, often fails to deliver true business

integration. Integration can be thought of as two or more entities (e.g., Sales & Operations)

behaving as if they were a single entity, in pursuit of a common set of goals. The levers of

integration are processes, organizational structure, and culture. S&OP failure is most commonly

a failure not of processes, but rather of organizational structure and culture. A business

integration audit can be a useful tool for identifying gaps between current state and best

practice. Both top-down and bottom-up change must occur to transform a culture into one that


2

promotes business integration. When these changes take hold and the true business integration

occurs, it can increase a company’s shareholder value by over 15% (Moon, 2015).

What’s wrong with S&OP?Today’s business environment is challenging and complex. “Globalization and the embrace of

outsourced manufacturing and distribution have increased complexity, leading to information

fragmentation and overload. Customer demand is volatile; product life cycles have become

shorter and product variation has created mind-numbing supply conditionality, making

forecasting and planning more an art than a science. Sales and operations must find a way to

plan for demand they can’t predict with supply they don’t control.” (E2Open, 2014)

Figure 1: The Universal Problem: Time, Distance and Complexity (E2Open, 2014)

In theory, S&OP is great, but in execution it often fails due to number of factors. Companies are

often too tactical in their approach using limited horizons of 1-2 quarters. S&OP can also

devolve into a relatively useless and time intensive reporting exercise; a series of meetings

reporting on last months results, rather than making decisions about how to balance demand

with supply in ways that best achieve organizational goals. Also, S&OP is often too Supply

Chain driven, perceived as only a way to run the Supply Chain instead of how to run the

business. This Supply Chain focus tends to result in limited engagement from Sales and

Marketing (some companies refer to it as “&OP”). Further, it may curb engagement of Senior

Executives – the required champions of change.


3

So, does S&OP lead to true business integration? Wait a second, what do we mean by

“integration”?

What is Integration?There are a few terms that get tossed around with regards to integration: Coordination,

Collaboration, and Integration. Let’s take a closer look at the definitions to ensure we have a

distinct understanding of exactly what integration is.

Coordination = “to cause (two or more things) to be the same or to go together well;

to cause (two or more things) to not conflict with or contradict each other.”

Is that adequate? That two or more entities not conflict with one another? No.

Collaboration = “to work jointly with others or together especially in an intellectual

endeavor.”

That sounds too discrete – “to collaborate on a project”.

Integration = “to combine (two or more things) to form or create something; to make

(something) a part of another larger thing; to make (a person or group) part of a larger

group or organization.”

So then Business Integration occurs when people in multiple entities (Sales, Marketing, Supply

Chain, Finance, etc.) behave in ways that promote the achievement of some set of common

goals.

Business Integration


4

Figure 2: Business IntegrationIn particular, this is what S&OP (or what I like to call

Demand/Supply Integration) is all about:

Figure 3: Demand and Supply Integration

There are three drivers of Business Integration:

Processes Organizational Structure Culture

Processes are formal, disciplined mechanisms that bring together relevant pieces of

information, from different points of view, delivered by different people, in a regularly scheduled

forum, to help the organization make decisions that will help it achieve its goals.

Figure 4: Demand Planning Process FlowUniversity of San Diego Supply Chain Management Institute

www.sandiego.edu/business/centers/supply_chain_management5

By Organizational Structure, I mean reporting relationships – to whom does Demand Planning

Report? Does S&OP “live” in Supply Chain, Sales, or Finance? Companies often try to promote

integration through matrix organization structures, or “dotted line” reporting relationships. Matrix

structures can be confusing, “I have 8 bosses, Bob. Pardon me? 8 bosses. Eight? Eight, Bob!

That means when I screw something up, I have to hear 8 different people tell me about it.”

(Judge, 1999) And dotted line reporting is typically ineffective due to lack of leverage and/or a

weak incentive structure.

Much has been written about Culture; it’s clearly a complicated animal. Webster defines it as “a

way of thinking, behaving, or working that exists in a place or organization (such as business).”

Cultures that tend to inhibit integration are those where trust is absent, for example:

“I don’t believe any of the forecasts coming out of sales; they’re way too optimistic.”

“All the supply chain people care about is minimizing inventory. They don’t care about

serving our customers.”

“Finance is living in dream-land. We’ll never make that AOP number.”

Sometimes we have to remind ourselves to ask, “Whose name is on the front of the jersey?”.

Here are some examples of how Processes and Organizational Structures, related to Business

Integration Planning, vary across regions globally:

Figure 5: Worldwide Process Capabilities Comparison (Aberdeen Group, 2013)


6

Figure 5: Worldwide Measurement and Organizational Comparison (Aberdeen Group, 2013)

What is a Company to Do?In order to gauge whether your S&OP (SIOP, IBP, DSI, etc.) Program is living up to its promise,

it’s critical to evaluate all three elements of integration: Process, Organizational Structure, and

Culture. And, though many maturity models exist, they tend to focus only on Processes while

overlook the importance of assessing Organizational Structure and Culture. “The IBP/S&OP

process has evolved over the last 30 years from an industry best practice to an industry

standard practice. The process has evolved from what was once known as production planning

to a company-wide management process.” (Oliver Wight, 2011)

I have developed a Business Integration Audit, similar to the Demand Forecasting Audit

developed by Mentzer and Moon, to document the current status of a firm’s integration

environment, the “as-is state” AND develop a roadmap for moving the firm from its current state

to a more integrative environment. The approach covers all three elements of integration:

Processes, Organizational Structure, and Culture and maps each dimension to one of four

stages in a maturity continuum going from Stage 1 (worst in class) to Stage 4 (best practice).

Company leaders must ask themselves as they go through the audit, “Are we quite mature in

some areas but less mature in others?” and “What are the barriers that exist that may prevent

us from moving from lower to higher stages of sophistication and maturity?


7

With a tip of the hat to Oliver Wight, this is an overview of the “super-process” that is often called

S&OP, SIOP, IBP, or DSI:

A Continuous Cycle of Events:

Figure 6: Integrative Process: Continuous Cycle of Events

“Unifying Sales, Marketing, and Finance – much less the people actually producing a company’s

products – has been no small challenge for many organizations, and offers one reason why

enterprises are unable to progress beyond middling levels of process maturity.” (E2Open, 2013)

The benefits to this approach is that it examines business integration in a holistic way,

expanding the conversation beyond process conformance, and examining the underlying

barriers to true integration by focusing on Organizational Structure and most importantly Culture.

And it provides a roadmap for change – the final report serves as a “blueprint” that identifies

priorities and articulates specific corrective actions. Here are some examples of my Maturity


8

Model:

Figure 7: Business Integration Audit: Comprehensive Integrative Maturity Model

“Many larger companies benefit from Integrated Business Planning (Advanced S&OP) because

it replaces an often time-consuming, flawed, annual business planning process. Since the

planning horizon of Integrated Business Planning is 24+ months, the following fiscal year is

already planned multiple times prior to committing to a financial plan. In essence, a flexible

budget process replaces the annual budgeting process.” (Oliver Wight, 2011)

Once the situation is documented, what tools do leaders have to effect change?

Top Down Change: All C-level Executives (CEO, CFO, Chief Demand Officer, etc.)

MUST become zealots – the champions of change! They must tell themselves and

their employees, “This is how we will run our business.” That senior executive should


9

NOT be the Chief Supply Officer – it should be the Chief Demand Officer (i.e. Sales or

Marketing). The best predictor of failure is lack of engagement from the demand side

of the business.

Bottom Up Change: Leaders MUST examine the measurement and reward

structure. People behave as they are incented to behave with little deviation. They

should ask, “Does our reward structure encourage non-integrative behaviors?” Finally,

there is education and training. Leaders must ask, “Does everyone participating in the

integrative processes understand their importance?” (That’s Education), and, “Does

everyone understand their role and how their behaviors are the key to success when

integration occurs?” (That’s Training)

Value Proposition: “The leader of one of the world’s largest logistic organizations has stated, “We are doing a great

job with our IBP implementation, but we haven’t accomplished anything until we can ‘show the

money’.” Improvements to top-line and bottom line results should be the expected outcome of

your S&OP/IBP process.” (Oliver Wight, 2010)

Typical results of implementing and maintaining a strong Demand & Supply Integration Program

include increased Profits through increased Revenues and lower Costs AND a reduction in

Capital Invested through improvements in Inventory Investment resulting in a significant

increase in Shareholder Value.

Figure 8: Impact of DSI improvement on Shareholder Value (an actual example)


10

“According to surveys, more than 50 percent of companies that implement S&OP/IBP indicate

that a key benefit is increased Sales Revenue.”

Figure 9: Percent of Companies Surveyed Reporting Improvements (Oliver Wight, 2010)

Summary: S&OP, as it’s currently executed in many companies, often fails to deliver true business

integration. Integration can be thought of as two or more entities behaving as if they were a

single entity, in pursuit of a common set of goals. The levers of integration are processes, organizational structure, and culture. S&OP failure is most commonly a failure not of processes, but rather of

organizational structure, and culture. A business integration audit can be a useful tool for identifying gaps between current

state and best practice. Both top-down and bottom-up change must occur to transform a culture into one that

promotes business integration.


11

Documents

SCMI White Paper-SOP-0415_FINAL