Competitive Advantage – S&OP Whitepaper
By Shanaka Jayasinghe & Carter McNabb | GRA Supply Chain
General Electric’s well-known boss Jack Welch once famously said that “engineers who can’t add, operators who can’t run their equipment, and accountants who can’t foot numbers become supply and purchasing professionals.” 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 supply chain strategy and consequently many companies underinvest in supply and purchasing team capability. The fall out of this is poor decision quality and lagging demand responsiveness – impacting service levels, cash flow, the innovation cycle and profitability.
Today, in the internet era, quality decision making and responsiveness are more critical than ever. Trends such as globalisation, product proliferation and channel diversification mean that managing the supply chain is no longer a back office responsibility. In fact, board executives are identifying it as a key pillar in delivering a sustainable competitive advantage.
Supply chain decisions reverberate across the entire business and the outcomes have immediate and direct influence on service levels, cash flow and profitability. Leading organisations recognise this and are better integrating 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 cases reinvigorating to execute this. S&OP, through enhancing responsiveness as well as forward visibility is able to 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 an organisational level, S&OP aligns this ‘planning capability’ with the business and supply chain strategy. And at a functional level, S&OP leverages the ‘organisational structure’ encouraging team members to collaborate and 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 large organisations are unable to effectively leverage its benefits – primarily due to poor execution of S&OP meetings and sub-standard planning practices.
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 would do it. Anybody could have done it, but Nobody did it. Somebody got angry about that, because it was Everybody’s job. Everybody knew Anybody could do it but Nobody thought that Nobody would do it. It ended up that Everybody blamed 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 the organisation you lead – consider the goals & incentives amongst the various functions. Effective S&OP cultivates accountability, promotes knowledge sharing and provides scope for the understanding of the high level implications of functional decision-making.
As it is often the nature of functional groups (Sales, Finance, Marketing, Operations and Supply Chain) to focus solely on their respective areas; S&OP is designed to provide each of these groups with broader perspective for decision-making on an ongoing basis. In its most basic form, S&OP dictates how the various functions in an organisation work together through structured and regular meetings. More sophisticated S&OP processes instil a culture 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 Organisational Structure are two vital foundations for effective S&OP.
The Big Picture
Business Strategy is the gravity for effective S&OP. The functional groups and team members of an organisation should know the Business Strategy and how this aligns with the value driver of the business, that is, the Customer Value Proposition. Often, a sign of a successful organisation is every meeting, decision and action stems from Business Strategy and Customer Value Proposition.
In addition to this, every executive and supply chain professional should know the Supply Chain Strategy and how this aligns to the Business Strategy. This cultivates accountability in the supply chain and as such, increases its durability and focus toward key business objectives.
The above strategies shape an organisations structure. That is, the reporting hierarchy, policy, incentives & KPI’s of an 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 order to generate real value from S&OP, the focus initially should be in this space. Lay the foundations and then look to leverage the benefit. The following pages detail these foundations, organisational structure and planning capability.
Executive Engagement, Policy and KPI’s
From an organisational structure perspective, a difficulty in many S&OP implementations is the lack of executive engagement and ownership. Without this engagement, the process does not have a crucial link back to the architects of the business strategy. The most effective meetings prompt actionable decisions. Keeping this in mind, 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 are there to hold each functional team accountable. Executives must ensure that the plan derived from the S&OP process is driving the business towards its strategic goals.
Policy, in a best-in-class environment, covers the whole scope of the integrated planning process – from procurement through planning and manufacturing to execution and customer order fulfilment. Policies provide a framework to manage trade-offs and decisions that drive optimal outcomes based on your organisation’s supply chain strategy.
This provides clarity and enables team-members to focus on value-adding activities, rather than having to individually navigate confusing circumstances. For example, is your strategy to be a low-cost provider or a customer-service focused supplier? Is this cascaded to and understood by your customer service staff when they are dealing with a customer order requires expediting? How do they go about making this call? Staff should not be going through the decision-making process every time such a circumstance arises, not only because of varied outcomes possible, but also because it wastes time. Drive consistency and efficiency by communicating organisational principles in your policies.
In addition to executive engagement and Policy, Key Performance Indicators (KPIs) are a primary input into each S&OP meeting. Utilised effectively, they monitor the health of different business processes and provide measures of 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 functional isolation. For example, Operations may have a KPI related to plant efficiency. However, if this is not reported together with a measure of inventory turns or cash-to-cash cycle, excellent plant efficiency as measured by that single KPI may disguise a resultant increase in inventory costs.
To execute on business strategy and strong organisational structure, ‘planning capability’ must exist. This is critical for competitiveness in any industry. Get this right and you have paved a solid foundation for sustainable, profitable growth. Planning capability in the form of people, process, systems and data underpins the S&OP framework. If the S&OP framework is to effectively provide a culture of accountability and collaboration, the capability must first exist to 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 identify areas 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 planning operations of the business, when we overlay Business Strategy and Organisational Structure, we arrive at the Planning Foundation. This is where we begin to optimise trade-offs in decision-making.
- Base Forecast – Approved Demand Plan – Promotions – New Items – Item Phase outs
- Management parameters developed and utilised
- Replenishment methodology – DRP – MPS – Capacity Planning – Production Planning
Planning Capability Maturity
The diagnostic table below is designed to assist in identifying the current maturity of your organisation’s Planning Capability and S&OP framework. It highlights how sustainable and effective S&OP requires a long-term view. The expectations of S&OP should reflect continuous improvement, not instant results. A culture of accountability, forward thinking and collaboration are outcomes of mature S&OP process, such as Adaptive S&OP (stage 4).
The 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 visibility of 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’s innovation 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, to produce an unconstrained picture of aggregate demand, comparing this to the sales budget. Action is agreed to ensure the sales budget is met.
The unconstrained demand plan is then an input into the Supply meeting, where it is tested against capacity and other resource constraints. Any resultant trade-offs are identified, and those that cannot be resolved by the team are elevated to the Integrated Reconciliation meeting.
The Integrated Reconciliation meeting takes the elevated trade-off decisions from the previous meetings and makes a call on what action to take. Executive S&OP takes the integrated plan and ensures it delivers on financial outcomes 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&OP is a robust sales and operations plan, built up through collaboration between the functions, driving strategic and operational alignment and coordinated action.
Strategic and operational alignment cannot be delivered by focusing on the above S&OP framework alone. The framework needs to be constructed upon the foundations described formerly in this paper – organisational structure and planning capability. S&OP should be viewed as a vehicle enabling an organisation to leverage such foundations to transform a good organisation that gets the basics right, into a leading organisation in terms of innovation, service levels, cash-flow and sustainable profitability.
This case-study highlights that successful S&OP requires solid foundations in planning capability & organisational structure, dedication & consistency and a continuous improvement culture. It also emphasises that S&OP is a long-term, strategic investment for sustainable competitiveness.
The Situation: A primary mobile and data-service provider is challenged with balancing supply and demand due to 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 structure seems to be relatively in shape; however, unfortunately the company’s current planning capability is sub-par and causing service-levels to drop due to poor planning execution. There is limited product availability which is translating to the company losing sales and customers to competitors. Consequently quality, the brand and profits are struggling due 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 effectively to ensure product availability and minimise excess inventory.
The Action: The Company implements S&OP across the organisation and in the process focuses on getting the basics right in planning capability – people, process, systems & data. A monthly S&OP meeting is conducted to review 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, and highlight areas requiring attention such as the current product portfolio. The key stakeholders also take the time to review the current capabilities of people, process, systems & data. Realising that the existing planning system is ineffective, management invest in a specialised demand planning software.
Utilising this new software, the mobile and data-service provider creates an unconstrained demand plan for review in 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 sales forecast. The Finance team similarly appreciate the benefits of the software as they now have greater product cost visibility 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 constrained plan which acknowledges production and labour constraints, supplier shortages and other cost factors. Utilising the 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, both internal 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 supply base.
As the supply chain plan is established during the S&OP process, the sales and marketing functional groups commit to 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.
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 improved from a low 64% to 80-88% and service levels increase from 91.5% to 98%. The improvements find their way onto the Financial Statements in the form of inventory related working capital and revenue. Profits increase significantly, as does the Shareholder value of the organisation.
Business Value of S&OP
Industry Benchmarks highlight a strong correlation between those who have an effective S&OP process and those who experience business success.
The table below details the benefits experienced by industry leaders in planning capability and organisational structure in reference to key metrics from service levels to inventory turns. On top of this, those with S&OP tend to experience amplified improvements – leveraging the benefit of planning capability and organisation structure.
The graphics below describes the opportunity available to business in reference to profit, forecast accuracy, service level and cash flow.
Competitive Advantage in testing times
“Engineers who can’t add, operators who can’t run their equipment, and accountants who can’t foot numbers 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 organisations sustainable 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 compensation package of approximately $378 million. This admittedly is extraordinary recognition that the supply chain is no longer a back office responsibility. However, perceptions of the supply chain and its role in delivering on business strategy 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 adapt and remain profitable. The lingering downturn in global growth is making it more imperative that businesses “get it 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 the end of 2011. The aftermath was a decline in its cash position of $1.1bn and a stock price slump of almost 40% in 2 months. The result was a harsh lesson in the need for integration across business strategy, new product introduction and operations.
Additionally, there is general acknowledgment among business leaders of the increasingly complex demands of a more-informed, more-demanding consumer. Your customer wants more product variety, expects that product sooner, 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.
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 organisations can be successful, but chance will favour the connected organisation.
The list below is useful to identify whether the S&OP framework is able to assist your organisation.
S&OP Requirement Symptoms
- Lost sales due to an inability to respond to changing requirements and specification
- Promotions leading to stock-outs
- Tension between functional groups (finance, marketing, supply, etc.) due to lack of communication/understanding
- Inability to maximise market share or profit from new product introductions
- Excess, ageing or deteriorating inventory not being cleared profitably
- Unreliable delivery performance, inability to provide reliable delivery dates and carrying excess inventory
- Mismatch of supply & demand, resulting in an excess inventory, no/low margin unplanned price reductions or stock-outs
- Lack of sustained focus on the most profitable customers, products, channels and supply sourcing
- Inability to effectively manage de-ranged products
- Strategy is short-term rather than long term, cannot effectively plan 6-12 months from today
- Failure to quickly identify and leverage market opportunities, or mitigate headwinds
- Production constraints causing additional costs (overtime, extra raw materials, etc.) to meet demand