The Secrets to S&OP Success [Page 2]
-- Supply Chain Management Review, 4/1/2006
Page 2 of 4 -- The benchmark study also revealed that leading S&OP practices are evolving away from merely balancing supply and demand. They now involve a more powerful and holistic process that allows companies to improve revenues, reduce inventory, increase profits, create a more dynamic product portfolio, and maintain longer-term customers. The study results also demonstrated that as S&OP strategies have evolved, the market drivers have changed.
This article details the results of the study and highlights the best practices being used by leading companies to meet customer demand while maximizing financial gain and synchronizing all operational plans. This article will also help readers determine if they need to update their current S&OP and rethink outdated processes.
Current Realities in Today’s Market
In the past few years, we’ve seen a sharp increase in the number of trends that are putting growing pressure on traditional S&OP practices. For example, brand loyalty has been declining, demand for customized and configured solutions has increased, and market uncertainty and global competition has eroded margins. Acquisitions, joint ventures, and outsourcing are changing organizational structures and are requiring rapid changes in plan objectives and targets. Companies are forced to concentrate efforts and resources on the best products, customers, markets, and channels while being constantly on guard in this unpredictable environment.
Companies have also come to realize that the risks and costs associated with poor decision making have increased—particularly in the area of aligning supply and demand and linking that to profitability. When companies target the wrong customers, products and services, or channels and geographies, they court disaster! Today’s market is less forgiving and much riskier. Excess inventory is frequently discounted. Unsatisfied customer demand now runs the real risk of lost sales and revenue.
Further, current market dynamics have rendered traditional S&OP processes and technologies obsolete. In the past, S&OP was characterized by demand-supply balancing in aggregate units such as tons, cases, cubic feet, and so forth. A key difference for today and for the future is that S&OP is no longer just about balancing supply and demand. It is about searching for and executing the most profitable strategy out of many possible scenarios. It is about relying on and enhancing those critical factors that give the business a sustainable competitive advantage.
Beyond the need for analyzing scenarios is the need to respond in real time. In the past, companies were faced with a big dilemma: Daily events, such as better-than-expected success with a big promotion, required a quick response, but the current planning-cycle capabilities were not up to the challenge. Planners could not replan quickly enough and in a consistent, measurable way to take advantage of opportunities as they arose. This failure has led senior management and staff to lack confidence in their companies’ current S&OP “balancing act.”
This is important because executive sponsorship is one of the necessary conditions to S&OP success. Lack of executive-level influence hinders a company’s ability to improve its planning capabilities. This is because, in real time, urgent priorities arise. When management lacks confidence in the S&OP process, reaction and expediting become the norm.
Other internal difficulties that present obstacles to the implementation of better S&OP programs and methods include budget constraints and the lack of credible benchmarks.
Key S&OP Business Findings
The results of the Aberdeen research demonstrate that improving S&OP practices drives gains in key performance areas across the value chain—in sales and marketing, distribution, manufacturing, and procurement. There is an explicit and clear relationship between the quality of an S&OP program and actual business performance (Exhibit 2). Enterprises that leverage S&OP best practices significantly outperform companies that are S&OP laggards. These findings hold true across companies of all sizes and industries.
Most enterprises today have at least some S&OP process in place to align demand and supply. However, there is a growing gap in performance between those that are focusing on a holistic S&OP strategy and those that operate S&OP tactically. Tactical S&OP, for instance, merely brings all stakeholders together once per month to agree on how the business plan will be implemented by operations. Holistic S&OP, on the other hand, introduces tools such as scenario-based modeling into the process so that rapid assessment of daily opportunities can be made. Holistic S&OP means the company’s local decisions can be measured against the success of business-unit and corporate goals.
S&OP can benefit all companies regardless of their size or S&OP maturity. For companies at all stages, S&OP programs have generated significant positive improvements in complete order fill rate, gross margins, and customer retention, as shown in Exhibit 3. The analysis further indicates that S&OP programs have a critical impact on profitability, help reduce inventory, and are crucial to enabling an effective and diversified product portfolio.
An effective S&OP program can substantially improve a company’s ability to plan and take orders for customized products and services—at the same time allowing the organization to focus on the most profitable and strategic customers and products.
The Effect of Globalization
One trend having a profound impact on the development of more advanced S&OP practices is globalization. In the 1980s through the ‘90s, much attention was given to the Japanese supply chain success stories. At that time, many of these companies maintained a local supplier base, which led to short lead times and enhanced flexibility to demand changes. Even some U.S. companies, such as Dell, became famous for their demand-driven supply chains where suppliers were local, often just across the street.
With the advent of global supply chains—where links of the chain are moved to where capital is best deployed and resources are best found—the situation has changed dramatically. Now, even the Japanese and Korean companies are engaged in offshoring.
The globalization of the supply chain brings rewards but also new challenges and risks. In turn, it further shapes the need for and approach to sales and operations planning. Some of the challenges of globalization that can affect S&OP include:
- Longer supply chain lead times.
- Increased reliance on security and risk management programs.
- Less control over data quality.
The extended supply chain means that in many cases logistics lead times are longer than production lead times. In the past, the focus of S&OP might have been on in-house or localized production capabilities and capacities. More and more, however, the focus has begun shifting to the capabilities and capacities of distant logistics and supply chain partners.
Increasingly, strategic planning depends on outsourced and third-party providers. As a result, management begins to see their influence decrease, which introduces a heightened need for risk management, scenario modeling, and execution strategies. All of these factors enable companies to cope with an environment of increased variance not only in demand forecasting but also in capability management.
As lead times become longer and more global partners must be considered in the S&OP process, the quality and predictability of data is also at risk. Therefore, the S&OP process must be flexible, focusing improvement efforts on gathering critical constraint information rather than detailed data from every node in the supply chain. As a result, the demand management component of S&OP shifts away from “one-number” forecasts for each and every SKU. Instead it focuses more on analysis of pessimistic and optimistic scenarios, with the executive team giving guidance on what products to push.
Continued...
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