The Secrets to S&OP Success [Page 3]

-- Supply Chain Management Review, 4/1/2006

Page 3 of 4 -- Best Candidates for S&OP
Companies that are prime candidates for a significant S&OP upgrade will share similar characteristics and face many of the same challenges. For example, one of the strongest indicators that your S&OP is outdated is failure to achieve key business metrics for targeted markets, channels, or product families. Also, if your organization lacks the agility to respond to new business opportunities or threats in real time (between planning cycles), you need to rethink your S&OP.

In general, the following are some early warning signs of an ineffective S&OP process that is in need of major change, replacement, or technology support. If you are trending negative on three or more of these for one or two periods, you should consider taking major action soon.

• Forecasts are missed for some critical product families.
• Earnings projections are missed.
• Inventories are increasing.
• Backlogs are increasing.
• Expedite charges are increasing.
• Agreed-upon alignment of supply and demand is not being sustained across the entire organization.
• Inventories are not aligned with planned deployments.
• The planning process takes too long.

Another sign that you are in need of S&OP emergency care: Operational plans are not tied to business plans. Many companies can say they have alignment only once per month, or worse. This is unacceptable and is definitely not best practice.

Implementing a Successful S&OP Strategy
The more successful enterprises focus their S&OP on profitability and continuous improvement. Their S&OP initiatives empower decision making at all levels and are supported closely by an integrated business information architecture. A successful sales and operations planning program will include the following five components: people, process, technology, strategy, and performance.

1. People
First and foremost, it is essential to obtain executive-level sponsorship. S&OP strategies fail without top-down support for the plan. Next, it’s important to create cross-functional teams that consist of sales, operations, finance, product development, and R&D. This step will eliminate the organizational silos and promote shared communication and collaboration across the enterprise. You’ll also gain better visibility into the pain points and success factors within every department.

Some additional S&OP conditions that will affect the people in the organization include:

• Only operational metrics approved by the S&OP team should be used, and all parties must be trained on the actions to take as business intelligence is delivered
• Management must establish guidelines for real-time response; for instance, what types of business events will trigger what possible response scenarios?
• All departments and business units must follow the formal S&OP system.

Finally, don’t forget to collaborate with your business network. It’s critical that the S&OP process leverage the capabilities and influence of customers and suppliers to expand the scope of potential improvements. This is particularly important when a company needs to exert its influence several “links” deep in their supply chain.

2. Process
Effective S&OP involves more than just holding formal monthly and quarterly meetings—although those meetings are extremely important. It is also about having real-time supply and demand visibility and making sure that business intelligence is continuously monitored at a strategic level, made relevant at the operational/actionable levels, and kept in alignment with the business goals. Take, for example, a new product introduction that is driving loads to exceed capacity for a critical, constrained resource, such as a plant or key raw material. Based on that information, the company must put into effect preplanned actions to cut back on other production (and possibly other sales) to optimize net profits and product-introduction goals.

To ensure this alignment, the formal meetings should begin with the CEO (or general manager) setting the tone for the meeting by bringing up any special, driving themes or situations that require priority attention. This way, all other aspects of the business can be subordinated to satisfying the stated needs.

All key functional areas of the business must be represented in the S&OP process, and a logical progression through the business must be made, including:

• Reviewing consolidated demand for all product families.
• Achieving consensus on the demand-side of the business.
• Testing the effect of plans on key constraints.
• Making adjustments to ensure optimal profit  and achievement of strategic goals.
• Gauging the effects of new product introductions.
• Reviewing other special projects.
• Documenting all decisions and actions to date since the last meeting.
• Discussing possible process improvement.

It is very important to ensure alignment of performance metrics. Managing plants only on efficiency and keeping score at the corporate level based only on profitability is certain to doom S&OP improvement to failure!

Once you’ve got your metrics aligned, deploy contingency plans based on multiple “what if” scenarios to determine the risks and opportunities. This helps to provide clarity on how to respond when the actual demand and/or supply is different from the plan. Further, this approach empowers people to anticipate any potential action or outcome. It also helps to pre-empt the competition and focus on the areas where the greatest risk currently lies in achieving business objectives. When creating “what ifs,” be sure to establish benchmarks that enable you to study outcomes and modify future plans accordingly.

Finally, create a documented plan. The plan should drive execution and continuously challenge base assumptions, processes, and technologies including benchmarking against other best-in-class enterprises.

3. Technology
Technology upgrades and advancement are also necessary parts of success. Incredibly, many otherwise excellent companies are hamstrung when it comes to technology.

For example, we see many companies relying on spreadsheets for S&OP. The result: siloed, inaccurate data; nonrepeatable outputs and outcomes from period to period; and an inability to scale up or down as the business changes. Further, we see results that don’t provide a comprehensive view across all areas including procurement, manufacturing, sales, operations, marketing, and finance.

We’ve also noticed that a growing number of companies are finding that their current business processes and supporting systems for enterprise resource planning, supply chain management, planning, and budgeting don’t deliver what they need to keep ahead of the competition and customer demand. It’s important to utilize technology enablers by developing and implementing a strategy that leverages transaction, decision-support, and business-intelligence capabilities in a real-time environment.

4. Strategy
Through the course of the Aberdeen research, three strategic elements continually outshone the others as delivering the most business benefits and the best capabilities for mitigating risks. The first element is the formal alignment of supply and inventories to demand. This effort is supported by a planning process that spans the entire enterprise and crosses all functions.

Start by focusing on the greatest risk to achieving your business objectives. In nearly 90 percent of the cases, this involves demand management. Improving demand management has an incredible way of resolving supply problems such as low customer fill rates and excessive inventories. Noted author Richard C. Ling has pointed out that the areas for greatest potential change center on demand and new product introduction. Yet historically, companies have focused most of their planning systems initiatives on the supply and financial side.

The second strategic element is a focus on profit. We know that S&OP has moved beyond the practice of merely balancing supply and demand volume. Today, it’s important to measure all planning scenarios based on their profitability impact. Cherished assumptions regarding which products are most profitable must constantly be challenged and changed if necessary.

The third essential element involves paying attention to the value chain. Working collaboratively with customers and suppliers is one of the main ingredients of a successful S&OP program. Listen to your customers and include your business network partners in the design of the process and success metrics. By leveraging the capabilities and influence of customers and suppliers, you’ll be able to expand the scope of potential improvements. Continued...

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