The Secrets to S&OP Success [Page 4]
-- Supply Chain Management Review, 4/1/2006
Page 4 of 4 -- It is impossible to try to compete in all customer, product, channel, and market segments. The key is to dominate the most profitable markets with the most profitable products. This requires the ability to define different segments, forecast revenue and profit potential, prioritize segments by desirability, and dominate the most attractive markets for you.
Finally, when it comes to strategy, you must emphasize continuous improvement. Keep the roadmap dynamic—you cannot effectively deploy plans too far ahead because you can’t predict the risks and market changes. It’s necessary to continually reassess the S&OP process and progress against actual results. It’s more important to develop guidelines to follow for making decisions during the period (such as what to do when product mix changes dramatically) rather than to rely strictly on the forecast for each product (which is probably wrong).
5. Performance
You cannot improve what you cannot measure. Even companies with very informal S&OP practices must measure performance. Historically, metrics have been specific to a single function (such as sales forecasting accuracy) and involve volumetric types of measurement (such as actual vs. planned sales volumes). The drive for competitive advantage, however, has spurred a rethinking of what metrics should be used to determine the success of the S&OP program. The emerging best metrics, such as gross margin, encompass the two-way impact of demand and supply decisions, rather than having separate and unrelated metrics for each.
Business intelligence systems today can give decision makers an accurate, up-to-the-minute picture based on pre-defined key performance indicators (KPIs). These KPIs are related to value chain processes, product and customer profitability, order fill rates, customer satisfaction or retention, sales per employee, percent volume growth, and gross margins. The metrics can all be delivered through highly flexible role-based portals and executive S&OP dashboards.
For a S&OP program to succeed over the long term, companies must consider how performance measurement itself must change. This means putting new metrics into place as business conditions change as well as increasing the frequency of reporting and analysis.
Going forward, the S&OP system will feel growing pressure to manage consensus across key stakeholders. Exception-based workflows are not enough when external partners are key to the success of the program. Instead, the system must support proactive decision rules (such as permissible buffer levels) to enable the performance levels needed to achieve strategic goals.
S&OP Best Practices
The Aberdeen study discovered that companies utilizing S&OP best practices share a common set of approaches, namely: (1) reliance on a phased approach; (2) development of an “outside-in” sequence of S&OP initiatives; and (3) a focus on critical information, not just more data.
Rely on a Phased Approach
S&OP is much more an integrated set of business processes and technologies than a single, all-encompassing process or technology. If you just focus on the implementation of a new technology and think that S&OP will miraculously take shape, you’re wrong.
Begin the S&OP plan by creating specific phases with defined business objectives and identify the metrics to be improved. These phases should be designed to generate measurable business benefits in three to four months. With a longer time horizon, you may be late in detecting fatal flaws in the initiative, thereby losing critical time and value before the issues could be identified and, hopefully, resolved.
Develop an “Outside-In” Sequence of S&OP Initiatives
Typically, the events that will have the most profound and negative impact on your sales and operations planning are those outside of your control. For the most part, these are due to the decisions and actions of your customers, partners, and competitors, which have a direct impact on your revenue and your competitor’s strategy.
Again, your biggest return will likely come from improving how you manage and respond to the demand component. This is true because no amount of added flexibility and adaptiveness invested in the supply chain can compensate for an ineffective demand management process.
Focus on More Information, Less Data
Another key to successful S&OP is clean, current, and accurate data. The Aberdeen research indicates that often times, less than 10-15 percent of all available data has a critical impact on the business objective. Plans are often slowed down by the effort of gathering data that has minimal importance to the overall project. It is important to ensure that you know exactly what business problem you are trying to resolve and understand the minimum data necessary for the project. The 80-20 rule is very much alive when it comes to S&OP!
No Standing Still
Clearly, there is a strong link between sales and operations planning and dramatic improvements in a company’s growth, profitability, and customer satisfaction. The market is placing increased pressure on companies to align sales with operations. S&OP has never been more strategic, difficult, or crucial than it is today during a time of lean manufacturing, shortened production schedules, demand for customized offerings, global sourcing, and increased market competitiveness.
We cannot just stand still with supply and demand matching. We must push harder to use the S&OP process as a “capability improvement” tool.
The Aberdeen study demonstrated that all companies can benefit from enhancing their S&OP capabilities, regardless of size and S&OP maturity. All winning approaches are based on a tight integration of business processes—across the entire organization and value chain. With integration in place, companies can move down the path of proactive rather than reactive sales and operations planning.
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An S&OP Success Story
In the mid 1990s, one of the largest telecommunications and data services providers in the United States realized that its business would benefit significantly from improved collaboration between suppliers and internal operations. The company was challenged with balancing supply and demand because of the extremely short life cycle of its cell phone products. Additionally, order lead times for handset accessories were as long as 16-18 weeks, making it difficult to achieve forecast accuracy and supply chain responsiveness. The repercussions of this environment were significant. Limited product availability meant that the company lost customers to competitors with little hope of recapturing them in the future. Excess inventory produced lower margins as incentives were used to sell product or disposal costs were accrued for obsolete product. The company recognized that the challenging nature of phone supply, short product life cycles, and the competitive market pressures made it critical to collaborate better with suppliers and internal stakeholders to improve forecast accuracy while maintaining supplier fill rates.
A Business Transformation
What the company needed was a way to understand its demand drivers and supply risk so that it could make sourcing decisions that ensured product availability while minimizing inventory. Good decision making was especially critical at the end of the product’s life cycle. Inventory varied significantly because constant changes in pricing and promotions made demand unpredictable. However, rather than allow the market to dictate demand, the company decided it would adjust its promotion strategies to increase consumer interest in products at the end of life that were slow to sell or that were in short supply. The company implemented a multi-step process to initiate and drive S&OP across the organization. A formal, monthly S&OP meeting was conducted with the stakeholders to review demand patterns and supply risks and to establish the supply plan for the next quarter. Participants of these regular meetings included executive staff and key stakeholders from operations, marketing, and finance. The S&OP team meetings were organized around a “stoplight” system (green=okay, yellow=warning, red=problem), where all products were reviewed to identify the opportunities, risks, and areas that need the most attention. Once the supply chain plan had been developed during the S&OP process, the marketing organization committed to making sure that pricing and promotion programs consistently supported the supply plan. Between monthly S&OP meetings, a portion of the S&OP team began to hold weekly meetings to analyze the current sales pace. The goal of these meetings was to determine what was working and what was not and to project performance eight weeks into the future. A second meeting involved suppliers in order to complete weekly collaborative planning, forecasting, and replenishment. A critical success factor for this company’s S&OP process was uniting the key stakeholders. For this reason, suppliers were engaged in the formal process. This resulted in improvements in the supply base in the areas of cost, product availability, and capability.
Technology Enablers
As part of the S&OP process, the telecommunications leader created unconstrained demand plans using a demand planning software. This functionality enabled marketing to manage changes to the current product forecast, the introduction of new products, and the retirement of selected current products. Then a constrained plan was created and utilized, acknowledging supplier shortages and taking into account the need to drive unfulfilled demand to other suppliers. The company used price and promotion changes to manipulate demand. Finally an advanced supply chain planning solution was leveraged to create planned orders, drop requisitions, and plan the final packaging. Relying on the demand planning software, the telecommunications company was able to sustain S&OP best practices in a high-volume, data-intensive environment. The solution served as an S&OP “demand hub” data repository, which alleviated the burden of data collection. All relevant sources of critical information were consolidated, enabling data transfer and validation. As a result of implementing S&OP, the telecommunications company realized substantial benefits. First, the company demonstrated the ability to triple the number of products offered. Through the course of an eight-year period, forecast accuracy was improved by 36 percent and inventory-related working capital was reduced by 25 percent. Finally, store service levels increased to 98 percent or better.
Authors’ note: This case study is based on material appearing in the Aberdeen Group’s Sales & Operations Planning Benchmark, 2004.
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