Is S&OP in Your Resilience Toolbox?

Editor’s Note: Kai Trepte, Research Affiliate, MIT Center for Transportation & Logistics, [email protected], and Jim Rice, Deputy Director, MIT Center for Transportation & Logistics, [email protected]

Supply chain resilience has received a considerable amount of attention over the last decade or so, and although companies have achieved much in making their supply chains more resilient, many are still unprepared for disruptions. For example, a 2017 Zurich Business Continuity Institute survey with 400 responses found that 23% of the respondents experienced a supply chain disruption leading to at least $1 million losses and 9% experienced a loss in excess of $100 million.

An interesting finding was that 51% of the respondents reported that the supply chain losses were not covered by their insurance. While Business Continuity insurance to cover supply chain disruptions is gaining popularity, its cost is partially dependent on company resilience. Consequently, it seems that assessing resilience will remain an important capability.

There are certain areas where resilience is consistently taken into account. Sourcing is an example, where it is accepted practice to use multi-source contracts to reduce the potential of a single point of failure. Also, in our research we have encountered a few forward-looking companies that are developing formal processes for investing in resilience.

However, anecdotal evidence suggests that investments in resilience tend to be based on knee-jerk reactions to the last disruption rather than systematic appraisals of risks and responses.

We see a growing awareness in the corporate and research community that an approach to operationalizing resilience investments may be needed. By embedding resilience in operational processes, companies will be better prepared to react to disruptions and recover speedily. Our preliminary research suggests the S&OP/IBP process can provide such a platform.

We believe that resilience investments can be quantified, but a regular systematic process is needed when these investments are reviewed and implemented. The S&OP/IBP process could act as the forum for assessing which resilience investments are funded. It can fulfill this role because major corporate functions (sales, marketing, operations, finance and leadership) are part of the process. The participation of these functions makes it easier to get buy-in, to proactively decrease the impact of adverse events and help organizations to serve customers holistically.

Supporting cases

To illustrate how such an approach might work, consider the example of a major chemical company we observed. The company had excess capacity and wanted to sell a product to an existing customer at a reduced price. Rather than closing the deal, Sales brought the concept to their S&OP/IBP process to get input from the other stakeholders. During the discussions, it was suggested that other customers would find out about the favorable terms and demand price reductions. As a result, sales and operations further differentiated the product and proactively offered it to all customers. The greatest benefit, as described by the company, was that the S&OP/IBP process was proactive and allowed them to sell the new product without eroding the value of their existing portfolio, making the new product's sales accretive to the bottom line. The chemical company used S&OP to gain upside potential while avoiding the downside effects of profit erosion.

We believe that investments in resilience may benefit from the same types of analysis and capabilities, trading off investment costs with franchise protecting investments.

Another, more topical, example is the recent KFC store closures in the United Kingdom. The New York Times reported that KFC switched from its long standing regional logistics provider to a global logistics provider in January 2018. When the new provider could not meet delivery schedules in the first month, KFC had to close 900 stores because it ran out of chicken. In March 2018, The Guardian newspaper reported that KFC returned 350 stores to the regional supplier because the new provider's delivery performance had not improved. Current estimates suggest that the direct revenue loss, excluding damage to the franchise, was $46 million. While the financial details of the contracts are not available, we believe that the potential savings may not have exceeded the potential costs.

Could the situation have been avoided? According to reports, KFC was told that rival company Burger King made the same provider switch and return six years earlier. It is possible that the proposed switch in light of Burger King's experience may have been handled differently when viewed through the lens of investing resilience and operationalized with S&OP/IBP.

Here are two potential considerations that may have emerged.

1. Assessment of Value-at-Risk: as the chemical example shows, when major supply changes are run through the S&OP/IBP process, stakeholders often assess financial and operational impacts differently because they are in different sections of the organization. It is possible that KFC may have gained a sense of the revenue impact from sales and operations when they considered a potential loss of supply.
2. Investment in mitigation/resilience: one can imagine that the S&OP/IBP process may have recommended a phased implementation with the potential to “roll-back” in the event of poor performance. It is possible that the higher cost of implementation could have been justified by avoiding the potential loss of supply.

While we're not privy to the details behind the decision process that persuaded KFC to switch providers, we suspect that the selected solution was partially impacted by a siloed assessment process. Our approach proposes to use resilience principles and the process of S&OP/IBP to help companies such as KFC assess investments in resilience. We have observed that companies struggle with how much to invest in resilience and which resilience investments to make.

Ongoing research

Our research will explore these questions and seek to understand if the S&OP/IBP process can support the implementation of resilience measures within companies.

To our knowledge, we are the first researchers to suggest adding resilience investments to the S&OP/IBP process. While this concept is in the developmental stages, we have observed multiple situations where new initiatives are reviewed as part of S&OP/IBP.

As the research progresses, more examples will emerge. For instance, while the details are still not fully known, we wonder if the current E. coli outbreak in the romaine lettuce business will follow a similar pattern.

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