Sales & Operations Planning is a proven means of facilitating better, more cohesive communication between various departments within an organisation. Manufacturing & Logistics IT spoke with key spokespeople from the S&OP software solutions space to consider the concepts origins and to get up to speed with a few areas of ongoing development and innovation.
Increasingly, S&OP is the engine that moves global manufacturing businesses forward. In fact, every manufacturing business must make regular cross-functional tradeoffs as a matter of survival. This is the view of Richard Nicholas, sales & consulting director UK and BNL at TXT e-solutions. And it would indeed seem to be the case that S&OP is a process that, when done effectively, delivers more business value faster than many of the ad hoc alternatives.
So what is the core reasoning behind an organisations need for such a methodology? Razat Gaurav, senior vice president at i2 Technologies, makes the point that organisations are likely to comprise various separate silos; such as sales, marketing, finance, manufacturing and logistics. However, at some point the company as a whole needs to consider certain goals and objectives within the context of an overall business plan. That business plan could be for the next year, or some companies may have a more strategic longer-term plan or think in terms of a three- to five-year time horizon. They also have quarterly, monthly and weekly tasks and targets. So, the S&OP process evolved in an effort to provide some overarching methodology to allow an organisations separate functional silos to come to the table together.
Gaurav added that, ultimately, various metrics and central structures that exist within these silos tend sometimes to work at odds with each other; and ultimately to the detriment of the overall company. S&OP tries to bring these various silos together and align them to a single version of the truth, and at some point create one effective sales and operational plan for the organisation, he said. S&OP also attempts to align the metrics so that they are reinforcing each other as opposed to being at odds with each other. In a very simplistic sense, S&OP tries to accomplish internal collaboration. Gaurav also observes that just about every large, small, regional or global organisation has some kind of S&OP process. They may not call it S&OP but the heads of finance, manufacturing and sales & marketing usually communicate with each other in some way. What S&OP tries to do is provide a more formalised structure so the department heads can communicate in a more beneficial, cohesive way.
John Ewing, sales & marketing director at Demand Solutions, adds that, since its inception in the 1980s, S&OP has been a vital process for managing profitability and risk. All too often we would see decisions made without thought of what consequences that decision would have on other parts of the business; for instance, inappropriate stock policies or shortfalls rolled into next months forecast, he pointed out. These were everyday occurrences, but no thought was ever given to the effect this would have or how it was to be achieved.
Ewing points out that 30 years ago this connection was realised for those that sought to balance aggregate supply and aggregate demand; thus making a vital connection between the markets served and the manufacturing process operated. However, Ewing highlights that in order to achieve this, improved communication channels both internally and externally were needed. This gave rise to the concept of Sales & Operations Planning, two halves of one business talking with each other and sharing information. Early adopters saw this as a real opportunity and recognised straight away that by designing an effective S&OP process, they could continually align their operational plans with their financial plans and align high level strategic plans with day-to-day operations. Faced with huge cultural barriers, unsuitable technology and collaborative challenges still being discussed today, these early pioneers achieved great goals and provided for everyone a wealth of valued material upon which to design your own processes.
According to Ewing, the primary key is in designing an S&OP process from the top down. You cannot buy or copy someone elses process, then make it work for you; it requires the total commitment of everyone, he remarked. Thankfully, there are now many tools available designed to assist with S&OP that take the grunt out of gathering, aggregating, analysing and presenting meaningful information for use in your S&OP sessions.
However, while the roots of the S&OP process definition are in the late 1980s, the current definition is quite different, claims TXTs Richard Nicholas. The process has shifted from a four-step process of balancing demand and supply in the early 1990s, to a collaborative six-step planning process in early 2000, to a nine-step process by demand-driven supply network (DDSN) leaders in 2005, he said. This new process has become the standard operating plan for leaders attempting to be demand driven. For these leaders, it is all about demand sensing, shaping demand and driving the best demand response for profitability. Nicholas added that tools for managing the S&OP process still cover the basics such as forecasting, but are now more sophisticated and add value to the business. For example, planners are now required to, at the same time, plan and concurrently analyse and interpret information to ensure the plan is feasible from all angles and that all trade-offs made are fully understood.
In his book on production control, Burbidge (1971) defines production control as follows: Production control is the function of management, which plans, directs and controls the material supply and processing activities of an enterprise, so that specified products are produced by specified methods to meet an approved sales programme. Pieter Van Nyen, project manager at OM Partners reflects that this definition shows that, already in the early seventies, at least some people were aware of the positive impact of coordinating sales & operations planning, which should result in an approved sales plan. Since then, a lot of new names have been invented for this coordination process, but the main idea stayed the same: balance the potential sales with the available production capacity, said Van Nyen.
He adds that two important evolutions are also worthy of mention: With the increased awareness of the financial impact of operations on the bottom-line result of the total company, financial departments started being involved in the S&OP process. In this way, they transformed S&OP into Integrated Business Planning, a process that strives for a one-number plan for the entire company. The evolution in information and communication technology resulted in increasingly powerful software packages, with strong planning functionalities, communication capabilities, etc. These packages can be considered as the technological enablers of efficient and effective S&OP processes.
In the view of Martin Woodward, managing director of ToolsGroup UK, the relationship between sales and supply chain has become more mature over the past few years. They understand each other far better, he said. The best systems can now model the complex relationships far more reliably. Key questions can be answered quantitatively instead of qualitatively and the language barrier can be broken down (sales generally thinks money while supply chain talks volume).
Woodward notes that, as the planning cycle time shrinks it leaves time to investigate alternative scenarios. The expected output from the S&OP process is no longer a feasible plan but increasingly an optimal plan, he said, adding that another consequence of the increasing velocity of the planning process is that other actors, namely finance, can begin to participate in the process. Business process tools allow a broader consensus to be reached in the widening window between planning and executing, said Woodward. As the barriers begin to break down, the S&OP process has emerged as the central business planning process.
Mike Novels, managing director of Preactor International has always viewed S&OP as a function positioned somewhere between the shop floor (where the majority of Preactors planning & scheduling applications are situated) and more high-level strategic planning. Typically, S&OP is undertaken over in a much longer timeframe than detailed scheduling, he points out. In fact, one of our products, Graphic MPS a configuration of Preactor APS operates at this type of level; you feed in forecast demand and current orders and then add capacity information. From this, and maybe based on some inventory control rules, you can work out how much product you need to make within each period whether weekly, monthly etc. and this is where S&OP really fits into the overall scheme of things. We can also take things further inasmuch that we link Graphic MPS with more detailed scheduling.
Roots to S&OP
Andrew Kinder, supply chain solution marketing director at Infor, observes that various players within the vendor community have arrived at their individual S&OP solutions from three distinct avenues; supply chain management, office of finance vendors and pure-play S&OP vendors. First, there are Supply Chain Management software vendors, including Infor, who have very sophisticated demand and advanced planning engines that, pushing up beyond the decision criteria, can also address the financial impact of decisions that are being made. Secondly, there are Office of Finance vendors effectively, the Business Intelligence solution vendors who primarily have customers within the finance community. Their solutions are geared to manage budgets and financials, and offer a lot of analytics. In terms of S&OP, these vendors found themselves having to move down into operational decision making away from the balance sheets. Thirdly, there are a few pure-play vendors who set out to create a dedicated S&OP engine. As regards ERP vendors, they dont have enough decision support functionality in their systems to really constitute S&OP, but they do provide the bedrock of what S&OP needs in terms of data. Kinder added that Infor has overcome integration issues concerning multiple sources of data related to supply chain, financials and S&OP by taking advantage of Service Oriented Architecture (SOA).
Integrated Business Planning
Fred Baumann, vice president, industry strategy at JDA Software, comments on the benefits of the evolved S&OP model Integrated Business Planning (IBP). Many in the market still focus on real-time tactical problems and issues as their primary focus; such as tactical replenishment and item level forecasting to address operational issues. While every company needs to address real-time supply chain issues, this is not the purpose of S&OP. If leaders focus their time on real-time issues (also known as fire-fighting), they are not thinking strategically over the long term. IBP or Advanced S&OP is an aggregate planning process that occurs monthly to ensure all company plans and strategies are aligned over at least a 24-month rolling planning horizon. This timeframe enables the executive leadership team to avoid problems, be opportunistic in the marketplace and have the freedom to focus their time and energy on executing the companys strategic and business plans rather than on fire-fighting. That level of detailed, short- to mid-term management is more effectively performed by mid-level managers.
Baumann also states that the next-generation S&OP process brings everyone to the same page, working in collaboration to agree upon a single operating plan that supports a companys overall strategy and business plan. The outputs of this well-executed, holistic process enable the creation of successful product/portfolio, demand, production and financial plans that meet business objectives, he remarked, also pointing out that it enables executives and functional managers to build synchronised, time-phased plans for sales, marketing, promotions, inventory management, purchasing activities, capital expenditures and other investments along with determining optimised financial management strategies.
Nicholas makes the point that Integrated Business Planning is an evolution from S&OP and not an outright functionality. The emergence of the term Integrated Business Planning means an optimised match between supply and product, demand, strategic finance, and line operations and is only for businesses looking to take their supply chain and ultimately bottom line to the next level. S&OP is a journey and companies without an S&OP process will not go from nothing straight into Integrated Business Planning. He adds that, to achieve Integrated Business Planning from a process point of view, companies must build on the nine-step S&OP process framework AMR Research introduced in 2006 to encompass the alignment of demand response with financial goals, analysing the implications of misalignments between strategic, tactical, and operational plans.
Defining the concept
In terms of an overriding definition of the term, is S&OP largely open to interpretation, or have the main vendors largely reached a consensus as to its role/purpose and benefits? Nicholas view is that it is by in large agreed that S&OP is the need for a predictable, profitable and agile Supply Chain to respond to change, meet business objectives and deliver shareholder value. Specifically, Nicholas cites S&OPs main drivers as including: the need for improved Cash flow; pressure from customers; keeping up with explosive sales growth; the need to reconcile financial and operational budgets; changes in supply chain structure; and shortened lead times. He adds that, while vendors have differing visions on how to achieve best practice S&OP there is a consensus about the benefits, which include: less inventory; stronger order fulfilment; shorter cash to cash cycle times; greater profit margins; and higher return on assets.
Van Nyen also believes there is consensus on the main functionalities of S&OP. And, at the highest level, Woodward concurs too. However, he reflects that at the tactical and operational level vendors definitions are coloured by their heritage. A Business Intelligence vendor is likely to emphasis monitoring and reporting, whilst an SCP vendor will focus on forecasting and supply matching, he said. From Ewings perspective, the term S&OP has now been accepted globally as meaning sales & operations planning. But, he maintains that this is a process of continual improvement and so would be shocked if it did not evolve. Variations he has begun to see include: Sales Inventory Operations Planning (SIOP), Single Integrated Operational Plan (SIOP) and, more recently, Sales & Operations Management (S&OM). What your process is called should not matter so long as it is achieving the desired result and involves all parts of the business, he said.
One company that has gained considerable success through marketing its solution and methodology as Sales & Operations Management (S&OM) is i2. Razat Gaurav explains the reasoning behind the companys adoption of the term. As weve worked with organisations all over the world, we have realised its not sufficient to just think in terms of planning. So, weve adopted a very simple yet profound framework around plan, do, check, act or what some companies call PDCAs. In our view, organisations that can close this PDCA cycle in a rapid way are the ones that have organisational velocity and ultimately are the organisations that are really able to deal with a lot of the variability and uncertainty. Companies may have established a plan at the beginning of their fiscal year, but that plan may have been based on a certain assumption of demand because the sales & marketing organisation may have committed to a certain demand projection or demand forecast. However, within months or sometimes even within weeks that demand picture may have completely changed even though the demand picture was what the manufacturing organisation was using for production planning and acquisition of raw materials. So, the rationale behind S&OM is becoming more and more compounded as companies have to deal with more variability and uncertainty in organisations operating environments.
Novels makes the point that the debate about the different definitions regarding the term S&OP is similar to the debate about the differences between the terms Planning and Scheduling. We come across this all the time one persons plan is anothers schedule and visa versa, he said. We always explain that a planning system deals with buckets of time but it doesnt deal with the operational sequence within that period, so they cant give you a specific dispatch list and a sequence of operations to be undertaken at each resource. Therefore, if sequence is important to a company for example, if they have sequence-dependent changeovers then a planning system alone wont meet their requirements.
Process and execution
To what extent is efficient S&OP down to processes and to what extent is it about execution and the people involved? Gaurav is quick to insist that creating an efficient S&OP/S&OM process is not only about the software. I was with a very large CPG company recently conducting a workshop on S&OM, and the bulk of the conversion was about the process, organisational and metrics side of the equation, he said. At this point the software just becomes an enabler. The transformation that needs to occur within organisations is around processes, organisational issues and the metrics side of things. S&OM is not a supply chain function, its not a finance function, its not a manufacturing function, its not a sales & marketing function. So who really facilitates and determines the cadence around it and structure around it? We have come to realise that the companies that do it well are those that have senior executive sponsorship around championing an S&OP/S&OM process. In many organisations, this has to be the CEO, because this is where these four or five different organisational silos really come together. This is important before jumping into the systems project.
Baumann agrees that executive level S&OP must have a sponsor typically the general manager of the business at a divisional level or the president or CEO at the corporate level to make sure the functional owners are aligned and working towards a single operating plan. Secondly, Baumann points out that S&OP has a process framework and cadence with major milestones that must be completed before later steps can be properly executed. We believe that a best-practice process framework has been established to assist with getting optimal results so that, after people are aligned with their behaviors and actions, they can work in a synchronised fashion on a common process, he said.
Finally, Baumann maintains proper tools are needed to provide decision support and a common view of the data across the different S&OP stakeholders. Todays S&OP approach is designed to unite a companys corporate objectives, financial goals and operational plans in order to realise significant top- and bottom-line improvements. Making this powerful transformation can be a significant undertaking, which is the reason many companies partner with experts to help with, for example: educating executive and middle-management teams on best practices and leadership behaviors required for an effective IBP/S&OP process; designing the process, including defining roles, responsibilities and accountabilities, process flow and information needs; establishing the calendar and cadence of the S&OP process; advising executives on creating a transparent and collaborative decision-making environment; providing support on the selection and implementation of tools to drive and complement the S&OP process from strategy to execution; and providing executive coaching on improving and evolving the S&OP process as business conditions change.
Woodward maintains that effective S&OP requires all the elements of process people and technology to be in place. Like a three legged stool; if one of the legs is missing it wont stand up, he said. Van Nyen agrees that both are critical success factors. A good process description is indispensible in order to have an S&OP that comes up with answers to the right questions, he remarked, adding: The involvement of the people is necessary to get the right answers.
From a more statistical perspective, Ewing points out some commentators maintain that successful S&OP is 90 per cent about process and only 10 per cent tools. However, I believe it to be more like 70 per cent process and 30 per cent tools, he said. It is widely accepted that well-designed S&OP processes achieve the greatest return when executed. Similarly, choosing tools to assist should also be considered carefully for their ability to mirror your design. They sit side by side, providing you with the platform upon which to make decisions and so should be complementary to each other. Ewing also believes a typical S&OP process calls for regular meetings to discuss trends and future demand, to identify any pinch points within the business or resolve any imbalance, then as a group agree corrective actions. Typically the outcome of such meetings is compared with the financial plan, with any exceptions being tabled in the board room, he said.
Nicholas believes effective S&OP is 60 per cent change management, 30 per cent process and 10 per cent technology. Supply chain is still one of the most people-based processes and, whilst many aspects have been automated over time, its evolving nature and constant stream of new challenges means that human intervention is still required, he said. Effective S&OP starts with the change management piece; without this no process, no matter how good, will work as the people driving/using it have not been given the tools to make it successful. Just because a process is new does not mean it will deliver continuous improvement.
Novels take is that software is absolutely essential if companies are serious about S&OP. S&OP has to take in all sorts of data forecast data, sales data, capacity data etc. from many different sources. And data needs to be manipulated, collected together and presented in a particular way that is useful for managers in order for them to make the best informed decisions. This is what software is good at; taking basic, raw data and putting it into a format that management can act upon. If such data is not presented in such a way its useless.
However, Novels also recognises that, at an execution level, it is important for individuals from the various departments within an organisation to work together as a team. Its a problem if the sales team is simply throwing orders over the fence telling production to get on with it while not having any visibility as to what the current production capacity is on the shop floor or what the current constraints are, he said. The sales team may also be giving delivery dates to customers that are unrealistic because of problems that are occurring on the manufacturing side. Basically, there needs to be a wider knowledge based on availability of materials, resources, machinery and staff in order for more accurate lead times to be determined.
In terms of vertical sector and size of organisation, where is the greatest uptake of S&OP adoption? Andrew Kinder reflects that just about every sector within manufacturing understands the essential meaning of the term, although their approach to S&OP can be quite different. When we talk with CPG companies, their starting point with S&OP will often be as far back as a new product introduction. Some of these companies start their cycle by considering what new products they plan to bring to market over the next 18 months, when they plan to bring them to market and when they plan to retire existing products. Then it moves into campaign, then into demand shape and then into optimisation. So the starting point is, effectively, campaign management. However, other types of organisation may also have an S&OP process, but their starting point might be what the current demand forecast is. Other organisations that operate in more of a push environment may start the process by considering what the crops are looking like this year, or how much of a scarce raw material they will be able to source. So, the term S&OP has wide adoption across all of manufacturing; both process and discrete, but different companies starting point in the process can be different. Interestingly, Kinder adds that awareness and adoption of S&OP doesnt seem to translate as comfortably to the distribution world or retail. This could be because most of the industry aficionados and most of the S&OP literature focus more on manufacturing, but the process of balancing supply and demand should still be seen as relevant for these other sectors, he said.
John Ewing comments that many global businesses were early pioneers of S&OP and their mistakes have been widely publicised. But, he insists, S&OP is not just for large organisations and I am seeing far greater adoption and uptake from within the SME markets. Nicholas view is that S&OP tends to be more CPG focused and is applicable for medium- to large-sized companies. He also observes that it is present in: the industrial manufacturing industry helping to translate demand into profitable supply plans; the high-tech industry helping to balance short product lifecycles and high margins; and in life sciences companies enabling them to take on more risk, handle lower inventory levels and better prepare for new product launches from competitors.
In a concise sense, Woodward has witnessed a high uptake of S&OP adoption within the FMCG and CPG sectors; medium uptake in the pharmaceutical sector and a lower uptake within automotive aftermarkets. Baumann has seen significant interest across multiple verticals including: life sciences; food & beverage; personal care; mass merchant retail; chemical; consumer electronics; durable manufacturing; and automotive/parts.
Finally, what are some of the burgeoning or keenly anticipated developments in the world of S&OP? Ewing comments that Demand Solutions is continually driving towards better planning and helping users to achieve far greater results in less time. To achieve this, we actively seek ways of utilising available information that surrounds us in more effective ways, he said.
Baumann makes the point that, as companies face increased global competition and supply chain challenges, along with rising transportation costs and volatile economic and market conditions, a transformation of S&OP is occurring. Many industry-leading manufacturers as well as consumer goods distributors and their retail partners have been working towards elevating their S&OP processes to an enterprise-wide global scale in order to enhance supply chain visibility, reduce costs and achieve more integrated business planning and management, he said. As a result, businesses of all types and sizes are now discovering how this next generation of S&OP can actually become a mission-critical element of an integrated business management strategy.
In addition, Baumann believes significant innovation will occur in the linkage of Collaborative Planning, Forecasting & Replenishment (CPFR) and S&OP. This has been recognised by industry groups such as VICS that have begun to write industry guidelines for best practices on this approach, he said. Over the past 10 years or so, companies have invested heavily in gaining alignment with their key trading partners on the concept of a shared synchronised merchandise plan, sales forecast, order forecast and replenishment plan. The insights and data from these trading relationships are natural integration points to the S&OP process.
Novels points out that there is an increasing level of activity taking place in the Business Intelligence (BI) area. A number of BI vendors are partnering with us to offer a product that fits inside Preactor, and enables users to undertake much more complex analytical calculations based on the schedules that are produced and in comparing them, he said. As well as the growth in analytics, Kinder reflects that there is a requirement for more real-time processes. S&OP is an 18-month process, so one might ask why is real-time data so important; the answer is to provide shorter term trend analysis, he said. Companies want to know if theyre off track at any stage of the process. The technology should support the processes that you have in place as a business not just in terms of workflow, but also in terms of capturing ideas and recording what decisions have been taken in order to improve future performance.