REAL-TIME S&OP: WORKING TO MAKE THE PLAN, THEN MAKING THE PLAN WORK. An E2open White Paper. Contents. White Paper

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1 REAL-TIME S&OP: WORKING TO MAKE THE PLAN, THEN MAKING THE PLAN WORK White Paper An E2open White Paper Contents e2open.com Executive Summary Feeding the Beast Making the Plan, then Making the Plan Work The Optimal S&OP Process Summary and Conclusion White Paper: Real-Time S&OP

2 Executive Summary The purpose of this white paper is to discuss the technologies and business processes needed to frame a successful sales and operations planning (S&OP) process. The paper discusses how to obtain the necessary information inputs to produce, communicate, align, and execute complex supply chain plans plus how to sense and resolve disruptions as they occur in the extended network. All effective S&OP tools rely on three basic functionalities: Access to accurate, timely information from a wide range of sources The ability to close the loop between planning and execution of the plan A mechanism for advancing the maturity of the process A business network, consisting of a cloud-based trading partner connectivity layer plus business process management and analytical tools, is a key enabler of all three of these objectives. In contrast to the days when companies were vertically integrated, today s S&OP process functions in a fragmented, global supply chain, where manufacturing is represented largely by contract manufacturers, rather than internal colleagues. In order to get timely, accurate information from all of the relevant participants in the trading network (for input into the planning process), brand owners require a cloud-based platform that offers both any-to-any connectivity and collaborative business process management and execution support. Such a platform enables companies to carry out collaborative execution of their plans with their trading partners, facilitating more rapid sensing of exceptions to the plan and more effective resolution of those exceptions. A business network provides early warning of deviations from the planned course, making it possible to make real-time course corrections to keep the plan on track even when reality differs from the assumptions embedded in that plan. Finally, a cloud-based business network with the connectivity, business process management, and analytics needed to enable collaborative execution offers a robust foundation for building the necessary competencies to advance the maturity of the S&OP process. Feeding the Beast High quality information from every tier of the extended trading partner network is essential to an effective periodic S&OP process. Better information always equals better decisions, but incomplete, inaccurate, or untimely information can be worse than useless it can be actively damaging. What is needed is a system a business network for aggregating and Page 2

3 summarizing demand information from a wide range of sources, including customer forecasts, sales force forecasts, input from marketing, company goals, and even macroeconomic data. Before this information can be deemed actionable, it must be gathered, aggregated, and normalized. The likelihood that every participant in the trading network will characterize their data in precisely the same fashion is vanishingly small, so one critical function of the system is mapping all of the data inputs to a single, common form that can serve as the lingua franca of the trading partner network. Figure 1. The monthly S&OP process: aggregate and summarize multiple data feeds. Network is a crucial word and concept here. Linear supply chains of years past have evolved into dynamic, multi-enterprise trading networks. Cloud-based communications systems, with an appropriate layer of inter-enterprise business processes running on top of them, are needed to bridge the data and process gaps between disparate partner firms so that they can accomplish their common goals. Making the Plan, then Making the Plan Work Once all of the required information is gathered, aggregated, and transformed into a standard form, companies have a wide range of planning tools and processes to choose from to develop their sales and operations plans. However Page 3

4 they do it, the ultimate product of their efforts is a plan that is meaningless until it is implemented in the real world. How, then, do global enterprises close the loop between planning and execution? How do they ensure that exceptions to the plan are both sensed and resolved in a timely fashion? The first step is to distribute the outputs of the plan to all participants of the trading partner network. This distribution is commonly done manually on a one-to-one basis, through , faxes, telephone calls, and the like. While the largest trading partners may have established electronic links (EDI connections, for example), brand owners require all of the parts on the bill of materials (BOM) in order to actually build and ship a product. This often introduces a significant amount of information latency and opportunity for miscommunication and human error as brand owners are forced to send, receive, consolidate, and analyze serial, one-to-one information feeds. Figure 2. The monthly S&OP process: collect capacity data from every tier. In contrast, a system built on a foundation of networked trading partners functions on a one-to-many basis, facilitating the rapid consolidation of data inputs as well as the near-instantaneous distribution of plan outputs. Electronic connections to multiple tiers of partners across the trading network reduce latencies and eliminate manual errors. And with all trading network participants leveraging the same system for collaborative execution, brand owners receive rapid answers to their queries in a single location, with any deviations from their orders highlighted by the system. Page 4

5 Figure 3. The monthly S&OP process: distribute plan information to multiple tiers simultaneously. A closer comparison of the conventional, open-loop S&OP planning and implementation process with the closed-loop, collaborative execution version outlined in this paper, highlights a number of important differences. Consider the example of a company with a weekly planning process: typically, the weekly or monthly MRP run is done over the weekend. First thing Monday, orders are distributed to suppliers. Over the next two days, responses to those orders trickle in, one-to-one, one at a time. Once responses to all the orders have been confirmed (manually), the orders must be sorted and analyzed (again, manually) in order to identify any exceptions. By this time, it is late Wednesday, or even Thursday, and the rest of the week is spent scrambling to resolve the exceptions through a combination of phone calls, s, and faxes. In contrast, with a collaborative execution platform, the ability to disseminate the plan electronically to all value chain participants on a one-to-many basis is an initial boon, followed by gains in gathering responses and highlighting exceptions. It s a three-step process: (1) in tandem with partners, a plan is defined and agreed upon; (2) cloud-based systems and processes sense materially significant deviations from the plan; (3) collaborative actions are taken to resolve these exceptions. This means that as soon as the MRP run is complete, orders are distributed over the network to all relevant suppliers, with any exceptions automatically highlighted by the system. The brand owner has real-time insight into which Page 5

6 suppliers have responded and which suppliers have not, and is able to begin resolving exceptions immediately. Not only does this mean there is more time to resolve potential problems, it also means that problems are addressed earlier, when they are more isolated and easier to correct. The process of resolving exceptions in collaboration with trading partners is both faster and more accurate if there is a technological and methodological platform in place to support that collaboration enabling partners to work off a single source of real-time information in order to determine and execute corrective actions. Figure 4. Traditional S&OP versus a collaborative execution approach. Another way of looking at the benefit of systematically closing the loop between planning and execution is to examine how quickly the plan degrades over time. That is, how quickly does reality deviate from the plan (the universal truth about forecasts is that they will be wrong)? How can collaborative execution be used for mid-course corrections to minimize the distance between the plan and reality? It is a long-standing joke in supply chain that we plan according to Deming but must manage according to Murphy. The best-laid plans are often disrupted by a port strike in Long Beach or a rogue Icelandic volcano. The unfortunate reality of supply chain planning is that our plans are inevitably based on assumptions that are obsolete by the time the plans are implemented. The distance between the plan and reality only increases over time, with this degradation or decay function accelerating as it goes. Exceptions to the plan can be caused by any number of factors, including parts shortages at a tier-2 supplier, critical components rejected for quality reasons, or logistic disruptions between any two steps of the production and distribution processes. There is nothing that can be done in the planning stage to prevent this divergence. In traditional planning processes, the response to exceptions is to re-plan using the latest information. This strategy, however, simply continues the cycle of plan-and-divergence, introducing significant noise into the supply chain and often generating confusion and distrust among suppliers and partners. If Page 6

7 trading partners learn, through repeated experience, that plans coming from a customer are subject to frequent changes, they may alter their own production plans in anticipation, raising costs or introducing delays when they overshoot or undershoot production. Figure 5. Decay of plan over time. By contrast, collaborative execution enables brand owners to harness realtime information from the entire trading network (where inventory is actually being created and transported) in order to execute mid-course corrections to exceptions as they arise. Real-time transparency across multiple tiers of partners means that parts shortages can be recognized more quickly, and dynamic reallocations can be implemented without the need to restart the entire planning cycle. Similarly, stock outs looming in the weeks ahead can be identified early and addressed in real time: by re-routing in-flight inventory, or transferring components between contract manufacturers to ensure that the most urgent orders are filled. By enabling the relevant people as opposed to an algorithm-based planning system to make decisions based on the latest information, the original plans can be modified and executed more quickly and intelligently. And ultimately, that means better supply assurance, fewer stock outs, and happier customers. Through the combination of electronic partner connectivity and robust business process logic, real-time information can quickly be put into an actionable context, enabling brand owners to sense and resolve exceptions within the profit margin window (when product value is at its maximum). At each stage Page 7

8 of the process from feeding the planning engine to monitoring supplier compliance the information funneling through a business network is real time (rather than batch), minimizing the distance between plans and reality by sensing exceptions sooner, and making course corrections before service levels are impacted. Figure 6. Course correcting with collaborative execution. The Optimal S&OP Process The optimal S&OP process is a constantly evolving target, with the bull s-eye a function of both the business environment and a company s current level of development. Gartner Group has created a four-stage process maturity model that helps individual companies identify where they are currently, where they would like to be, and what it takes to reach higher levels of supply chain sophistication and maturity. Gartner analysts have broken out the distribution of companies by stage, with only a tiny minority (4%) of companies reaching the most advanced level of process development. In order to advance from stage to stage in the quest for an optimal S&OP process, a company must first accurately identify its current status and then take the steps necessary to reach the next stage. These steps are supported and accelerated by the technology and business process components of a collaborative execution business network: a cloud-based system with the ability to increase its intelligence over time as more data is incorporated to inform the adjustment of planning attributes. Page 8

9 Figure 7. Gartner Group four-stage supply chain process maturity model. Summary and Conclusion Three critical aspects of running an effective S&OP process include the following: 1. Feeding the planning process with timely, accurate information from all trading network participants 2. Closing the loop between making and executing the plan, including collaborative execution of the plan (with partners) and mid-course corrections to resolve exceptions 3. Increasing the maturity and effectiveness of the planning process A business network, consisting of electronic partner connectivity across multiple tiers, plus the business process logic needed to put real-time information into action, is a vital enabler of each of these three elements. The network promotes the gathering of information from each value chain participant and the mapping of that information into a central, canonical form that is accessible and meaningful to all parties. The network allows the rapid propagation of plan instructions to participants, and at the same time enables collaborative problem solving and execution to tackle supply chain exceptions as they confront the Page 9

10 original plan. Finally, the network and attendant process management and business intelligence tools provide a platform for advancing the maturity of a company s S&OP process, thus enabling even greater gains in effectiveness. About E2open E2open is a leader in collaborative execution, delivering a strategic, cloud-based solution for brand owners managing businessesacross global trading partner networks. Collaborative execution enables brand owners and manufacturers to leverage the collective brainpower of their trading partner communities to efficiently manage end-to-end supply chain processes and respond intelligently to continuous change in supply, demand, products, and partners. E2open customers include Celestica, Cisco, Dell, Hitachi Global Storage Technologies, IBM, LSI Corporation, Motorola, Panasonic, Seagate Technology, and Vodafone. E2open is headquartered in Foster City, California with operations worldwide. For more information, visit Offices Published: 2011 E2open, Inc. E2open and the E2open logo are registered trademarks of E2open, Inc. Customer legal disclaimer goes here. All other marks are trademarks, service marks or registered trademarks of their respective owners. All rights reserved. E2open Americas Foster City, California (HQ) Dallas, Texas Austin, Texas E2open Europe Reading, England Düsseldorf, Germany E2open Asia-Pacific Kuala Lumpur, Malaysia Taipei City, Taiwan Shanghai, China Page 10