S&OP as a Profit- Focused Decision Engine October 19 th 2014 Alex Harbell

Transcription

1 S&OP as a Profit- Focused Decision Engine October 19 th 2014 Alex Harbell

2 Abstract Following mergers companies are often challenged to integrate and harmonize disparate S&OP processes. Building a single source of the truth approach can lead to more mature S&OP processes and up to 500 basis points of EBIT margin improvement. We will discuss the elements of Profit Focused Planning and the creation of an integrated S&OP process. Specifically, we ll explore how some companies have build mature processes that have improved EBIT.

3 Agenda 1. History of our S&OP Process 2. Profit Focused Planning 3. Where are we going? 4. Key Takeaways

4 Agenda 1. History of our S&OP Process 2. Profit Focused Planning 3. Where are we going? 4. Key Takeaways

5 KapStone s Approach to Planning Multiple acquisitions led to an environment of different legacy approaches to planning Legacy East Coast Mill System KapStone s History Originally formed in April 2005 by industry veterans to establish operations in paper, packaging, forest products & related sectors Internal Converting Facilities Operated autonomously from the mill division Limited collaboration Key Facts: Generally leveraged a top down planning approach Legacy West Coast Mill System Successfully employed a bottom up planning approach Over $2B in revenue each year #1 N.A. producer of Kraft (brown) paper Top producer of containerboard for corrugated products (boxes) 4 pulp/paper mills + 22 box plants Started as a special purpose acquisition company 2008 Acquired additional board/paper mill on the East Coast 2011 Acquired additional board/paper mill on East Coast and additional Converting Facilities 2007 Acquired board/paper mill on East Coast 2010 Ranked 5 th in Fortune Magazine s list of 100 Fastest Growing Companies 2013 Acquired board/paper mill on West Coast and additional Converting Facilities

6 Although legacy processes had beneficial qualities. Rapid cycle times Local decision-making could be made quickly to meet unplanned and urgent customer needs High utilization of manufacturing assets was maintained with quick production planning adjustments and flexibility Familiar organizations and systems East Mills, Box plants and West Mill are each adept and leveraging legacy IT system to gather localized data Teams leveraged known resources and meeting cadence to manage the planning process Effective Demand Supply balance Several customers and channels were leveraged to flex demand Order fulfillment lead times were managed at industry average while inventory levels were better (lower) than average

7 they also lacked an enterprise view without a single source of truth used in a harmonized S&OP process Demand Forecast from Several Sources Updated 2-Months Out Supply Planning Approach Differed by Mill Planning approach differed by sales team Timing horizons Product hierarchy level Aspirational vs. historical expectations not aligned Run rate history not consistently incorporated into forecasts Inefficient Exec S&OP Decision-Making Ad hoc decision making Limited transparency between mills Decisions revisited multiple times Shorter term decisions explored Reactive vs. proactive mind-set Pre S&OP Meeting Did Not Exist No governing profit focus across the enterprise Demand supply balancing done in production planning Scenario planning done opportunistically without an enterprise viewpoint

8 Agenda 1. History of our S&OP Process 2. Profit Focused Planning 3. Where are we going? 4. Key Takeaways

9 Several things were needed to improve our S&OP process effectiveness and drive greater profitability A Shift in Process A Shift in Culture Purpose-built meeting agendas that enable factbased and profit focused decisions A Shift in Data Thinking less like separate planning groups to one company, serving a customer base with a network of assets A single source of the truth for both the enterprise unconstrained forecast and available capacity for 12 to 15 months into the future

10 Process We are concentrating on creating business specific content enabling greater focus on revenue and profitability Unique Methodology to Pinpoint Value & Risk Identify decisions that are most critical to the business Prioritize and design S&OP cycles around critical decisions Make risk levels transparent and define tolerance for risk Close the gap between decision criticality and information quality Revenue & Profit Generation vs. Supply/ Demand Balance Avoid balancing supply and demand as an effort to avoid disappointing customers in the near term Shift to making trade-off decisions that meet market needs while creating incremental margin opportunities

11 Process Critical operational and commercial decisions were identified and became core to our S&OP process design Value Chain Decision Continuum Raw Materials Availability Raw Material Storage Production / Mfg. of Product Finished Goods Storage Trans. & Logistics Channels to Market Markets and Customers S&OP process structure is wrapped around the decisions identified. Our planning process is built around the value chain and the critical decisions identified at each step Each decision has a lead time and we map it to a specific review meeting We concentrate on analyzing the exact information required to support making each decision Appropriate level of granularity (e.g., by Market, Product Line, SKU, etc.) Appropriate time horizon to support execution. with process architecture based on driving rapid improvements in profitability

12 Process Unlike traditional S&OP processes, our cycle cadence is wrapped around the timing of critical business decisions Value Chain Decision Continuum Raw Materials Availability Raw Material Storage Production / Mfg. of Product Finished Goods Storage Trans. & Logistics Channels to Market Markets and Customers Map to an S&OP Cycle to Tee Up Decision Signal Time required to prepare the business Business Readiness: Customers and Products Time required to penetrate the market Business Decision Signal Expanding into one market and contracting in another 1 Demand Review 2 Supply Review 3 Pre S&OP 4 Executive S&OP Forecasting far enough in advance (15 months) Improving the demand forecast for market specific products Making sure that adequate capacity of specific products is available to expand into the market Validating the business case for market expansion and profit implications Making the decision to capture incremental profit and authorize resources required to make it happen in time

13 Culture Building a common and collective agreement on how we move forward has been challenging We needed to re-define and communicate functional accountabilities We empower the supply chain organization to own the S&OP process and take accountability for its improvement We demanded cross functional input to the S&OP process nobody was allowed to opt out of the process Not opting out of the process meant that data submitted to the S&OP Process could not be questioned We ve changed the executive conversation by support fact based strategic decisions rather than allowing orbital conversations

14 Culture and we are successfully making this cultural shift by asking three things of Profit Focused Planning participants Be Transparent & Be Prepared Collaborative The process is not designed to call people out We asked people to team with colleagues & share thinking openly We designed meetings to be concise and crisp, and asked for help to achieve that We recognized that every cycle is an opportunity to update and improve forecasts and information We realized that diligence in the sales process and funnel management helps us improve Own the Information Nobody knows your markets and customer base better than you Demand forecast accuracy is up to you, and needs to be measured and improved in alignment with the needs of the business

15 Data Many IT sources house essential elements that make up a required single source of the truth INPUTS West Mill ERP System East Mills ERP System Box Plant ERP System Sales Cube Data points essential to the S&OP Process are currently being pieced together by a manual process SINGLE SOURCE OF THE TRUTH Transportation Management System Excel Models on Hard drives

16 Data Different supply planning approaches were used and required standardization 4 months Supply Review Cycle I Supply Review Cycle II Supply Review Cycle III Mill 1 (West Coast) 98% of Localized Budget Estimate 98% of Localized Budget Estimate Mill 2 (East Coast) Mill 3 (East Coast) Uniquely Calculated Production Rate Localized Budget Estimate Uniquely Calculated Production Rate Modified Budget Estimate Commonly Calculated Production Rate Methodology Mill 4 (East Coast) Localized Budget Estimate Localized Budget Estimate

17 Our decisions have identified and helped capture significant value for the enterprise Sourcing / Raw Materials Production Working Capital Transportation / Logistics Commercial S&OP Cycle #1 S&OP Cycle #2 >$2M $0.8M >$2M >$4M $0.4M >$5M S&OP Cycle #3 YTD Total Annual value of decisions is rapidly driving 500 basis points of EBIT improvement

18 Agenda 1. History of our S&OP Process 2. Profit Focused Planning 3. Where are we going? 4. Key Takeaways

19 In order to be successful in the long term we need to address a number of action items 1. Opportunity to leverage advanced statistics to determine the level of forecasting needed for each sales team 2. Developing improved Customer Service Guidelines to establish a more differentiated service model 3. To align with the annual budgeting process; the S&OP horizon will remain a rolling 15 months 4. IT platforms aligned across the entire organization 5. Set forecast accuracy metric targets and develop the actions needed to hit those targets

20 Our success to date hasn t tempered our desire to achieve industry leading performance Accomplishments Further Improvements Expected Potential Key Dependencies 0-6 Months Identified Top 60 Customer & Top 85 Product Pareto Consolidated Demand and Supply Planning Files Established Process KPI s Improve consistency in forecasting Improve data analysis cycle time Improved sales cube master data quality Engaged demand planning key stakeholders 6-12 Months 15 Month rolling forecast S&OP tie in with annual budget process Integrated plant forecasting Link S&OP more closely to pricing Integrate with TMS Semi-automate data aggregation & analytics Customer segmentation and differentiated service model Months Industry leading demand forecasting performance Real Time scenario optimization on a monthly S&OP cycle Implement demand planning tools what-if" analysis integrated with financial modeling Incentives linked to S&OP metrics Basic EDI with key accounts

21 driving to a Stage III maturity in 18 months or less 18-month target Global Enterprise Optimization Ad-hoc S&OP Stage 1 Process and calendar defined but regular compliance is poor Planning is reactive and focuses on tactical issues Limited engagement outside Operations Poor visibility to end-to-end planning data Today Emerging S&OP Stage 2 Process and calendar driven by Operations and include some Sales, Marketing, Eng, and Finance engagement VP/Director-level participation; limited SVP/EVP involvement S&OP meetings focus on current quarter demand-supply disconnects Major supply constraints are understood and addressed Excel used to aggregate and analyze demand-supply data Difficult to link operational data to financial forecasts Integrated Executive S&OP Stage 3 Generates a single, consensusdriven shipment plan at all levels tied to revenue plans Strategic priorities/plans and key partner inputs captured in a business assumptions package Dedicated S&OP org drives activities; non-ops groups engaged /provide key inputs NPI schedules integrated into S&OP processes Pre-meetings used to resolve disconnects/identify strategic issues to escalate Supply constraints analyzed in advanced tools with supply what if capability Robust reporting enables key data roll-up and drill-down Stage 4 Integrates financial goals, unconstrained demand, and resources to generate consensus plans that optimize revenue and margin CXOs participate/endorse process and provide guidance Incentives/MBOs across all functions drive S&OP engagement and collaboration Product roadmaps and market segment plans reconciled to meet financial/shared goals Market and supply scenarios analyzed to mitigate risk and pursue market upside Advanced analytical tools with "what-if" analysis integrated with financial modeling Integrated, end-to-end systems provide holistic views to make proactive, fact-based decisions

22 Agenda 1. History of our S&OP Process 2. Profit Focused Planning 3. Where are we going? 4. Key Takeaways

23 Key Takeaways 1. We do not drive our S&OP process to a 30 day cycle. Profit Focused Planning S&OP drives cycle placement and timing around strategic decisions. 2. The goal of S&OP is NOT to balance supply and demand in the short term, balancing is inherently a process to avoid short term mistakes in the market. The goal of Profit Focused Planning prepares us for the longer term (3 15 month horizon) oversold or undersold conditions. 3. Advanced analytics and forecasting tools will improve forecast accuracy and reduce the risk associated with each strategic decision, making the organization more confident and engaged in the S&OP Process.