Strategy-Driven S&OP Our vision at Solventure. by Prof.dr. Bram Desmet, CEO at Solventure

Transcription

1 Strategy-Driven S&OP Our vision at Solventure. by Prof.dr. Bram Desmet, CEO at Solventure

2 Strategy-Driven S&OP At Solventure, we have invented a new concept called the Strategy-Driven S&OP. It uses S&OP as your satellite navigation, steering your business towards value along strategically chosen financial targets. Though S&OP has long been claimed as an executive process, many S&OP processes lack the buy-in from the CEO and certainly fr om their board of directors. We strongly believe our Strategy-Driven S&OP is about to change this. In our vision paper on the Strategy-Driven S&OP we have explained how Strategic Benchmarking can be used to derive strategy-dependent targets for key financial metrics, and make the S&OP process truly a means to an end. The Executive S&OP meeting is the de facto meeting where all of this comes together. In this vision paper, we will describe how we believe the Exec S&OP needs a broader, and more integrated set of metrics to truly understand where the business is heading and which actions to take depending on the course. If we want S&OP to be our satellite navigation, and the Exec S&OP to be truly Executive, we need to go beyond OTIF delivery performance and inventory turns as a discussion. Figure 1 - Strategy-driven S&OP as invented by Solventure

3 Building a balanced and holistic scorecard, based on the supply chain triangle. Most of the exec S&OP s we see have a too narrow focus on On Time In Full (OTIF) delivery performance, Inventory Turns, and some cost or efficiency metrics like actual and planned plant utilization. As we will argument this set of metrics is too narrow, lacks the strategic context and has an efficiency bias. To make the S&OP process strategy-driven we need to account for that strategic context, which will put efficiency metrics in perspective, and, as we will show, it requires a broader KPI base. As mentioned in our vision paper on Strategy- Driven S&OP, strategy is about making choices. In essence it is about choosing a cost or a differentiation advantage, as initially explained by Michael Porter. Treacy & Wiersema, have proposed a product leadership differentiation or a customer intimacy differentiation. Crawford & Matthews take it one step further in explaining that value propositions are made up of 5 key value drivers: product, price, access, service and experience, amongst which companies need to choose. They can dominate on 1 driver, differentiate on a second, and will have to play at par at the others. It repeats the same mantra that strategy is about making choices. You can try to be the best at everything but that will at best leave you stuck in the middle as smarter competitors do make a choice and leave you behind on their chosen drivers. Figure 2 shows our supply chain triangle where in the service corner, we have used the advanced strategy model of Crawford & Matthews to highlight different possible drivers for service or more generally value to the customer. OTIF delivery performance is an aspect of access. Important to remember is that if you can dominate on 1 parameter, and differentiate on a second, it is typically OK to be on par at the others. As such, if you are a product leader in the definition of Treacy & Wiersema, you may try to dominate the market on product quality, which means that customers buy from you because you simply have the best and the latest product. In this situation the OTIF delivery performance can be at par, and should not necessarily be best in class. Next to product quality a high innovation rate or a short time-to-market is crucial for a product leader. You don t want to be in a situation where these parameters are lagging behind whereas the OTIF is best-in-class. We need to put things in perspective, and more specifically in a strategic perspective. Figure 2 also shows KPI s for cost and for capital employed. As different strategies lead to different choices in the value drivers, they also lead to different targets for the cost and capital employed. As discussed at length in our vision paper on the Strategy-Driven S&OP, as a product leader you probably will be worst-in-class when it comes to inventory turns but that s OK given you will compensate for that by being bestin-class for gross margin and EBIT!

4 Figure 2 - Linking metrics to the supply chain triangle Figure 3 continues our story in retaking that the value-drivers are drivers for the top-line, that top-line and cost lead to bottom-line, and that bottom-line over the capital employed leads to return metrics. It also shows that KPI s for operational process are causal or diagnostic metrics for the value metrics and the financial metrics. Take forecast accuracy as an example. An improvement in forecast accuracy will typically help to improve OTIF while at the same time lowering operational costs and lowering inventory. Like strategy impacts your performance in financial KPI s, as discussed at length in our vision paper on Strategy-Driven S&OP, the same holds true for operational metrics. Let s again take forecast accuracy as an example. Product leaders have much more uncertainty on their forecasts, driven by the higher innovation rate and the bigger bets they place on new products, as a result their forecast error will always be higher than that of the operational excellence player, who has a simpler product portfolio, focused on fast moving products. Again, be careful when benchmarking forecast accuracy, as a product leader you may be the worst-in-class instead of the best-in-class, but that is perfectly normal, even required. Once your demand becomes predictable, you may no longer be a true product leader! 1 Porter, M., What is Strategy?, Harvard Business Review, November-December Treacy, M., Wiersema, F., The Discipline of Market Leaders, Basic Books, Crawford, F., Mathews, R., The Myth of Excellence, Why great companies never try to be the best at everything, Three Rivers Press, 2001

5 Figure 3 - A strategically balanced scorecard Case Study from a Product Leader. Taking the Exec S&OP to a new level. Figure 4 shows an example of a strategydriven KPI dashboard for a product leader company. The targets for the key financial metrics (Gross Profit/COGS, EBIT/SG&A, DPO, DSO, DIOH, CCC, Fixed Assets and ROCE) have been defined using the strategic benchmarking technique described in our vision paper on Strategy-Driven S&OP. The targets are shown here as the budget. We show the actual performance, the delta with the budget, and the delta with the previous year. The story behind the figures is that the company had a huge success with a major new product. With 5-6 major vendors, being on different technologies, our company seemed to have won the lottery, as for multiple reasons, our technological choices, gradually turned out to deliver superior performance, making the full market shifting towards our products, because of our superior standards. We see that this new product is propelling our sales ahead of the targets and significantly beyond last years performance. In the %SalesofNew we see the %Sales of New products, which is an important KPI for us as a product leader, is significantly ahead of schedule. As a product leader, this is what we dream off.

6 The business problem or challenge is that some of our key suppliers are unable to follow the growth rate. Given we did not anticipate this to happen, they are doing what s possible to scale-up, however, as always, getting new equipment in and ready takes some time, and is catching some delay. The problems at key suppliers explain the low supplier OTIF, and actually that also weighs on our OTIF delivery performance and on our customer order lead time, which is at 3 weeks instead of just 1 week. All the expedited shipments and last-minute production change-overs are weighing on our direct material costs and our cost of goods sold, which weighs on the EBIT, which at 7,53% is below what we had budgeted, but is way ahead of last years performance. From a ROCE perspective we still are on schedule, given the somewhat lower than planned EBIT, is compensated by a lower working capital. Figure 4 - Example Strategy-Driven KPI Dashboard for a Product Leader Imagine you try to build that business story by having only a fraction of the KPI s. Though this is what we see in exec S&OP meetings, where we try to sift through 30 product-region combinations, showing the forecast, the inventory and the OTIF at best. Many Exec S&OP meetings are no more than demand review meetings, where instead of discussing the forecast, half of the meeting is lost in discussing whether the actual demand seems to be correct.

7 We do believe an Exec S&OP meeting should have a state-of-the-business in a 1-slideoverview, as the one shown in Figure 4. Based on this 1-slide-overview, we can focus on the business issues at hand, which in this case will be what are we doing to speed up the supply of key components?, have we explore alternative suppliers?, what if we d use more expensive parts with availability to substitute for lower cost parts with a shortage?, what would be the impact on the top-line, the bottom-line, and the ROCE?. This is the type of scenarios that will keep your CEO in the meeting instead of out. Other discussions will be on how will we do the allocation of the finished product that comes available?, will it be first-come-first-served or do we want to differentiate for A-B-C customers?, what if we d cut some segments of customers and products all together?, what will be the impact on the top-line, the bottom-line, and the ROCE?. Again, this is what will keep your CEO in the meeting, where he will need to make the decision. And as a publicly listed company for sure I ll want to have the latest update on when do we expect supply to start matching demand?, what is our risk at that point if demand would start slowing down?, what kind of commitments are we making to suppliers for them to expand their capacities?,. how have we managed our risks when doing so?, what is the potential impact on inventory build-ups, free cash flow and write-offs?, what is a conservative estimate we are willing to share with investors?. All of these are discussions with substance so they will have to be prepared. That is why some companies will hold a pre-s&op meeting, to ensure the relevant questions get listed, so that the different alternatives can be explored and worked out for their top-line, bottom-line and ROCE impact. When doing a pre-s&op, do it with your CEO and/or divisional president. If you know their questions, and can propose alternative answers, you will be assured of their buy-in, at the time you organize a broader Exec S&OP meeting. Many S&OP meetings get killed by PowerPoints showing graph after graph and table after table. When reviewing your business, do it on a high and aggregated level, like the one shown in Figure 4. More important is to list the issues you are facing, options to address them, and what is their impact on the top-line, bottom-line, capital employed and as such ROCE. That s what is so badly needed to make the Exec S&OP a true Executive meeting, and have the decisions being made in the meetings, instead of outside of the meetings, as we have so often witnessed.

8 Currently in the making: creating an external focus to the Exec S&OP In our Strategy-Driven S&OP, the target setting through Strategic Benchmarking creates an extra Executive edge. Next to monitoring your own performance, at Solventure we are working on a way to do a quarterly benchmark with the performance of your key competitors. We re down to 127days of CCC, which is 23days better than planned but what if our closest competitor would have come down to 115 days from historically comparable levels. It is hard to be critical when times are good, as it is hard to be positive when times are bad. Through our quarterly competitive benchmarking we will bring extra challenge and focus in the Exec S&OP meeting. We believe all of this is needed to make the S&OP truly strategy-driven, with your CEO in the meeting instead of outside. Maybe our +41M vs budget in Figure 4 looks great, but what if our closest competitor would show a 20% growth compared to last year, where we re only showing a 144/1041 = 14% growth!.

9 In summary On Executive S&OP, a lot has been written on what should be on the agenda and who should attend. For all the paper knowledge we have, we believe 80% of the meetings are killed by PowerPoints of +100 slides, with a spotty attendance (at best) of the division presidents and the CEO. The compiled overviews are extensive, though still lack substance. We may see a forecast, some actuals, some OTIF and some inventories, but none of it comes close to the broader overview we have shown in Figure 4. If you want to talk business, you need to show the business. Do your utmost best to compile the business in a 1-slide-overview. Prepare the Exec S&OP with your BU president and/or CEO. Get to know what he wants to know and what he sees at the options. After the 1 slide overview, dig into the business issues, show the options with their impact on the top-line, the bottom-line, the capital employed and the ROCE. When setting your targets, account for your strategy, and ensure your targets are balanced across margin, cost and capital employed. With ambitious but realistic targets, a well-attended and highly energetic Executive S&OP decision making meeting, the S&OP process will truly become your tool to drive your strategy. That s the vision we have built at Solventure. That s our goal when we work with our customers. We d like to hear from you! Let us know your thoughts. We re curious on which aspects you d agree or disagree. Where are you in the S&OP journey? Which challenges are you facing? Together we can make it even more exciting and rewarding! About the author Prof.dr. Bram Desmet is the CEO of Solventure, a Europe based expert in designing and implementing S&OP processes using the Arkieva software. Bram is also an adjunct professor in Operations and Supply Chain at the Vlerick Business School. He obtained his Phd at Gent University on the topic of Safety stock optimization in multi-echelon production-distribution networks. He finished his first book Supply Chain Strategy and Financial Metrics, which is available for pre-order at the website of KoganPage. Look out for more at Bram welcomes your feedback at bram_desmet@solventure.eu. About Solventure As Solventure we proud ourselves of being experts in designing and implementing Sales, Inventory and Operations Planning. We do that through a unique combination of people, processes, tools and analytics. Solventure is the channel partner of Arkieva, an award winning S&OP software. Together with Arkieva we provide global support to our growing customer base. Check us at or contact us at contact@solventure.eu for more info.