DISRUPT DIGITIZE The Evolution of Sales and Operations Planning (S&OP) Tapan Mallik SYNERGIZE
The Evolution of Sales and Operations Planning (S&OP) Key Findings After adopting and implementing S&OP, some corporations cannot sustain the process. There is a lack of trained people with business and IT knowledge to drive the S&OP process. It requires skill to translate high level concepts into effective processes and solutions. Most employees in organizations do not understand how their work affects business strategy and strategic initiatives. Most organizations struggle with defining appropriate common business metrics or performance measures that encourage cross-functional collaboration to achieve strategic business objectives. Corporations have been implementing and adopting Sales and Operations Planning (S&OP) processes for several decades with mixed results. Find out why some fail, and what you can do to capitalize on S&OP over the next decade. Often, there is no clear S&OP journey road map with clearly defined maturity goals. Inadequate or non-existent governance process to keep the organizational behavior focused on achieving common business goals as opposed to succumbing to functional interests. Recommendations A formal integrated business management process with clear goals and outcomes aligned with business strategy and leadership accountability is a necessary starting point. Businesses need to create a cross-functional collaborative work culture focused on achieving common business goals and performance measures driving alignment. Institutionalize a culture of business execution guided by the S&OP plan and put a governance mechanism in place to keep the organization from deviating from the plan. Ensure organizational readiness prior to embarking on the journey in all three dimensions - people, process and technology, in that order. People and process have been the biggest barriers. Define cross-functional business process, common metrics, reports and information architecture before beginning the technology evaluation. Stay focused on the key essential requirements rather than glitzy, non-essential, nice-to-have functionality. Analysis Generally, the S&OP journey in a business starts with great deal of hope and expectations. In most cases, an external consulting partner devises the charter and provides initial training and education to a select group of people. The external partner helps establish the initial process with meeting agendas. The process gets rolling and roughly 12 to 18 months 2
into the journey, the expected result is not realized. The planning and the execution side of the business remains disconnected. Various reports are defined to support Demand and Supply Review meetings without the definition of an information architecture. Planners are challenged with manually pulling in the data from disparate sources to format and create necessary reports while continuing to do their day job. In most cases, adoption of a new S&OP process and the need for a cooperative work culture is not communicated to the rank and file in the organization. The S&OP plan is either not communicated or ignored by the planner community. In one global organization, planners for each of the product lines maintained their own planning spreadsheet which had no connection whatsoever with the S&OP plan. Planners and schedulers maintained their own separate ways of doing business - as long as they managed to keep the business running, no one questioned them. Many formal and informal studies were commissioned to understand the root cause of the failure of the S&OP process gaining traction in the organization. Some common reasons: Lack of cross-functional communication and collaboration Lack of common business metrics and misalignment with overall business strategy Lack of clear connection to financial performance and shareholder value creation Lack of process sponsorship from the executive management Lack of talent with cross-functional depth and breadth S&OP plan disconnected from business execution Excessive focus on supply chain and demand-supply balancing without a clear understanding of the plan s financial impact. It is more a problem with businesses stuck at the Stage 2 maturity level Businesses are also challenged by additional factors beyond their control. With globalization, product proliferation, shorter product lifecycles and increasing demand volatility, comes the challenge of profitably serving customers. These challenges will make the effective execution of S&OP even more important. These factors are instrumental in effective implementation of the S&OP process as well as moving beyond Stage 2 maturity level: 1. Clearly defined business goals aligned with business strategy 2. Organizational change management a. S&OP process ownership and sponsorship b. Cross-functional collaborative business process and communication c. Governance d. People competency development 3. Connecting planning with execution 4. Technology innovation enhancing S&OP capability with proper underlying data structure to support strategic, tactical and operational planning with what-if scenario analysis using prescriptive analytics 3
5. Change S&OP process scope from supply chain focus to business focus - Integrated Business Planning(IBP) As organizations attempt to make progress in their S&OP journey, these five focus areas will be instrumental in achieving business excellence through IBP. Let me use IBP and S&OP interchangeably. In the subsequent sections, these five focus areas will be explained with recommendations wherever appropriate. 1. Clearly defined business goals aligned with business strategy Businesses need to have clearly defined financial performance goals and a business strategy to achieve them. A diagnostic analysis is recommended to identify opportunities for improving revenue, gross and operating margin, IDS, customer service, free cash flow, forecast accuracy and possibly bias. These are a good set of metrics to start the journey and an exercise in strategy definition by each of the functions will help drive the necessary cross-functional collaboration and alignment. Without a clear business case, organizational cross-functional alignment with the overall business strategy is difficult, if not impossible. The organisation should do this right before undertaking any major effort. The organization needs to clarify the rationale for its existence and how to accomplish objectives as an organization. Figure 1 highlights different functional strategies that need to align with overall business strategy. Figure 1: Alignment of Business Strategy with Functional Strategy 2. Organizational change management Organizational change management can be broadly classified into four categories: S&OP process sponsorship and ownership - It is one of the most important steps in the S&OP journey. If Step 1 is done right, it will most likely result in having the business leadership as the sponsor of the S&OP process because the leader understands the value of the process. Even if an organization excels at Stage 2 maturity level, it must transcend supply/demand balance focus to 4
business focus. It requires a senior executive not only sponsoring and owning the process but also making the S&OP meeting his own forum for collective decision making and communicate the plan to functional heads for cascading the plan down in their organization. Cross-functional collaborative business process and communication - One of the key premises for early stages of S&OP implementation is to break down the barrier between supply and demand functions. It is a foundational requirement for Stage 2 maturity. For the next higher level of performance, it is necessary to broaden the scope of S&OP towards integrated business planning and management which instills the culture of cross-functional collaboration and communication. If an organization has gone through the exercise of developing functional strategy aligned with business strategy, it most likely has achieved the goal. Otherwise, a coach (preferably external) with strong facilitation skills can guide the functions in developing a collaborative process through a business case and education with sponsorship from the executive management. It is important to design an integrated business process with shared understanding, agreement and common business metrics so that people have a better understanding of intra-functional process touchpoints and common business drivers. Without a documented business process, it is difficult to manage the uniformity of the process understanding, especially in a large global organization. This approach also maintains the continuity as people periodically rotate in their roles. Governance - When documenting the business process as mentioned in the previous section, it is important to identify the process owner and establish a governance process not only for the business process, but also for data, and mindsets and behaviors. It is the process owner s duty to ensure that the process is well understood and executed as intended. For large global organizations, adoption of business process management (BPM) is strongly recommended. Also, once a maturity level is achieved, it is important to not only maintain the level but make an effort to continuously improve the process. BPM is an excellent approach for managing process on an ongoing basis. People competency development - It is important for the organization to help its people develop cross-functional business knowledge with broader perspectives of critical issues. It is also important to have people with a background in advanced analytics, Six Sigma and Information Technology. Knowledgeable people with a broad business background can help sustain a good business process. 3. Connecting planning with execution Surprisingly, the S&OP plan vs order fulfillment and execution is not well connected in many organizations, according to surveys. It is one of the reasons why organizations cannot realize the benefits of the S&OP/IBP effort. It happens for several reasons: In one company, the S&OP process is confined within the mid to upper level employees while the rest of the organization does not have a clue about what happens in S&OP meetings or what is an S&OP plan. There is no formal communication of the plan. Lack of formal policy for the order execution process. Many organizations do not have a properly defined market or customer segments, sales policies, abnormal demand handling policies. When a customer service representative receives an order, the order needs to be confirmed, possibly within minutes. Without any guidelines, they will most likely go by the first come, first served rule, which may be detrimental to the profitability of the business. 5
There is insufficient data and technology support for some of the automation necessary for an effective integration. In Figure 2, a high level generic business processes is outlined combining the concepts from S&OP and APICS as the BP framework. Figure 2: Key Steps in Integrated Business Planning - an Example In Figure 3, the sequence of five steps in IBP is shown in order of execution: Step 1- Product Review Step 2 - Demand Review Step 3 Supply Review Step 4 - Integrated Reconciliation (IR) Step 5 - Executive Review (ER) Integrated Reconciliation is a collaborative meeting of various functional leaders with the finance manager to develop a baseline consensus plan with a few scenarios, each with its own financial projections - e.g. revenue, COGS, gross margin, free cash flow, etc. The baseline consensus plan with multiple scenarios having financial outcomes are reviewed in the Executive Review (ER) meeting and an approved plan is published for communication and execution. This plan is at the family/sub-family level which requires disaggregation to Stock-Keeping Unit (SKU) level for execution. It calls for defining an appropriate data structure supporting not only different functional views but also different levels of aggregation and disaggregation. It is a critical step where the need for an IT expert with a strong business background is necessary, who understands the information requirement for each of the Review meetings and is able to create appropriate information architecture to support the requirement. It is difficult to find this skillset. Figure 3: Sequence of Steps in Integrated Business Planning - an Example 6
Figure 4 is similar to Figure 3, which shows the interaction of different planning levels by time bucket and high level information flow across processes. S&OP process steps are in monthly time buckets which typically run for 24 months, whereas weekly MPS process typically runs for six months in weekly buckets. Figure 4: Integrated Planning Steps in Different Time Horizons The volume-based family level aggregate plan from ER is disaggregated to run MPS at SKU/mix level in weekly buckets for a six-month time horizon. The weekly quantities from MPS are used to create detailed schedule in continuous time. 7
Figure 5 shows how to incorporate the feedback loop into the S&OP or IBP process from the execution step. Properly implemented, it empowers the organization to manage marketplace volatility while keeping everyone informed. Any deviation from the plan is captured through the feedback loop where information from scheduling feeds early periods of MPS and early periods of MPS feeds early periods of the aggregate plan. This feedback loop helps monitor the plan through a weekly demand-supply-reconciliation process keeping the situation under control as shown in Figure 4. Figure 5: High Level Integration for Integrated Business Planning - an example 4. Technology innovation supportive of S&OP/IBP With the evolution of S&OP to IBP, it is expected that software will evolve to support the process integration. The software industry is not there yet, especially for constrained supply planning and generation of financial projections. One needs to assess if the underlying data structure in the tool can support mapping of family/sub-family structure down to the detailed SKU level and translation of one view from another, e.g., marketing view to manufacturing view for rough cut capacity planning or capacity allocation by prioritized market segments. Innovation in prescriptive analytics can be incorporated in the S&OP tool to generate profits or a cost optimized baseline plan. In today s complex business environment, there are too many degrees of freedom for anyone to manually determine the best business trade-offs in the face of competing priorities. Having an analytics expert on the team is helpful to build a prescriptive analytics model to analyze options and come up with a profitable and executable plan. 8
5. Change S&OP process scope from supply chain focus to business focus As we have already seen, this transition happens for business reasons. An organization will not likely excel without an integrated managing process. S&OP will eventually evolve to IBP. Niels Van Hove provided a definition of IBP in his website www.supplychaintrend.com: Integrated Business Planning (IBP): A holistic planning philosophy, where all organizational functions participate in providing executives periodically with valid and reliable information, in order to decide how to align the enterprise around executing the plans to achieve budget, strategic intent and the envisioned future. My recommendation supports this general principle outlined in this definition. Consulting firms such as Oliver Wight have modified their S&OP approach along the lines of the above definition and rebranded the S&OP as integrated business management. Businesses will benefit from this trend and associated work practices. Conclusion Developing business strategy, organizational alignment, connecting planning with execution and technology innovation will enable a successful integrated business planning process implementation. People with strong IT skills and business acumen can help develop the foundational information architecture which will help take advantage of technological innovation and the use of prescriptive analytics. The trends discussed in this white paper will pave the way for sustainable S&OP/IBP adoption for businesses. References: https://supplychaintrends.files.wordpress.com/2012/06/supply-chain-trend-sop-pulse-check-iii-july-2012.pdf https://supplychaintrend.com/2014/10/27/the-sop-pulse-check-2014-insights/ https://supplychaintrend.com/2015/11/25/a-new-definition-for-integrated-business-planning/ http://www.slideshare.net/cranesp/apics-trends-shaping-evolution-of-sop-integrated-business-planning-final https://blog.kinaxis.com/2008/05/key-trends-in-sales-and-operations-planning-sop/ http://www.scdigest.com/assets/on_target/08-04-30-1.php?cid=1646 Uskert, Michael and Jane Barrett, Sales and Operational Planning Maturity: What Does It Take to Get and Stay There?, Gartner Research Report, 1 November 2010 Barrett, Jane and Steven Steutermann, Conquering the Seven Deadly Challenges of Sales and Operations Planning, Gartner Research Report, 18 January 2010 9
About the author Tapan Mallik is an S&OP Lead at Bristlecone. He has a PhD in Management Science & Information Systems. Tapan has 28 years of experience in supply chain planning and business process optimization. His areas of expertise include business process re-engineering, S&OP implementation, integrated supply chain planning, and project management. Bristlecone is a premier Supply Chain Advisory and Analytics SaaS+ firm headquartered in California s Silicon Valley.We have offices in the United States,canada,United Kingdom, Germany, Switzerland, Singapore, Malaysia and India. Learn more at www.bcone.com. To set up a discussion with our team, please send your inquiry to sales@bcone.com 2017 Bristlecone Ltd. Bristlecone believes the information in this presentation is accurate as of the presentation date. The information is subject to change without notice. Bristlecone acknowledges the proprietary rights of the trademarks and product names of all companies mentioned herein. All Rights Reserved. 10
An ever increasing amount of data is being generated throughout supply chains, which can be used as an advantage. Irfan Khan CEO Bristlecone