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Achieving Better Service and Profitability with More Advanced Forms of S&OP

The desire to improve service is the top driver for many companies' investments in information technology (IT). Achieving this goal would be very difficult without a robust Sales & Operations Planning (S&OP) process. The goal of sales and operations planning is to achieve high service levels by effectively balancing demand with supply. This requires both internal and external collaboration. Internally, at a minimum, the manufacturing, demand planning, and sales and marketing groups must collaborate effectively. S&OP, however, is evolving to provide better support for external collaboration, better integration with longer term business planning, and better simulation capabilities to support both contingency and ad hoc planning.

Better Service is the Top Concern of Corporate Executives

Last summer, ARC Advisory Group completed a survey that monitored why companies adopted and used a wide variety of enterprise applications. The survey explored the investment drivers for these applications and the adoption and use of advanced functionality in each application area. One hundred and fourteen executives from around the world responded to the section of the survey that examined key drivers for IT investments. Smaller numbers responded to sections of the questionnaire that required knowledge of particular types of applications (Finance, Human Resources, Supply Chain Management, etc.).

Given a list of 14 possible external drivers for IT investment, respondents selected the desire to achieve better service performance as the leading driver. Along the same lines, when the survey participants were asked specifically about IT investment drivers for improving supply chain processes, they indicated that better supply chain service performance was their companies' key goal.

Better service would be very difficult to achieve without an S&OP process focused on better internal and external collaboration with the goal of more effectively balancing of supply with demand.

Since better service was the key corporate goal driving IT investments, it is not surprising that Supply Chain Management (SCM) applications took precedence in terms of the IT technologies and applications in which companies wanted to invest.

What do Users Want in their SCP Applications?

Companies that want to improve their S&OP processes cannot just go out and buy an S&OP-specific application. Rather, they need to look at supply and demand planning applications with the right set of capabilities. In light of this, we found what executives were looking for in their supply and demand planning applications to be very interesting.

What do executives want in their supply planning solutions? We asked executives from process, hybrid, and discrete manufacturing industries this question. A variety of features and functions applied to some manufacturing environments, but not others. However, we asked about six advanced supply planning features that apply equally well across the process, hybrid, and discrete manufacturing industries. Three of the top four desired functions have an important role to play in either S&OP, as it is typically practiced, or the more robust forms that are only now emerging.

Obviously, because S&OP involves a variety of functional areas, better workflows and appropriate views based on a specific worker's operational role will improve this process.

Analytics that support operational excellence can also play a very important role in improving the sales and operations planning process. These analytics track how a company is performing on key performance indicators (KPIs) and whether the performance is trending up or down on a particular KPI. Key performance indicators that would be particularly important for achieving higher service levels and more effectively balancing supply with demand include forecast accuracy, production throughput, and the ability for production to surge to meet unexpected demand.

Finally, as we'll see later, it's also important to be able to compare the plans against what was actually achieved.

The Evolving S&OP Process

To achieve the goal of efficiently balancing supply with demand, Supply Chain Planning (SCP) applications are evolving to provide better support for external collaboration, better integration with longer term business planning, and better simulation capabilities that support ad hoc contingency planning.

Most S&OP processes are too inward facing. For consumer products manufacturers, there is usually some level of interaction between sales and marketing and retailers surrounding promotions. But this is often not properly factored into demand forecasts, and rarely into replenishment plans. For industrial manufacturers, there might be some limited, and generally ineffective, forms of collaboration for trying to understand channel partner's demand forecasts. But most S&OP collaboration has been focused on the internal interaction of manufacturing, sales and marketing, and the forecasting groups. Better demand collaboration and more frequent data on what is actually selling, improves forecasting, reduces process lags, and prevents the build-up of bullwhip inventory.

However, over the last decade, many companies have dramatically increased their use of contract manufacturing partners and offshore sourcing of key components. While there are a few exceptions, most supply planning applications were not designed to support advanced forms of supply side collaboration. Implementing more advanced forms of S&OP in companies with increasingly outsourced supply chains will clearly require better supply side collaboration.

Among manufacturers that do have a formal S&OP process, some leading companies are evolving their process to better integrate S&OP with budgeting and financial planning processes. This is driven, in large part, by the fact that financial planning applications are making it far easier - although it would be going too far to say it was easy - to do rolling quarterly budgets, rather than just one big budget per year. This increase in the number of budget cycles makes it less likely that the assumptions in the budget will become outdated and the budget targets impractical and unrealistic. This makes it natural to begin merging S&OP, which is generally done on a monthly basis, with budgeting, done on a quarterly schedule.

S&OP and integrated business planning can begin to merge through a granular understanding of the profitability of customers and products. This new form of integrated S&OP and financial planning is increasingly leading CFO's to chair their companies' S&OP executive planning meetings.

The action items that come out of executive S&OP meetings should not be confined to the supply chain team. Sales executives can play a key role in balancing supply with demand, particularly by communicating to customers that only the largest and most important (a polite way of saying "profitable") customers are guaranteed the best service levels.

The plan-versus-actual feature set is important to this new form of integrated S&OP/financial planning. In the executive S&OP meeting, executives need to review how they are doing against budget targets, including revenues, costs, and profits. Simulation tools are critical for both contingency analysis and ad hoc decision-making. In the run up to the executive S&OP meeting, key planners can do "what-if" analyses. For example, they might run a simulation to understand what the impact might be if demand on key product families is 10 percent less than forecasted. The sales and marketing team could then look at various solutions to the hypothetical (but not unlikely) problem.

Another S&OP challenge occurs once the company commits to a plan, leaves the executive planning session, and the supply chain team tries to implement the agreed upon plan over the course of the coming month. Things may be changing so much, that continuing to manufacture or replenish to a plan that does not reflect demand becomes counterproductive. Many companies have so many different SKUs that they cannot plan for all supply/demand contingencies. Companies are struggling to understand what level of deviance from plan (which would differ day-by-day during a 30-day planning horizon) should trigger an ad hoc executive S&OP meeting and the need for ad hoc contingency planning. Consumer goods companies are also beginning to experiment with using real-time demand data to adjust replenishment plans several times a week. Nevertheless, it is clear that plan-versus-actual-budget reporting and simulation are important tools in closing the gap between what is planned for during budgeting cycles and what is actually achieved.

Last Word

The majority of manufacturers do not have formal, documented S&OP processes in place. For the S&OP process, the "crawl, walk, run" approach is particularly appropriate. While we are discussing how S&OP is becoming even more advanced based on advances in SCP and financial budgeting applications, many companies are not yet even at the "crawl" stage. Still, an understanding of where the "run" stage is heading can increase the speed with which companies can move to more advanced forms of S&OP.

For further information or to provide feedback on this white paper, please contact your account manager or the author at sbanker@arcweb.com. ARC Briefs are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be reproduced without prior permission from ARC.