Odd, isn’t it, how the most crucial operations in any function tend to be the least regarded – the domain of nerds, geeks, and those who ought to get out more. Sales and Operations Planning tends to fall into that category: a necessary but unglamorous back-office process: at least until something goes horribly wrong.
Our April roundtable, sponsored by Oracle, brought together a more enlightened panel: no back-room geeks these, but people who understand only too well that their supply chains, and their entire businesses, depend on ‘gold standard’ S&OP. But do their Boards really understand this?
Simon O’Neill of Heinz (see panel for participant details), suggested that Board understanding was at best theoretical. ‘Over the years we have had local S&OP projects, but we never managed them at European or Global level. But two or three years ago we hit a major cross-Europe issue: we seemed to be unable to grow the top line except by acquisition. So we set up a global team to deliver a top-down business management/S&OP approach across 12 major businesses producing 90 per cent of our profit. We had a full-time head and Ollie Wight training, tools to share best practice globally.
‘But Pittsburgh doesn’t appreciate the cultural diversity of Europe – they’re looking for a ‘one size fits all’. We found that S&OP has to be a global framework, but one which you can tailor to win local support and ownership’.
John Saxby of Danone asked the obvious question: ‘How do you ensure that aggregating these variants on the process give a coherent view?’ O’Neill’s answer was that the process starts with demand forecasting: 22 countries using one tool and virtually one process, and more importantly to a common timetable for signoff and consolidation. (This is inevitable – one plant in Holland, for example, serves all 22 countries). ‘We got support for a common calendar from HQ, and worked back from that. Getting the common calendar was really the big challenge, the big breakthrough’.
Jim Tennyson of Oakley noted that sometimes units submit forecasts ‘too early’ so there is a need to ‘doctor’ them, and O’Neill agreed, with the proviso that ‘if we can’t validate the change, we don’t change the forecast. It does mean we are reviewing almost on a weekly basis, and we are still working through that’.
Martin Jarvis of Unilever suggested that ‘You have to have a degree of internal rigour. It doesn’t much matter if you deviate from the Ollie Wight model, providing you are creating your degrees of flexibility within some sort of fixed network’.
But, Jarvis suggested, flexibility raises another problem, ‘IT has to be an enabler, not a constraint. IT has tended to dictate how we run things around the world, and that’s difficult to get out of’. Tennyson noted the desire to ‘whip these IT guys into place’ but suggested that in reality, most of the IT capability for decent S&OP is often there – what’s lacking is the skills sets to use the capability – and the IT takes the blame.
Analysing the output
Jarvis pointed out that most businesses actually have more data than they need, but that doesn’t mean they have the information to give a rough, quick answer. ‘Someone needs to be the advocate for people who know how the business and the system runs. I’d rather succeed on a spreadsheet than fail on SAP. We have systems that are big hungry beasts for data, but we spend no time analysing the output.
‘We are trying to do exception management. The vast majority of skus want the system to run them’. It’s a classic ABC analysis, O’Neill suggested – focus on the most profitable skus, and the ones with the most promotion (and the consequent cannibalisation of other lines’.
Jarvis proclaimed the need for links from supply chain thinking to financial risk management. ‘We can look at volatilities and say that these stock levels equate to certain risks and costs. We need to talk [to finance] about the big picture stuff – let them leave the detail to us. So we need a different type of people in the supply chain – people who can prompt the right supply chain questions, people who can see the big picture and the forward view’.
But how do you present supply chain risk to the Board, asked Mark Burgess of Vimto. What level should you be dealing at? Jarvis conceded that this varied. ‘For most of Europe we’re planning on a regional level, and the Board is seeing things at regional level by category, or at brand level by country. But elsewhere, Asia for instance, the whole thing is still mostly local. We’ve found the need to change the level of debate with time – now, we may have a specific problem at the sku level; later we may need a much broader approach.
Anyway, people get bored with the same level of detail all the time’.
How far down the S&OP process would or should the Board be drilling, asked Burgess. Jarvis reiterated that the aim is management by exception. ‘There are occasions when the Board is invited into a fundamental make or buy decision; but routine make-or-buy, for example to cope with seasonality in ice creams, that probably isn’t Board stuff’.
Burgess (definitely on a roll in the penetrating questions game!) asked about typical review periods – weekly, monthly, quarterly, annually – although the latter isn’t really S&OP. Saxby suggested it depends where firms draw the ‘boundaries’ of S&OP. ‘For us, S&OP is an integrated part of the strategic planning process, from three years down to quarterly (and we need to have run some sort of S&OP for those) although the core process is monthly. We tend to run to the ends of financial years, so the live process can range between six and 18 months out’. Jarvis similarly had processes ‘concertinaing’ between six and 18 months, but Burgess revealed his company was trying to move, with suppliers [bearing in mind all Vimto’s production is out-sourced] to a 12-15 month rolling basis. ‘We’re lucky in that all our trade is in finished goods, but our suppliers take our info into their 15 month schedules, although we only have strict liability for our 13 week forecasts. We regard ourselves as still having a factory – they regard us as the driver for their demand’.
The purpose of S&OP is to smooth and reconcile the differing problems and potentials of sales and manufacturing. If that’s all there were, it would be a trivial task, but unexpected constraints will intrude. Saxby spoke of last year’s World Cup which revealed huge transport constraints that hadn’t been factored in to the process. Similarly, Burgess said that last year a new product launch was pulled, because it became impossible to source a particular closure in a specific colour. ‘We only found out because we had passed our information to our supplier in good enough time for him to identify the constraint’.
These are real risks, to cope with them, Jarvis said his company is moving from single point forecasts to ‘range’ forecasts. ‘We can ask, within this range, which of my materials or transport requirements could start to fall under constraint, even if they look okay at the midpoint of the estimate. And then you can think of volatility – how much of this can I absorb in my normal stocks and processes; how much do I need to react to’. David Food of Oracle suggested an escalation process in a nice epithet: ‘S&OP ought to make a decision so that the Board can take it’. But, Jarvis counselled, ‘We need to know the major assumptions and share them with the Board. Ask them “are you happy with these
assumptions? Because if so, these are the consequences”’.
Burgess suggested that a ‘gold standard’S&OP process ‘has to take it out into the materials side – the supply chain doesn’t stop at your door’, but Saxby warned that you can’t do that for every component. There has to be a higher level of aggregation. But flexible, youhave to be able to drill down when required. Jarvis returned to the World Cup. ‘The games are scheduled long in advance: you can easily predict increased beverage sales in Germany, but you don’t need to do everything at the same level of detail’. Or perhaps you do – Saxby pointed out that here was a surge of beer, snacks, everything else into Germany – all on plastic bases or pallets which themselves became a supply constraint. ‘You need your
suppliers to be giving you some of that information’, commented Jarvis.
Burgess pointed out that a lot of companies and suppliers won’t themselves have a formal S&OP process. The majority, he suggested , use some form of MRP as effectively a glorified spreadsheet. ‘It depends on the perceived relevance [of S&OP] to their industry’.
So it’s important to work with those suppliers, but equally with your customers. ‘We’re getting heavily involved in collaboration work with the retailers and they are taking some of our concepts on board – for example we are looking with one of the big chains to get 99 per cent on shelf availability by looking at allocation by store, which depends on getting a truer picture of their demand’.
Stephen Mannion from the Institute of Operations Management said he had been taken with comments about ‘learning’. ‘S&OP isn’t just about planning into the future – there should also be a learning process afterwards, reflections on what actually happened, and how do we improve?’ To which O’Neill responded that ‘our UK sales teams are “goalled” on forecast accuracy (although they’ve wriggled out of that in the past!). 60 per cent of our UK activity is “on promotion” which means a lot isn’t in the formal forecast. Some of our national account managers are very good at forecasting in that environment, and some are frankly appalling. Our goal from the new financial year is not to use performance against forecast as a stick to beat them with, but actively to ask them “what are your learnings?”
‘But some businesses are very highly promoted, others are highly seasonal. We are looking at volume levels, and also at the individual sku level, which we haven’t done before. Our performance against forecast at, for example Asda, is very high , but has plateaued – At Lidl, it’s been only 47 per cent but is rising rapidly. So we need some very tailored targets. And for forecasting promotions, that’s all down to our relationships with the trade, so we have to encourage the collaborative approach’.
Kevin Johnson of Oracle asked, ‘Should promotional planning be a core part of the S&OP process or an exception?’ Promotions are clearly the bane of good planning. Saxby worried about cannibalisation across brands – how do you model an Evian promotion’s impact on Volvic (both being brands under his aegis). O’Neill confessed that ‘We never used to look at the possible impact of a promotion by our rivals at HP. Now we own them!’ Equally,he said, you need a ‘helicopter view’ of promotions – to see, for example, if all five of your major customers are running promotions at the same time. But as Jarvis commented, that raises the whole question of what promotions are worth doing in the first place – a rather wider subject. ‘That “90 per cent of promotions lose money” is the dirty little secret. The real cost of service is difficult to get quickly before management’. Saxby added ‘they aren’t just short term costs, long term you may be undermining the brand’. Jarvis suggested that ‘some brands are ones for the retailers to play with; some are too good (for us) to let them; and there are some that the retailers want to do something with that we should probably buy into’.
And here, it might be concluded, is the missing link. Tying together, and recognising and reconciling the constraints, of sales and operations on profits, then at the limit we are merely devising more efficient ways of selling good at a loss!
Meet the Panelists
Mark Burgess – Head of Supply Chain, Vimto Soft Drinks
‘How do you present supply chain risk to the Board? How far down the S&OP process should the Board be drilling?’
Martin Jarvis – Global VP – S&OP Programme, Unilever
‘IT has to be an enabler, not a constraint. IT has tended to dictate how we run things around the world, and that’s difficult to get out of’
Jim Tennyson Operations & IT Director, Oakley
‘Sometimes units submitforecasts too early so there is a need to doctor them’
John Saxby – Demand & Supply Planning Manager, Danone Waters UK
‘For us, S&OP is an integrated part of the strategic planning process, from three years down to quarterly ’
Simon O’Neill – European Supply Chain Planning Director, HJ Heinz
‘We set up a global team to deliver a top-down business S&OP approach across 12 major businesses producing 90% of our profit’
Kevin Johnson – Principal Consultant, Oracle
‘Should promotional planning be a core part of the S&OP process or an exception?’
David Food Business Development Director, Oracle
‘S&OP ought to make adecision so that the Board can take it’
Stephen Mannion Tutor, Institute of Operations Management
‘S&OP isn’t just about planning into the future – there should also be a learning process afterwards, reflections on what actually happened’