Successful business decisions rely on good planning and accurate information. The problem is the more distant the planning horizon the more ‘unknowns’ enter the equation. But are there ways of mitigating the risks associated with those unknowns? Nick Allen finds out.
According to research conducted by CSCO Insights for Oliver Wight and Oracle in the summer of 2013, only 10 per cent of organisations claim to have “excellent or world class” Sales & Operations Planning and a fifth of organisations surveyed have no recognisable S&OP process in place.
The report, which also looks at the related field of Integrated Business Planning, suggests that 44 per cent simply “don’t get the benefits”. So why is this? Given the critical importance of planning in determining the future operational and commercial performance of a business, shouldn’t executive decision makers be more active in ensuring that their planning processes are up to speed?
Liam Harrington, partner at Oliver Wight believes senior management in many organisations are being challenged by the S&OP or IBP process to alter their traditional behaviours. “Executive management are, to some extent, placing a ‘glass ceiling’ on the performance of the process because of executive behaviours,” he says.
He explains the traditional game of “budgetary mindsets”: “This is where you think you need 100 of something, so you ask for 110. Then they say the most you are going to get is 90 and you negotiate to a position. And sometimes, you may be bullied into agreeing something you don’t think is possible, so the next time you manage their expectations in advance – so you say next year is going to be difficult and we need 120.”
Harrington outlines how IBP and S&OP requires a very different way of working. “We don’t negotiate, we simply tell the truth,” he says. “Openness and transparency are values of the process. We don’t manage expectations. But of course, when openness, honesty and truth meet pressure and negotiation, there is a disconnect. And that is what I mean by the glass ceiling.”
Julian Mosquera, director at LCP Consulting, sees a growing desire within the ranks of senior management for top level business planning tools.
“Over the last five years the degree of volatility in just about every sector has meant that businesses have found the [planning] capabilities they have in place – using standard algorithms – just aren’t adequate, leaving them exposed to shortfalls or too much inventory in their pipelines,” he says.
Mosquera believes companies have traditionally tended to rely on algorithms that reflect the past rather than future expectations of demand. With the high volatility in demand experienced by most companies over the last few years such reliance on past data can be woefully inadequate when planning horizons are two or three years out. He sees leading companies now looking to integrate S&OP with Customer Relationship Management data.
Envy of the industry
“Historically, if you had any form of account sales history you tended to slavishly take the forecast by account and just apply it,” he says. “What we are doing is saying, there is no point in trying to bring in the granularity of any account management because it is always partial, you never get a complete picture. So we take the history and apply it with seasonality, then we do any uplift on general trends, market trends, market intelligence – and then overlay key account insights on how they are likely to trade.”
Mosquera cites their client, Edwards, the manufacturer of specialist vacuum pumps, and how their scientific division can forecast with a level of precision that is “the envy of the industry”. In the semiconductor sector, “a sudden call for iPads will drive a demand for a particular type of chip that will shift production from one side of the world to the other – and Edwards is a supplier into that industry. Their business can move 600 per cent from a base line to a sudden uplift, and they are expected to respond to that within 8 – 16 weeks,” he says.
Interestingly, the consultancy is applying S&OP principles to sectors that have traditionally not incorporated S&OP. Stewart Higgins, retail partner at LCP Consulting, explains how a major UK carrier supplying the home delivery market for retailers has taken the traditional elements of S&OP and linked them to its CRM data to enable the company to better understand seasonal peaks. Seeing what key accounts require has enabled the carrier to have commercial conversations with their key accounts on how they are likely to consume capacity and how much of that capacity the client may wish to secure.
“They have been able to secure and guarantee services for their retail customers across seasonal peaks and they have been able to maximise their own commercial position because they know exactly what capacity they have available to sell within the market and at what rate they should sell it to secure a profitable operation,” he says.
Similarly, this approach is being adopted by the fresh food sector. “Here again it is the key account managers, dealing with the supermarkets on a day-to-day basis, that are actively taking part in the demand planning meetings feeding into S&OP,” says Higgins. “To set up a planning environment where you can plan the availability of fresh produce – which is typically on a growing lead-time of up to twelve weeks – it actually suits the disciplines of S&OP. We are not aware of anyone else doing this.”
Danny Halim, VP Industry strategies, JDA sees the definitions of S&OP naturally progressing towards Integrated Business Planning – “a lot of people have been introducing it as a differentiator to S&OP and it has taken it a little longer for people to absorb and digest that, but now going into 2014 they are moving towards IBP,” he says.
Halim believes most companies are now planning for growth but are still cautious. “They [businesses] need to have the ability to get more accurate, timely responses on answering questions such as – what is the projected profitability? What is the projected cash flow? – beyond a typical S&OP scope,” he says. “But increasingly the most important question is – What is the projected risk?”
His reasoning is that companies are expanding internationally and many want to be able to see plans on a regional basis, while at the same time combining the projected costs of the whole operation. He says they want to scenario plan “what is the risk if they don’t achieve the [projected] revenue growth? How do they mitigate those risks?” he says. “They want to able to monitor all of that in a more consistent manner – so they can make decisions on the complete picture,” he says.
According to Halim, IBP is getting the attention of CFOs. They are using it to see when to invest and many are looking for three years supply risk down the road.
“Operational S&OP tends to look at 12 to 18 months and IBP is changing that, because at minimum they are looking at 18 months – but companies want to extend that to 24 months or even 36 months period.
“Beyond 24 months there are a lot of uncertainties. But as part of the IBP process this is where you add in the risk assumptions, because once you have put in a plant in China you are not just looking at two years down the road, you have to look at least five years out. I think that’s what IBP is helping them to do,” he says.
However, Mike Straiton, business development manager for Orchestrate planning and scheduling software at Access Group, believes that longer term plans often fail to take account of the local constraints that are more visible in a short term plan, a situation that can present impractical results and unrealistic expectations. “We try to use the same data for the long term plan as we would for the shorter term plan, so we can take account of the constraints at all of the various factories and production lines when we are trying to decide whether we have enough capacity in the supply chain,” he says.
Straiton explains that having a common data set and taking account of the capacities that are constraining the supply chain are critical aspects of good planning. But he believes not every business outcome can be measured in terms of financials. He says: “For example, we might choose to measure the available stock of a product at various points in the supply chain. And although you could say, therefore it costs me this amount of money to keep that stock, really the measure of effectiveness of the plan is whether or not you have enough stock to cover the obligation to the customer. So being able to think about non financial business outcomes is something everybody does but is not necessarily taken on board with regards the software that supports the process.” He points out that this often results in people “cooking their own soup” using S&OP plans produced on Excel.
“I’ve seen things go wrong when people take a spread sheet approach. I have seen different versions of the plan,” he says. “So department ‘one’ have their plan and they are resourcing on their set of assumptions and department ‘two’ are resourcing on a different set of assumptions, and conflicts can arise.” Non integrated plans create issues – having a single view of the truth is critical.
Straiton believes things are starting to change. Tools like Orchestrate are available “that link into those main systems and have the ability to [provide] ‘what if’ analysis. The data is more consistent – and everyone is using the same underlying assumptions.”
With regards S&OP planning horizons, Harrington of Oliver Wight normally sees companies working to 24 months as a rolling monthly process. However, when it comes to IBP and planning at the executive and commercial management levels, he sees much longer term horizons than those used traditionally for supply chain led processes.
On the question of the level of granularity of data to work with S&OP and IBP, Harrington has strong views. “With self implemented processes, or traditional consultancy led implementations, the biggest issue we come up against is that they are working on far too much detail – working out precisely what is never going to occur,” he says. “If you were looking at a 24 or 36 month horizon and tried to do it by SKU, by customer, it would be stupid.”