Perhaps one of the greatest lessons to come out of the recession has been that flexibility and frequent updates to the planning process are critical to the commercial success of the enterprise. Sales and operations planning holds the key.
The unpredictable nature of a sharp recession, followed by a slow and inconsistent recovery, throws into stark relief the weaknesses within a great number of organisations to plan and respond to shifting patterns in demand. In a business environment where capital is hard to come by, over-investment in inventory can expose a company to grave dangers. But then an unforeseen sudden recovery in demand can prove damaging too if sales are lost and customer satisfaction is compromised.
Sales and operations planning (S&OP) is a critical process at the heart of the business that should balance production and demand, and should seek to commit the organisation to the minimum inventory necessary to ensure profitable customer service. Which sounds great, but is it achievable? How do you gain clarity of forecast to plan for future demand? How do you balance risks and costs? And with growing complexity in supply chains owing to global sourcing, are simple spreadsheets enough?
Surprisingly, most companies still work with spreadsheets. But, according to Logility’s VP marketing Karin Bursa, you cannot trust your S&OP business plan to a spreadsheet. “To be effective the plan must be available for review and analysis in multiple units of measure – financial and volumetric,” she says. “You also need the ability to plan multiple business scenarios – at least three come to mind – realistic, optimistic and pessimistic.” Bursa explains that each scenario must tie both market demand and supply together with distribution constraints and lead times. “Most companies also benefit from the ability to drill down and look at specific issues, such as capacity constraints, new product introductions, competitive response and demand volatility.”
Once the plan is agreed you need the ability to implement, monitor and measure its effectiveness – something spreadsheets cannot support, says Bursa.
Accuracy of data is vital to the success of the process. “You need one sales forecast, one production plan, one stock file and one orders file,” says Stephen Rinsler of Bisham Consulting. “It’s important to have one set of data, but it needs to be accurate. If you are getting low on stock you need to know the stock you’ve got is available, isn’t damaged and is actually there. So stock accuracy in the warehouse is critical – and that means accuracy in picking and putting away. So whenever you need to plan you can do so with the best information you have.”
Rinsler suggests S&OP is all about trade-offs: “How much stock do I have? How frequently do I order from production? How frequently do they change their machine? What’s the cost of changing the machine? What’s the cost of holding additional stock, at what customer service level?” Making these decisions depends on the market and customer expectations. “Supermarkets like very high availability on-shelf, which requires very high availability on the order going in,” he says. “You’ve got to get up beyond 98 to 99 per cent of orders arriving at the customer on time, in full, with no damage.”
The S&OP process allows you to balance risk through the supply chain, says Rinsler. “A well run S&OP process should reduce stocks, increase customer service levels and reduce costs of production. It sounds counter-intuitive, but it works.”
Although accurate data is vital, there is also the danger of getting too bogged down with detail. Les Brookes, chief executive of consultancy Oliver Wight, originators of S&OP and now advocates of Integrated Business Planning (IBP), which brings in a strategic perspective, believes planning granularity depends on the level of the organisation the process takes place at and therefore, on which planning horizon. “Short-term planning should of course be in detail and by SKU, however for the IBP process, planning needs to be by product and process family, as well as channel and segment, to ensure the focus is on changes in the key business assumptions.”
Agility in responding to changes in demand and the business environment is a considerable attribute for any organisation to acquire. This places an emphasis on flexible planning capabilities. Kelly Thomas, SVP of manufacturing at JDA, believes that in the current climate, businesses cannot simply implement plans at the start of the year and execute them blindly. “It is critical that feedback and correction take place frequently so that organisations can predict, flag and respond to demand changes,” he says.
“As a response, many businesses have created plan-do-check-act (PDCA) cycles. These continuously monitor supply chain performance and make adjustments as needed, helping the business stay one step ahead,” says Thomas. “Before the economic downturn, most organisations invested more time and energy in the “plan” and “do” phases. This created increasingly elaborate supply chain plans, based on historic demand levels. But as demand uncertainty increased, these plans quickly became irrelevant and companies were left scrambling to re-plan and re-execute.”
He believes businesses need to sense and respond to any changes proactively and then review their results. “The companies with the most effective supply chains use these opportunities to capture information that will improve their future forecasts, risk management strategies, and other business processes,” he says.
Cathy Humphreys, UK country manager at Inform, holds similar views. “It’s not just the accuracy of the forecast further ahead that is important, but also the ability to monitor changes within the longer lead times associated with global supply. The monitoring of changes is only possible with frequent refreshing of the plan, not necessarily re-planning but monitoring the signals within new data,” she says.
“Planning should no longer be discussed in planning “buckets” such as weeks or months, but as a continuous plan which is updated as frequently as something changes to impact the validity of the plan.” Interestingly, she adds that it is very difficult to plan in anything other than a “bucket” when using spreadsheets.
However, a big question is – who should own the S&OP process? “That’s the sixty-four thousand dollar question,” says Rinsler. “I’ve always thought supply chain should own the process, because they are relatively silo neutral. It’s not entirely fair as they normally have the costs of distribution to consider but they should have the non-silo view and they are trying to facilitate across a number of areas, such as sales, production and distribution.”
But he says: “What is important is that you use simple KPIs – what’s the percentage forecast error? What’s the percentage of manufacture output to plan? What’s the percentage customer service level?” A well run S&OP process should reduce stocks, increase customer service levels and reduce costs of production. It sounds counter-intuitive, but it works.
Planning brings strategic advantage
Food packaging specialist, Ono, has received Class A certification for planning and control at its French plant, following a successful business improvement programme. The company has enjoyed 30 per cent growth, reduced handling, warehousing and freight costs by 20 per cent and cut inventory days, while improving customer service levels.
Ono Packaging, based in France, manufactures expanded polystyrene trays for the food sector. The company’s key customers are French supermarket chains, including Carrefour, Intermarchéand Système U.
Following a leveraged buyout, the business strategy was to increase the value of the company through growth using existing capacity but with increased agility. Christophe Aynes, president of Ono, believed this could be achieved through improved supply chain performance and inventory reduction, and in October 2006, he engaged consulting firm, Oliver Wight, to implement an Integrated Business Planning programme (IBP).
Ono has one small warehouse on-site at its French plant and didn’t want to expand its inventory beyond this, regardless of growth.
Supply chain director Patrice Blandineau was tasked with maximising the company’s existing storage capacity (by optimising days-of-stock) and reducing the logistics cost impact on EBITDA.
“We are obsessive about constantly driving down inventory but top of the list for our supply chain strategy is to deliver the best possible service to our customers and any new business has to be integrated into the current SCM organisation, without any disruption,” he says.
As well as selecting and monitoring the most appropriate hauliers to work with, his objective was to get SKUs under control, by speeding up new product introduction, and discontinuing older or obsolete SKUs as new ones were introduced.
Ono has been able to run increasingly smaller batches with shorter lead times, and inventory days have reduced from 40 to 27 without negative impact on customer service, which is now consistently 99 per cent.
As a consequence of the improved co-operation between manufacturing and supply, sales forecast accuracy at an SKU level has also improved from 30 to 50 per cent in two years. Blandineau has applied an ABC classification for SKUs and for his fast runners, forecast accuracy has improved by nearly 100 per cent in the same period, from just over 40 per cent to 80 per cent.