Sales and operations planning is a critical process for most businesses – ensuring that corporate aims are put into effect. But just how good are companies at it? By Nick Allen.
Gaining visibility of future demand and accurately planning to match that expected demand is one of the most challenging aspects of supply chain management. What has made this task infinitely more difficult in recent years has been the unpredictable nature of demand in a recovering global economy.
Planning against previous years’ figures is little use when markets have fallen away and demand is erratic.
When cash is tight no-one wants to be caught out holding excessive amounts of inventory. But then, if demand picks up, no-one wants to miss the sale.
The challenges of the past couple of years have thrown into stark relief the importance of sales and operations planning in the commercial performance of the enterprise. This balancing of production and the holding of inventory is a decision on investment that cuts across most corporate departments, from finance to design, production to sales and of course, marketing – all of which makes it a difficult process to conduct.
Most companies still use an Excel spreadsheet to run their S&OP – an Aberdeen Group survey reported that up to 85 per cent were founded on spreadsheets – but there is a growing acceptance of systems that automate this process and make the data visible across the organisation.
A recent supply chain management survey, conducted by AMR Research, found that 88 per cent of respondents were already using or planning to deploy an S&OP solution in the next 12 months.
Findings also indicated that the number one area of S&OP where businesses want more support is in the ability to provide “what if” simulation capability.
Andrew Kinder, director product marketing supply chain at Infor, believes that a spreadsheet-based approach to S&OP is long on effort and short on return.
“It does not offer proactive analysis, cannot integrate across the business, suffers from poor data integrity and consequently delivers weak reporting. This stands in stark contrast to what businesses actually want from their S&OP; the ability to quickly and accurately explore ‘what if’ scenarios across the business,” he says.
Kinder believes that the first step is to collate information from different sources and then put it into a common hierarchy.
This enables all relevant departments to not only input information but also to take out their own analysis in the formant and language that they are used to. Different departments use different systems and technologies, from ERP systems for production to CRM systems in marketing, SCM solutions in demand management and financial software in accounting. He says a common hierarchy simply means that the information is put together in a way that enables all departments to talk the same language.
Kinder explains that the common language is value. “This is usually, but not always, expressed in terms of sales, costs, margins and service levels,” he says.
“It is also important that the hierarchy works at levels of detail that is relevant to decision makers. Senior management is more likely to talk in terms of product groups, regional performance and horizons of 18 months. Functional managers will want to drill to the underlying details and see actual customers, products and orders.”
He adds that the inability to bridge strategy and operations has traditionally been one of the sources of frustration for S&OP practitioners.
Cathy Humphreys, UK country manager at Inform – another software vendor – believes that the emphasis in the S&OP process needs to shift to exception management. Her view is that most companies spend too much time involving key departments in lengthy meetings on the detail contained within S&OP reports and do not concentrate on the important “exceptions” that require attention.
“It’s the issues where supply is not meeting demand, or where you have a budget for sales and you realise that if we carry on like this we are not going to make the expected sales revenue, where managers need to stop and analyse the situation. This is where it’s necessary for departments to communicate and this is what the monthly meeting should be about,” she says.
However, Humphreys sees a further problem. “S&OP has tended to be an Excel spreadsheet based process where people pull reports off their systems and take them along to meetings. But, once a decision has been made, how do you ensure it’s implemented operationally?”
Humphreys reckons the answer is to use software that helps with exception management, “that focuses on where the decisions need to be taken”, and then secondly, offers integration back to the operational centre to indicate the changes to plan. Therefore information goes from operational planning through to execution.”
But, not all are convinced that expensive software is entirely necessary for efficient S&OP. Martin Green, managing consultant at Unipart Expert Practices believes that although S&OP forms only a part of the overall supply chain and business planning hierarchy, it is important in that it provides a forum for reviewing, accommodating and/or eliminating complexity.
He says S&OP is management’s “handle” on the business and therefore should direct resources necessary for improvement to where they will have the most benefit. It is the forum where decisions on the product, channel and asset portfolio should be decided.
“S&OP meetings need to be well structured, well organised and very business focused.
If you achieve that, you don’t spend a lot of time in them,” he says.
“There is a perception that it’s a long and complicated process, but actually, it needn’t be and certainly shouldn’t be. A well run S&OP meeting is where you have agreed the inputs to the meeting, you know what the agenda is and you know what to expect to get out of it.”
According to Green, the biggest challenge in S&OP is one of culture. “Historically, businesses have been divided in two; there are those who do the sales, marketing and agree prices, and then there is another group who are on the supply chain side who do the purchasing, manufacturing, and the inventory management – and traditionally, those two sides of the business do not communicate very effectively,” he says.
“S&OP is about structuring that communication, getting the two sides of the business to talk a common language. You have a sales and marketing team that do their measures in pounds and a supply chain team that do all their measures in tonnes or cases.
“You have to find common ground…to speak the same language. This also enables the management team to do what it is supposed to do – take a longer-term view of the business and become less involved in day-to-day management.”
Green offers an example of where S&OP proves its worth. “I have seen cases where an order comes in to the supply chain for a product that they’ve never seen before, for a customer they have never dealt with before.
“The result is an environment of fire fighting, with the associated additional costs. Better planning would prevent these problems. This should have been part of a structured conversation that took place at the start, and then supply chain would have been prepared,” he says.
“Although this sounds very straightforward, in a lot of companies this just doesn’t happen. Structured and timely communications are vital.
“This is particularly important in special events such as promotions, new product introductions and seasonal lines where orders for a particular product may be very uncertain or go up by huge percentages. The purpose of S&OP is to highlight these activities in advance and to have a co-ordinated plan in place.”
In developing sound sales and operations planning practices there can be a lot of process changes involved. “It may require cultural changes; encouraging people to share thoughts and ideas and plan around problems, where historically they may have dealt with them in a more ‘siloed’ way,” he says.
An area that may need to be looked at is the way staff is incentivised. Green gives an example: “If you are a buyer in a retail environment you are probably measured on the gross margin you get on the product. So you are incentivised to drive down the purchase price from the supplier. However, the supplier may say: that’s fine, but I’ll have to deliver in full vehicle loads.”
The buyer meets his objectives, but this results in the logistics and distribution team taking on larger amounts of inventory.
“Senior S&OP meetings are normally held once a month, but this may be underpinned by more operational meetings that may be held once a week, or under certain circumstances once a day – whatever is appropriate,” he says.
S&OP has become an essential business process in de-risking the supply chain. The reality is that in any operational planning process there are multiple ways to meet customer demand.
But which is the “best” plan for both customers and the business? This is where discussion and scenario planning really play their part.