Trying to manage the synchronisation between the detailed planning process and the aggregate planning process is no easy matter. Nick Allen looks at what it takes to get it right.
The sales and operations planning process has been around for a long time. But according to Simon Bowes, VP manufacturing solutions at JDA, what has changed in recent years is an increased focus on S&OP as a result of the volatility created by the economic downturn. He says, “S&OP is not just being put in place for management comfort, but is now required for managing the business.”
Managing profitable manufacturing output in a volatile market requires greater control across the business – achieved at a macro rather than micro level. To align production, inventory and supply chain with company strategy, financial plans and marketing objectives, S&OP must cut across many different functional silos within the business and aggregate data from these sources.
“One of the big changes has been trying to integrate the planning process with the financial budgeting process,” says Bowes. “This is known as Integrated Business Planning (IBP) – integrating financial planning and the budgeting process with the supply chain planning processes at a more detailed level”.
Bowes believes that many companies are experiencing such volatility in demand that they are unable to work effectively using an annual plan. “Businesses are having to monitor how things are moving throughout the year and are either potentially revising the budget or, more importantly, measuring the size of the gap between where they are now and what was in the original budget,” he says. “Traditionally it has been such a long process to pull that information together. The automotive market might go from being down in the dumps to being resurgent all in the space of a year, so you need to be more flexible to plan and deal with longer term planning – because that is what S&OP is about. Its not about the next week or the next couple of weeks, it’s about the mid-term time horizon.”
He says, “Businesses are starting to look at how to best use capacity. It comes down to the business planning process of deciding which customers are the profitable customers. We can then say on that basis, here’s our business plan.”
Bowes outlines that traditionally S&OP has always been done on spread sheets but now this highly complex activity is required on a monthly basis which is leading many organisations to invest in IBP systems. “Trying to get the synchronisation between the detailed planning process and the aggregated planning process that is done in the S&OP phase has meant that you have got to be able to run S&OP in a month,” he says.
“Typically, it takes so long getting all the different stake holders to combine their data into one super spread sheet, that you either don’t get it done in a month or there are too many errors. There is now a real increase in demand for systems that support that S&OP.”
Liam Harrington, senior partner at Oliver Wight, has over twenty years experience in S&OP. He had thought by now that most organisations would be proficient at the process. However, he says: “There are still a large number of people out there doing a lousy job of it.”
Harrington believes too many companies tend to implement S&OP simply because they have an immediate problem – perhaps to improve customer service or to get to grips with inventory. But he says, “this is not sustainable, because once the problem goes away the attention of senior management evaporates.”
Harrington sees S&OP as a continuous process for enabling businesses to make important decisions on direction and investment. He offers the analogy of steering a ship. “If you steer a ship once a year, by the time you get around to steering it again it will be quite considerably off course,” he says. So he believes there should be an S&OP process applied on a regular monthly basis. As with Simon Bowes of JDA, Harrington refers to S&OP more readily as Integrated Business Planning.
“To bring marketing, sales, financials, operations and supply chain into an integrated plan on a monthly basis ensures that everyone in the business is driving, strategically and operationally, in the same direction – and that’s the only way to do it,” he says. He is concerned that management is otherwise distracted by the often divergent targets of different departments, rather than looking to the collective benefits and strategic objectives of the business.
Again, Harrington offers a useful analogy: “If you were walking along a road arm in arm with your marketing, sales, technical, supply chain and financial colleagues and you came to a ‘T’ junction, would you all turn in the same direction? Or would you say I would have to go a different way? We have our functional goals which set us in different directions, and often in opposing directions,” he says. “Having an S&OP process steers the ship in the right direction. It helps to keep people aligned to a common objective.”
On the issue of granularity and the level at which an S&OP process should work at, Harrington says: “Companies should not be going down to SKU or individual end item, or by every customer, level … we talk about product segments or market segments or channels as the level they should be looking at.”
In terms of benefits, Harrington believes that companies that invest in S&OP or BPI experience greater business growth and margin growth, with optimised inventories and enhanced customer service. He also suggests that BPI helps companies to make decisions that save money. “We had a client recently that made a decision that they reckoned saved them 30 million and they could not have made it without this process – they just wouldn’t have seen it,” he says.
According to Hugh Williams, managing director at Hughenden Consulting, when it comes to S&OP, “companies often try to boil the ocean, get scared by the enormity of the task, then give up and revert back to fire-fighting.”
He believes there are two reasons for this. Firstly, he says there can be a problem with a sustained commitment from the management to change the way of working. “While many reap quick rewards initially through improved communication, the greater return on investment comes after two to three years. Once companies realise this, many start to lose the commitment and enthusiasm for S&OP.
But he points out that the payback can be huge, with greater flexibility to change and better anticipation of issues.
Secondly, he believes companies often misjudge the changes and methodology involved with S&OP. He says: “S&OP requires a staged approach, starting with its ‘feeding’ components such as demand planning, capacity planning and supply planning. Only once these components are established will the aggregation into S&OP make sense. Otherwise, you end up with an S&OP process but little information feeding it and no notice being taken of its decisions.”
Williams takes the view that too often S&OP efforts concentrate on technology and forget about the people and skills development needed to embed the process and make it sustainable. He provides a colourful image to illustrate his point: “Put commercial, production, finance and purchasing in a room once a month and you will get a very loud meeting. Give them the technology to present graphs and share reports, and you will get a loud meeting with a tidal wave of data,” he says. “This will never achieve S&OP on its own. ‘Integrated planning’ carries a number of basic disciplines that require skills training and cultural changes. The need to plan much further ahead than people are used to is just one example. The planning of contingencies is another. And the ability to think globally to take decisions that are the right compromise for the business overall will challenge many deep-rooted habits.”
Case study- A vital component
TE Connectivity, a $14 billion dollar company that designs and manufactures some 500,000 passive electronic products, has piloted a JDA S&OP solution at two of its business units in EMEA and is now rolling it out to other units across its global organisation.
The challenge was that every division was approaching planning from a different perspective, and many, if not all, were simultaneously managing organisational, process or IT issues. While TE’s global IT organisation supported all of the company’s business units, the company did not have a common S&OP platform or tool set, and business units were replicating information across multiple tools.
TE needed an S&OP solution with the scalability to handle multiple business units and the ability to support flexible corporate hierarchies and various product codes. Integration with current enterprise resource planning and other systems, as well as robust exception management capabilities, were also key requirements.
At TE Automotive, to create a demand driven S&OP environment, the company has instituted a monthly five-step process that includes a product review, demand review, supply review, financial reconciliation and an executive business review. A rolling 18 month view of forecasted demand at the part number level helps the business anticipate change and maximise agility.
The company has benefited from the ability to effectively measure and enhance forecast accuracy with consensus forecasting, experiencing enhanced customer service and revenue. “We’re measuring customer service, and the automotive business has increased its ship-to-request performance by eight per cent year over year. Inventory turns have also improved while business revenue has increased,” says Tony Leisher, IT director, supply chain, TE.
“For us, S&OP is a continuous journey. We’re in a much better position than we were 18 months ago when we didn’t have a common platform and a common tool. We’re trying to get better at each step of the process,” says Leisher.
“We’re pretty sure that the new S&OP process will help us in managing our supply chain more efficiently and cost-effectively, and will enable us to act quicker. And we think that the more flexible we can get in these markets, the more it will be a real competitive advantage for TE,” says Steffen Penschke, director, global materials, TE.