APICS 2009 From the Expo Floor: Is S&OP Coming of Age? - Part 3

Part 1 of this blog series talked about my attendance of the APICS 2009 International Conference in Toronto, Canada in early October. I attended only a few education sessions, as my conference visit focused more on exploring the expo floor and talking to the exhibitors. My overwhelming impression from the conference's expo floor was that the main value propositions this year revolved around the various flavors of demand management, most notably sales and operations planning (S&OP). This made me think about the reasons for the concept’s (and accompanying software solutions’) renaissance in light of its existence of a few decades.

While Part 2 zoomed on traditional S&OP shortcomings, Part 3 of this blog series will analyze the key success factors of deploying S&OP solutions and approaches. But before that, let me first go further into what has lately changed to enable the revival of customer interest in this practice.

Indeed, why is S&OP more popular these days, given that the concept has been around for decades? Is it the combination of the economy (i.e., business folks' awareness and the “wake-up call” to get serious and on the same page in today’s increased demand volatility, global networks with supply risks and uncertainty, increased product proliferation and shrinking product life cycles, globalization-based virtualization, etc.) and some favorable technical developments (i.e., analytics, information visualization tools, etc.)? 

The S&OP Perfect Storm

One reason why the S&OP software category is doing well these days is that the companies that have the core components (like demand planning, supply chain planning [SCP], transportation management systems [TMS], etc.) are looking for the next level of automation, and an S&OP overlay or composite application provide this. Also from a business standpoint, there is a great appeal to the “balancing supply and demand for profitability” message, especially in times of recession (i.e., reduced demand and scarce cash). In other words, sharing a common plan (and being on the same page) means that the sales folks can no longer (with impunity) be selling without regard to the production plant’s ability to deliver, while the production counterparts can no longer ignore market demand in their production planning processes.

Even more, today there is a move away from S&OP being merely a collaborative SCP process designed to drive more accurate demand forecasts and align demand with production capabilities to ensure timely fulfillment of customer orders. Namely, as companies face increased global competition and supply chain challenges, along with rising transportation costs and volatile economic and market conditions, many industry-leading manufacturers–as well as consumer packaged goods (CPG) distributors and their retailing partners–have been working towards elevating their S&OP processes to an enterprise-wide global scale.

These trading partners are striving for this scale in order to enhance supply chain visibility, reduce costs, and achieve more integrated business planning and management. As a result, businesses of all types and sizes are now discovering how this next generation of S&OP approach and enabling tools can actually become mission-critical elements of an integrated business planning (IBP) strategy, as introduced in Part 1. Some of the primary business drivers for IBP include the following:

  • significant organizational pressure to improve corporate performance

  • the need for a more formal process and tool-sets to grow business

  • drastic shifts in consumer buying patterns driven by the economic downturn

  • large cost reduction initiatives including a desire to reduce inventory and working capital.

Can IT Help S&OP?

In his series of papers on S&OP, Dr. Larry Lapide of the MIT Center for Transportation and Logistics says that first and foremost, one needs to recognize that software tools are not very useful on their own unless one is able to improve a business process. Often, however, without technology, a business process like S&OP is cumbersome and cannot support the scale needed to achieve all its benefits.

In that case, technology becomes necessary, but not sufficient. The process is frequently dealing with a large complex set of needs that require a level of automation and computational sophistication that goes beyond what can be achieved with manual processes merely supported by spreadsheet software.

Indeed, one traditional challenge to the wider S&OP process adoption has been the lack of advanced IT to facilitate workflow-based data and process integration across all the functional areas involved. A staggering number of companies are still using pedestrian tools such as Microsoft Excel or Microsoft Access to manage their departments.

Other companies have a multiplicity of automated technology systems in place to manage various functions. For example, their internal and field sales organizations may use customer relationship management (CRM) or sales force automation (SFA) solutions, while production planners may use enterprise resource planning (ERP) or other planning applications.

Last but not least, their forecasting and demand planning folks may use any number of diverse SCP and supply chain management (SCM) solutions. Yet, without an enterprise-wide (if not supply chain wide) integrated information platform, this incohesive mix of data crunching systems will likely lead to incorrect assumptions. Especially when one thinks of the need to move and manipulate numbers between disparate systems, one can legitimately raise doubts about the accuracy and integrity of the data used to formulate the S&OP consensus plan.

You Only Get What You Measure

As for S&OP’s proper use, I believe that for a long time the missing component were dashboards and analytics for managers to be able to review the necessary data and to see the impact of what-if analyses. Namely, any disconnect from the operational side could mean the lack of participation from the sales or finance folks. Without accountability, business units do not have the incentive to make a corporate-wide analysis of performance possible.

Accurately predicting revenue and operating performance is a daunting challenge facing many enterprises today. Despite the raising awareness of the adverse impact of badly missed forecasts on their business plans, the most common solution for budgeting and planning in companies is still a plethora of disconnected spreadsheets that make the planning process unreliable and inefficient.

The resulting long budgeting cycles and forecasting inaccuracies prevent responsiveness to change, causing companies to miss out on true business opportunities while wasting money and resources on declining business segments. To ensure accountability and the engagement of executive-level management, tools such as dashboards or an audit trail are needed to track the business performance history.

As explained in the APICS CSCP Learning System’s Module 1 entitled “Supply Chain Management Fundamentals,” measurement (or metrics) forms one of the key supporting elements of supply chain strategy. Whether the management challenge is assessing the current state of the supply chain, setting goals and objectives, or tracking progress of an initiative, a set of meaningful metrics is as essential as a map to a traveler.

As the saying goes, "you get what you measure," but this is likely half true. While there is no guarantee that a firm will achieve a goal it decides to measure, it's virtually certain that the firm won't achieve what it fails to measure.

Once a firm selects its objectives and metrics, they need to be communicated throughout the extended enterprise along with the expected benefits of achieving them. Since it is not feasible to measure and monitor every supply chain goal or activity, managers have to choose a reasonable number of key performance indicators (KPIs) that are related to their strategic objectives.

A key point about KPIs is that they have to be applied to supply chain processes that are derived from the holistic corporate and supply chain strategies. A KPI will not promote collaborative behavior if it measures only activity within a silo, such as inventory holding costs at one warehouse, cost containment on one leg of a cross-country shipment, or increased production at one plant.

Namely, it may do more harm than good to reduce inventory if the lack of a buffer causes the wholesaler downstream in the chain to experience more frequent stock shortages. Speeding up one process in a synchronized system can throw everything out of balance. Costs cut unilaterally in one area will invariably lead to increased expense somewhere else. Activities in supply chains are all linked together, and one cannot move one link in a chain without disturbing all the rest.

Finding a Perfect Balance

In 1992 Robert S. Kaplan and David Norton introduced the balanced scorecard (BSC). Initially designed to give managers a comprehensive view of business performance, it has since been adapted to the design and measurement of supply chain performance.

Why is the scorecard called "balanced?” Well, because it includes four different types of measurements that aim to provide a broader, more "balanced" perspective on business performance than traditional KPIs that are focused only on financial results. The scorecard is a formal system of measurement that provides the following four different perspectives on corporate performance (with individual goals and measures):

  1. Customer perspective – Includes measures such as on-time delivery or even more subjective measures such as satisfaction with customer service or impression of reliability;

  2. Business process perspective -- In a functionally oriented business, this area might focus on number of prospecting calls or productivity, but can also encompass flexible response, waste reduction, or other SCM goals;

  3. Innovation and learning perspective -- This area can include formal training for staff, or it can refer to innovations in products or processes; and

  4. Financial perspective -- The traditional way of judging business performance relied on such measures as cash-on-cash-return cyclereturn on investment (ROI), and debt-to-equity ratio.

Since financial measures are retrospective, they don't always provide a true indication of the current state of affairs, much less of the future performance. Thus Kaplan and Norton wanted to give managers a tool that would encourage a broader, more future-oriented view. Nevertheless, a balanced scorecard approach must always include the financial perspective, since bottom-line (net income) results are still the final measure of success.

In fact, S&OP can be seen as a bridge between customer value proposition and supply chain efficiency, since the S&OP process integrates the tactical focus of the operations side with the customer orientation of the marketing and sales side. There is an inherent tension between the needs of the customer and the evolving quality standards of the supply chain.

Reducing cycle times, squeezing out unnecessary inventory, paring down the number of partners, practicing lean manufacturing, and focusing relentlessly on quality may result in a swifter, more agile supply chain. However, that can come at the expense of the end customer if marketing isn't there to keep a close eye on the final product’s value.

In common terms, cheaper and faster are not always better from the customer's perspective. Nor, on the other hand, is the perfect product always affordable from an operational standpoint. S&OP integrates the sales and marketing perspective with the operational perspective so the inherent tension between the two can become a creative force that drives the business.

Not merely a plan, S&OP is also a process of (usually) monthly meetings that focus everyone's attention on the practices that keep supply, demand, and profits in balance. This continuous review and improvement should incorporate a balanced scorecard for evaluating results. Besides measuring progress toward financial goals, the team should also monitor and encourage continuous improvement process in the other three measuring areas of the scorecard.

Some Advanced S&OP Features to Look For

In summary, the maturity of the IT landscape (i.e., the abundance of data available now), new technological developments (such as the Steelwedge Software’s Enterprise-Enabled Excel front-end, as mentioned in Part 2), and economic necessity have stirred a re-awakening of interest in S&OP. For its part, by integrating Oracle Hyperion Planning and Demantra solutions, Oracle has expanded its S&OP footprint into IBP.

As mentioned earlier, IBP fills a long-standing gap in corporate planning systems to provide the chief executive officers (CEOs) and chief financial officers (CFOs) with a much more accurate revenue forecast. In addition to the business intelligence (BI) and business performance management (BPM) tools, other handy S&OP-enabling tools include network-wide capacity planning capabilities commonly found in strategic network design applications.

Coming back to the example of Oracle mentioned in Part 2, the vendor has these capabilities via Numetrix (acquired by former J.D. Edwards way back in 1999). These applications can help with large-scale demand and supply matching, and can flag any freight, plant, or distribution center (DC) capacity issues.

Differentiation amid S&OP solutions is all about how well the technology fits the S&OP process. An astute S&OP solution must be flexible enough to match the current “as is” process as well as the future “to be” process. S&OP is also more than a reporting tool, since it must be interactive and allow for a rapid re-planning in the S&OP review meeting.

Companies need the ability to model capacity changes, increases or decreases in demand, and changes in rollout dates for brand-new products. They also need the ability to see how well the plan did when compared to the actual results. Finally, another big differentiator is the ability to “close the loop” and tie the overall plan to the actual operational decisions and programs managed by the supply chain, marketing, and sales teams.

Sense-and-respond capabilities, which detect plan deviations and other events and then respond to close any gaps, are the S&OP components that are important for fostering corporate accountability. “Sensing” requires an event management framework that looks at various plan elements and can detect deviations on a continual basis. Once detected, deviations can be routed in a BPM manner to the appropriate stakeholder for analysis and resolution (“response”).

Part 4 of this blog series will analyze the role of top management in deploying S&OP solutions. The article will also describe the strategic nature of S&OP and analyze the typical S&OP process.

Your views, comments, opinions, etc. about S&OP and about the overall demand management software category per se are welcome in the meantime. We would also be interested in hearing about your experiences with this software category (if you are an existing user) or your general interest in evaluating these solutions as prospective customers.
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