APICS 2009 From the Expo Floor: Is S&OP Coming of Age? - Part 4

Part 1 of this series talked about my attendance of the APICS 2009 international conference in Toronto (Canada) in early October. I attended only a few education sessions, and 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 its main value proposition this year revolved around the various flavors of demand management, most notably Sales & Operations Planning (S&OP).

Part 2 analyzed the traditional shortcomings and the reasons for the S&OP concept’s (and accompanying software solutions’) current renaissance in light of its existence of a few decades. Part 3 then analyzed the key success factors of deploying S&OP solutions and approaches. Part 4 of this series will analyze the role of top management in deploying S&OP solutions, as well as the strategic nature of S&OP. 

The Buck Stops With Top Executives

At the end of the day, all departments involved in the S&OP process should submit annual budgets for review by the top financial executives. The final plan should merge and reconcile all functional areas’ plans and be reviewed by top management. Indeed, to work as envisioned, S&OP must be much more than a once-a-year process of formulating a plan to print out and distribute (and forget about) for the next 12 months.

The essence of the S&OP is the monthly executive meeting, which is preceded by two weeks or so of preparation by all the members of the team. Sure, the process could be run on a different timetable, but monthly data collection, analysis, and meetings are typical.

Karin Bursa, VP of Marketing at Logility (whose Voyager S&OP solution I currently consider as one of the top five in the market), believes that the revived S&OP popularity comes from the fact that many company executives are feeling the “pain” directly. Leveraging a better S&OP process is back on top executives’ agendas, as it will impact their ability to make the "best decisions” for the business. Executives need the ability to evaluate multiple scenarios (i.e., good, bad, most likely, etc.) that weigh all areas and aspects of the business.

Figuratively speaking, for a long time these executives have been “driving blind.” They are operating off disconnected data for a variety of time periods that are brought together in a spreadsheet for most businesses (even though robust S&OP solutions are available in the market). Bursa believes that the key issues in today’s volatile global market are the following:

  • Dynamic changes in demand – up significantly above historic highs for select products (e.g., value products) and dramatically low for many others (e.g., premium products)

  • Inventory investments -- most business have reduced inventory so dramatically that they run the risk of poor customer service or losing market share. They need to “build” the inventory that the market wants and is therefore most likely to sell

  • New product developments (NPD’s) – most companies have a hit-and-miss track record with their NPD’s, which is expensive in terms of time, materials, and production disruptions. We are seeing an increased focus on improving the “win rate” and acceptance of NPD’s.

When executed properly, the new S&OP paradigm is a formal process led by senior management that, on a monthly basis, evaluates time-phased projections for new products, demand, supply, and the resulting financials over a rolling timeframe ranging from 18 to 36 months. Some even use the “Executive S&OP” term to denote the last step in the S&OP process, or the top management component of the overall set of S&OP processes.

Several success factors can influence top management participation in the S&OP process, including executive-level S&OP education and change management training, a focused meeting agenda addressing strategic decisions, and what-if analysis to help manage risk and optimize decision making.

Also crucial is the ability to view the plan in both unit volumes and financial terms. To that end, some leading S&OP solutions feature the ability to keep a monetary forecast (typically used by finance and sales) synchronized with a unit forecast (typically used by operations). This means that financial and sales targets are always visible to the operations group as they make decisions about balancing supply and demand. Moreover, the finance executives always have a current operating plan with updated cost of goods sold (COGS) on which to base their financial projections.

Nothing Without Propagating the Strategy

Communication of the strategic purpose to supply chain constituents should not remain in the minds of top executives without filtering out to other levels of management. If lower-level managers are to help make change happen, they need to fully understand why some actions are good for the business, the customer, their own areas, and themselves.

Aligning supply, demand, and profits helps ensure product availability with minimal waste and inefficiency. This process of aligning must be designed to ensure that the plans in all functions and geographies are aligned with and support the corporate strategy. Once a consensus is reached on a single operating plan, the members of the executive and operational management teams must hold themselves accountable for allocating critical resources to effectively and profitably meet customers' needs in order for the plan to work.

One should resist the deeply ingrained temptation to use the balanced scorecard (BSC) (explained in part 3) mainly as a brainstorming tool without understanding that the four BSC focus areas need to be mutually reinforcing and aligned with the strategy. For example, if the supply chain strategy is to penetrate a new, high-end market with an innovative electronics gizmo, then the business process perspective in the scorecard might be to develop a more rapid product innovation cycle. This aim could then be linked to measures of process innovation and design workshops in the scorecard’s innovation and learning area, reduced delivery cycles in the customer perspective area, and a profitability measure in the financial area.

I would say that products from Logility, Oracle, i2 Technologies, Demand Solutions, and JDA Software could all be considered strategic S&OP solutions. The key is these vendors’ S&OP offerings’ ability to link back to the actual supply chain planning (SCP) and enterprise resource planning (ERP) systems that are feeding data to the S&OP process, along with the ability to drill down to the stock-keeping unit (SKU) level of information.

John Bermudez, Senior Director of Oracle’s SCM Product Strategy (who was mentioned in Part 2), said:
“I think the popularity of S&OP is a combination of the economy and the availability of better technology. The rapid downturn in business was a wake-up call to even the best-run companies that nothing less than a fully synchronized response from all functional areas would enable companies to survive this turbulent business environment. Improving their S&OP process is the fastest way for companies to coordinate their response to changing market conditions. As companies look to improve their sales and operations planning processes, they find that they are supporting this process with inadequate spreadsheets and reports that are not integrated with the ERP and supply chain planning systems.

The Oracle Sales and Operations Planning solution is built into Oracle's Value Chain Planning applications so that as planners are doing their daily planning work they are also contributing to the sales and operations planning process. This means once decisions are made at the Executive S&OP meeting, these changes are immediately reflected in the systems that drive the required changes to purchase and manufacturing orders. With spreadsheets, these changes must be done manually with great difficulty.”

One should think of S&OP as going way beyond mere reporting and business intelligence (BI) capabilities to being interactive and alert messaging-based. Most advanced S&OP offerings can, for example, categorize exception messages for root causes.

Logility, which has also long been involved in helping companies with collaborative planning, forecasting, and replenishment (CPFR), has seen some companies using S&OP and CPFR together. The vendor believes that the revived interest in S&OP was actually driven by efforts around CPFR in some sectors, such as between consumer goods manufacturers and retailers or between manufacturers and retailers of do-it-yourself (DIY) hardware products.

The executive teams at these companies apparently wanted greater confidence in the collaborative (CPFR) commitments they were making to their customers/suppliers. "There was very much a “get our house in order” philosophy for many companies and S&OP was the ideal business process to guide that discipline before taking the next CPFR “leap of faith” stated Logility's Bursa.

The S&OP Process

It should be clear from the discussion so far that S&OP needs to be a “formal” process first, one driven by a top C-level executive, such as chief operating officer (COO), chief executive officer (CEO), chief financial officer (CFO), or so. The S&OP effort is not typically driven by the chief information officer (CIO) or an IT manager, meaning that it is not an IT project per se.

According to the five-step Oliver Wight framework (possibly the best-known and most-relevant framework for organizations), the monthly S&OP process includes four preliminary steps plus the executive meeting to review the data and make course corrections as necessary. The preliminary steps are as follows:

  1. Data gathering (the marketing events activity review) -- Shortly after the end of the month, the IT department should update all the files necessary to develop the new statistical forecast. The input should come from all relevant marketing calendars, including NPD’s. This needs to be done quickly to keep the process moving ahead on time.

  2. Demand planning (and review) -- Sales and marketing representatives should review the data and issue an updated medium-term management forecast for current and new products. Based on their expertise, they may override the statistical forecast if in their empirical judgment upcoming changes in the market will affect demand in ways that statistics, limited as they are to the past, cannot adequately predict. The management forecast should be reviewed by a senior sales and marketing executive before being entered in the S&OP files. The input comes from relevant demand planning processes, and reviews may be at a local, regional, and global level. There may also be a formal meeting of the demand planning team.

  3. Supply planning (the capacity review) -- Based on the demand forecasts, the supply management team may alter the operations plan and revise the S&OP data. The input comes from relevant supply planning processes, and as in the previous step, reviews may be at a local, regional and global level.

  4. Pre-S&OP meeting (the demand and supply balancing review) -- Key players should assemble to review the data and set the agenda for the final step, the Executive S&OP meeting. Team members at the pre-S&OP meeting typically include people from the previous steps, at least one person from the finance area, and the owner of the S&OP process. Other pre-S&OP team members might include a number of managers from key areas, such as the plant manager, the logistics manager, the product manager, the customer service manager, the scheduler, the accounting manager, and, of course, the supply chain manager, among others.

Again, the purpose of the preliminary S&OP process is to break down the barriers between functional areas and get agreement on one up-to-date set of numbers to guide decisions in all functions. The pre-S&OP meeting is executed at an aggregate product family level. The review resolves issues that cannot be determined through the normal day-to-day planning processes and elevates them to the middle management level for resolution in the S&OP process.

The final step of the S&OP cycle comes the Executive S&OP meeting. This should be a regular (monthly) executive meeting, not lasting more than a couple of hours (subject to the success of the preceding steps). The meeting should include vice presidents (VPs) from the abovementioned basic supply chain functional areas.

The assembled executives may accept the decisions and the numbers forwarded from the pre-S&OP meeting, or they may take another path. They should make decisions pertaining to each product family, authorize any decisions with significant financial implications, compare the sales and operations plan to the long-term business plan to see if either needs adjustment to keep them consistent, and review other issues. The ratification of the current plans takes place here, usually including an evaluation of the financial effects of these plans. The executive meeting should also include the evaluation and selection of alternative scenarios (a what-if analysis).

Marrying the S&OP Process (Consulting) and Technology

Although S&OP is an operational effort, it can be significantly streamlined through the use of technology. Traditional S&OP consultants like the Oliver Wight Group are thus jumping onto the IT bandwagon. Oliver Wight is currently partnering with JDA, and the company partnered with Demand Solutions and Logility long ago.

JDA provides strategic consulting services for its customers in several key areas of S&OP and its supporting process. Oliver Wight is an alliance partner of JDA and is well known for establishing the very first S&OP initiatives, as well as innovating S&OP processes over time.

As can be seen from the discussion thus far, today’s S&OP approach is designed to unite a company’s corporate objectives, financial goals, and operational plans in order to realize significant top-line (revenue) and bottom-line (net income) improvements. Making this transformation can be a significant undertaking, which is the reason many companies partner with experts to help with the following:

  • Educating executive and middle management teams on the best practices and leadership behaviors required for an effective integrated business planning (IBP)/S&OP process

  • Designing the process, including defining roles, responsibilities and accountabilities, process flow diagram, and information needs

  • Establishing the calendar and cadence of the S&OP process

  • Facilitating the creation of an organization suited for S&OP

  • Advising executives on creating a transparent and collaborative decision-making environment

  • Providing support on the selection and implementation of tools to drive and complement the S&OP process from strategy to management execution

  • Providing executive coaching on improving and evolving the S&OP process as business conditions change and the executive organization transitions to include new roles or leaders.

While Steelwedge Software has a dedicated Strategic Services organization incorporating a team of S&OP experts, the world’s largest consultancy, Accenture, has (according to Steelwedge's CEO) selected Steelwedge as its exclusive partner for S&OP and is currently introducing the Steelwedge S&OP solution to many of its customers. The vendor has worked closely with Tom Wallace on training programs and Webinar programs. Accenture provides Steelwedge with a global reach and access to a large team of industry-focused S&OP experts.

For its part, Logility has worked with a number of consultancies over the years. Its Voyager solution was reviewed and influenced by Richard C. Ling and has been deployed to support processes defined by Oliver Wight, Delloitte, and a number of other boutique consultancies that specialize in S&OP.

Oracle’s S&OP Take

Oracle does its own consulting and is also helped by consulting partners such as IBM, Wipro, Deloitte, and Fujitsu. In contrast to its competitors, the vendor has developed its own S&OP workflow that coordinates a 9-step process.

Some of the steps resemble those in the aforementioned classic 5-step process. But Oracle has inserted a number of additional steps as to accommodate a number of differentiating capabilities, especially the ability to shape demand via trade promotions (that take cannibalization into consideration) and strategic network optimization (SNO). The steps to drive the consensus process to gather sales forecast and customer demand are as follows: 

  1. Collect sales and market input -- Gather data from the sales and marketing departments using simple and intuitive electronic forms. The input is reviewed and accepted after applying a filter for bias based on an analysis of the historical input

  2. Develop a demand plan -- Using statistical analysis and/or management input, build a multi-period forecast plan. Key elements to focus on in the definition of requirements are the forecasting of NPD’s, product lifecycle forecasting, seasonality profiles, causal factors, promotion and rebate modeling, and revenue management

  3. Refine the demand consensus -- Compare the multi-period output of the statistically generated forecast against the various sales and channel partner forecasts to identify and understand exceptions. Use the outcome of this collaborative forecast as the base forecast for demand shaping in the next step

  4. Shape the demand based on what-if analysis for demand and supply -- Develop plans and analyze opportunities for demand-shaping actions such as promotion planning, price management, contract compliance, and the timing of new product introductions. Package these key scenarios with the base-level forecast for the operational planning in the next step

  5. Develop a constrained plan -- Using the forecasting output generated in Step 3, analyze the best alternative for the business based on profitability, revenue, customer service, and targeted inventory levels. Also identify constraints, demand shortfalls, and capacity opportunities for the consensus meeting review

  6. Conduct what-if analysis -- Determine tradeoffs on the measurements and identify demand-shaping opportunities. Evaluate the what-if, demand-shaping scenarios in Step 4 based on profitability, revenue, customer service, and inventory targets. Again identify constraints, demand shortfalls, and capacity opportunities for the consensus meeting review.

  7. Develop a consensus plan -- Review scenario alternatives and gain consensus on the operating plan

  8. Publish the constrained plan -- Communicate the constrained plan to the operational teams for execution

  9. Measure the plan and publish the metrics -- During the month, measure the success of the plan and use this information as the starting point for the next S&OP cycle. Monitor plan success based on forecast accuracy, expected-versus-actual profitability, expected-versus-actual revenue, expected-versus-actual inventories, and expected-versus-actual customer service levels (e.g., perfect order or case fill rates).

As S&OP is “built-in” to Oracle's Value Chain Planning applications, Oracle Consulting and most of its implementation partners have S&OP experience. In addition, Oracle has S&OP implementations going on at both Oliver Wight and Tom Wallace clients.
The strength and flexibility of Oracle Sales and Operations Planning supports either business process methodology. For instance, Inspirage, a successful Oracle Value Chain Planning implementation partner, has established its own relationship with Oliver Wight to bring additional business process expertise to a project. 

Part 5 will conclude the series by analyzing the S&OP solution from JDA Software as another product that arguably deserves the Top 5 S&OP title. The article will also recap the potential S&OP benefits.

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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