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Analytics Leader Voices Its Opinions on S&OP State of Affairs

Written By: Predrag Jakovljevic
Published On: February 3 2011

Sales and operations planning (S&OP), or integrated business planning [IBP]—the next evolutionary step if you will, has received much attention as of late. S&OP (as well as demand planning, budgeting, and forecasting) solution providers and industry pundits have worked together in organizing both in-person seminars and virtual (Webinar) events, providing a forum for their marquee customers to share their experiences in the deployment of S&OP solutions and the resultant benefits to their businesses—a much-need in today’s tough economic climate. APICS, the Association for Operations Management, offers programs and training tools on S&OP and under the guidance of its local chapters requests from the community a variety of relevant topics for coverage at their professional development meetings.

Technology Evaluation Centers (TEC) has produced an exhaustive series of blog posts on S&OP entitled APICS 2009 From the Expo Floor: Is S&OP Coming of Age? as well as a post entitled Linking S&OP and CPFR (For Retailers and Manufacturers Sake): An Executive Panel Discussion, which received much interest and valuable feedback from the end user community. Moreover, TEC’s prolonged coverage of S&OP led to an offer from Kinaxis for TEC analysts to participate in a guest interview series on the Kinaxis blog on the same topic.

 

Vendors Do Have S&OP Experts
The simple fact remains that analysts, pundits, and consultants are not the only S&OP/IBP experts in the market. Therefore, TEC sought to pose similar questions to renowned vendor staffers, giving them the opportunity to voice their opinions and establish their expertise. Karin Bursa, the longstanding vice president (VP) of marketing at Logility, was one of the first to participate in an interview with TEC, providing much insight into the state of affairs with S&OP.

Charles Chase, global business enablement manager of demand intelligence solutions at SAS Institute’s global manufacturing & supply chain practice, has now joined the discussion on S&OP (see discussion below). Chase is the principal architect and strategist for delivering demand planning and forecasting solutions to improve supply chain efficiencies for SAS customers. He is also the former associate editor of the Journal of Business Forecasting and is currently an active member of the Practitioner Advisory Board for Foresight: The International Journal of Applied Forecasting. Chase has authored several articles on sales forecasting and market response modeling.

 

Some Background on SAS Retail
SAS Institute, the leader in business analytics software and services, is the largest independent software vendor (ISV) in the business intelligence (BI) market. With $2.43 billion (USD) in revenues in 2010, SAS is by far the largest privately-owned software company in the world. Since 1976, through its innovative solutions delivered within an integrated framework, SAS has helped customers at more than 50,000 sites improve performance and deliver value by making better decisions faster.

With a stronghold on BI and predictive analytics, SAS has expanded into the provision of many industry-oriented solutions. Via both in-house development and acquisitions, SAS has built an industry business knowledge that is easy to use and that provides unparalleled analytics to drive better financial results.

The 2003 acquisition of Marketmax was a crucial move in the arena of retail and manufacturing. For more information on SAS, read an in-depth article on SAS’s alliances and strategies partnerships that I wrote in 2005, a cornerstone year for SAS. Following Marketmax’s assimilation, SAS delivered most of its previously diverse solutions as well as a number of industry solutions on a unified enterprise framework.

Many retailers and manufacturers have thus turned to SAS to drive better results. In fact, the SAS retail business reportedly grew an impressive double digits in 2010. SAS retail solutions are implemented using flexible deployment models, i.e., on premise or on demand (via a grid or private cloud). Many of these solutions utilize multi-threaded analytical processing components and in-memory processing models for high-performance computing, creating a single system to analyze massive amounts of data in parallel and answer complex business questions in real time.

With SAS' retail business expertise, spanning more than 30 years, retailers can choose SAS for customer insight (i.e., campaign management, marketing automation, marketing optimization, etc.), localized assortment optimization, space planning and optimization, inventory optimization, size profiling and pack optimization, price optimization, merchandise planning, and advanced analytics (e.g., merchandise financial planning, revenue optimization, merchandise assortment planning, etc.).

These solutions help retailers reduce ineffective stock to free up capital. SAS’ sophisticated analytics have helped many retailers see changing demand patterns in individual stores throughout the chain to improve forecast accuracy down to the stock-keeping unit (SKU) level.

The newest solutions from SAS include High-Performance Markdown Optimization, which takes an industry-leading solution farther by providing on a high-performance computing platform. Macy’s spoke at the Big Idea session at National Retail Federation (NRF) BIG Retail Show 2011 around The Science of Localization. Macy’s, an iconic retail brand, has grown and acquired other retailers in recent years. In the midst of these acquisitions and an increased focus on the customer, Macy’s sought to provide a truly personalized experience to the local customer yet retain the efficiencies of a large company. Solutions such as SAS Markdown Optimization are key to making this personalization possible for the iconic retailer in the My Macy’s initiative.

Another updated solution suite announced at NRF 2011, SAS Retail Space Management, encompasses SAS Space Optimization, SAS Space Planning, SAS Collaborative Planogramming, and SAS StoreCAD Plus modules. The software suite and its built-in report function allow retailers to better understand spatial productivity, as well as track and simplify execution. Store-specific planograms developed by retailers create optimal store and fixture space allocations based on the analysis of local market demand, product placement, usage, and performance. Sharing, working, and analyzing detailed plans has been tedious with traditional legacy systems, but SAS Retail Space Management streamlines planogram activities to allow retail teams—including vendors and suppliers—to work better together.

SAS retail customers include Aéropostale, AutoZone, Bakers Footwear, Brooks Brothers, Burger King, Cabela’s, Carrefour, Casino, Casual Male, Charming Shoppes, The Children’s Place, Eddie Bauer, Family Dollar, Gander Mountain, Hallmark, Hudson’s Bay Company, Kohl’s, Luxottica Retail, Macy’s, Mark’s Work Wearhouse, Marks & Spencer, Northern Tool & Equipment, Office Depot, Rusta, The S Group, Sainsbury’s, ShopKo, Sport Chalet, Spiegel Brands, Staples, Tesco, Tween Brands, Waitrose, Wakefern, Williams-Sonoma, and 1-800-FLOWERS.COM.

 

The S&OP Discussion
Within SAS’ arsenal of products, S&OP is most closely related to the SAS Forecast Server and SAS Inventory Optimization offerings. What follows is a question and answer discussion with Charles Chase.

Q1. What do you believe is behind the surge of interest and activity around S&OP? What are the anticipated benefits?

A1. S&OP is not new—it has been around for more than 20 years. However, S&OP has reemerged to the forefront due to recessionary pressures driving companies to squeeze every bit of profitability from their operations. Companies are therefore looking to improve the efficiency and performance of their supply chains via better alignment, planning, and visibility. They are realizing that “leaving money on the table” with understocking or increasing costs with overstocking is not competitive.

This has led to a new generation of S&OP, focusing more on demand and using data and analytics, rather than judgment, to support the process. In the past, the S&OP process was too focused on supply side and process, with little focus on the demand side and the data/analytics that support the process. As a result, most companies have had to match demand to supply, rather than supply to demand. Although those companies have seen improvements in supply efficiencies, they are still experiencing poor planning and visibility.

Realizing the importance of balancing demand and supply, companies are now looking at “optimizing” S&OP. This means creating an optimal balance between supply and demand, with a focus on sensing and shaping demand rather than trying to match demand to existing supply. Those companies have lacked the ability to truly understand the factors that influence demand, which has allowed them to drive more profitable volume (demand) growth through improved profit margin, improved customer service, improvements in market share (growth), and ultimately improvement in overall revenue. 

However, many analysts believe that a more balanced S&OP process drives higher business value by enabling organizations to better sense demand, shape demand, and translate demand patterns into an actionable, profitable operational plan, resulting in the following:

  • significant improvements in revenue
  • significant reductions in inventory
  • significant increases in success of new product launch commercialization

Q2. Do you think the definition of S&OP in the marketplace is clear? If not, is that a problem? How would you define S&OP?

A2. I do think that the definition of S&OP is not clear in the marketplace. It is too focused on the supply side and the process, and not enough on the demand side and the supporting data/analytics. The pure nature of the acronym “S&OP” lends itself to being more on supply/operations than on demand. As you know, the “S” in S&OP stands for sales and marketing, yet we use the “S” only for sales, but we use “OP” for operations planning. In fact, if sales and marketing are not attending the monthly S&OP meetings, you have to ask yourself why you are doing S&OP in the first place. There needs to be more emphasis on the demand (or market) side (e.g., demand sensing, shaping, and influencing).

This is the reason behind a new-generation S&OP process focused on balancing and optimizing supply and demand is gaining so much attention—it focuses more on demand and the data and analytics that support the process. This new-generation S&OP also lends itself to a reemergence of inventory optimization (IO) and something new called, “supply shaping.” We now can implement “Multi-echelon” inventory optimization along with “What If’ analysis to shape demand.

Q3. Could you please expand on the concept of Multi-echelon Inventory Optimization (MEIO) and its relation to S&OP?
 
A3. MEIO allows companies to balance inventory simultaneously across complex supply chain networks. In other words, you can balance inventory across (horizontally) between warehouses, not only from the upstream manufacturing warehouses (vertically), but also across downstream customer facility warehouses to more efficiently balance inventory (supply). In fact, you can run “What If” scenarios to determine the effects of increased customer service, improved demand forecasts, lead times, and other related inventory factors to “shape” supply. We have found that in many cases you can actually lower upstream manufacturing warehouse customer service levels and inventories while increasing customer service at downstream customer facilities (warehouses), without incurring additional inventory costs using MEIO. 

Q4. How important is a maturity model for S&OP? Do companies have to be at the most advanced stage of S&OP processes to claim to be doing S&OP?

A4. The maturity model approach is very important for S&OP, or for any new process and supporting technology implementation for that matter. Not all companies can move to best-in-class overnight. In fact, it’s not recommended to set expectations too high for initial phases of new initiatives, as you may set your company up for failure. You need to implement new initiatives in phases similar to technology implementations for the following two key reasons:

  1. You need to learn and make changes based on that initial learning.
  2. You should show wins to establish improvements and get additional support, or take advantage of what is referred to as a “low-hanging fruit,” and address things that don’t require a lot of resources.

Companies also need time to slowly make changes related to corporate culture that requires “change management.” I would also recommend designating someone (a C-level manager) in the company as the corporate S&OP “Champion” to help facilitate the change management requirements to implement this new-generation S&OP. Usually, this is the senior vice president (SVP) or VP of supply chain management.

Q5. Are many experts in the field advocating the evolution of S&OP into IBP? Are you a proponent of IBP, per se? Tying the financial plan/measures directly into the process is a key component of IBP—what else distinguishes IBP from S&OP?

A5. Yes, I would agree with that evolution. The finance department should participate in the S&OP process, as it determines whether the unconstrained demand forecast created by sales and marketing actually increases profit. Finance should be validating or invalidating sales and marketing programs (e.g., sales promotions, marketing events, and others) to determine if these programs are bringing not only incremental volume, but also revenue and profit to the company.

As you know, many sales promotions and marketing events do not always generate profit. In fact, most drive incremental volume, but very little profit, if any. So, rather than holding all collaborating departments to the financial plan, the finance department should be validating or invalidating the sales and marketing programs to identify financial risk or opportunity. In this new S&OP framework, finance plays a key role from an IBP standpoint.

Q6. Organizational thinking is often inherently bound by the dimensions of the “box” it is currently in because people don’t strongly question working assumptions. Do you believe “process inertia” is a barrier to advancing S&OP processes?

A6. Yes, absolutely. As I mentioned earlier in our conversation, most S&OP processes are too focused on process, with little emphasis on the data and analytics that support that process.

Q7. Can the S&OP process be carried out without technology? Does this relate to the S&OP maturity model?

A7. Given all the products companies have in the different geographies, regions, markets, channels, and customers, the task is too large for Microsoft Excel spreadsheets to handle. Also, given all the distribution centers (DCs), warehouses, and customer-facing locations, it is almost impossible to truly implement S&OP manually using Excel spreadsheets. You need a large-scale enterprise solution to do all the heavy lifting, with alerts and exception reporting. We need to rely on technology to monitor, track, and report all the information via a Web portal/dashboard with alerts and exception reporting in real time. Those companies that are moving from beginners toward best-in-class realize that technology is key to enabling this process. 

Q8. Is it possible to have an effective S&OP process that only looks at the aggregate or “volume” level? How important is it to consider the operational and tactical feasibility of the S&OP plan?

A8. It is very important to consider all three of these levels:

  1. Tactical (1−6 weeks into the future).
  2. Operational (1−18 months into the future).
  3. Strategic (2−5 years into the future).

Most companies are focusing on the operational level, with some now beginning to look at the tactical level. I personally believe that if you have the right technology and are truly using analytics to determine alerts and exceptions in real time (via enterprise portals/dashboards), you can review all three levels during the monthly S&OP process. Most companies review all their products across their entire supply chain network every month when they should be reviewing only the exceptions.

Q9. There is indeed a great deal of cross-functional cooperation and collaboration that is required for managing S&OP. How are companies enabling this, and are they doing it successfully?

A9. Yes, cross-functional collaboration is required for enabling a successful S&OP process. Today, most companies are not very good at getting all the cooperation needed to create a true consensus demand forecast. The main reason is that the process is too complex. This is exacerbated by the fact that these companies are using Excel spreadsheets, which require manual consolidation (taking too long to complete), and are trying to review every product across the entire supply chain, and that the process is too supply focused, with very little attention to unconstrained demand.

As I said earlier, there are more supply folks involved in this process, with virtually no involvement from demand (Marketing) folks. These companies seem to be matching demand to supply, rather than supply to demand. As a result, the corporate culture becomes a major hurdle, making it difficult to get more involvement from sales and marketing on the demand side. There needs to be more incentives for sales and marketing’s participation in the process. If the focus were more on unconstrained demand, maybe this would encourage more sales and marketing participation. Another key factor is accountability.

Q10. If you had to name three priorities for a company looking to evolve their S&OP process, what would they be?

A10. They would be as follows:

  1. Sense and shape demand by transforming volumes of consumption data into powerful insights into market trends and customer demand.
  2. Align sales, marketing, operations, and finance by providing a collaborative platform where stakeholders can share on-the-ground customer and supply chain intelligence and assumptions.
  3. Create actionable, profitable operational plans by allowing executives to predict fluctuations in demand, evaluate appropriate supply chain trade-offs, and develop demand-driven sales and production plans that will maximize market potential and profitability.

Q11. What role does exception management play, or should play, in S&OP?

A11. It plays a key role, as I mentioned earlier in our discussion. Given the complexity of companies’ supply chain networks and the number of products, geographies, regions, markets, channels, customers, and DCs, the only way for a company to manage its S&OP process is on an exception basis using real-time reporting and alerts. This requires more advanced technology. 

Q12. How and where do "what if" capabilities fit into the S&OP process? Is it a priority capability for an effective S&OP process?

A12. Yes, what-if analysis is required to move from a traditional S&OP process to an “optimized” S&OP process. In this new-generation S&OP process, demand sensing and shaping is key to understanding how to influence demand, and supply shaping is key to meeting demand cost-effectively across complex supply chain networks. 

Q13. What is the role of master data management (MDM) in S&OP, and what is SAS doing in that regard?

A13. MDM is key to supporting any process, particularly S&OP, due to the amount and complexity of the data required to support the process. SAS has an entire department devoted to MDM, along with technology solutions to enable MDM (owing to the 2000 acquisition of DataFlux).

As I pointed out earlier, any process is only as good as the supporting data and analytics. Getting data that is correct, complete, and available when you need it with data management tools that can access the data from any system and in any format, including downstream data, and then automatically transform and cleanse the data for analysis is key to a successful S&OP process.

 
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