The Intricacies of Sales and Operations Planning

Managing supply chain is increasingly a demanding task of satisfying the customer and the shareholders. Supply chain professionals worldwide have a daunting challenge of managing a global supply chain aligning with the business needs and financial downturn adds another dimension to the complex challenge structure. All agree that supply chain manager’s primary task should be apart from keeping customers or stores properly stocked and deliver the perfect order every time, they must balance the need for low costs, proper inventory levels and maximum service levels. They must ensure that supply chain management is an integral component of the company’s strategic direction and plan to create and maintain a competitive advantage.

Apart from the above-mentioned challenges and tasks of a supply chain manager, we have few more issues to tackle in the modern world and they are Globalisation; Terrorism; Product Proliferation; Scrambled Merchandizing and Customer Retention.  In order to balance all tasks and counter all challenges, we need a process and that is called Sales and Operations Planning.

Sales and operations planning (S&OP) is an integrated business management process developed in the 1980s by Oliver Wight through which the executive/leadership team continually achieves focus, alignment and synchronisation among all functions of the organisation. The S&OP planning includes an updated forecast that leads to a sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning than steadily consumed products. Done well, the S&OP process also enables effective supply chain management (Source: WIKIPEDIA). S&OP is critical for any company that is targeting strong performance.

Let us understand global challenges faced by many organisations in different regions in order to understand how S&OP can help us to counter them.

As explained above more or less all regions in the world face some unique challenges such as demand for velocity improvement, faster and accurate order fulfilment, global supply chains, the pressure to reduce costs, and last but not least is to improve top line revenues.

Planning can be classified as two different methods, the first one deal with unconstrained planning.  This means typical material requirement planning, which answers the question of what is required to meet the demand without any constraints.  The second method is constrained demand planning.  This method with the help of a tool measures what can be produced with a given constraints and available resources.  Let us see who is good at unconstrained planning? EMEA and all other regions are doing very well both in responding to the unplanned event and also in an unconstrained environment. In my opinion, the most disappointing factor of the survey is that the best in class results in the case of responding to unplanned event or demand and conducting a gap analysis and initiating corrective actions indicate there is a lot of work on hand.

Constrained planning and the ability to respond to the unplanned demand in a timely manner indicate the level of supply chain flexibility and supplier collaboration, apart from manufacturing nimbleness.  Living with a problem and addressing the problem through gap analysis distinguishes the supply chain.  The world is the true classroom. The most rewarding and important type of learning is through experience,  there is only one thing more painful than learning from experience and that is not learning from experience.

But how many organisations are involved in going through the S&OP Process?  EMEA seems to be heading the group at a Macro level.  The S&OP success largely depends upon the SKU level measurement, all other regions are better compared to EMEA.  What is disappointing is that no other region is close to the best in class.  S&OP process is driven by the people and it is very critical that they understand the importance of the process and implement it effectively in order to drive the organisation in the right direction.  It is heartening to note that all other regions have done better than best in class in understanding the business systems and utilising them effectively.  Individual or functional (departmental) goals and objectives sometimes derail the S&OP process and that could result in heavy inventory and disappointed customers and shareholders.

It is needless to add that technology is very critical for the S&OP Planning and execution.  What is sad to know is that many organisations do not invest in specialised IT tools to drive the S&OP/Demand planning, they rely on ERP tools.  This was very clearly established by the survey undertaken by Aberdeen group. Demand forecasting in a retail and FMCG markets and within PUSH supply chain area is challenging due to product proliferation.  You need a specialised tool that could provide a variety of options and models with regard to your future demand.

North America organisations are heavily wedded to legacy systems compared to other regions.  It is sad that a matured market such as North America depends on the legacy and old systems and lacks the emerging market’s capability.  Further, NA does not boast an integrated ERP solution in place. It is clearly evident that emerging markets are more adventurous in investing in technology which could lead to better planning, less inventory, improved customer service and increasing top line revenue with the attractive bottom line.

We have made an attempt to understand how the world is managing S&OP business process.  Before I sign off, let me spend few minutes to explain the current challenges of S&OP process globally.  The first challenge is to align the process to the business strategy; we have often seen both heading in the opposite direction. The business ownership for the process, it is quite common to see S&OP as a sub-function of Supply Chain with more emphasis on managing supply than the demand.  In my opinion, the biggest challenge is managing the change (fear of failure).  This is very commonly seen in constrained planning situations.  Many people believe that S&OP process is all about the forecasting the demand but very few understand that it is a process to align the operational excellence with business needs in the form of customer demand.  Many do not see the value of S&OP in containing the inventory carrying thus resulting in cost reductions.  In order to address this issue what we need is executive governance.  The executive team should understand the importance of S&OP process and drive it effectively.  It is quite common to see Management team is involved in approving the outcomes and not driving the outcomes.  It would be effective if executive management drives this process aligning with organisational goals.  Another commonly noticed challenge is the new product launch.  Any product launch should go through product lifecycle management (PLM) process and all elements of PLM process should be thoroughly reviewed before the launch, if not the S&OP process will not help in achieving the product success.  The last but not least is connecting the planning to the execution.  Many organisations are good at planning, when it comes to execution, to a great extent many are not successful.  S&OP is only a business process, in order to make it successful, business discipline is critical and governance is paramount.

Cartoon Source: Cayuga Partners