by Gaurang Pandya
Originally focused on matching supply and demand, sales and operations planning (S&OP) now facilitates organizational alignment between business goals and plans, while enabling quick responses to continuously changing business conditions. As organizations are more driven than ever by shareholder expectations, new-generation S&OP has a fresh focus: consistent profitability, where the operational plan reliably achieves the financial plan.
Advanced tools and processes enable this new generation of process maturity--one capable of handling the increasing complexities of globalization and dynamic consumer demand. S&OP is assuming an even more integral role inside companies and commanding more respect than ever. As the Aberdeen Group noted: “It is the single most important competitive weapon for ensuring that the enterprise is profitably servicing the right customers, through the right channels, with the right products." (The Sales and Operations Planning Benchmark Report: Leveraging S&OP for Competitive Advantage, Aberdeen Group, Inc., June 2004.)
In the past, it was typical for the CFO to set a yearover- year growth target. As scenarios changed and data were collected, there was very little reconciliation between reality and plan. It was difficult to close the loop and see if the plan was going to miss.Without a technology or process in place to continuously adjust the financial plan, S&OP couldn't be optimized to contribute to consistent profitability.
Things have changed.Today's new generation of supply chain solutions offers capabilities for complete data visibility, frequent analytics and rapid decision making, thereby ensuring that operations are consistently aligned with the financial plan. Organizations that want consistent profitability throughout the year are questioning their decisions about product introductions and production, asking: “Does this activity make sense in terms of overall profitability for the company? Does it require additional investments to fulfill demand? Will it counter supply chain upsets?"
These decisions can now be made with confidence, because organizations can see the whole picture and make instantaneous evaluations that help steer operational decisions to meet the plan for the bottom line, keeping profitability on track.
Stages of maturity
While many organizations have implemented their own S&OP process, only a few have reached the newgeneration functionalities in the progression from lesser to greater stages of maturity. The stages of maturity are defined as:
- Ad hoc processes-In the early stage, an organization is plagued with ad hoc processes, driven by targets defined by top management. But each functional area has its own plan and the focus is on local resource optimization.
- Functional efficiency-The next level focuses on functional efficiency and optimization of functional management. Companies begin using formal processes and measure them with performance metrics within each of the functional areas. Each function (e.g., sales, production, finance, product development) aims to maximize efficiency and thus achieve its goals. However, the metrics, processes and tools are isolated in silos and lack true crossfunctional synchronization. And the organization follows forecasts as if they were written in stone.
- Cross-functional integration-The next level of maturity focuses on cross-functional integration, where all functional constituents have common goals and metrics. Cross-functional processes and organizational structures are put in place to achieve these metrics. However, the focus is mostly within the four walls of an enterprise; the silos cause a lot of information latency. As a consequence, such organizations are slow to react to today's highly dynamic business environment.
- Consumer demand synchronization- At this level--responsive to the dynamic consumer-choice models and buying patterns of recent years, and the increasing variability throughout the supply chain--the S&OP process focuses on the customer and on synchronizing the entire supply chain to meet consumer demand. At this stage, formal processes and metrics are established to: measure and improve relationships among customer organizations and supplier organizations; eliminate the padding of numbers by sharing metrics and truly collaborating with supply chain partners; and focus on rapid identification of and reaction to changes.
| Previous Generation | New-Generation S&OP |
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The new generation of S&OP processes and technology creates shorter cashto- cash cycles and optimizes capital investments.
In spite of these S&OP improvements, however, companies at this level still do not understand the profitability or financial implications of constantly realigning the supply chain to respond to consumer demand.
Characteristics and capabilities of the new generation
In the new generation of S&OP, enterprises focus on developing a plan and then making the plan happen with consistent profitability. They achieve this by:
- Establishing performance metrics that are tied to financial metrics at each level of the organization
- Establishing process playbooks to deal with supply or demand “upsets," thus sensing and shaping supply and demand
- Using financial instruments for risk and reward analysis
- Enabling joint decision making on planning and execution, analyzing the effects of trade-offs such as promotion versus logistics costs and production versus warehousing costs
- Taking a Six Sigma approach to minimize process variability By adopting the following best practices, an organization can come closer than ever to its objective of consistent profitability.
Focus on cross-functional processes--
Having cross-functional processes in place is vital to meeting upper management's goals. Developing the processes to ensure that there is coordination among functions requires executive buy-in and sponsorship.When there is not an executive-level process owner to bring together the functions, S&OP strategies fail. A COO, GM or even a CEO is needed to empower the facilitators who will make up the small group to manage process coordination and execution. Many organizations find that engaging this kind of executive team is an extremely effective way to run the cross-functional process. By creating a cross-functional team (which should include a tie breaker), organizational silos are eliminated, and shared communication and collaboration across the organization are promoted.
Consider this business example: An international manufacturer had little alignment between its strong supply chain capabilities and processes and its business plan. It created a business leadership team, which tied the business plan to the quarterly financial plan, monitoring it on a monthly basis. Using rough cuts of data from supply chain management processes, the team reduced changes to the initial weekly scheduling and buy plans. The team created one business system that all orders went through. Although initially the biggest skeptic of the changes, the finance department became the biggest champion once results were realized.
The cross-functional team is responsible for creating strategic goals and a set of measurements or key performance indicators to support the goals. There must be a process in place with activities and timelines to meet the goals, with clearly defined and assigned roles and responsibilities. Role-based activities ensure that the right person does the job, and agreed-upon data templates guarantee that the necessary data are collected. Adherence to the process is continually measured to map effectiveness.
Synchronized planning models and cycles--
To achieve consistent profitability, plans and planning cycles must be linked among finance, sales, marketing, production, engineering and other functions in the organization. Each of the functions analyzes its own capabilities and the levers it has to control adherence to the plan. It shares any changes with the other functions and understands what impacts its plan will have on other plans. For example, a price change impacts volumes and therefore production, requiring changes in inventory plans and production schedules. These changes propagate to the financial plan as well.
Collaboration--
Collaboration is critical for consensus between planning and execution. This includes cross-functional collaboration as well as collaboration with customers, suppliers and trading partners. Collaboration is essential for creating realistic stretch goals and a commitment to execution throughout the organization.
Meeting the challenge to make collaboration with trading partners truly work is difficult. Organizations have to provide incentives to ensure the accuracy and timeliness of inputs. In return, they can guarantee better service levels, better order lead times and greater flexibility. Then, by measuring the agreed-upon metrics against the trading partners' behaviors, an organization can measure the effectiveness of the collaborative process. These measurements can be used for any necessary renegotiation of terms and conditions.
The collaboration process is most effectively facilitated using role-based workflow tools, which greatly reduce misalignments between functions. Collaboration supported by scenario-based analysis ensures maximum value throughout the organization.
Proactive monitoring--
Consistent profitability can only be achieved if there is a single version of the truth represented in the operational plan, and if it is monitored frequently. To do this, the plan needs to be translated into an execution profile--the rate at which the execution of the plan is anticipated. Then the execution results and metrics need to be matched with this profile to sense deviations and the need for plan adjustments.
For example, let's assume there is a monthly demand plan in place in a company and its objective is to shape demand to consumer response. In order to dynamically respond to that consumer input, the company needs to get into the details each month--in other words, get closer to execution.Within a month there is a profile-dependent upon various factors such as season, demand point, demographics-in which the demand is realized. In order to shape demand, the company needs to understand the deviation from the anticipated consumption profile. If the consumption is less than anticipated, a promotion can be introduced to shape the demand. If sales shoot through the roof, a price change can stabilize the demand.
New-generation systems allow companies to ensure that there is an adequate process for raising alerts when execution is not meeting the plan. And they also allow companies to ensure that a single version of “the truth" --a synchronized plan--is used for execution. In fact, any organizational lever can be made part of the execution profile, leading to a better understanding of cause-andeffect relationships and continuous improvement.
Process for constraint management--
It is crucial to proactively identify possible constraints in each area of the supply chain. Good constraint management means creating a plan to manage these constraints and to understand their impact on financial performance and avoid lost opportunities. As the constraints change, adjustments are made to the business plan, so that it stays aligned with the financial plan and remains on track for consistent profitability.
Scenario analysis--
When alarms are triggered, indicating possible upsets to the plan, there should be a process in place to identify alternative actions. The process compares, analyzes and selects the best alternative scenario and presents recommendations to the designated stakeholders. Financial instruments and optimization tools are used by stakeholders to evaluate different scenarios. Then an alternative can be selected and put into operation to meet the business plan. The scenario construction and evaluation process is consensus-driven. Having a structured scenario analysis leads to well-informed and validated decisions for risk mitigation--an essential component for achieving consistent profitability.
Proactive and empowered management--
A measurement system to harmonize efficiency and responsiveness with the business plan is essential in proactive management. Scorecards linked between functions help keep them aligned. By aggregating and disaggregating performance metrics between all levels of all functions, linked scorecards ensure empowerment and accountability.
Proactive and empowered management requires a defined process for monitoring forward-looking metrics and clearly notifying the right managers when alarms are signaled. That way the right people are alerted to find the right resolution. The process includes ongoing root-cause analysis to prevent alarms from happening in the first place. A layered decision process can be put in place, showing what is cause for alarm and the levers that can be used for resolution. For example, if there is a production failure, the production organization is empowered to resolve the failure within its span of control, if the failure does not impact a higher-level metric such as line-of-business (LOB) metrics or sales metrics.
If it does impact higher-level metrics, then an alarm can be raised at the LOB level or with sales to collaboratively resolve the problem or to have Sales or LOB use their span of control for resolution. In the latter case, LOB or Sales could possibly allocate the constrained supply to priority orders. If this action at the sales level prevents the achievement of a financial metric--for example, revenue attainment for the quarter--then an alarm could be raised to Finance, bringing this function into the resolution process.
Multi-dimensional organization levers--
Organization levers across functional areas are a main factor in making consistent profitability possible. They can be any method or option used for course correction or to accomplish a goal or meet a target; for example, promotions, expediting, adding capacity or demand shaping. Here, it is important that companies identify useful levers associated with each objective or metric, assess the potential impact of the levers on the other objectives and develop the relationship model between the objectives and the levers.
It is also important to understand the different lead times needed for the levers to be effective and the probability for each lever to affect the objectives. The key to effective levers is having a well-defined process for applying them: specifically, who can apply the levers, when and under which situations. Best-inclass practice is to construct and use a lever-effectivity matrix for each functional area or potential problem.
Benefits of consistent profitability
Consistent profitability does more than benefit the bottom line. It also improves overall efficiency in operations and personnel. The new generation of S&OP processes and technology creates shorter cash-to-cash cycles and optimizes capital investments. Because revenue is continuously balanced to cost, and supply matched with demand, an organization consistently meets its financial objectives. This can be achieved because the processes, systems and communications are in place to create organizational efficiency and rapid decision making.
Organizations with such new-generation processes and empowering solutions in place experience improved responsiveness because they have become forward looking and proactive. They're able to maximize opportunities and minimize the impact of upsets. Process and technology lead to reduced planning cycle times and less information latency. Along with improved decision making, such companies gain a competitive advantage that keeps them at the forefront of their industries.
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Gaurang Pandya is a director in i2's Solutions Marketing organization. For more information, contact supply_chain_leader@i2.com. |
