VANTAGE POINT-- Sales & Operations Planning: Enabling Responsiveness in the Consumer Products Industry
By Parimal Goel, program director, Manufacturing Industry Solutions, MindTree Ltd.
Consumer products companies today are required to constantly innovate on their product and marketing strategies to satisfy their ever more demanding consumers and fend off competition. While this pace of innovation is good for consumers, it places a huge stress on the supply chain.
Companies find that global sourcing and expanding distribution networks have made supply chains more complex. Yet the volatile demand environment requires shorter lead times and responsiveness. Even as traditional planning tools (ERP, MRP, Advanced Planning & Scheduling, etc.) have become common, there are often still disjointed decision making silos within the organization. As a result, managers are unable to focus on strategic initiatives, and instead spend time on ad-hoc firefighting and expediting.
In this context, Sales & Operations Planning (S&OP) is finding favor among senior executives as a way to increase organizational agility and respond to these pressures. This article explores how a robust S&OP business process, when supported by the appropriate technology enablers, can make an organization truly effective in responding to a dynamic marketplace.
Key Concepts in S&OP
The American Production and Inventory Control Society (APICS) defines S&OP as the "function of setting the overall level of manufacturing output and other activities to best satisfy the current planned levels of sales, while meeting general business objectives of profitability, productivity, competitiveness, customer lead times, etc."
In order to achieve this objective, S&OP must rely on two critical concepts:
1) Single Number Plan
A supply chain has many participants (as figure 1 depicts), who influence its outcomes. These could be within the organization or across the value chain. A supply chain manager requires a different view of plans for each of the participants.
-- On the customer side, a demand plan represents the forecast for each product
-- On the supply side, one requires a supply plan for each item to be procured from suppliers
-- The operations plan represents the planned levels of production, transportation and inventory for the enterprise
-- The financial plan represents the level of financial resources (cash flows, capital requirements, projected income & expenses) required to support the operations plan.
Fig.1: Single Number for all participants
Though each plan is meant for a different audience and projects different figures, a truly integrated S&OP process derives all plans from a single set of numbers. This allows all participants to co-operate with each other in a transparent manner and focus on improving those plans.
2) Appropriate usage of supply chain "levers"
Once a single number plan is available, the S&OP process strives to balance demand & supply in line with organizational objectives. There are several "levers" (as shown in figure 2) that a supply chain manager can use to influence the demand supply balance.
Fig.2: S&OP Levers that influence the final outcome
To illustrate this point, we take an example of a situation where supply is less than demand. A supply chain manager can adopt several strategies to balance the two, but each has different implications. A few examples are as follows:
A. Pre-build inventory by producing more in periods of slack demand. This strategy maximizes capacity utilization, but locks up working capital. This is feasible when there are known periods of slack demand and there is enough advanced visibility of the demand peaks (e.g. seasonal products).
B. Build high capacities to cater to load at peak demand. This strategy would minimize inventory, but requires large investments in fixed capacity. This is feasible when fluctuations in production do not affect quality, lead times
or cost in an adverse way.
C. Outsource production to sub-contractors to cater for peak load. This strategy minimizes capital investments as well as inventory. However it may increase the unit cost of production leading to lower margins.
D. Increase prices (or withdraw promotions) to reduce demand. This strategy would increase unit margins without increasing cost in the short term. But there could be higher than anticipated reduction in volume or a long-term opportunity cost of lost sales if competitors gain market share.
E. Allocate constrained supply (or reduce availability in certain markets) to reduce demand. This requires no immediate cost; however it may impact customer satisfaction and create long-term opportunity cost of lost sales to competitors.
Choosing the right strategy requires careful analysis and involvement from all the stakeholders. An S&OP process brings cross-functional teams and senior management together and enables them to make fact-based decisions and then support the choices made during execution.
The S&OP Process
S&OP is a continuous process that must take place to monitor the demand / supply situation and make adjustments to the supply chain. There are 5 important stages in the process as shown in figure 3.
Fig.3: 5 stages of the S&OP Process
1. Historical data (e.g. actual inventory, sales, production) is the backbone of the S&OP process and must be captured accurately and in a timely manner.
2. Demand Planning typically starts from an "Unconstrained" base line forecast. In addition one may capture inputs from other sources such as:
-- Marketing & Sales plans that reflect promotional campaigns, new product introductions, pricing actions, and changing competitive environments.
-- Data from customers who are involved in co-managed inventory programs such as Vendor Managed Inventory (VMI) or Collaborative Planning, Forecasting and Replenishment (CPFR).
3. Supply Planning typically uses an optimization tool to generate inventory, production, distribution and procurement plans that minimize costs (or maximizes profits) subject to various constraints. The S&OP process can then locate gaps where supply is less than demand or vice-versa and flag exceptions.
4. Pre-S&OP Meetings allow supply side and demand side managers to come together to make decisions that balance the plan. The plans are also converted into financial plans for management review. In large organizations with multiple product categories and markets, a series of meetings are required with the respective teams coordinated by a central S&OP team.
5. Executive S&OP Meetings allow review of the overall business impact and authorize the firm's single number plan. Senior management from all functions attends these meetings so that exceptions from pre-S&OP meetings can be resolved.
Technology's Value Proposition
Once the various challenges involved in supporting an S&OP process are understood, technology solutions can help overcome these hurdles. There are 4 technology enablers (as depicted in figure 4) that are important to the success of the S&OP process.
Fig. 4: Technology Enablers for S&OP
Enabler 1 -- Advanced Planning & Optimization
Optimized demand & supply plans are key inputs to the S&OP process.
-- Demand Side Planning requires statistical tools for baseline forecasting and demand collaboration tools to capture market or customer intelligence.
-- Supply Side Planning requires mathematical optimization capability to plan around material, capacity and other resource constraints.
Such advanced planning systems also require tight integration with transaction systems such as ERP, MES and other legacy applications.
Enabler 2 -- S&OP Workbench (Aggregate What-if Planning)
In addition to the detailed plans above, supply chain managers need the capability to aggregate plans in volume and value terms to a higher level of granularity (typically a product family, customer group level). An aggregate planning tool must also ideally allow creation of planning scenarios and execute rough-cut what-if calculations. These capabilities allow managers to rapidly arrive at better decisions during S&OP meetings.
Enabler 3 -- S&OP Scorecard (Plan evaluation metrics)
Participants in S&OP meetings require quick and reliable means of evaluating the plan. Tools that combine planning data with historical data to deliver metrics are ideally suited. These help managers narrow down the most important problems, thereby improving effectiveness of the S&OP process. Examples of metrics required are:
1. Measure against the business plan
a. Track YTD achievement on sales, cost, margins, etc.
b. Operational metrics (capacity utilization, inventory days, landed product cost)
2. Measure demand/supply gaps (compared with past trend and targets)
a. Projected order-fill rates
b. Value of lost/delayed sales
c. Value of excess inventory
3. Measure execution efficiency
a. Forecast accuracy, forecast bias
b. Plan compliance, Stock v/s norm ratio
Enabler 4 -- S&OP execution (Plan execution and tracking)
Since S&OP decisions involve multiple stakeholders, it is important to record these in a common repository with the ability to track progress and notify managers of actions due for them. Benefits of such a system are:
-- Planning decisions are recorded transparently
-- Open issues are tracked and escalated until resolved
-- Responsibility of execution is clearly defined
-- Plan compliance is improved
Conclusion
Sales & Operations Planning is a powerful mechanism to improve business performance. While keeping the supply chain at its heart, in reality it impacts every part of the enterprise and extended value chain. In doing so, it ensures that:
-- The supply chain is more pull (demand) driven
-- Customer service levels are improved
-- Supply chain costs are optimized
-- Productivity is improved
-- There is enhanced teamwork within the organization
-- There is greater accountability for various decisions made
Lastly, remember that effective S&OP requires a combination of well-defined process and robust technology enablers that work in tandem.
_____________________________________________________
About Parimal Goel
Parimal Goel is the program director of Manufacturing Industry Solutions at MindTree Ltd, a global IT solutions company. He has extensive experience in the field of Supply Chain Management & ERP solutions, and has worked on designing supply chain processes and implementing technology solutions for improving business performance. Goel specializes in the Consumer Products and Hi-tech manufacturing space and has advised leading organizations such as Procter & Gamble, Unilever and Samsung on supply chain technology aspects.
Consumer products companies today are required to constantly innovate on their product and marketing strategies to satisfy their ever more demanding consumers and fend off competition. While this pace of innovation is good for consumers, it places a huge stress on the supply chain.
Companies find that global sourcing and expanding distribution networks have made supply chains more complex. Yet the volatile demand environment requires shorter lead times and responsiveness. Even as traditional planning tools (ERP, MRP, Advanced Planning & Scheduling, etc.) have become common, there are often still disjointed decision making silos within the organization. As a result, managers are unable to focus on strategic initiatives, and instead spend time on ad-hoc firefighting and expediting.
In this context, Sales & Operations Planning (S&OP) is finding favor among senior executives as a way to increase organizational agility and respond to these pressures. This article explores how a robust S&OP business process, when supported by the appropriate technology enablers, can make an organization truly effective in responding to a dynamic marketplace.
Key Concepts in S&OP
The American Production and Inventory Control Society (APICS) defines S&OP as the "function of setting the overall level of manufacturing output and other activities to best satisfy the current planned levels of sales, while meeting general business objectives of profitability, productivity, competitiveness, customer lead times, etc."
In order to achieve this objective, S&OP must rely on two critical concepts:
1) Single Number Plan
A supply chain has many participants (as figure 1 depicts), who influence its outcomes. These could be within the organization or across the value chain. A supply chain manager requires a different view of plans for each of the participants.
-- On the customer side, a demand plan represents the forecast for each product
-- On the supply side, one requires a supply plan for each item to be procured from suppliers
-- The operations plan represents the planned levels of production, transportation and inventory for the enterprise
-- The financial plan represents the level of financial resources (cash flows, capital requirements, projected income & expenses) required to support the operations plan.
Fig.1: Single Number for all participants
Though each plan is meant for a different audience and projects different figures, a truly integrated S&OP process derives all plans from a single set of numbers. This allows all participants to co-operate with each other in a transparent manner and focus on improving those plans.
2) Appropriate usage of supply chain "levers"
Once a single number plan is available, the S&OP process strives to balance demand & supply in line with organizational objectives. There are several "levers" (as shown in figure 2) that a supply chain manager can use to influence the demand supply balance.
Fig.2: S&OP Levers that influence the final outcome
To illustrate this point, we take an example of a situation where supply is less than demand. A supply chain manager can adopt several strategies to balance the two, but each has different implications. A few examples are as follows:
A. Pre-build inventory by producing more in periods of slack demand. This strategy maximizes capacity utilization, but locks up working capital. This is feasible when there are known periods of slack demand and there is enough advanced visibility of the demand peaks (e.g. seasonal products).
B. Build high capacities to cater to load at peak demand. This strategy would minimize inventory, but requires large investments in fixed capacity. This is feasible when fluctuations in production do not affect quality, lead times
or cost in an adverse way.
C. Outsource production to sub-contractors to cater for peak load. This strategy minimizes capital investments as well as inventory. However it may increase the unit cost of production leading to lower margins.
D. Increase prices (or withdraw promotions) to reduce demand. This strategy would increase unit margins without increasing cost in the short term. But there could be higher than anticipated reduction in volume or a long-term opportunity cost of lost sales if competitors gain market share.
E. Allocate constrained supply (or reduce availability in certain markets) to reduce demand. This requires no immediate cost; however it may impact customer satisfaction and create long-term opportunity cost of lost sales to competitors.
Choosing the right strategy requires careful analysis and involvement from all the stakeholders. An S&OP process brings cross-functional teams and senior management together and enables them to make fact-based decisions and then support the choices made during execution.
The S&OP Process
S&OP is a continuous process that must take place to monitor the demand / supply situation and make adjustments to the supply chain. There are 5 important stages in the process as shown in figure 3.
Fig.3: 5 stages of the S&OP Process
1. Historical data (e.g. actual inventory, sales, production) is the backbone of the S&OP process and must be captured accurately and in a timely manner.
2. Demand Planning typically starts from an "Unconstrained" base line forecast. In addition one may capture inputs from other sources such as:
-- Marketing & Sales plans that reflect promotional campaigns, new product introductions, pricing actions, and changing competitive environments.
-- Data from customers who are involved in co-managed inventory programs such as Vendor Managed Inventory (VMI) or Collaborative Planning, Forecasting and Replenishment (CPFR).
3. Supply Planning typically uses an optimization tool to generate inventory, production, distribution and procurement plans that minimize costs (or maximizes profits) subject to various constraints. The S&OP process can then locate gaps where supply is less than demand or vice-versa and flag exceptions.
4. Pre-S&OP Meetings allow supply side and demand side managers to come together to make decisions that balance the plan. The plans are also converted into financial plans for management review. In large organizations with multiple product categories and markets, a series of meetings are required with the respective teams coordinated by a central S&OP team.
5. Executive S&OP Meetings allow review of the overall business impact and authorize the firm's single number plan. Senior management from all functions attends these meetings so that exceptions from pre-S&OP meetings can be resolved.
Technology's Value Proposition
Once the various challenges involved in supporting an S&OP process are understood, technology solutions can help overcome these hurdles. There are 4 technology enablers (as depicted in figure 4) that are important to the success of the S&OP process.
Fig. 4: Technology Enablers for S&OP
Enabler 1 -- Advanced Planning & Optimization
Optimized demand & supply plans are key inputs to the S&OP process.
-- Demand Side Planning requires statistical tools for baseline forecasting and demand collaboration tools to capture market or customer intelligence.
-- Supply Side Planning requires mathematical optimization capability to plan around material, capacity and other resource constraints.
Such advanced planning systems also require tight integration with transaction systems such as ERP, MES and other legacy applications.
Enabler 2 -- S&OP Workbench (Aggregate What-if Planning)
In addition to the detailed plans above, supply chain managers need the capability to aggregate plans in volume and value terms to a higher level of granularity (typically a product family, customer group level). An aggregate planning tool must also ideally allow creation of planning scenarios and execute rough-cut what-if calculations. These capabilities allow managers to rapidly arrive at better decisions during S&OP meetings.
Enabler 3 -- S&OP Scorecard (Plan evaluation metrics)
Participants in S&OP meetings require quick and reliable means of evaluating the plan. Tools that combine planning data with historical data to deliver metrics are ideally suited. These help managers narrow down the most important problems, thereby improving effectiveness of the S&OP process. Examples of metrics required are:
1. Measure against the business plan
a. Track YTD achievement on sales, cost, margins, etc.
b. Operational metrics (capacity utilization, inventory days, landed product cost)
2. Measure demand/supply gaps (compared with past trend and targets)
a. Projected order-fill rates
b. Value of lost/delayed sales
c. Value of excess inventory
3. Measure execution efficiency
a. Forecast accuracy, forecast bias
b. Plan compliance, Stock v/s norm ratio
Enabler 4 -- S&OP execution (Plan execution and tracking)
Since S&OP decisions involve multiple stakeholders, it is important to record these in a common repository with the ability to track progress and notify managers of actions due for them. Benefits of such a system are:
-- Planning decisions are recorded transparently
-- Open issues are tracked and escalated until resolved
-- Responsibility of execution is clearly defined
-- Plan compliance is improved
Conclusion
Sales & Operations Planning is a powerful mechanism to improve business performance. While keeping the supply chain at its heart, in reality it impacts every part of the enterprise and extended value chain. In doing so, it ensures that:
-- The supply chain is more pull (demand) driven
-- Customer service levels are improved
-- Supply chain costs are optimized
-- Productivity is improved
-- There is enhanced teamwork within the organization
-- There is greater accountability for various decisions made
Lastly, remember that effective S&OP requires a combination of well-defined process and robust technology enablers that work in tandem.
_____________________________________________________
About Parimal Goel
Parimal Goel is the program director of Manufacturing Industry Solutions at MindTree Ltd, a global IT solutions company. He has extensive experience in the field of Supply Chain Management & ERP solutions, and has worked on designing supply chain processes and implementing technology solutions for improving business performance. Goel specializes in the Consumer Products and Hi-tech manufacturing space and has advised leading organizations such as Procter & Gamble, Unilever and Samsung on supply chain technology aspects.