A Framework for a successful S & OP Process

Aatish Goel, Balaji Narasimhan A Framework for a successful S & OP Process Synopsis Sales & Operations Planning (S&OP) is an integral component of an...
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Aatish Goel, Balaji Narasimhan

A Framework for a successful S & OP Process Synopsis Sales & Operations Planning (S&OP) is an integral component of an organization’s planning process that drives both revenue enhancement and cost control. Although it is not new to the industry, its interpretation is varied. Only a few organizations have implemented this in practice to achieve full benefits. With external pressures such as globalization, Mergers & Acquisitions, consumerization, technology advancements etc. and internal challenges that are process, technology and organization related, many organizations are focusing on S&OP with renewed vigor. This paper suggests a possible framework to overcome some of these challenges and implement an effective S&OP process. Keywords: Sales & Operations Planning, Demand and Supply Planning, Stakeholder participation

The term ‘Sales & Operations Planning’ (S & OP) has multiple connotations to it and therefore, understood differently. This paper attempts to demystify S & OP and presents a possible framework to achieve the desired benefits of putting an effective S & OP into practice.

Key issues facing global organizations Before deep diving into what S & OP is all about and what it can do to organizational performance, it would be good to see what are the broad level trends and issues being faced by organizations, particularly the ones that operate on a global scale (Fig.1)

Fig.1: Trends and issues imperatives for organizations

and

It is not an uncommon scenario that the key functions within an organization – Sales and Marketing, Manufacturing and Finance work with conflicting objectives leading to the following issues: Page 1 of 6

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Aatish Goel, Balaji Narasimhan A Framework for a successful S & OP Process

     

Ineffective planning process that is not aligned to the overall business objectives Delayed decision making Poor demand and supply balance leading to improper inventories and customer frustration Ad hoc response to changes resulting in inefficient planning process Reduced gross margins and profitability Lack of transparency and trust in the system

It is in this context that an integrated planning process that balances the ‘concerns’ of the key functions becomes increasingly relevant.

S & OP defined In simplistic terms, S & OP is a process to balance the demand plans and supply constraints proactively to achieve revenue enhancements and cost control. What is more important to note however, is that this process needs to follow a structured approach and should be a culmination of cross functional team and top management participation. While the above may look to be simple, reality is that this has not been implemented in practice in its fullest measure.

What ails organizations in practicing S & OP? S & OP is not new to the industry. However, many organizations have not been able to achieve the expected benefits as it is not practiced with a right approach.

The following are some of the critical challenges faced:  S & OP is considered to be an adhoc and informal process  The key business functions operate as silos and each function looks at the other with a lot of unease and suspicion  There is no equal participation from all the key stakeholders  Supply chain functions are not mature enough to see its importance  Limitations in technology support hinder its effectiveness

S & OP benefits

and

potential

Organizations are taking cognizance of the some of the challenges highlighted above and working through them. This is because having such an integrating planning process has been on the priority list for most organizations, considering the potential benefits that it can bring along. An Aberdeen research survey of around 140 organizations in June/July 2006 highlighted the key drivers to improve the S & OP process1. In this survey, it was indicated by around 66% of the respondents that improving customer order fill rate was the primary driver to focus on improving the S & OP process. Apart from this, the other key drivers were: Better Return on Net Assets (65% of 1

Integrated Business Planning Building the case for technology to enable S&OP excellence http://www.sdcexec.com/online/article.jsp?id= 8730 (accessed on Sep.18, 2007)

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respondents), shrinking % profit margins (62%) and Customer retention pressure (58%). Similarly, an AMR research 2007 survey on 101 organizations confirms that S & OP is being looked as a tool that can achieve much more than just balance supply and demand2. This AMR research highlighted that nearly 25% of the respondents indicated S & OP as contributor to Maximizing opportunity and mitigating risk, Driving growth in new product introduction (19%), Developing the most profitable plan (18%) and then followed by Balancing Demand and Supply to minimize out of stocks (16%). Thus, one can see that the importance of S & OP as a strategic tool cannot be overemphasized.

Highlights of benefits realized by some of the Industry leaders Now, let’s look at what some of the S&OP leaders have done to achieve excellence in their respective industry2: 

An $80 billion diversified electronics manufacturer designed a closed-loop S&OP process that allows its key decision makers to assess the demand and supply situation at a SKU level on a weekly basis and re-evaluate its plans







Essential pre-requisites for a sound S & OP process We had earlier seen the challenges that organizations typically face in implementing S & OP. This section briefly mentions about some of the essential pre-requisites that need to be in place to have an effective S & OP process.  

  

2

‘Next-Generation S&OP: The Path to Bottom-Line Value’ – AMR Research, http://www.amrresearch.com/Content/View.as p?pmillid=20588 (accessed on Sep.18,2007)

A $14.3 billion chip manufacturer could realize benefits substantially by reducing earnings variation through redesigning its S&OP process A $3 billion memory disk maker improved its forecast accuracy by 25% resulting in a substantial profit improvement – again by tightening its S&OP processes A $500 million global white goods company could reduce lost sales by maintaining ‘right’ inventory and customer service levels as a result of improvements in S&OP process

S & OP is a formal planning process that has the complete backing of senior management It requires participation from key stakeholders from functions such as Marketing, Sales, Demand Planning, Manufacturing and possibly Design and Procurement There is a fairly fixed timeline, usually monthly but may vary by industry or maturity levels Planning discussions are holistic in nature and the objective is to have an optimal plan There is a structured mechanism to review past performance of various key metrics, firm up the present plan and build consensus on future scenarios Page 3 of 6

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Aatish Goel, Balaji Narasimhan A Framework for a successful S & OP Process



Focus of planning is usually at the aggregate level with a flexibility to go granular, as required

S & OP approach 

S & OP process follows an integrated planning cycle encompassing involvement of all key stakeholders. Here, we look at the various stages in this planning cycle (Fig. 2) and highlight the key activities in those stages.

does it and how is it done. Similarly, there should be clarity on the level at which the demand and supply planning would be done – SKU level or otherwise. Distribution Requirements Planning:  Reviewing inventory norms  Reviewing supply network  Finalizing unconstrained requirements from factory Supply Planning:  Capacity planning  Procurement planning  Feasible / constrained Production planning

Fig.2: S & OP – Integrated Planning Cycle The key activities that contribute to the success of these stages include: Demand Planning:  Data gathering and cleansing – this is very important as the success of the entire process depends on the quality of data used. Information on what are the data sources, who owns the data, how is data defined, governed and consumed are key inputs that need to be considered  Statistical forecasting  Finalizing forecasting based on consensus  Finalizing unconstrained demand It is important to understand the forecasting process – its objective, who

Pre-S & OP Meeting preparation:  Preparing performance reports  Evaluating alternate scenarios for unmet requirements  Prioritization planning  Incorporating latest market / factory changes  Preparing agenda for the S & OP meeting  Highlighting critical issues Monthly S & OP Meeting: This is a very critical activity that should get the participation of all the key stakeholders. The activities here would include:  Reviewing past performance  Discussing any critical point in the agenda  Reviewing the supply plan with specific focus on unmet requirements  Reviewing the backlog and rolling supply and demand plans

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Evaluating possible alternatives to arrive at the final supply plan Reviewing sales, financial and inventory plan with the confirmed supply plan Reviewing new product plan Circulating the minutes of meeting so that everyone is in sync with the decisions taken

Benefits of the process cannot be fully realized in the absence of the right supply chain performance metrics. Reporting to get accurate information on supply chain performance, root cause analysis for appropriate decision making etc. hold the key. It should also be possible to manage the initial pilot runs to showcase success results and highlight improvement opportunities.

Possible framework to have a ‘holistic’ S & OP in place An effective S & OP process relies on the success and co-ordination of these dimensions – Process, Technology and Organization. Benefits of S & OP would be fully realized when these dimensions are looked at holistically. This section presents a possible framework to consider the key aspects under these dimensions. Let’s look at what each of these dimensions mean to make a meaningful S&OP. Process:  Designing the right processes for each of the S&OP components  Ensuring Data sanctity: right and single source of information  Defining planning parameters such as planning cycle timelines, frequency of S&OP meetings  What-if scenario planning



Educating/Training end users for developing the right skills  Performance reviews  Showcase early/quick wins with the team and set feasible targets Technology:  Having suitable Planning system in place (with required features and capabilities)  Developing capability to get the right data from disparate sources  Reporting capability (for various stakeholders in their own language)  Capability to review alternative options (analysis of what-if scenarios) Organization:  Roles and responsibilities of people involved in the planning process  Performance metrics aligned to the business objectives  Top management involvement, reporting structure  Skills and aptitude of people involved Fig. 3 below illustrates the assessment of parameters for each dimension and possible recommendations. Organizations should not look into each of these dimensions in isolation because they are interdependent. For example, based on the assessment, an organization can discover that one of the prime sources of an inefficient analysis in planning process is its poor master data management. It could be due to a combination of lack of technology support and wrong reporting relationships. Therefore, correcting only one dimension will not solve the problem and hence the need

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Aatish Goel, Balaji Narasimhan A Framework for a successful S & OP Process

for looking at the problem across each dimension. In most of the cases, it has been observed that organizations fail because they lack this capability. We suggest organizations can follow this assessment framework with recommendations relevant to their industry and business model and achieve an effective S&OP process.

About the author Aatish Goel has over seven years of work experience in Supply Chain function in multiple industry environments and is currently working as Manufacturing and Supply Chain Consultant in Domain Competency Group in Infosys Technologies Limited. He is a trained Six Sigma Green Belt professional and is CPIM certified. His articles have been published in various international conferences and publications such as International Conference on Management Innovation-2007, Supply Chain Conference – 2007 organized by IBF and the International Symposium on Logistics (ISL) – 2007.

Fig.3: Looking at Process, Technology and Organization holistically

Conclusion Sales & Operations Planning is a strategic initiative with a time frame of at least 10-20 months depending on the complexity of the industry and nature of business operations. It is a process based approach to align the strategic goals of a company to its operational objectives. A successful S&OP process is the one that has the right ingredients as described during the paper, with a buyin across the organization and appropriate involvement of its extended business partners.

Balaji Narasimhan has over eleven years of combined experience in Software Product Management, Industrial Sales and Distribution and Engineering Consulting and is currently working as Manufacturing and Supply Chain Consultant with the Domain Competency Group at Infosys Technologies Limited. He is a trained Six Sigma Green Belt professional and is CPIM and CSCP certified. His articles have been published in various international publications and conferences such as Supply and Demand Chain Executive, SOX Compliance Journal and the International Symposium on Logistics (ISL) – 2007.

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