Advancing Productivity, Innovation, and Competitive Success

Sales & Operations Planning Two Decades of Learning at BASF

Alan L. Milliken CFPIM CIRM CSCP
April 14, 2007
Region IV

Region IV Meeting New Orleans, LA

Alan L. Milliken CFPIM CIRM CSCP

20+ years at major manufacturing sites working in Production, Logistics, Process & Quality Control, Industrial Engineering, Training, and Scheduling

11+ years as a Supply Chain Consultant and APICS Instructor including two years in Mexico City helping BASF Mexicana improve their supply chain
Identified by an independent consulting firm as one of three APICS members who best answer the question, What is a Supply Chain Manager? Served as an SME (Subject Matter Expert) on the team that developed the new Certified Supply Chain Professional (CSCP) program. Served as an SME on the team that developed the new Certified Forecasting Professional (CFP) for the Institute of Business Forecasting (IBF) Engineering Degree from Auburn University and MBA from Clemson University
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Objectives of the Presentation

Define formal Sales & Operations Planning (S&OP)
Describe the primary steps in the formal S&OP Process and explain the purpose of each Relate the inputs and outputs of each step in the process Identify the participants in and responsibilities for each primary step

Discuss Key Performance Indicators (KPIs) for each step in the process

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S&OP Process Overview

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What is formal Sales & Operations Planning?

S&OP is the process with which we bring together all the plans for the business (customers, sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans. The objective of Sales & Operations Planning is to arrive at a business Game Plan to help manage and allocate critical resources to meet the needs of the customer at the least cost to do so.

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S&OP as part of ERP

S&OP links Strategic Planning to Operations

Source: APICS Illustrated Dictionary

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High Level Enterprise Resource Planning Model

F O R E C A S T I N G &
2-10 Years Forecast Only Annually Forecast Only Monthly

Strategic Planning Business Planning

Sales & Operations Planning
Resource Planning Rough-cut Capacity Planning Capacity Requirements Planning

Forecast Only
Weekly Forecast & Orders

C A P A C I T Y

D E M A N D

Master Scheduling
Detailed Planning & Scheduling

Daily
Orders Only

P L A N N I N G
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S&OP in Product Hierarchy

Total Company Business Unit
Family S&OP Levels
Actual Demand is collected at the detailed level.

Forecasts are more accurate higher in the hierarchy

Too Aggregated

Subfamily Model / Brand Package Size

Stock Keeping Unit (SKU)

SKU by Customer SKU by Customer by Location

Too Detailed

S&OP is usually performed at an aggregated level (e.g. Product Family or Group)

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S&OP is a Five-Step Process:

Pre-S&OP and Executive S&OP may be combined into one meeting

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The Basic S&OP Grid:

History is included to highlight past plan-toactual performance

Inventory Plan = Planned Opening Inventory + Planned Production - Planned Sales

Actual Inventory = Opening Inventory + Actual Production Actual Sales Region IV Meeting New Orleans, LA

S&OP is a Cross-Functional Process

Engineering

S&OP Process
Product Definition Workforce Availability Product Demand

Marketing & Sales

Human Resources

Capital
Finance

Master Capacity Schedule Business Plan

Operations Management

Materials

Must champion the process

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Benefits of S&OP
If implemented and used effectively, S&OP will yield major benefits to the firm: improved customer service reduced inventory lower manufacturing & distribution costs better control of overall business performance increased team work within and across functions
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Steps in the S&OP Process

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Step 1: Updating Input Data

Data
R E O R R S&OP Planning Process

Remember the GIGO Principle. It takes much effort to ensure accurate & timely data is driving the process.

Results:
High Inventory
Low Service High Unit Cost Poor Decisions
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Step 1: Updating Input Data (Continued)

Key input data (e.g. inventory, sales, production, KPIs, etc..) should be updated as soon after month-end as feasible. Typically, 2-3 business days are allowed for this subprocess. Key Performance Indicators (KPIs) for data gathering include: Accuracy of the data Timeliness of sharing the data How well the data conforms to agreed upon formats Take care to get what you like or you will be forced to like what you get. George Bernard Shaw
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Step 2: Demand Planning Process Overview

Marketing & Sales are responsible for this step in the S&OP process. The output is used to drive supply planning.
Inputs
Market Intelligence

Process

Outputs

Sales Forecast

Review and update forecast (Marketing & Sales)

Demand Plan

Internal Demand

Customer Orders

The key performance measure for output is accuracy and for the process step is meeting timing commitments.
Region IV Meeting New Orleans, LA

Step 2: Demand Planning Activities

Generate new forecast (IT if automated)

Marketing/Sales:
Review new forecast, revise if needed, and approve for updating of S&OP grid

Review previous months forecasting performance and identify root causes for data outside tolerance
Provide status for new product introductions

Document assumptions and risks associated with new forecast

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Step 2: Demand Planning Sample Plan

The final plan is used to update the S&OP Grid and drive supply planning.
Product Family or Group

History

Management Overrides Go Here

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Step 2: Demand Planning Forecastability

The accuracy of the forecast depends heavily on whether or not the forecasting tool is applicable to the history data. One test to determine this is the Coefficient of Variation (COV). COV = Standard Deviation of Period-to-Period Sales/ Average Period Sales. If COV >0.8, conventional forecasting such as moving average should not be used.
Example where only Bulk Product can be forecasted:
Material (Prod-Pkg) 1 2 3 4 5 SUM PRD (Bulk) Material_De Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 20-Mth 20-Mth Std CoV scr. SUM Avg. Dev' 10 10 10 10 10 10 Packaged Packaged Packaged Packaged Packaged Bulk 4 3 7 2 1 3 2 1 3 2 1 4 1 8 2 1 3 2 2 2 2 5 1 6 2 2 2 1 3 2 2 2 2 4 3 3 2 2 4 2 4 6 2 1 3 2 2 2 2 26 6 8 20 5 65 1 0 0 1 0 3 1 90% 1 376% 1 249% 1 130% 1 220% 2 65%

Example where Product-Package can be forecasted:

Material (Prod-Pkg) PRD (Bulk) Material_De Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 20-Mth 20-Mth Std CoV scr. SUM Avg. Dev' 11 Packaged 5 5 2 2 2 2 2 4 2 2 6 2 5 6 2 5 2 2 2 5 68 3 1 40%

Example of a Material (Prod-Pkg) that should be Made-to-Order:

Material (Prod-Pkg) PRD (Bulk) Material_De Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 20-Mth 20-Mth Std CoV scr. SUM Avg. Dev' 11 Packaged 2 2 1 2 1 2 2 12 1 1 147%

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Step 2: Demand Planning Symptoms You Need a Formal S&OP Process

Top-Down Directives Conflict Significantly with Current Market Conditions:
3-Year Plan Profits

Revenue Forecast

Shareholder or Owner Board of Directors

A formal S&OP Process will ensure alignment across organization & planning levels.

Actual Sales

Sales Manager Sales Representative

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Step 2: Demand Planning Symptoms You Need a Formal S&OP Process

Marketing/Sales Suffer with the Field of Dreams Syndrome If we make it, they will come! Forecast

Output
Manufacturing

Inventory

Well guess what, in many cases we made it and they did not come.
A formal S&OP process will ensure cross-functional review of forecasting performance.
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Step 2: Demand Planning Symptoms You Need a Formal S&OP Process

The Scope of Marketing/Sales Participation is Limited
Bill, this is Jim. I want to make an appointment with you to discuss our Demand Planning process? Oh, Hi Jim. Actually we dont have a formal Demand Planning process. However, Im updating the latest forecast at this very moment.

Inventory
+10%

The Supply Chain Manager contacts the Marketing Manager.

The Marketing Manager responds.

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Step 2: Supply Planning Process Overview

Manufacturing operations and purchasing are responsible for the Supply Planning step of the S&OP process.
Inputs Process
Develop and Review Production & Purchasing Plans
Assess Manufacturing & Supplier Capabilities

Outputs
Supply Plan by Production Family

Demand Plan

Inventories

The key KPI for the process output is the deviation between planned and actual supply. For the process itself, timely & accurate data to drive the next step is most important.
Integration of Supply Planning

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Step 2: Supply Planning Activities

Key activities for the Supply Planning subprocess include:
Develop the preliminary supply plan based on the demand plan

Perform Resource Planning (Capacity Planning) for key resources

Identify and resolve imbalances in demand & supply as feasible Identify imbalances to be reviewed by management
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Step 2: Supply Planning Sample Plan

Machine Hours & No. of Batches are Key Resources

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Step 3: Supply Planning Symptoms You Need a Formal S&OP Process

Manufacturing & Business Goals are not Aligned
Congratulations Fred, your unit cost in production was below plan last month and Ive been authorized to give you a bonus. Jim, what is going on in Production. Fred did not make the rate decrease we had in the S&OP Plan and Inventory is out-of-control. Inventory Production JIM Sales

Plant Manager
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Step 4: Demand-Supply Balancing Process Overview

The Master Scheduler will typically facilitate the balancing of demands with supply once the preliminary S&OP plans are developed.
Inputs
Demand Demand PlanPlan

Process
Balance Demand/Supply
Balance 1 Balance 2

Updated Financial View

Outputs

Balance 3

Updated Inventory Targets

Exceptions

Supply Supply Plan Plan

Model / Option Against Inventory Policy

Load vs. Capacity

Customer Service vs. Inventory

Resource Recommendations

S&OP Meeting Agenda

The primary objective is to resolve any imbalances at the least cost to do so. Region IV Meeting
New Orleans, LA

Step 4: Demand-Supply Balancing Activities

Make decisions regarding demand-supply balancing

Resolve issues and formulate recommendations

Document the issues that could not be resolved and the alternatives for each

Convert the plans to financial units for management review

Develop the agenda for the executive S&OP

Note: Depending on the size and complexity of the business, this step may require a formal meeting or may be done leveraging communications technology (e.g. shared files).
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Step 5: Executive S&OP Meeting

The purpose of this meeting is to approve recommendations, make decisions, and issue the firms game plan. Sample Agenda Executive S&OP Meeting Review of Overall Business Performance
Review & Discussion of Key Performance Indicators

Discuss Status of New Product Introductions

Family-by-Family Review and Decisions Approve Production/Supplier Rate Changes

Collective Impact on the Business Plan

Review of Decisions Made & Action Items Assigned Critique of the Meeting
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Step 5: Outputs & Objectives of Executive S&OP Meeting

The outputs of the meeting are the Meeting Minutes, modifications to the Business Plans, and the finalized S&OP Plan. Collectively, these are referred to as the Game Plan. Objectives for the meeting include: Make final decisions for issues raised during the S&OP process
- accept or change proposals - choose from alternatives provided

Compare the financial numbers from the S&OP Plan to the current
Business Plan and reconcile the two. Finalize the S&OP Plan.

Review current performance for Customer Service, Inventory, etc.. , and make any necessary changes to plans or targets.
Review New Product Issues, Special Projects, and Business Level Issues and make the necessary decisions.

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Step 5: Sample S&OP Plan in SAP

DEMAND

SUPPLY
RESOURCE PLANNING

INVENTORY

Note: Most ERP Systems provide a platform to enable S&OP

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Step 5: Sample S&OP Plan in EXCEL

Plan Historical Performance

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Step 5: Sample S&OP Business Scorecard

Period Ending: December, 2006

KPI ScoreCard
PREVIOUS UPPER LOWER TARGET MONTH LIMIT LIMIT REPORTING MONTH DEC STATUS OK OK OK OK OK OK OK OK OK OK OK OK OK OK OK OK OK OK OK TREND ROLLING OWNER 12 MONTH
J. Doe J. Doe J. Smith J. Smith J. Smith B. Jones B. Jones B. Jones J. Green J. Green J. Green J. Green J. Green J. Green J. Green J. Green J. Green D. Easy D. Easy D. Easy

SBU A
Total Sales ($M) Contribution Margin ($ Total Demand (M lbs) DEMAND Demand vs. S&OP Forecast Accuracy Total Production (M PRODUCTION Production vs. S&OP S&OP Capacity Total Finished Goods Inventory vs. S&OP DII (PIT) Raw Materials DII (YTD) Raw INVENTORY DII (PIT) Finished DII (YTD) Finished DII (PIT) DII (YTD) Non-Saleable On-Time Shipping LOGISTICS Actual Ship Qty. vs. Total Fixed FINANCIAL

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Keys to Success

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S&OP is Journey not a Destination

Get the basics in order

Focus the S&OP Process

Learn by Doing /Align Efforts

Continuous Improvement
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Get the Basics in Place: S&OP Basics Early Implementation Tasks

Task# 1 2 Task Description Conduct Initial Briefing/Education Determine S&OP Team Members: - Demand Plan Owner - Supply Plan Owner -S&OP Spreadsheet Developer - Consultants (e.g. Finance) -Functional Leaders Set dates for Next 12 S&OP Meetings Planning Groups Identified Planning Horizon Decided S&OP Spreadsheets Designed S&OP Spreadsheets Programmed
11

Task#
8

Task Description
S&OP Performance Measures Selected - Actual vs. Planned Demands - Actual vs. Planned Supply - Actual vs. Planned Inventory - Customer Service Performance - Financial Performance etc., etc. S&OP Performance Measures Reported S&OP Meeting Agenda Issued - Demand/Supply/Inventory Review - Performance (KPI) Review - Issues needing a decision - Special Projects First S&OP Meeting Conducted

9 10

3 4 5 6 7

Responsible Person and Due Date required for each task.

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Focus the Process: Sample S&OP Planning Calendar

SUNDAY MONDAY TUESDAY WEDNESDAY THURSDAY
The Journey Begins

FRIDAY

SATURDAY

1 (1)
Update Actuals into FCST Model Mktg. Finalizes Demand FCST

2 (2)
Dmnd Plng Mtg.- Final Plan Due

5 (3)

6 (4)
Supply Plan Finalized (Mtg.?)

7 (5)

8 (6)

9 (7)

10

11

12 (8)

13 (9)

14 (10
S&OP Mtg. Exceptions Resolved

15 (11)
KPI Scorecard Available

16 (12)

17

18

19 (13)
Sr. Mgmt. Approves S&OP Plan

20 (14)
Approved S&OP Plan to SAP

21 (15)

22 (16)

23 (17)

24

25

26 (18)

27 (19)

28 (20)

29 (21)

30 (22)

31
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All team members must meet sub-process due dates to ensure success.

Learn by Doing/Align Financials: Sample S&OP Grid with Financials

Includes planned and actual as well as volume and value.

Only white rows require entry; other data is populated automatically or calculated automatically.

Includes estimated profit margins.

The S&OP Plan must be aligned with the Financial Business Plan
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Continuously Improve: Sample Key Performance Indicators (KPIs) for the S&OP Process Demand Planning Overall Process
- Customer Satisfaction (e.g. OTD) - ROI/ROA/Cash Flow,etc.. - Market Share - Inventory Performance - Forecast Accuracy - Sales Plan Performance

Supply Planning
- Plnd. vs. Actual Production - On-time Supplier Delivery

New Product Planning

- Due Date (milestones) - Velocity (time to market) - Revenue/Cost

- Prime Yield

- Cost to Acquire Focus on Performance-to-Target and Trends in Performance

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S&OP - Barriers to Success

Process Ownership is with Planning not the Leadership Team Lack of understanding of the S&OP Process Insufficient resources for process implementation Inadequate performance measurement Resistance to giving up individual freedom to achieve best overall results
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S&OP is a Key Process at BASF

2006 Supply Chain Project

The Supply Chain Project of the Year 2006 Award goes to the Implementation of a Global Sales & Operations Planning Process in the EVN Business. The award pays tribute to innovative supply chain solutions and outstanding performance in the implementation of supply chain concepts. The award is sponsored by Dr. Kurt Bock, CFO for BASF Group.

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BASF Corporation 5-Year Stock Performance

(PPS in USD)

S&OP is one of many things BASF Corporation has done well to improve overall performance.

At BASF, We dont make a lot of the products you buy, we make a lot of the products you buy better. Source: YAHOO.com

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