Anthony Bruno OPM 460E SUPPLY CHAIN MANAGEMENT A-12/SP

2/08/12

SALES & OPERATIONS PLANNING (S&OP) EXECUTIVE SUMMARY In spite of the fact that most of us are very active and busy these days, we sometimes find ourselves searching for something of value that can be added to our business efforts. When you find yourself in that position, consider a tested and proven technique that can bring significant new value to your firms supply chain effort. Consider discussing how a planning tool can improve forecast accuracy, better match supply with demand, and greatly reduce dependence on inventory. That tool is sales and operations planning (S&OP). S&OP has become a major tool for supply chain leaders tired of accepting the inherent problems with poor sales forecast accuracy, complications with planning and scheduling due to changing customer demand, and the need to build safety stocks into inventory for the inevitable problems introduced by vagaries in the marketplace. This paper addresses the ideas behind S&OP and discusses techniques that have been successfully applied. At its core, S&OP is about gathering information thats generally available but not provided or used. Moreover, its about balancing supply and demand in a way that overcomes the deficiencies of weak forecasting and results in more optimum performance from the initial suppliers to the satisfied customers. Several action cases will be used to demonstrate how to apply the tool to cope with the problems and meet business objectives through the solutions it provides. When deployed across a business enterprise, up to a potential full point of new profits can be attained by: Increasing revenues because there are less out-of-stocks Determining more accurately what the real demand is from key customers Reducing inventories closer to what is needed Shortening cycle times from order to cash Improving planning and scheduling due to the greater accuracy created Eliminating mistakes in the processing Better satisfying customers while reducing supplier frustrations These are just a few of the advantages to be gained from application of a key element of supply chain success.

Sales & Operations Planning is a core business process which notifies the appropriate functional areas of the business of anticipated demand volume and how the company plans to supply product to meet that demand and best serve the customer at the lowest risk to the enterprise. The basic ingredients accomplish some fundamental business needs, since successful S&OP efforts are characterized by: A top-down and bottoms up approach, linking the firms business plan with the current demand and supply plans A cross-functional, collaborative process that focuses on improving business performance A structured, formal, holistic set of monthly consensus business processes At the same time, we should understand that S&OP is not: Informal, cross-functional communications around the water cooler (one end of the spectrum) Paralysis by meetings (other end) A silver bullet solution to resolve all business problems A near-term business issue resolution process The characteristics of a successful effort include: Formal high-level process with assigned accountability, executed through cross functional team consensus decision-making (closed-loop system) Seeking a 90+% accuracy with sub processes and data sets across the business, realizing there will be nuances by business, mitigated by striving for as much consistency as possible Consistent language and understanding from all functional areas throughout the organization Enhanced decision-making (data-driven, timely and shared functional perspectives) Benefits of such an effort will typically include improvements to performance in: Commitment at all levels of the organization including executive and team members Proper performance measurement system which motivates total supply chain behavior Appropriate information systems support through accurate, timely, exceptionreporting Adherence to the process through discipline and accountability At its heart, S&OP is a business solution which addresses the business processes, metrics, information requirements and the culture of the company. It is applied to ensure that a holistic perspective is brought to the system that matches what the customers really need and what the firm is really capable of supplying through its network of suppliers and its system of manufacturing and delivery. Such a solution mandates the involvement of constituents across that business network.

Consider what happens when a firm makes the decision to apply S&OP as a process improvement and management tool. The technique starts with gathering the projected demand information and compiling it in a usable form by multiple constituents across the supply chain. From that information, a consensus demand forecast is generated, typically beginning with the sales forecast originally used for planning purposes, but augmented with inputs from key customers and amended by knowledge of current operating and market conditions. In the next step, an evaluation is made to match the consensus demand against any known or anticipated manufacturing and logistics constraints. When problems are encountered, the system is used to notify important constituents on either side of the manufacturing firm. Specific conflicts are considered for resolution through a gate that determines whether they can be resolved or need further attention. Where they can be resolved, there is a step in which alternative actions are considered and decisions made to resolve the conflict. When the conflicts cannot be immediately resolved, the next step is to establish a consensus execution forecast or new supply plan that is again communicated to all important constituents. Finally, there is a step to monitor progress versus the altered demand and supply plans. The overall objectives, of course, are the optimal utilization of corporate and enterprise resources and better satisfaction of the customer. Case Example An Energy Division of a Major Industrial Manufacturer To illustrate what can be accomplished with a renewed focus on Sales and Operations Planning, lets consider a success story. The participant was a division of a large, multinational industrial products and services company. The primary objective of this project was to design and implement a new S&OP solution which addressed process needs, information requirements, metrics and organizational responsibilities. The intention was to enable the Business Unit to improve its ability to proactively plan, in order to meet its financial commitments to the parent organization while satisfying customer needs The current situation can be describes as one that included: Robust long term strategic planning being absent, and the majority of time being spent on expediting short term issues and action items Long term demand is known but not actionably linked to operations  In many cases, customer demand is known for 12 months  Operational activities start only a few months prior to confirmed delivery date  Operations just executes to whats in the ERP system

Missing typical key S&OP performance metrics such as Target Inventory Adherence, Production Schedule Adherence, Production Capacity Throughput and accurate Customer Delivery Reliability (customer request and last confirmation date), resulting in unknown Manufacturing Capacity and Capability. Communication for the units business is conducted in an informal, ad-hoc manor, lacking the necessary formal communication and clear accountability tenants Follow up actions and milestones are not strictly adhered to or executed against A future state process overview was established such that the Demand, Supply and Consensus Meetings take place within the same week every month, typically before the 10th of each month. The future state design was to have these characteristics:  Formally schedule S&OP meetings for the next 3-6 months, same day, time and location  Participants MUST show up to all meetings, if not, have back up person assigned and prepared  Review of Key Performance Indicators (KPIs) with corrective action determined and acted upon  S&OP information requirements completed since start of fiscal year and looking out 12 months  Business assumptions, logic and rationale documented and meeting consensus agreement There were some initial successes with the demand meetings, including:  Demand Planning Meetings  Established what true demand is and what should drive supply decisions moving forward  Published overdue order reduction plan for each product family  Business Impact  Changed the production schedule quantities and timing, thereby impacting Revenue Realization and Customer Delivery Reliability The initial success of the supply meetings included:  Supply Planning Meetings  Published rough capacity check for each product family to proactively plan resources  Developed action items to increase capacity to meet future consensus supply plan

 Business Impact  Opened requisitions to hire 8-12 FTEs in order to meet Supply Plan. Also, identifying internal resources that could be pulled from various work centers was also established, thereby having a realistic chance to make forecast targets There were also preliminary successes with the consensus meetings:  Consensus Business Meetings  Identified and quantified the gap between year-to-date performance, the supply plan for the remainder of FY07, and the forecast target  Business Impact  Proactively making decisions and executing work activities to positively impact this full years performance As the effort proceeded, time was taken to record the Lessons Learned:  Cultural change is the most difficult aspect of the project:     Everyone still works off their own databases and spreadsheets Meeting attendance needs to become mandatory with back up named and notified Action items and milestones need to be executed in a timely manner new sense of accountability and urgency May need to tie follow up activities with annual review processes and procedures

 Attendees see the value of the meetings face-to-face, real discussions and actions being identified and executed against  Have Key Performance Indicators (KPIs) review to drive ownership and improved level of performance across the business. Recognize and celebrate successes Based on the results, a list of Major Considerations for S&OP Roll Out was developed: PROCESS Every business has unique attributes the S&OP process must be tailored to account for these attributes. Tailoring is part of acceptance and change management Although benefits begin quickly, full realization can take some time. This condition can be estimated as 3 monthly cycles + time to make corrective measures + end to end lead time Defining, calculating, base lining, and updating KPIs is time consuming. Gaining acceptance of them requires education
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PEOPLE The S&OP Coordinator is critical. These individuals must understand the business and the S&OP process and be dedicated to preparing for the monthly cycles Initial monthly cycles must be monitored on sight. Overlapping rollouts will create scheduling conflicts Executive Management and team education is important. The former for buy in and credibility, the latter for execution EXECUTION S&OP process uncovers shortfalls in other critical processes: Data Quality Forecasting, Capacity Planning, Materials Planning, Vendor Management The difficult questions that need raising are not always obvious Executing to a schedule is difficult CONCLUSIONS S&OP is a proven business improvement tool, and implementation is one of the strengths of a successful supply chain practice. Most businesses might have some form of S&OP within some part of the organization, but most are not reaping the greatest benefits due to a lack of a formalized approach and deployment of the inherent concepts and business objectives. Any firm in virtually any business can apply the tool and its concepts to enhance business performance. The ongoing success factors are important and include: 1. Ongoing, routine S&OP meetings 2. Structured meeting agendas 3. Pre-work to support meeting inputs 4. Cross-functional participation 5. Participants empowered to make decisions 6. An unbiased, responsible organization to run a disciplined process 7. Internal collaborative process leading to consensus and accountability 8. An unbiased baseline forecast to start the process 9. Joint supply and demand planning to ensure balance 10. Measurement of the process 11. Supported by integrated supply-demand planning technology 12. External inputs to the process (Poirier, 2012)

Works Cited
Poirier, C. (2012). Sales and Operations Planning A Key Element of Supply Chain Success.