Some Thoughts Concerning Sales & Operations Planning, Part 1

Stephen DeAngelis

November 16, 2010

In a post concerning Sales & Operations Planning (S&OP), Lora Cecere wrote, “Supply is tightening, international currency is changing, prices are more volatile, and the future is less certain. Supply chain leaders need to steer the course. As a result, S&OP has risen in importance. If 2009 was about demand, 2010 will be all about supply. Are you ready?” [“S&OP: Letter Perfect,” Supply Chain Shaman, 7 June 2010]. Before continuing with Lora’s comments, let me provide a quick primer in S&OP. In his book entitled Supply Chain Management: Best Practices, David Blanchard writes:

“Supply chain planning coordinates assets to optimize the delivery of goods, services, and information from supplier to customer, balancing supply and demand. Supply chain planning solutions allow companies to create what-if scenarios that weigh real-time demand commitments when developing forecasts.”

Blanchard claims that “the average error rate of forecasts in the consumer packaged goods industry is about 50 percent.” The reason, he asserts, is that people often try to protect themselves by making “overly optimistic forecasts.” The inevitable results of such forecasting is higher inventories “as well as the costs of obsolescence, warehousing, expedited shipping, and everything else that [is] affected by overly optimistic forecasts.” Clearly, good forecasting is important; but, inaccurate forecasting is almost as bad as no forecasting. Blanchard explains that many forecasts are created using “consensus planning.” He explains:

“Many … companies [use] a traditional S&OP consensus process, which triangulates between sales, marketing, and demand planning. These three groups get together to agree on a number. That forecast ultimately ends up going to the general manager for endorsement. ‘Instead of aiming for a single demand figure, progressive companies have turned to forecasting a range of potential outcomes,’ explains Yossi Sheffi, director of the MIT Center for Transportation & Logistics. ‘They estimate the likely range of future demand, and use the low end and high end to guide contracting terms and contingency plans.’ The goal of this range of forecasting is to get companies to widen their planning horizons. Even after consensus planning, though, the odds are pretty good that a company is not going to hit that number, which makes it all the more important that a system of open and ongoing dialogue is in place.”

Lora reports that more and more companies are beginning to realize the importance of good S&OP. She writes:

“Over the past six years, I have spoken to over 150 companies on Sales and Operations Planning (S&OP). When I started this research, less than 10% of companies had a well-defined S&OP organization and a focus on S&OP excellence. This has changed. Today, three out of five projects for Supply Chain Planning (SCP) software are driven by a person with a S&OP-specific title. … This important horizontal process makes a major difference in a company’s performance. Companies with strong S&OP processes sensed the recessionary downturn and corrected supply chains five times faster than those with less mature processes. As we wobble through the swings of the recovery, companies are realizing that cross-functional alignment matters more than ever. The greatest opportunity for profit and risk will happen in the economic rebound. The risks and the rewards will be greater. They want to be ready. As a result, S&OP has become main stream.”

Blanchard uses the Campbell Soup Company as a case study in S&OP. He examines what Mike Mastroianni did when he was hired in 2001 to oversee S&OP at Campbell’s. Mastroianni recognized that Campbell’s had a “need for better forecasts [in] its collaborative planning, forecasting, and replenishment (CPFR) efforts with key retail customers.” Blanchard continues:

“‘What fuels S&OP is facts,’ [Mastroianni] observes. That meant Campbell’s needed to put key performance indicators (KPIs) in place to hold people accountable, as well as measure improvements in forecast accuracy. Mastroianni’s team turned to real-time forecasting tool capable of creating daily, short-term forecasts with 52 weeks of live data. Being able to forecast in real time allows Campbell’s to track patterns that used to go undetected. The system might say, for instance, ‘Forget about the order today as it relates to your forecast. You need to be thinking about the next seven to fourteen days because, based on this current pattern, your next month is going to look like this,” he explains. ‘Or it just might say, “You’re holding on to a forecast that just isn’t going to happen. So let it go, and produce to this lower number.”‘ … As Campbell’s learned, no matter how capable and experienced its planners are, their plan is only as good as the information that feeds it.”

Lora agrees that collecting the right information at the right time is critical. She continues:

“I believe that the term S&OP is letter perfect. The practices are imperfect. The embellishment of the standard S&OP acronym is a current fad. The list of names –- SIOP, DDS&OP, DDBS, IDDSP, IBM, and IBP –- goes on and on. The danger is that as we rename and embellish S&OP initiatives, we lose the essence and the meaning of this important process. The real issue is that due to bad practices, and the lack of understanding, the term S&OP has become tainted. The letters, when understood stand strong on their own:

-S: The S in S&OP is about selling strategies and market drivers. Effective processes focus on go-to-market strategies. It is often confused to be about sales. What is the difference? Let’s contrast the difference it through a case study: In 2006, Del Monte transitioned from asking sales [personnel] what they were going to sell to focus on market drivers. They stopped their process of collecting sales data at the item level through laborious spreadsheets to focus on sensing demand, understanding market drivers and using the information to shape how they go to market. The new process focuses on shopper insights: who is buying what, where they are buying and why they are buying. It focuses on how to best shape demand in these sectors (the right combination of assortment, price, promotion, trade deals, and sales incentives) to drive profitable demand. Del Monte found that the right data to collect from sales is clarity on the market drivers: the number of new accounts taking new products, competitive activity in the market, success on past promotions, and retail channel insights.”

Interestingly, Lora believes that Del Monte’s process is better than Campbell’s. She explains:

“Contrast this type of approach—a focus on market drivers—by a company like Del Monte to a focus on sales—what does sales forecast that they are going to sell—by Campbell’s Soup. … [Del Monte’s] stock price [significantly outperformed Campbell’s] through the recent recession. While I cannot attribute all of the difference to S&OP, it was a contributing factor.”

Both companies, Lora notes, outperformed the Dow Averages. She next discusses the importance of the conjunction “and”:

-&: And, what? The and in the S&OP process represents the cross-functional coordination/alignment required to meet the strategic goal of the process. For example, if the goal is to be demand-driven, the focus is on outside-in market sensing. The demand plan is an input into the financial plan and the organization is tasked with determining:

  • The best working capital plan: determining the right form and function of inventory versus constraining inventory or focusing on just inventory levels
  • Trade-offs: The alignment of the value chain to balance growth initiatives with the trade-offs between sustainability, corporate social responsibility, tax efficiency, speed to market, and costs.
  • Network design: Based on demand and supply variability, and market conditions, what is the best network design to minimize risks and maximize the market opportunities?

“At Cisco, the supply chain organization is called the Customer Value Chain Management organization (CVCM) for a reason. The company runs a risk management engine of 4300 inputs with over 1000 simulations by 10 planners a month. Intel calculates the effective frontier between service and costs. Del Monte runs weekly Monte Carlo simulation models to translate demand volatility to orchestrate demand horizontally (promotions and pricing moves are based on the simulation of market demand with commodity market fluctuations.) To do this, companies need to start with the goal in mind, and work backwards. A starting point is determining how many supply chains you have, the goal of each supply chain against the corporate strategy, the trade-offs for each to make these goals, and how to mitigate the supply chain risks.”

Without the willingness to make trade-offs, executives will foster silo thinking and emphasize improvements in their areas without understanding how their decisions could adversely affect the overall goals of a company. You simply can’t maximize every process and expect the results to be optimal for the company. Finally, Lora talks about operations.

-OP: OP is about operations. It is not just about the factory or the enterprise. It is about the network: making the right trade-offs in the network across the processes of deliver, make, and source. When done right, S&OP planning is also tied to execution. For example, at a recent WAM Systems conference, Celanese spoke on the translation of trade-offs in S&OP to optimize the manufacturing rhythm wheel (product sequencing) for each of their plants. A common mistake made in S&OP is to focus only on operations. Companies that have fallen in this trap feel the greatest need to embellish.”

In conclusion, Lora writes, “Yes, here we have it. S&OP: Letter perfect. Practice imperfect. As we see at Cisco and Del Monte, what a difference a few changes can make in improving performance.” A good S&OP process is an essential part of any sense and respond supply chain. For more on that subject, read my post entitled Sense and Respond Supply Chains. My discussion of S&OP concludes tomorrow with Part 2.