As I noted in a recent post [Is S&OP a Guiding Light or a New Religion?], there is an ongoing debate about the role of sales and operations planning (S&OP) in the larger business environment. Some analysts seem to think that it primarily serves a supply chain function while others believe it serves a much larger purpose. Those who fall into the latter category often favor the term “integrated business planning” over S&OP. Supply chain analyst Trevor Miles indicates that he has “been following the debate about the use of the terms IBP (Integrated Business Planning) and S&OP (Sales and Operations Planning) over the past few months with a lot of interest.” [“IBP or S&OP: What’s in a Name?” The 21st Century Supply Chain, 11 May 2011] He indicates that he has a difference of opinion on this subject from another noted supply chain analyst, Lora Cecere, who believes “that the term S&OP is letter perfect.” [“S&OP: Letter Perfect,” Supply Chain Shaman, 7 June 2010] Miles indicates that he enters the name debate “with much trepidation”; especially in light of what Lora wrote in a subsequent post [“What Happens in Vegas should not Stay in Vegas!“, Supply Chain Shaman, 5 May 2011] In this latter post, Cecere argues:
“Let’s get beyond the nuance of the debate. This debate is not about the TERM. I REALLY don’t care what term is used or what process is called. I agree with Shakespeare, ‘A rose by any other name would smell the same.’ … But, I don’t agree with the conventional views on Integrated Business Planning (IBP) in three areas: focus, emphasis, and readiness.”
Miles writes, “Lora argues that IBP is simply sophisticated S&OP. I’m not sure I agree. I think this characterization misses some subtleties between the two terms.” He explains:
“Let’s start with Lora’s argument:
‘The number one change management issue with S&OP is and continues to be the role of the budget. If the company wants to maximize opportunity, the budget should be an input into the process, but not constrain the process.’
“Yes, I agree, but this is looking at the issue from the wrong perspective. What is broken is the budgeting process, which should be a continuous process driven by the operations forecast.”
Miles provides some great quotes about the budgeting process; but, I think the most powerful arguments come from Bjarte Bogsnes, vice president of performance-management development at Statoil, the large Norwegian oil-and-gas producer. Bogsnes said, “‘We still do what the budget unsuccessfully tried to do for us: target-setting, forecasting, and resource allocation. … We used to try to force these three purposes into one set of budget numbers, which created serious problems. For example, how can you expect an unbiased sales forecast from a sales manager if that number also will become a target? And how can you expect unbiased cost or investment forecasts from the organization if those forecasts also serve as an application for resources, and everybody sandbags?” You simply can’t do great planning with unreliable or unrealistic numbers. Miles continues:
“Who am I to disagree when even the McKinsey Quarterly in an article titled ‘Just-in-time budgeting for a volatile economy‘ published in the Spring 2009 edition in which the authors, when commenting on the budgeting process, state that:
‘Managers often spend significant amounts of time on it, only to be dismayed by how little value comes from four to six months’ effort. Under volatile conditions, when economic forecasts change from week to week, developing one reliable budget to coordinate business units and track performance for an entire fiscal year is very difficult. Following the traditional budget process may even be unproductive.’
In fact they argue that the budgeting process needs to include the following:
- Scenario planning with trigger events
- Zero-based budgeting
- Rolling forecasts
- Quarterly budgeting
Perhaps even more importantly budgeting as part of FP&A covers a lot more than demand/supply balancing, which is the cornerstone of S&OP. Lora may argue with me that a mature S&OP should include much of what I discuss above, which is true, but the breadth of S&OP does not usually cover workforce management, R&D spend, capital expenditure, indirect procurement, and a whole host of other areas of interest to the budgeting process.”
Miles argues that “bringing all of these different cost elements together based upon the revenue forecast is integrated business planning, whether we call it IBP or not, and has a much wider scope than does S&OP.” Tim Payne, Research Director at Gartner, agrees with Miles that IBP has a broader focus than S&OP. He writes, “IBP is seen to connect S&OP through to Corporate Performance Management (CPM) and to facilitate the development and evaluation of feasible, and financially modelled, strategic initiatives that can illuminate alternative operational models that better support the achievement of strategic goals. Today, there are no fully baked IBP solutions in the market, although some of the more advanced S&OP solutions are evolving in that direction as well as a couple of emerging niche vendors.” [“Supply chain management hype cycle,” Financial Times, 25 January 2011]. Miles concludes, “For all the reasons others have given, the budgeting process should be driven by the revenue forecast generated as part of the S&OP process, not the other way around.”
Miles’ final point is that “supply chain management (SCM) is very manufacturing focused and, as a consequence, so is S&OP. Of course we can talk about SCM in Retail, but the heart and soul of SCM is manufacturing. … I’m not convinced that S&OP is sufficient to run [other companies, such as financial institutions, consulting groups, or bio-pharmaceutical companies], optimally.” I’m not sure that Miles and Cecere have found common ground in their debate, but my suspicion is that they have a very similar overall view of what businesses need to succeed in today’s environment. Putting that debate aside, let’s look at what other analysts are saying about establishing successful S&OP systems. Karin L. Bursa, Vice President of Marketing at Logility, insists that a successful S&OP system with take into account “people, process, and technology” [“A Foundation for Successful S&OP,” Supply Chain Digest, 10 February 2011]. She writes:
“This trio of people, process and technology, is the foundation for success. This foundation will provide needed structure along with the flexibility to evaluate and respond to a variety of business challenges and opportunities.”
Bursa focuses on having the right people involved in the S&OP processes. She writes:
“Critical to the success of any initiative is the people behind it. You need to ensure you have the right people for the job. Just as important, you must empower them. Provide each person with the authority to make decisions and drive confidence across the enterprise. From this confidence, your sales and operations planning process runs more smoothly, stays focused on the goals and helps ensure buy-in from all parties.”
Miles indicates that “people” need to be considered in another way as well. He writes:
“Workforce management [is critical to the process] because so much of a company’s cost base is salaries for it employees. Deciding how many people should be in Marketing in a certain region should be based upon the forecast for that region. The manner in which the Marketing budget is spent should depend on the make-up of the projected revenue for that region. The same is true for Sales and Admin, Procurement and Warehousing, etc.”
It’s clear that Bursa believes that S&OP lies outside of the budgeting process (so I guess she falls into Miles’ camp). She reports, “Many companies are still working on how and when to engage finance in the S&OP process.” She continues:
“The good news is they are engaging finance and have evolved beyond the volumetric or production-oriented view of S&OP. This is an important step and enables a company to align operational decisions with corporate financial budgets to free up working capital, evaluate investments, and drive your long-term success.”
Corporate alignment is what integrated business planning is all about. Bursa next turns her attention to the S&OP process itself. She writes:
“The process has to be well defined and aligned with the goals of the organization. Best practices have shown us a great foundation is a 5 step process including:
- Innovation and Strategy Review reminds us this is a forward-looking business process focused on identifying and understanding the impact of various business decisions such as new product introductions, market/channel development, etc. on sales, production, inventory, and finance.
- Demand Review identifies the unconstrained mix and volume of products the company could sell in specific time periods along with the desired level of customer service the company will strive to achieve.
- Supply Review is based on the consensus demand plan and allows the supply team to determine how they can satisfy the demand plan. Here, two elements are crucial in determining how to profitably satisfy the demand plan – inventory optimization and production/procurement optimization.
- Financial Review is an increasingly important step in the S&OP processes. While the demand and supply teams have kept the company’s overall objectives in mind, in many businesses some bias creeps into the process. The financial review step helps remove that bias and enables all constituents to agree on the profitably balancing of demand and supply as well as the ability to evaluate alternative plans that will be presented during the executive S&OP review.
- Executive Business Review provides the executive management team with the information they need to make critical decisions over the S&OP horizon. Building off the information from the first four steps, this review produces an action list to move the company forward and sets in place contingency plans. Besides reviewing best case and alternative demand and supply scenarios, it is important to also assess internal and external risks to the supply chain.”
Although calling these steps “reviews” implies that they are somehow outside the S&OP process, I believe that Bursa sees them as more than mere sensitivity checks. I suspect she sees these reviews as intimate phases of the process during which inputs, suggestions, and adjustments are made to refine the outputs and make them more useful. Bursa’s final comments are about technology. She writes:
“I like to view technology as the glue that brings together the people and process. The right software solution can significantly improve the quality and integrity of data to create a comprehensive plan that can be evaluated based on multiple units of measure (financial, volumetric, etc.), provide visibility into the future and drive the ability to evaluate multiple scenarios. The right tools also allow you to close the loop on the process, to ensure the agreed upon plan can be easily incorporated back into the supply chain, be repeatable and yet flexible enough to evolve as the business grows. Sales and Operations Planning is critically important as executives try to strike the optimum balance between what generates the most profit and what will satisfy the company’s strategic and operational goals. Regardless of the rhetoric, remember your success is dependent upon the foundation you build with the right people, process and technology.”
Only those involved in the S&OP process can appreciate its complexity. Technology can play an important role in helping reduce the complexity so that plans can drive decisions in the right direction. Lori Smith, from Kinaxis, asserts that there are four “keys to highly effective S&OP” [“The Four Keys to S&OP Effectiveness,” The 21st Century Supply Chain, 28 April 2011] They are:
- East-West integration, bringing together demand and supply planning
- North-South integration, bringing together Finance and Operations
- Tying together volume and mix plans
- S&OP on demand, not only on schedule
That list doesn’t make it clear whether Smith sides with her colleague Trevor Miles in believing that S&OP is a lesser included process in IBP or with Lora Cecere that S&OP and IBP are one in the same thing. From the discussion that follows, however, I tend to believe that Smith sides with Miles. To learn more about these “keys,” click on the link to Smith’s article and you can download the eBook from which they are taken. Below are some brief discussions of these “keys” taken from the study.
East-West integration, bringing together demand and supply planning
“Too many companies develop and manage separate demand plans and supply plans in isolation, only coming together with an aggregate or volume plan during the S&OP meeting. In a recent survey, almost 1 in 3 of the executives polled said the biggest problem with their S&OP was that not all the information they need is available in one system. Ideally, all plans can be developed in the same system, and encompass all the operational details that fall under the high-level summaries. Many call this ‘east-west integration’ to suggest how it brings two points of the compass together. Executives know this integration of demand and supply is vital to gain:
- “Cross-enterprise view — Having more data from contract manufacturers and parts suppliers integrated in one central place gives you a comprehensive view of your extended supply chain.
- “Cross-functional view — When you can see across and deep within the traditional silos of demand and supply planning, you gain better insight into what’s really going on and what’s feasible going forward.
- “Better, faster plans — Demand and supply integration supports more accurate plans, faster planning cycles, clearer insights, and better collaboration.
- “Better decision support — When demand and supply planning are brought together, testing the feasibility of high-level plans and reconciling planning to execution are faster and easier for everyone.”
North-South integration, bringing together Finance and Operations
“Another key to S&OP success is bringing Finance into the process in a meaningful way. We can call this ‘north-south’ alignment. This doesn’t always happen. A recent survey asked senior managers what role Finance plays in S&OP. The result: Finance helps draw up S&OP plans in only 1 of 3 companies surveyed. In the other 2 out of 3, Finance simply rubberstamps or files away plans developed without their input.
“Why CFOs should care about S&OP — S&OP gives CFOs an opportunity to evaluate, monitor, and influence the financial impact of the plan. Finance should play an active role in setting targets and ensuring operational plans are aligned with corporate objectives. According to studies by Ventana Research, bringing Finance into S&OP is the second most important factor in building revenue, profit, customer satisfaction and forecast accuracy. Why is this? Because linking financial metrics (such as revenue, margin, and cash flow) to operational metrics (such as orders delivered on-time and in-full, inventory turns, and capacity utilization) gives you a way to check if your operational decisions are consistent with your financial objective. This also helps you see if your financial objectives are achievable. With so much at stake, why not involve Finance in your S&OP? Who else is better qualified to comment on the financial impact of the plan? What’s more, it’s rather risky not to involve Finance. Any company that doesn’t is clearly taking a big gamble.”
Tying together volume and mix plans
“One of the stumbling blocks of traditional S&OP is that volume-only plans often end up being infeasible when disaggregated to the mix level. The challenge is to translate the aggregate, volume-level plans to a SKU or mix-level operational plan and then test the feasibility of the plans before committing to them. Companies must focus on developing a plan that is not only optimal, but also feasible. Otherwise, the S&OP plan will lose credibility within the organization. The second challenge is to keep the plan feasible and in check. It sounds good to talk about aligning daily operations with S&OP objectives. But to achieve true S&OP maturity, executives and managers throughout the enterprise must learn to regularly ‘dive into the details.’ Companies must find a way to reconcile demand and supply, Operations and Finance on an ongoing basis, not just as part of a periodic planning and review cycle. The way to bridge the gap between planning and execution is to continuously check if you’re on track to meet future objectives. You must be able to immediately see any deviations that need to be addressed before they become ‘actuals.’ When the company can plan and execute in real time, it can bridge this gap between volume and mix plans, and between planning and execution.”
S&OP on demand, not only on schedule
“While the monthly S&OP meeting is important, mature firms develop a way to revise plans and take action any time the plan is at risk. Companies with a modern S&OP process enable a continuous flow of course corrections to help generate more effective results. Here are a few goals for S&OP on demand, not only on schedule.
“Goal #1: Unshackle yourself from the calendar — You don’t want to review your plan (and your performance) only once a month. You need more flexibility to respond to any events that have an impact on your S&OP objectives.
“Goal #2: Gather and analyze data faster — In some firms, it takes three or four weeks—or more—to do one cycle of S&OP data collection and analysis?! This makes mid-cycle course corrections impossible. Address whatever is slowing down your cycle time; it’s most likely some combination of people, process, and technology.
“Goal #3: Encourage collaboration across your enterprise — You need to exchange detailed S&OP data with every other function, location, division, and legacy system in your enterprise. And you need to support both planned and ad-hoc discussion and consensus-building with multiple stakeholders in your company whenever it’s required.
“Goal #4: Support data integration across your supply chain — You also need to exchange detailed S&OP data with all your trading partners across your extended supply chain. The most mature enterprises support ongoing decision making and consensus-building with outside partners, including suppliers and contract manufacturers.
“Finding a way to support ad-hoc S&OP may not be easy. This likely involves making changes to your process, information, and technology. But this capability is a vital key to the S&OP promise.”
As you can see, there are lots of good ideas and information contained in the eBook and I’m sure that Kinaxis would be pleased to have it downloaded a few more times. Obviously, the debate about S&OP and IBP isn’t over. But it may be a false debate; both Miles and Cecere are proponents of integration and alignment. I suspect their advice to companies would be: “Just do it.”