An article in SupplyChainBrain, noted that “a report by Gartner revealed that two-thirds of businesses do not progress beyond the first two stages of the four-stage maturity model for adopting sales and operations planning (S&OP) capability.” [“S&OP: What’s It Really About?” 24 October 2011] For those unfamiliar with Gartner’s Four-Stage Maturity Model, it is shown in the figure below. The model defines maturity in terms of organizational balance. In Stage 1 (reacting), organizations are trying to figure out where they are headed with the goal being the development of an operational plan. In Stage 2 (anticipating), organizations try to match supply with demand. Gartner analysts believe that the bulk of companies continue to fall within this stage. In Stage 3 (collaborating), organizations begin proactively working outside of corporate boundaries with other supply chain stakeholders. In the final stage of maturity, Stage 4 (orchestrating), companies go beyond collaboration and begin exercising control or exerting significant influence on operations and standards throughout their supply chain. The below figure provides a good explanation of the four stages.
Supply chain analyst Trevor Miles told the SupplyChainBrain staff that the reason most companies fail to get past state 2 “has something to do with the multi-functional nature of S&OP. ‘Most people find it difficult to span across those functions and share information,’ he says. ‘Most analysts will tell you that it’s 70 percent process, 20 percent people and 10 percent technology.'” In other words, corporate silos continue to be barriers to better collaboration, despite breakthroughs in technology. The article continues:
“Miles describes the effort to transcend traditional corporate divisions as ‘crossing the Grand Canyon.’ Individuals find themselves struggling to ‘force-fit the sharing of information by spreadsheet.’ The fact that so much of that data is out of synch contributes to the distress that accompanies its sharing. ‘People don’t trust the information from other functions,’ Miles says, ‘and therefore are less willing to share. That is the big barrier.’ Companies further find it difficult to implement S&OP because they have yet to define basic terms like ‘sales’ and ‘operations’ as they relate to the organization. Things get even more complicated where external partners are involved, a common scenario given the popularity of outsourcing.”
Before coming down too hard on business executives, one must recognize that S&OP isn’t easy. Analyst Lora Cecere admits that even preparing a white paper on S&OP isn’t easy. [“Sales and Operations Planning: Putting the Pieces Together,” Supply Chain Shaman, 18 November 2011] She explains:
“I have been working on a report on the evolution of S&OP technologies for the last two years. Normally, a report is much quicker for me, but this one has been difficult, because of the many nuances. There are three dynamics in play: the definitions of the basic process terms have changed, the technologies have improved, and the market is over-hyped by technology and consulting pundits. It has taken (even an old analyst gal like me) months to figure this out.”
If someone as bright as Cecere has had difficulty figuring out S&OP, one can forgive business executives for having a difficult time as well. Miles told the staff at SupplyChainBrain that “managers need to understand the nature of an operational forecast” if they have any hope of getting S&OP right.
“Miles says the term involves collaboration between market-driven and operations-driven organizations, including the understanding of disparate incentives. They don’t have to be identical across departments – procurement might still need to focus on long-term contract pricing, while manufacturing is concerned with maximizing asset utilization. The key, says Miles, is to have in place a ‘mechanism for understanding the consequences’ of an accurate forecast. ‘Let’s understand how all those interact.’ To achieve that goal, companies must consider a number of ‘what-if’ scenarios, not to mention classic chaos theory and the so-called ‘butterfly effect’ – the notion that a tiny change in one place has enormous impact throughout the system.”
The most profound thing that Miles stated was that S&OP is focused on providing understanding. A lot of people probably believe it is focused on forecasts, but understanding is a much more important benefit. In a post about S&OP, analyst Bob Ferrari seems to agree. He writes:
“As Rob Burrows astutely noted, S&OP thinking was incubated in a supply rich environment when excess production and inventory was far more tolerated. Today supply chains exist in an on-demand and pull-driven business environment where factors of market share, customer service and utilization of capital can outweigh operations driven planning. One of the sacrosanct tenets of S&OP thinking is the ‘one-plan, one-number’ perspective that drives the process. As Burrows noted, a ‘market-savvy’ S&OP that has a market-in and management by analytics perspective may call for scenario-based planning. What’s the best-case plan for meeting required service levels? What is the most profit optimized plan? What is the worst case plan if demand falls short of budget or an unplanned supply shortage occurs? Predictive analytics applied to S&OP introduce scenario and continuous planning, and in our particular view, an era where true business intelligence becomes the enabler of integrated business planning.” [“The State of S&OP in 2011- Wide-Scale Adoption and New Thinking on What’s Coming- Part One,” Supply Chain Matters, 15 September 2011]
S&OP processes should focus on “one plan, one data set” rather than “one plan, one number.” A company will achieve neither understanding nor alignment if each department keeps its own set of data and doesn’t trust the data used by other departments. If a company can get past arguing about data, and start focusing on gaining understanding, it will go a long ways towards closing the chasm between stages 2 and 3 in Gartner’s maturity model. Cecere provides a few reasons why that gaining understanding through a good S&OP process is important. She writes:
“In qualitative interviews with 60 line of business supply chain leaders, when asked what is your focus for S&OP in 2011, the response was:
- 90% of supply chains are grappling with skyrocketing costs and supply volatility.
- 87% are struggling with the integration of business planning and supply chain planning technologies.
- 85% of supply chains experienced a disruption.
- 62% of companies have multiple S&OP processes.
- Uniform frustration that industry progress on working capital has stalled.
“There are several major shifts in the technologies:
- Evolution of a S&OP Platform: Recognition that there is a need for a S&OP platform for demand translation, mix analysis and analysis of differing units for volume (always amazed at how many different definitions of volume there are in an organization). This also is evolving to connect the multiple S&OP processes together.
- Change in how Planning is Done: Movement from tight integration of demand and supply to the need for iterative analysis between demand, inventory, financial and supply modeling.
- S&OP Execution: Evolution of S&OP execution to tie planning to execution.
- Better Analysis: Deeper modeling and what-if capabilities.
- Improved Visualization: Better visualization of S&OP processes for the executive S&OP meetings.”
In an interview with Lalit Panda, until recently the Global CIO at D&M Holdings Inc., Dustin Mattison asked, “Why is Sales & Operations Planning (S&OP) important in an organization?” [Dustin Mattison’s Blog, 30 November 2011] Panda responded:
“The sales and operations planning process is the fundamental backbone for the organization’s ability to deliver products on time to customers and in the right quantity, while managing the financial metrics of the business. Unless this process is coordinated between the demand side and supply side of the organization it is likely the organization is not likely to generate the efficiencies and exploit all of the sales opportunities that come across. Having a very efficient and coordinated sales and operations planning process is absolutely critical to the healthy operation of global corporations.”
Mattison followed up his question by asking, “How are S&OP systems different from ERP in organizations?” Panda replied:
“ERPs are transactional systems that enable the business to run their operations. They generate a lot of data. S&OP systems are really planning systems. You look at different options and trade-offs. In supply chains there are always trade-offs to be evaluated and also to get data across different scenarios and determine the best option for the organization to execute. Sales and operations planning systems enable the organization to evaluate multiple choices and alternatives and come up with a plan that is most optimal, given the constraints they are operating under. ERP allows the transactions to take place. What happens is that the S&OP system generations the plan and it is executed within the ERP. The planning process is substantially different from the transactional processes that are there within the ERP. This is why they need to be in different environments where people can try out different strategies and see the impact on the financial and operational metrics.”
In other words, Panda agrees with the experts cited above that the primary purpose of an S&OP system is to gain understanding by evaluating multiple choices and alternatives. Mattison next asked, “What are the challenges of implementing S&OP systems successfully?” Panda responded:
“The first challenge is obviously process. There are a lot of different touch points in the sales and operations planning process. There are various stakeholders and different sources of data. Getting them all aligned and getting a common understanding of the goal and processes behind these key activities within the organization is the first step. I would not recommend that an organization start an S&OP implementation without fundamentally re-thinking and evaluating how they do their sales and operations planning process, and determine where are the efficiencies in transferring data from the demand side to the supply side and vice versa. They should also determine who should be owning the S&OP system. For example, in some organizations sales tends to head S&OP. In other organizations supply chain is at the core of the process. In other organizations the supply side takes ownership as well. Determining where the responsibility lies and where the process hand-offs and data exchange happens, is very important. Until a clear blueprint and map is created, it may be inefficient to go and implement a system. Once you have a blueprint then you can look at how the layer it onto a sales and operations planning system and that should help in executing it.”
I agree with Panda’s recommendations, but I would add that some attention needs to be given to what data is used. As Lora Cecere has noted before, data should be written once and read many times. In other words, there should only be one source of truth in an organization. Otherwise, S&OP sessions can end up as debates about whose data is correct. Mattison next asked, “How do S&OP systems enhance business value?” Panda stated:
“The core process of the organization for generating revenues, controlling costs, reducing working capital is centered around this S&OP system. It enhances business value firstly because it delivers better customer service levels. Secondly, it does it at the most cost efficient manner possible. Thirdly, it enables the organization to work as a coordinated well oiled machine transferring data and being responsive. In the current environment of competition world-wide, unless you have this working very closely and dovetail between the different elements of it, it is very difficult to deliver shareholder value by getting better financial metrics. S&OP systems have this basic role to play to make that process more efficient and effective.”
If Panda is correct (and there is near unanimous agreement among analysts that he is), then the effort it takes to advance beyond stage 2 of Gartner’s maturity model will be worth it. Mattison’s last question is, “What advice do you have for organizations contemplating revamping their S&OP Process?”
“The first step is to get everyone on the table and map the current process so that everyone has a common understanding of how the current process works. Also, stress the inefficiencies and identify the areas where opportunities to improve are there. You may also do some best practice comparisons with other organizations. Then you start thinking about where the value is. Is it in terms of getting better availability at the customers or the regions? Is it more in terms of getting better manufacturing efficiencies? Look at the various aspects of it. Everyone knows supply chain is like a water bed, you can’t push it to one side and expect the whole to operate efficiently. It has to be all across the chain. The sales and operations planning process fundamentally supports that process. To have a good solid process in the future it is important to first lay out the framework where you are, determine where you want to go, and then figure out where the enhancements need to be made. After that there are several tools out there in the market. There are very good tools to help you accomplish this optimization of the whole process. Then it should be justified with the business case in terms of increased revenues, increased margins, reduced costs and improved efficiencies. It is a journey. The S&OP process continues to evolve. There is a maturity level across S&OP organizations. The maturity level where you are at needs to be assessed. A plan needs to be made for how to improve it and get it further along to the stage where the organization is extremely responsive to demand changes in the market in an optimal manner.”
I thought Mattison’s interview with Panda provided some excellent thoughts and recommendations for any company that wants to improve its S&OP process. What rational executive doesn’t want to gain a better understanding of his business?