While my colleagues Khudsiya Quadri and Gabriel Georghiu diligently attended numerous conference sessions and reported their impressions of each convention day (Day 1, Day 2, Day 3, and Day 4), my much shorter attendance of the APICS 2009 International Conference in Toronto (Canada) in early October revolved mainly around exploring the expo floor and talking to the exhibitors. My overwhelming impression from the conference’s expo floor was that the main value propositions this year revolved around the flavors of demand management.
This was not too terribly surprising, given that the past two years have dispelled any doubts about the advantages of managing demand effectively. First, as an overture to the recession, companies and consumers were battered by a sharp rise in energy costs (especially crude oil), which resulted in sky-rocketing transportation costs and reduced margins.
Then, when the recession came in earnest, they were hit by the precipitous economic downturn, which resulted in an almost unprecedented drop-off in demand (and fuel prices). Many companies were “left holding the baby,” i.e., their hedge transportation contracts that once seemed to be a smart strategy of locking carrier price and capacity.
There can be little dispute that demand and supply volatility have persevered during this trying period, leaving very few companies unaffected. Innovative companies have been able to somewhat reduce the financial impact of demand volatility by adopting demand management processes and systems to detect (sense) and respond to demand changes early and more quickly. Early detection and quick response are both key aspects of business agility, allowing companies to match finished goods inventories and component supplies with actual demand, greatly improving their financial performance.
Especially in this unforgiving economic environment, hardly any company can afford to suffer from the all too common supply chain and demand problems, such as lost sales due to stock-outs, excess inventory (tied-up working capital in the era of scarce funding and cash), late or unsuccessful product launches, and introduction of new products that cannibalize their existing brethren. Companies with the above problems left unabated will lose market share to competitors who are better able to gauge market demand and introduce new products to market in a timely manner.
S&OP: Demand Management’s First Cousin
In other words, manufacturers must get by with lower inventory levels, reduced head count, and excess (underutilized) capacity. Many fear it could be several years before business volumes approach pre-recession levels. Therefore, sales and operations planning (S&OP) processes have been revised in many companies to accommodate the higher degree of demand forecasting uncertainty.
Statistical forecasting practices (of estimating the future based on the past, and hoping for the best) are lately being de-emphasized in favor of soliciting market intelligence (MI) more frequently (much nearer to real time) from sales account representatives, indirect channels, and customers. Planners, product managers, and sales and marketing teams who once met monthly for a formal S&OP review are now meeting every two weeks or even weekly, looking for evidence whether markets are behaving as predicted or not. It has become all about maintaining operating flexibility and reacting quickly to vacillating demand.
Looking forward, manufacturers will strive to survive with leaner staff and leaner inventories while closely monitoring the market for signs that a sustained recovery is underway. Those who recognize a market turnaround early and who can respond quickly stand to gain market share at the expense of their competitors. Those employing a more frequent S&OP cycle will increase their odds of catching the anticipated (and yearned for) economic recovery wave first.
Why Much More S&OP These Days?
Indeed, S&OP, inventory optimization (IO), and forecasting were the demand management-related themes of the APICS conference’s expo floor. The most visible vendors there were the following: JDA Software, Oracle Value Chain Planning (in great part based on the Demantra acquisition), Logility Voyager, Demand Solutions, Demand Works, Smart Software, Forecast Pro Software, HighJump Software, John Galt Solutions, IBM Cognos’ manufacturing offerings (including IBM’s vast partner ecosystem), and more.
There were only a few attending enterprise resource planning (ERP) vendors: IFS North America, SYSPRO, Epicor Software, and Microsoft Dynamics. IFS displayed and gave away its own white paper on S&OP.
The APICS CSCP Learning System’s Module 2 entitled “Building Competitive Operations, Planning, and Logistics” says that even though S&OP has been around since the late 1980s, it still feels like one of the new kids on the block. Like the entire realm of supply chain management (SCM), S&OP rests on the assumption that firms wishing to compete in the expanding global marketplace can and must break down the silo walls between functional departments and break through the barriers separating supply chain partners.
In principle, S&OP takes input from a variety of company experts across many disciplines, and then leverages that collective knowledge to get ahead of the curve and plan for the future. Better than any individual’s “gut” feeling or traditional wisdom, S&OP accounts for many different aspects of business to provide a more effective and informed plan for the future.
S&OP’s traditional objective is to balance and synchronize supply and demand. This balance is achieved by reconciling predicted sales, or unconstrained demand forecasts, with supply plans in terms of volume, plant capacity, inventories, available labor, equipment, and other constrained resources.
Departments within a company and supply chain partners on the outside are accustomed to developing their own plans, controlling their own information, and calling their own shots. S&OP simply cannot function if these attitudes, and the attendant barriers, remain in place.
Gone are the days when sales folks would simply try to sell as much as possible of the products that they think they can sell easily, while the production would be driven by an inflexible schedule. To make matters worse, plant managers would be rewarded for high utilization regardless of whether they were producing dud products and overflowing the racks in the warehouse, while damaging the equipment via over-use.
The basic premise of S&OP is that there should be one unifying plan to tie together all the major functions: not only sales and operations, but also the financial office. Further, S&OP assumes that key players, especially top executives, will agree to the unified strategic (“big picture”) plan, carry it out tactically, and continuously monitor and adjust it in regular (e.g., monthly) S&OP meetings.
As S&OP consultant and author Thomas F. Wallace puts it in his blockbuster book entitled “Sales and Operations Planning: The How-to-handbook”, “S&OP is as much about institutionalizing communications throughout the organization as it is anything else.” If, as Wallace also states, you “get all the facts on one sheet of paper” reviewed jointly by the key players monthly, communication has to happen; facts have to be recognized, even if they’re negative; decisions have to made, debated, and acted upon–before the next meeting.
Nothing Without a Mindset Change
In fact, S&OP is intended to be a planning and controlling tool not just for the manufacturing plant but also for the entire supply chain. To maximize operational efficiency, traditional S&OP relies on coordinating planning efforts across multiple functional departments such as sales, marketing, distributors (and other business partners), customers, and forecasters on the demand side, and inventory, procurement, plant management, production planners, and schedulers on the supply side. Breaking down those barriers and turf-based habits, however, doesn’t always happen quickly or easily.
Some enterprises struggle with achieving success with S&OP because of the coordination that involves multiple stakeholders across multiple organizations and trading partners–all of whom must unify to determine a cohesive strategy. The path to the next-generation S&OP process will require key changes in behavior, process, and tools to transition to higher levels of performance.
More frequent S&OP cycles (as suggested earlier on) are of little use if the company continues to use a static and insular S&OP process–one based more on logistics and historical performance than on a visionary strategy. The next “quantum leap” is a holistic dynamic and integrated S&OP approach–one that brings together all of the abovementioned departments and supply chain constituents to continuously (and more successfully) meet customer demand.
Consider how the APICS Operations Management Body of Knowledge (OMBOK) Framework defines S&OP:
“S&OP develops a mid-range plan for operations using input from top management. The plan identifies key resources to achieve the firm’s strategic objectives and goals and is the basis of all subsequent material and labor resource decisions, as well as the basis for the master production schedule (MPS).”
After the collaborative process that creates the sales and operations plan, the operations department is on its own to create an MPS that will commit the firm to producing specific products on particular dates. S&OP deals mostly with aggregate supply and demand, projecting volumes for product families rather than individual products. The master scheduler, therefore, has to disaggregate the product family data into numbers of individual products.
S&OP does not require a substantial investment of money and resources. What it does require, though, is buy-in from senior executives and a modest time commitment and effort from top managers.
It has been well publicized that one major stumbling block in implementing S&OP is the difficulty in engaging the president and top management in the process. As a result, medium- to long-term strategic operational decisions are often overlooked, leading to imbalances in supply and demand, poor customer service, and missed revenue and profit opportunities.
New-generation S&OP for More Agile Supply Chains
Lately, there has been a growing awareness that a more effective S&OP process can take companies to the next level of supply chain efficiency and market success. Nari Viswanathan, Aberdeen Group vice president (VP) and principal SCM analyst, shared with APICS 2009 attendees the recent findings from Aberdeen’s customary investigation into best-in-class companies’ practices. Participants at the Tuesday, October 6, 2009 luncheon could hear some useful pieces of advice about how to achieve more effective integrated supply networks:
“It’s a very different world now. Companies have lost visibility and control over their supply chains. In order to prepare for the economic recovery, you need to look at the supply chain organization as a strategic driver for improving your business.”
Viswanathan urged attendees to focus on supply chain visibility and responsiveness, creating a clear-cut inventory management process, and accomplishing integrated business planning (IBP), which he described as “the next step in the evolution of S&OP.”
“The traditional approach–looking at how to reconcile the sales forecast with production plans–is a good start, but IBP forces us to think about supply, demand, and finance as equally important issues. When you’re trying to balance supply and demand, you must not forget about the finance side.”
S&OP is a proven process for creating significant value by helping manufacturing companies better align supply and demand. Yet, many companies do not have a strong link between sales, operations, and finance departments, and this chasm can lead to process inefficiencies and missed revenue and margin opportunities. Companies can maximize performance by improving collaboration and integration between S&OP, financial planning, and budgeting processes.
Part 2 of this blog post series will analyze the traditional shortcomings of early S&OP solutions and approaches. Then, the post will go into what has meanwhile changed to enable a revival of the customers’ interest.
Your views, comments, opinions, etc., about S&OP and about the overall demand management software category per se are welcome in the meantime. We would also be interested in hearing about your experiences with this software category (if you are an existing user) or your general interest in evaluating these solutions as prospective customers.