The Secrets to S&OP Success
By Maha Muzumdar and John Fontanella -- Supply Chain Management Review, 4/1/2006 Ask any supply chain professional this question: Is sales and operations planning (S&OP)
important to your company? The chances are good that no matter what type of company they work for the reply will almost always be ―Yes!‖ But if this attitude is so commonly held, why are so few companies willing to step forward and say they are actually doing something to institutionalize a strong S&OP process in their business?
It is no secret that most companies struggle with even the basics of balancing supply and demand in their supply chains. Retailers have excess inventories for some products while facing high product shortages for others. Consumer products companies are challenged with building ahead of the seasonal curve, which is based at best on questionable histories and more often on uninformed hunches. High tech and industrial companies work hard to put master plans in place only to have them unravel in the face of customer and supplier churn and uncertainty. And distributors must balance not wanting to have an oversupply in their distribution centers against the hefty discounts that usually result from carrying too much inventory of their product in the stores. Even worse, stories abound of companies that were not prepared for the demand created by highly discounted promotions, resulting in product shortages and a record number of unsatisfied customers. Could all of these symptoms have a common root cause? Could significant progress be made in reducing these undesirable effects in so many companies? Certainly all supply chain professionals and executives want to
reduce uncertainty and continuously improve how they manage risk. If there are so many opportunities for improvement and so much support for S&OP, what are the obstacles and what are the steps to overcome them? In this article, we address these key questions. The Potential of S&OP
Regardless of size and industry, most companies in recent times have faced significant business challenges including shrinking profit margins, reduced customer loyalty, growing global competition, and increased supply chain velocity. At the same time, business growth is either below plan or below potential. These market factors have created new obstacles for supply chain executives and managers and have altered the global competitive environment into one of high uncertainty and risk. What has become clear is the importance of integration across operational silos as well as trading partners.
Sales and operations planning is one of the key strategies and approaches that successful companies are taking to respond to an increasingly complex business climate. The need for S&OP is being fueled by customer demand for faster response to market shifts and for more made-to-order products and services. For companies looking to create a sound strategy to mitigate and manage risks while increasing profitability—S&OP is the answer. First a definition:
S&OP is the set of business processes and technologies that enable an enterprise to respond effectively to demand and supply variability with insight into the optimal market deployment and most profitable supply chain mix. S&OP strategies help companies make ―right-timed‖
planning decisions for the best combination of products, customers, and markets to serve. The typical planning period ranges from four weeks to as long as two years. When applied correctly,
S&OP has the power to enable an enterprise to achieve an immediate and significant increase in return on investment. It can have a direct impact on profitability, performance, customer satisfaction, and the product portfolio. Many company executives, however, are unsure what the key elements of an S&OP program really are. Common questions include: Isn‘t S&OP only for large enterprises? And, why would my company need to implement S&OP now? To help answer questions like these, Oracle sponsored The Sales and Operations Planning
Benchmark Report, a study of more than 200 companies conducted by the Aberdeen Group.
The goal of the S&OP study was to survey a wide variety of large and mid-size companies to identify successful strategies for sales and operations planning. One of the key findings was that most enterprises have some sort of S&OP process to align demand and supply. In fact, more than 70 percent of respondents to Aberdeen‘s survey indicated that they are actively
engaged in enhancing their existing S&OP capabilities. As shown in Exhibit 1, a significant number of participants revealed that they expect an enhanced S&OP program to significantly improve operational performance across the value chain, from sales to procurement. These respondents are motivated to improve their S&OP process by a combination of decreased business growth, diminishing profit margins, and competitive pressures.
The benchmark study also revealed that leading S&OP practices are evolving away from merely balancing supply and demand. They now involve a more powerful and holistic process that allows companies to improve revenues, reduce inventory, increase profits, create a more dynamic product portfolio, and maintain longer-term customers. The study results also demonstrated that as S&OP strategies have evolved, the market drivers have changed. This article details the results of the study and highlights the best practices being used by leading companies to meet customer demand while maximizing financial gain and synchronizing all operational plans. This article will also help readers determine if they need to update their current S&OP and rethink outdated processes.
Current Realities in Today’s Market
In the past few years, we‘ve seen a sharp increase in the number of trends that are putting growing pressure on traditional S&OP practices. For example, brand loyalty has been declining, demand for customized and configured solutions has increased, and market uncertainty and global competition has eroded margins. Acquisitions, joint ventures, and outsourcing are
changing organizational structures and are requiring rapid changes in plan objectives and targets. Companies are forced to concentrate efforts and resources on the best products, customers, markets, and channels while being constantly on guard in this unpredictable environment.
Companies have also come to realize that the risks and costs associated with poor decision making have increased—particularly in the area of aligning supply and demand and linking that to profitability. When companies target the wrong customers, products and services, or channels and geographies, they court disaster! Today‘s market is less forgiving and much riskier. Excess inventory is frequently discounted. Unsatisfied customer demand now runs the real risk of lost sales and revenue. Further, current market dynamics have rendered traditional S&OP processes and technologies obsolete. In the past, S&OP was characterized by demand-supply balancing in aggregate units such as tons, cases, cubic feet, and so forth. A key difference for today and for the future is that S&OP is no longer just about balancing supply and demand. It is about searching for and executing the most profitable strategy out of many possible scenarios. It is about relying on and enhancing those critical factors that give the