Evolving S&OP through integrated business planning principles.
Manufacturers are constantly faced with having to navigate economic pressures and dynamic market conditions in order to achieve supply chain excellence. Today, the "trickle down effect" of a tightening economy and escalating oil prices will impact multiple aspects of the supply chain -- including the cost of developing and delivering new products to market. Meanwhile, improving margins, decreasing inventory and increasing customer satisfaction require consistent, forward-looking sales and operations planning processes that enable manufacturers to adapt quickly and make real-time decisions to protect their bottom line and competitive positioning.
Aligning demand and supply profitability determines the competitive positioning of an enterprise in a challenging marketplace. However, disconnected cross-organizational communication and collaboration often get in the way of achieving that alignment and result in drawn-out, dysfunctional sales and operations planning (S&OP) cycles. The situation is further complicated due to unforeseen or uncontrollable factors such as volatile customer demand, proliferating SKUs, increasing new product introductions, global sourcing options and competition from multiple manufacturers.
Additionally, current manually-driven S&OP processes fail to alleviate many of these pressures and are not sufficient in today's high-pressured business environment. In order to be successful, S&OP approaches must evolve to adopt the attributes of "integrated business planning" -- incorporating truly cross-functional, multi-dimensional processes that include all elements of demand, supply and financial analysis in relation to the business goals and strategy. In this article, we will highlight the challenges and opportunities facing manufacturers as they seek to modernize their S&OP processes and provide advice for embracing transformative strategies that encourage collaboration and drive measurable operational improvements.
Evolving S&OP through Integrated Business Planning Principles
By incorporating integrated business planning principles to achieve a more forward-looking, collaborative, cross-enterprise approach to decision-making, manufacturers are well on their way to achieving operational improvements and streamlined planning processes. This more integrated, collaborative approach stands in contrast to the paradox created by traditional reliance on "business intelligence" technology, which can include general reporting and spreadsheet tools that support IT -- rather than focusing on the specific business process or problem and enabling it with the right Integrated Business Planning (IBP) technology. Traditional departmental reliance on manual reporting and spreadsheet tools tends to perpetuate the problems of organizational silos. When each department uses its own technology solution to address its own planning processes, this creates a myopic and disconnected view of S&OP that is inefficient, costly and not sustainable.
The success of an integrated business planning approach to S&OP is due in large part to breaking down organizational silos by addressing key people, process and technology issues. To get started, organizations must assign clear ownership and accountability for specific S&OP processes (people). At the same time, re-active firefighting must come to an end by devoting more focus and regularity to proper business analysis and forward-looking planning (process). Finally, manufacturers must move away from using disconnected spreadsheets to supplement their S&OP processes in order to gain a "single version of the truth" (technology). While spreadsheets are often the most familiar and comfortable for companies to use, this strategy is dangerous as it lends itself to multiple versions of the data and is rarely accurate or effective over the long term.
A Case Study
Linksys, a Division of Cisco, is an excellent example of a company that transformed its S&OP processes by focusing on these key people, process and technology elements in order to break down organizational silos. Linksys' old S&OP process was driven largely by a proliferation of spreadsheets throughout the business and within each functional group. As the scale and complexity of the company's supply chain grew, it became clear that its manual, spreadsheet-heavy approach to S&OP simply wouldn't scale to meet long-term needs.
Getting Started: Prioritizing Forecasting, Inventory and Production
Linksys was encountering the same problems that many other manufacturers face daily; it was only looking at what happened in the past to form its opinions about the future, which promoted very reactive and knee-jerk response cycles. In many ways, it's like driving a car while only looking in the rear-view mirror. Companies must have a good view into the future -- based on coordinated, cross-functional planning and forecasting for both supply and demand data -- so that they can proactively respond to issues before they happen.
Linksys understood that the biggest play on P&L performance was asset utilization. Manufacturers must manage inventory, production and sales forecasts simultaneously and independently -- a three-variable equation. However, companies all too often only manage sales forecasts and try to keep inventory levels constant, creating two problems: unpredictable supply side behavior and poor asset utilization.
Given this challenge, manufactures like Linksys whose S&OP goals focus on reducing inventory and improving customer service levels must rely on the people-process-technology formula that allows them to create a new, more collaborative organizational structure, processes that focus on planning (not just forecasting) and technology that enables the organization and S&OP processes to function more efficiently.
With the right Integrated Business Planning (IBP) technology in place to support this approach, more people and functions can be included in the S&OP process, and can rely on the data and information it produces to drive decisions. They can communicate more effectively across silos because everyone is working from the same set of numbers. This drives transparency, accountability and performance across the extended value chain.
Breaking Down Silos: Expected Results?
An example of how this collaborative, forward-looking approach to S&OP can benefit a manufacturer is assessing the impact of the relationship between price and volume. By taking pricing data out of operational silos and consolidating the information in a centralized way, manufacturers can connect the revenue and overall financial management of the company with its operational execution and can make both the appropriate changes in pricing and demand strategy on-the-fly, and before the competition has time to react.
For example, when a company increases or decreases the price of a product to a certain point, that price change will influence demand behavior for that product and/or other similar products. Yet, so many companies today make decisions about supply and demand based only on forecasts and virtually ignore this very key variable of price. Therefore, integrating price/volume elasticity into the S&OP process is critical and can help organizations overcome situations they face every day and help them reach business performance level goals for their overall product portfolio. Consider a company that has excess inventory of a given product. That company wants to move more of that product and does so by announcing a special discount or promotion for a number of weeks looking forward. Or, consider that same company that has low inventory of a product and needs to transfer demand to another product. Using more collaborative approaches that include price and volume decisions together, they can increase the price of the low inventory product to shift buying behavior to another similar product, or announce a similar promotion on the similar product to pull demand away from the short supply product. Pricing wisdom can influence and impact the supply chain while not only moving the right amount of product, but do so at the price that is going to maximize the result on a company's bottom line. This would not be possible with spreadsheet-driven, siloed approaches.
While it may seem daunting to undertake the people, process and technology changes necessary to modernize your current S&OP processes, certainly the rewards are clear, and there are plenty of examples and best practices available to smooth the transition. Next generation S&OP processes will embrace integrated solutions providing a single, cross-functional view of the business, generating impact assessments that include price and other financial metrics, and empowering the organization with a synchronized and forward-looking view of planned business execution. Economic pressures show no signs of easing, so the more timely implementation of this collaborative, forward looking approach to S&OP, the sooner manufacturers can ease their reliance on simple cost-cutting and downsizing as strategies to improve their bottom line. Instead, a more sustainable, scalable strategy hinges on the creation of a flexible, proactive approach to anticipating, and addressing, unforeseen or uncontrollable market conditions.
Tal Ball is the CEO of Symphony Metreo which serves global enterprises with applications in the areas of Enterprise Pricing, Operations Management and Performance Management. Symphony Metreo is a wholly-owned subsidiary of the Symphony Technology Group, a $2.1 billion strategic holding company. http://www.symphony-metreo.com.
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