Disconnected Business Functions Can Be a Nightmare for Manufacturers

Variability. Volatility. Uncertainty. Change. Disruptions.

It reads like a horror movie poster. And for some manufacturers, disconnected business functions that hamper competitive performance and executive decision-making can indeed be a nightmare. Companies face trade-offs between financially sound and operationally effective decisions and need to enable the right balance between the two. Effective Sales & Operations Planning (S&OP) can be the difference between success and failure for manufacturers in these volatile and uncertain economic times. The proper combination of process and technology around S&OP can dramatically improve executive-level decision making on corporate, financial and operational plans by enabling integrated business planning and management across all business functions.

A recent S&OP practices survey by JDA Software sought to understand company usage, processes, tools and approaches, as well as current S&OP challenges and perceptions about this business process. Respondents included executives in supply chain, finance, marketing, new product development, logistics and operations. Industry segments included discrete manufacturing (high-tech, semiconductor, auto, industrial, metals, diversified manufacturing, aerospace and defense) and process manufacturing (chemical, consumer packaged goods, pharmaceuticals, food and beverage.)

The Current State of S&OP

The survey reported that profitable growth and customer satisfaction were the top metrics driving company behavior. Variability in the supply chain was identified in the survey as the primary disruptor of well-laid plans. Almost three-out-of-four respondents pointed to supply-side issues or shortages as the primary reason for supply chain disruptions. Some 63% of respondents indicated that market or demand pattern changes caused key disruptions and more than half of respondents pointed to late changes in customer orders and forecasts.

Awareness about S&OP has been growing across manufacturing companies. Most respondents believed that S&OP would be beneficial for their departments and the company. Demonstrating their proximity and understanding of S&OP further, more than 60% of the respondents saw the need for improving the S&OP process at their company and indicated they would be able to influence or drive such process improvements within their company.

Reflecting an increasing adoption of S&OP processes, less than one-fifth of participating companies did not have formal S&OP processes guiding the company's actions. In fact, 35% of participating companies have had formal S&OP processes in place for more than five years. An equal number have had it in place for two-to-five years, while another 13% have just instituted a formal S&OP process over the past year.

An overwhelming majority of companies with an S&OP process have moved to a monthly cycle, according to survey results. This is different from a few years ago when S&OP processes operated in quarterly cycles in alignment with a company's financial quarters. The pace of change has driven the need for more frequent alignment between different functions.

Does S&OP Matter?

Does effective S&OP help make a difference in a company's business performance? Based on an analysis of the survey results, it appears that companies with mature S&OP processes tend to have better business results.

Of the companies with high S&OP maturity:

  • 63% reported a high score on forecast accuracy
  • 69% reported a high score on inventory performance
  • 81% reported a high score on on-time delivery performance
  • 69% reported a high score on capacity management
  • 75% reported a high score on increased revenues
  • 75% reported a high score on performance-to-plan
  • 75% reported a high score on functional team alignment

Across almost every performance metric, companies with more mature S&OP processes fared better. The difference is most striking on forecast accuracy and functional team alignment metrics.

The Emerging Role of Technology

On the efficacy of the S&OP process, only 43% of participating companies responded that their current S&OP process was satisfactory or good. Surprisingly, the primary challenge identified with executing S&OP was not organizational in nature. The most significant challenge identified across the board was the lack of suitable technology to conduct what-if analyses related to S&OP options. The next two most significant challenges were related to technology as well: the lack of tools to see aggregated information across demand and supply, and the inability to link multiple plans.

Much has evolved over the past few years when it comes to technology solutions supporting S&OP processes. While spreadsheets continue to be used regularly, the survey shows that an increasing number of companies (more than a third) have started relying on more specialized technology to add speed and reliability to their end-to-end S&OP process. Extending beyond traditional demand-supply matching, appropriate S&OP technology solutions can provide necessary visibility and decision support to help create the right balance between financial and operational goals, and to drive close alignment across different functions.

Software based S&OP solutions have come a long way in providing effective decision support to manufacturing companies. These solutions allow businesses to create a series of planned, repeatable processes that can be implemented quickly to reduce or eliminate plan deviations, and promote continuous process refinement by incorporating plan-do-check-act capabilities. In addition, manufacturers can identify critical demand and supply gaps and assign associated action items, as well as analyze different demand and supply scenarios to bridge gaps in revenue and margins.

Conclusion

S&OP is certainly not a new concept and has been around for decades. However, the volatility in today's business environment is prompting more and more companies to explore business processes that enable alignment between financial and operational goals.

At this point in 2011, survey results suggest that manufacturing companies' investments in nurturing S&OP processes appear to be yielding tangible results. Understanding current challenges these companies are attempting to overcome, technology enablers should continue to pave the way for more effective functional alignment that delivers profitable growth and customer satisfaction -- and eliminate potential nightmares.

Puneet Saxena is a vice president of Industry Strategies at JDA Software Group, Inc., a supply chain company. Over the past 20 years, Puneet has worked intimately with global manufacturing companies solving complex supply chain problems.

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