The concept of realism has had its share of champions and skeptics across the centuries, in arenas as wide-ranging as philosophy, literature, and physics. But for manufacturers intent on perfecting their sales and operations planning, it is essential.
The sales and operations planning (S&OP) concept has been around for more than two decades and has won much attention in recent years. At the crux of the discipline is a series of activities that allow a manufacturer to say, "Based on our sense of market demand, we expect to sell X amount of product, and we will set our operations plan based on that expectation."
Ideally, it is a realistic assessment of future activities. But it seldom turns out that way, experts say.
Salespeople forecast a great quarter, ignoring the fact that orders have been trending downward. Or a plant manager predicts that operations can make a certain quantity of product, even though he knows a machine is down and won't be fixed on schedule.
Reality sits somewhere in the middle, and it is manufacturing management's job to play the two ends off against the middle. The stakes are high. A manufacturer that sets pie-in-the-sky sales goals will overproduce, expending precious capital and leaving warehouses with costly inventory and the P&L littered with chargebacks. Likewise, a company that overestimates its ability to make product could end up with orders it can't fill and angry customers it may never see again. S&OP inserts a dose of reality into the process.
The consultant firm Oliver Wight has stood at the vanguard of S&OP since it mapped the process' early blueprint in the 1980s. The Oliver Wight methodology promulgates five crucial steps to an effective S&OP process: demand planning/forecasting at the product family level; a demand planning meeting to consolidate all product forecasts; capacity and supply planning; a pre-S&OP meeting of managers from sales and operations; and the executive S&OP meeting with top management to reconcile any perceived conflicts or incompatibilities. For the most part, this model has survived as the de facto standard. The description may be succinct, but when people get involved, it rarely yields a color-by-numbers success.
J. Paul Dittmann has seen this firsthand. As director of the Office of Corporate Partnership at the University of Tennessee and former head of global logistics at Whirlpool, Dittmann often conducts S&OP audits of manufacturing companies.
The audits have turned up interesting variations on the classic process, including employees at one manufacturing company who told Dittmann they had an S&OP process in place, but it didn't include representatives from sales. Another started out with sales involved, but found that meetings were veering into unrelated discussions. To get things back on track, the other participants simply stopped inviting the sales team.
Unfortunately, that's where many companies find themselves, Dittmann says. "There's all these errors, and generally this is what happens the first time companies try this."
The most nettlesome aspect of the process, experts say, is the coordination required. S&OP hopefuls must corral constituents from sales, marketing, manufacturing operations, procurement, logistics, finance, and the executive suite and force them not only to interact with one another regularly, but also to take one another's activities into consideration and make realistic efforts to align their goals.
In most cases, experts say, the initial reaction is pushback. The thought of spending more time in meetings for S&OP inspires many naysayers. But management must overcome the dissension. "It'll save you hundreds of hours by investing five or 10 hours," says John Dougherty, a principal at consultant firm Partners for Excellence and co-author of the book Sales and Operations Planning — Best Practices
Source: Editorial from the March 2008 issue of Managing Automation, Back to Reality,
Dougherty and others have seen the results of a successful S&OP process, and stress that the effort is well worth it. Oliver Wight cites benefits from its recent engagements, including Caterpillar North America's Commercial unit, which reduced inventory and simultaneously saved $20 million and freed up $500 million in capital; Leggett & Platt's Hoover plant, which saw a 50% improvement in finished goods record accuracy, a reduction in weekend overtime shifts, and a jump in equipment efficiency; and pump maker Weir Floway, which attributes 50% year-on-year growth and a tripling of its profit margin to its success at S&OP.
The Latest Wrinkle
The traditional enabler of S&OP has been Microsoft Excel, which helps companies organize the sales forecasts and histories that inform the process. Even today's leaders in specialized S&OP software admit the ubiquity of Microsoft's spreadsheet program. "Who doesn't use Excel?" says Joe McConnell, CEO of software provider McConnell Chase Software.
The application has its limitations, however, including a lack of master data management. If 15 product managers add forecast data to 15 different spreadsheets and pass them to another team member who manually rolls them up into one, tracing the origin of the data becomes onerous at best, and that information turns stale as soon as it leaves the originators' hands. Another hindrance is Excel's inability to run complex what-if scenarios. In Ventana Research's most recent survey on S&OP, this ranked as the most desirable software feature for companies undertaking the process.
Steve Hochman, supply chain research director at AMR Research, sketches a typical thought process: "What if I were to change price or volume? What if I were to invest in overflow capacity ... and what impact would that have on my ability to hit my six-month or my annual operating target?"
That what-if capability underlies the latest wrinkle in the S&OP process — integration with the financial and business plans. Manufacturers with advanced S&OP strategies consider not only the projected market demand for their products and the company's ability to fill that demand, but also the financial goals of the business plan, according to experts.
The new objective of S&OP, in Ventana's words, is "to enable decision-makers to reach consensus on a single operating plan that allocates critical resources to reach corporate performance targets."
Ventana refers to this as operational performance management. AMR cites many of the same objectives, but prefers the term "integrated planning." Split the difference and the result is the same: a process that's better integrated into a company's business plan and financial performance.
Here again, realism plays a role. If the business plan calls for a sales boost in March, and in that same month the company launches a new product without adding sales staff, the business plan isn't grounded in reality.
"For S&OP to work well, management's got to give a lot of value to realism," Dougherty says. "They've got to accept when somebody says, 'No, we don't think we can do it; we can't meet the original plan ... Here's what we need to do or here's what we need to spend to get back on plan.' "
Research shows that manufacturers haven't yet warmed to the expanded process. Only about one-fourth of respondents to a recent Ventana survey identified consolidated planning as the goal of S&OP. But top-performing companies are doing just that, experts say, and it's only a matter of time before the masses follow.
Besides Excel, a number of software tools can help streamline the S&OP process, including forecasting tools, advanced planning and scheduling (APS) systems, and business intelligence offerings. However, most experts — even the software vendors themselves — concede that there is no such thing as a fully capable S&OP software suite.
Paul Hoy, director of manufacturing industry solutions at Cognos Inc., believes that no vendor can say, "Here's your S&OP module. Push the button and it calculates it." But software can help align data from sales, operations, and finance, he says, and that can lighten the workload demanded by S&OP and produce more reliable data.
Cognos chose to approach the process via "blueprints," which Hoy describes as S&OP best practices translated into pre-built data models, reports, and workflows. The vendor has released two — its main S&OP blueprint and a second that addresses the executive review. The blueprints draw data from a manufacturer's Cognos Planning or Cognos 8 system to build a demand plan. Users can run analyses of specific scenarios to predict the impact on constraints, plant capacity, worker resources, or materials, for instance.
Applications juggernaut SAP used its NetWeaver infrastructure to create xApp Sales and Operations Planning, which helps SAP users integrate data and tools for S&OP, manage and track the process, and present user-based views of data.
For its part, software provider Steelwedge Software has embraced the ubiquity of Excel and made it the front end of its S&OP automation offering. "Our view is, people are not going to learn new software," says CEO Glen Margolis. "You're not going to get, especially, the casual users to log on to something new."
Among other functions, the Steelwedge product sends e-mail to S&OP stakeholders, such as sales managers, capacity planners, and procurement specialists, to solicit their feedback — such as, a big order will likely slip, there's a looming labor shortage at Plant X, or the cost of raw materials is dropping. The software incorporates that data into the master record that governs the S&OP process and helps the manufacturer make planning decisions.
In addition to Steelwedge, SAP, and Cognos, leaders in S&OP-focused software include Logility, Oracle (through its Demantra and Interlace acquisitions), Demand Solutions, AspenTech, i2 Technologies, Adexa, Supply Chain Consultants, and Symphony-Metreo, according to experts.
Dougherty acknowledges the growing interest in more advanced software, but says the 13 best-practices companies in his book and almost all of his clients over the years have taken data from ERP or another transactional system, fed it into an Access database, and used Excel spreadsheets to look at the past and the future of the business.
Manufacturers interested in S&OP shouldn't let the software equation trip them up, Dougherty and other experts say.
"S&OP is too important a process to delay until everything is perfect on the systems front," Dittmann says. "We invariably prioritize systems last. Not to say it's not important; it's very important. It's just more important to get the process right, to get the organization right, to get the metrics right."
Getting the metrics right is what Mark Payne is paid to do. Payne has made a career of conducting S&OP, with a twist.
Payne is vice president of worldwide operations, systems, and processes at Cisco-owned Linksys, a maker of routers, switches, and storage devices. Linksys hired him in 2006 to bring more visibility into its planning process. Before that, he implemented his unique brand of S&OP at Polaroid and Compaq.
Payne's approach defies the advice of most experts, who say that when forecasting and planning, companies should dig no deeper than the product family level (routers, switches, and storage devices, in Linksys' case). Payne dives deeper — the WRT 54G router, for example — and monitors the sales and inventory of each SKU.
With that level of granularity, "we know that 10 SKUs are causing our miss or the 10 SKUs that are doing really well," he says.
To facilitate the process, Linksys uses Symphony RPM from Symphony Metreo. The tool rolls up all the SKU information — something that in most companies demands a manual effort to combine multiple Excel data sheets. In addition, Payne relies on his planning department to monitor each SKU within pre-set parameters. Each planner manages 500 to 700 SKUs, responding only to metrics for inventory, sales, or production that exceed the parameters.
Since Payne implemented the system at Linksys, inventory has dropped 30% and the order backlog has shrunk. Payne says customer satisfaction has gone up because Linksys is better able to identify what goods are available to ship. Meanwhile, order expediting has fallen 90%.
According to Colin Snow, vice president and research director at Ventana Research, Payne's use of the Symphony RPM tool and dedicated planners — a process Payne details in his book, Make the Numbers, Don't Chase the Numbers — has saved Linksys and other companies "tons and tons of money."
Both Payne and Snow credit the software for its role in the process. "You need a good technology to be able to do cross-functional planning and reporting and performance management," Snow says.
Payne believes the process promotes realism. "It's all about showing the business what's real," he says. If salespeople consistently inflate their forecasts, the system points out the disparity. "It's a big spotlight," Payne says. "And it shines it on the operational group, it shines it on the portfolio... and it shines it on the production side."
Payne's approach is not for beginners, but it does highlight the fact that a realistic view of the business — and what is to come — can produce substantial gains.
For companies looking to realize those gains, Dittmann of the University of Tennessee has some advice. First, the CEO or a top-level executive must show "very obvious and visible support of the process. If you don't have that kind of support, it's virtually impossible to connect the dots by aligning the functions."
Second, "attendance at [S&OP] meetings has to be mandatory," and the participants must remain focused on the decisions at hand, not the latest mini-crisis. "Without that, we've seen them fall apart time after time," he says.
Further, those meetings must draw on good data, a hallmark of strong decision-making. And the executives in charge should spread objectives across functions, Dittmann says.
"That's not to say that sales guys are going to care as much about operations issues as operations guys do." But each side, he says, "needs to really begin to appreciate, in a way that has some teeth in it, the issues on the other side."
Nobody said reality was simple.
by Chris Chiappinelli, MA Editorial Staff
Source: Editorial from the March 2008 issue of Managing Automation, Back to Reality,