S&OP: framework and fundamentals - Part 2

Introduction

In Part 1 of this series, we explored some current trends in S&OP and its renewed importance in the current business climate. In this article we will discuss the S&OP framework and the core business fundamentals of organisational structure (ownership, accountability, and KPIs) and planning capability (people, process, systems, and data), and explain how, just like the brick house in The Three Little Pigs, they provide the foundation with which to build successful S&OP.

S&OP - The Framework

The S&OP framework is relatively simple to understand. At its core, there are five distinct S&OP meetings. The first is the New Activities/Portfolio meeting. This meeting examines the demand and supply effects of the company’s innovation pipeline, and provides a feed of forecast demand for new products into the Demand meeting. The Demand meeting takes this information and consolidates it with forecasts of current product demand, to produce an unconstrained picture of aggregate demand, comparing this to the sales budget. Action is agreed to ensure the sales budget is met. The unconstrained demand plan is then an input into the Supply meeting, where it is tested against capacity and other resource constraints. Any resultant trade-offs are identified, and those that cannot be resolved by the team are elevated to the Integrated Reconciliation meeting. The Integrated Reconciliation takes the elevated trade-off decisions from the previous meetings and makes a call on what action to take. Executive S&OP takes the integrated plan and ensures it delivers on financial outcomes and is aligned with the business strategy. The meeting cycle is monthly. Each has particular participants, inputs, and outputs, and the planning horizon is typically in the intermediate range of 12 to 18 months.

The meetings, the sequence, the cycle, and the planning horizon form the S&OP framework. The outcome of S&OP is meant to be a robust sales and operations plan, built up through collaboration between the various key functions, driving strategic and operational alignment and coordinated action. However, strategic and operational alignment cannot be delivered by focusing on the framework alone. The framework needs to be constructed from bricks, in the form of strong business fundamentals.

S&OP - The Fundamentals

To be successful, S&OP relies on some core business fundamentals. Two of the most important are organisational structure and planning capability. Organisational structure includes ownership, accountabilities, and KPIs, which align the organisation and drive the right behaviours. Planning capability is the people, processes, systems, and data, which deliver a bottom-up, integrated, forward-looking plan. Together, these fundamentals support the entire S&OP framework.

From an organisational structure perspective, a problem with many S&OP implementations is the lack of executive engagement and ownership. Without this engagement, the process does not have a crucial link back to the architects of the business strategy. From a practical perspective certain key trade-off decisions cannot be made without executive sign-off. At a minimum, relevant executives should own each of the meetings, driving decisions and actions. They are there to hold each functional team accountable. Executives must ensure that the plan derived from the S&OP process is driving the business towards its strategic goals.

In addition to executive engagement, Key Performance Indicators (KPIs) are a primary input into each S&OP meeting. Used effectively, they monitor the health of different business processes and provide measures of performance. With S&OP it is important that KPIs reflect the horizontal, cross-functional nature of the process. That is, KPIs should be chosen to support collaboration, not to measure a process or performance in functional isolation. For example, Operations may have a KPI related to plant efficiency. However, if this is not reported together with a measure of inventory turns or cash-to-cash cycle, excellent plant efficiency as measured by that single KPI may disguise a resultant increase in inventory costs. A business is an integrated system, where the different functional elements interact and influence one another. KPIs selection needs to reflect this reality.

Together with executive engagement and aligned KPIs, the business must have the right interaction of people, processes, systems, and data, capable of producing the forward-looking plans that are a fundamental input into each S&OP meeting. Often, this is not the case. In many businesses, projects to implement enterprise systems often lack effective user training and education. The result is a disconnect between people and systems, leading to informal processes that produce manual work-arounds. The data necessary to inform the S&OP process ends up off system and functionally isolated. The effort required on a monthly basis to consolidate this data is much greater, leading to frustration with the S&OP process itself. Adequate user training and education is crucial to ensure effective use of system and data resources.

In addition, certain functionality of the enterprise system may be lacking relative to best-of-breed systems. For example, the inventory modules of many enterprise systems do not integrate customer service level policies directly with stocking policies. Ideally, the business should be able to adjust service levels, and the system should automatically determine the optimal stocking levels considering supply chain costs and variability. Such capability can elevate the discussion in the relevant S&OP meetings, from one on stocking policy divorced from customer service level, to one where customer service level and stocking policies are integrated, allowing informed trade-offs to be made between the two. This kind of simulation and modelling capability is essential to support best practice S&OP processes that focus on optimising trade-off decisions.

Executive engagement, aligned KPIs, and effective use of systems and data provide a much sturdier foundation upon which to build your S&OP process.

Conclusion

There are many success stories of businesses with mature S&OP processes driving superior financial performance and delivering strategic outcomes. Trends in enabling technology and the evolution of the process itself are ensuring its relevance and importance in the current environment. However, businesses must recognise that success with S&OP is not ensured by the framework alone. When implementing S&OP or looking to reinvigorate the process, a business must also check the integrity of their fundamentals, particularly those related to both organisational structure and planning capability. To withstand the huff-and-puff of volatility, complexity, and disruption characteristic of the current environment, businesses will want fundamentals made of bricks, not straw and sticks.

To read part one click here.

Carter McNabb is a founding Partner of GRA Supply Chain Consultants and is widely acknowledged as an influential industry expert. He advises CEOs of some of Australia’s top companies and speaks regularly to this audience. For the last 20 years Carter has helped organisations in North America, Asia and Australia deliver rapid and sustained inventory reductions, service level improvements and supply chain cost reductions through the practical application of leading supply chain processes, techniques and systems. In addition to his extensive industry experience, Carter runs an Executive Supply Chain Forum comprised of CEOs from ASX 200 companies and is a member of the CEO Institute. He has also authored and delivered Masters courses within Monash University's Logistics & Supply Chain Management Post Graduate Program.

For more information about GRA please visit www.gra.net.au

Carter may be contacted by email: cmcnabb@gra.net.au     phone: (03) 9421-4611