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S&OP: Framework and Fundamentals

S&OP framework and fundamentals

In Part 1 of this two part series, Carter McNabb of GRA explores current trends in S&OP and its growing importance in the current business environment.

PART 1

In the fairy tale The Three Little Pigs, the big bad wolf tears through houses made of straw and sticks, until our porcine protagonists finally find shelter in a house made of bricks. So it is with Sales and Operations Planning (S&OP). While the framework for the S&OP process is analogous to the concept of shelter as four walls and a roof, the building materials are the fundamentals supporting the S&OP process. The key fundamentals are the organisational structure (ownership, accountability, and KPIs) and the planning capability (people, process, systems, and data) of the business. Often, S&OP failure, just like the first two houses is a result of exclusive focus on the framework, without regard to these fundamentals.

Trends in S&OP

New Technology

Several trends are driving change in S&OP. One such trend is the growth in software solutions tailored for S&OP. These solutions are providing an integrated view of sales, operations, and financial information.  Some software providers, such as Steelwedge in the U.S., are entirely focused on providing S&OP solutions. Steelwedge offers a cloud-based S&OP platform that is used by global companies such as computer hardware manufacturer Lenovo and agribusiness Syngenta, to drive and support their S&OP process. The market for this technology is expected to exceed US$1.25bn in revenue by 2016.

In addition, advancements in predictive analytics, in-memory processing, and Software-as-a-Service (SaaS) offerings are giving companies more advanced planning capabilities and opportunities to collaborate with supply chain partners. For example, enterprise solution provider SAP has recently moved their S&OP offering into the cloud and onto their HANA real-time, in-memory processing architecture. The application is designed to allow key stakeholders to “rapidly translate dynamic fluctuations in customer demand into actionable operational plans for logistics, manufacturing and procurement.”

New Thinking

Alongside the technological enhancements, the S&OP process itself has evolved. From its beginnings in the 1980s, characterised primarily by the needs of manufacturing and operations, the process has evolved into a broad, cross-functional business planning process, linking the questions of “where do we want to go?” (business strategy) to “how do we get there?” (operational tactics).

The process now integrates key business functions: Product Development, Sales and Marketing, Operations and Supply Chain, Finance, and General Management, in developing a comprehensive sales and operations plan, balancing a much wider range of trade-offs, all aimed at delivering on the goals outlined in the business strategy. The S&OP conversation has shifted from one of volume only, to one that is focused on profitability, cash flow, and return on investment. New meetings, such as the Integrated Reconciliation and Executive S&OP reflect this evolution.

The Growing Importance of S&OP

These trends proceed in tandem with a growing interest in S&OP. What is driving this renewed interest?  After all, the S&OP process was first articulated 30 years ago by Dick Ling and Walter Goddard in their book “Orchestrating Success.” The answer perhaps lies in the current environment businesses are operating in. This environment is characterised by the following:

  1. The downturn in global growth is making it more imperative that businesses "get it right" when it comes to delivering on their value propositions. The margin for error has shrunk enormously. The risk of getting “right product, right place, right time” wrong is greater and more costly. Consider mobile hardware maker RIM. It took a $485m inventory write-off bath on its Blackberry Playbook at the end of 2011. The aftermath was a worsening in its cash position of $1.1bn and a stock price slump of almost 40% in 2 months. The result was a harsh lesson in the need for integration across business strategy, new product introduction, and operations.
  2. In addition to the downturn, the regulatory burden on companies is growing. In particular, regulations around energy use, carbon emissions, and source-to-customer product tracking all have a particular supply chain focus. Take for example the fallout in the Australian live cattle export market after the exposure of animal cruelty at some Indonesian abattoirs. The result was a temporary but costly halt in all live cattle exports and a substantial change to federal regulations governing the issuing of live export permits. The new regulations have a strong emphasis on the need for exporters to track live animals right through the entire supply chain, ensuring welfare outcomes at each stage.
  3. Finally, there is general acknowledgment among business leaders of the increasingly complex demands of a more-informed, more-demanding consumer. Your customer wants more product variety, expects that product sooner, and has an increasing ability to compare and contrast your value proposition with that of your competitors, which for many businesses are now spread over the globe as a result of online shopping.

In all these instances the advantage of S&OP is its forward-looking and collaborative nature, which is increasingly seen as providing the level of planning and control required to operate in such a difficult environment. In effect, S&OP provides a framework which can shelter the business from volatility, complexity, and disruption. However, in order to ensure a sturdy framework, the business must have strong fundamentals. Let’s explore the framework and fundamentals in more detail.

Conclusion

In Part 1, we have explored some current trends in S&OP and its growing importance in the current business climate. The confluence of new technology and a challenging operating environment have generated a renewed interest in S&OP and its potential to drive coordinated decision-making and action within the organisation. In Part 2, we explore the S&OP framework, and discuss why the fundamentals of organisational structure and planning capability are key to implementing successful S&OP.

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