S&OP In Five Steps

 

The results are significant, but CP companies are laggards in S&OP. Based on interviews of more than 120 companies, we find that CP companies lag other industries in S&OP maturity with the strongest S&OP maturity in the chemical and high tech consumer goods vertical sectors. The factors are two-fold: The evolution of supply chain processes and the historic industry focus on building strong vertical organizations versus strong cross-functional processes.

 

CHALLENGE 1:
Process evolution. Based on a recent AMR Research study of 55 North American and European consumer products, 62 percent of companies surveyed responded that they had a supply chain organization. The average supply chain organization averages 230 employees with major differences in process maturity by region and size of the company. The average age of a supply chain organization within a CP company is three years with 58 percent of the companies studied having less than two years of experience in supply chain processes. With more than 80 percent of CP companies completing the implementation of enterprise resource planning (ERP) and advanced planning systems (APS) systems, there is a shift in scope from system implementation to continuous improvement and from transactional efficiency to market-planning processes. However, this journey is just beginning.

 

CHALLENGE 2:
A focus on strong functional processes. Ask any CP company what they are good at, and the answer is usually based on perceived strength in a functional area. Recent examples that I have heard include: "We are good at brand marketing, this drives our success." "We are excellent at manufacturing. There is no company that can touch our ability to make products quickly." "Our foundation for success is finance and a focus on the lowest costs."

 

However, in our research, we find that the companies with the best results have strong cross-functional not functional organizations. They learn to make tradeoffs across organizations based upon market conditions and business strategies. This is a hard transition for the CP company that has built strong functional organizations, but lacks the understanding of how to make cross functional trade-offs. This is a fundamental change transformation effort requiring leadership, a redefinition of the vision of success and the reshaping of incentives. More than 50 percent of the effort to drive S&OP excellence lies in this organizational transformation.

 

HOW DO I GET STARTED?
CP companies lag other industries in S&OP maturity and there is an increasing business need to close this gap to improve new product launch and marketing program effectiveness. As a result, there are many companies looking at plans to close these gaps. Here are five steps that you can take to propel this journey:

Step 1: Profitability mapping. S&OP organizational reporting structures should parallel profitability reporting structures. Since in mature processes, there is a shift in goal from demand and supply unit balancing to making the best decisions for profitability, the most effective S&OP processes report to managers that have profitability decisions.

Step 2: Understand your supply chain rhythms and the constraints. The most mature teams, map supply chain rhythms and analyze demand shaping and agility strategies that fit each supply chain. To enable these processes, S&OP teams need technologies to support internal collaboration, simulation and what if analysis. The key is to find the right balance of demand-shaping and agility levers for each business to maximize opportunity and minimize risk.

Step 3: Define an S&OP governance model and determine the right the fit of S&OP program with new product introduction and supplier development programs. The more mature teams have developed a governance model that defines linkages between S&OP and new product introduction processes. Since one of the greatest benefits for the mature S&OP processes in CP is improved success in new product launch -- a 20 percent higher success rate -- than companies with less mature processes, defining the intersection of these two processes is essential.

Step 4: Develop a clear definition of success.
As processes mature, teams go through a transition of goals. The first goal is usually demand and supply matching with a focus on the prevention of out-of-stocks. The next phase becomes outside in with a focus on customer scorecards and profitable performance at the shelf. As a result, the focus of success is on forecast accuracy with key trading partners, perfect order performance in the eyes of the customer and inventory required to support a profitable and reliable response. At this stage of the model, the team is dealing with embedded innovation, marketing programs to improve the customer experience, and customer- specific programs to improve market share. Customer scorecards become a guiding light for defining success and driving continuous improvement, and cost-to-serve and product profitability modeling to improve corporate profitability becomes and embedded quarterly activity. Let me give you an example. In one building supply company that I recently interviewed, their processes were designed to focus on demand and supply matching based on the conventional definitions of supply chain planning. This lack of an outside-in focus caused them to miss the June housing down turn at Home Depot and Lowes by six weeks. By focusing only on their forecasts and orders, they built too much inventory resulting in a drag in profits of 2 cents a share.

Step 5: Resource the effort.
While many companies endorse the need for S&OP, they fail to resource the effort appropriately. The average team requires at least five full time equivalents to analyze and manage the business. These teams have defined calendars with clear accountabilities at each step of the process. Companies need to recognize that the rigor of cross-functional planning requires resources and discipline to make it work.