Driving profitability through advanced S&OP

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As Gartner Research Director Matthew Spooner noted in his recent presentation at the Gartner Supply Chain Executive Conference, advanced sales and operations planning (S&OP) is like a hotel. It’s “somewhere you visit, not somewhere you live.” What exactly does that mean? Essentially that while it can, and in many cases does, drive improvements to your balance sheet, it’s not a blanket, one size fits all process that applies to every aspect of your company’s supply chain. In fact, Spooner says S&OP isn’t a supply chain process at all. It’s a business one. Also often referred to as integrated business planning (IBP), it’s just one way many businesses are evolving to stay competitive in a changing landscape. Uncertainty around high-impact events, expanded global presence, pricing pressures and increasing product mix complexity are just some of the reasons more companies are looking to kick their traditional supply chain practices into high gear.

Improving P&L

As outlined in Spooner’s presentation, companies with higher S&OP maturity are clearly seeing a positive improvement when it comes to profit and loss (P&L) statements. According to data from Gartner’s 2013 S&OP Maturity Research Study, higher maturity businesses saw a 5.6% increase in revenue, 7.5% decrease in costs and a 7.2% increase in profitability because of successful advanced S&OP. Some specific industry examples, as presented by Spooner, where advanced S&OP has created value include:

  • Inventory down 7%
  • Service up 8%
  • Forecast accuracy up 23%

High tech

  • Inventory down 9%
  • Revenue up 7%
  • Expedited shipments down 30%>
  • Forecast accuracy up 20%
  • Scrap reduced 65%
  • Service up 12.7%
Food and beverage
  • Market share up 7%
  • Inventory down 40%
  • Bias down 10%
  • Inventory down 12%
  • Forecast accuracy up 31%

These results, while likely not typical across all businesses in those verticals, are directly related to P&L alignment with the supply chain, resulting in the ability to make better tradeoff decisions, which provides better profitability overall. In another example noted in Spooner’s presentation, one company was able to see dramatic results by applying advanced S&OP to its specialty products, and not its standard ones. The decision was made because of the high level of difficulty in forecasting for those specialty items. By not holding accountability for forecast inaccuracies for those SKUs, the company was able to take what was a constraint and work it through into a positive—effectively tripling its profit levels in the process.

Making financial planning more predictable

 "Based on our research, every organization which aligns top down financial plans with bottom-up demand plans, as part of their S&OP, see an improvement in the accuracy and predictability of their financial forecast" —Matthew Spooner, Research Director at Gartner

According to Spooner, no process is more fundamental to financial prediction accuracy as S&OP. Gartner’s research shows more than one-third of companies are missing the ‘S’ or ‘OP’ in their S&OP processes. Only 19% of those surveyed said they had strong bidirectional (upstream/downstream) S&OP owners in their companies. But what’s surprising is that even among that group, only 55% of companies are actually operating to the agreed upon demand plan. Why? Spooner says it’s likely a result of poor alignment—the people who committed to the plan aren’t actually following it. Instead, they’re all doing their own thing. When you have groups within your organization that are playing games with the numbers like that, it has a direct impact on the financial plan. And that puts the rush on to remove that behavior to prevent further degradation of your bottom line. By reconciling demand, supply and financial plans you inherently improve the accuracy of those financial plans because you have real numbers that are actually being executed to. When everyone’s aligned to the same plan, the same metrics and the same corporate vision, improving your P&L statement becomes a monumentally easier task.

Putting the pieces together

It’s important to remember advanced S&OP doesn’t happen in isolation. There are multitudes of pieces that have to be in place to make advanced planning work. Spooner lists some of them as:

  • Product review
  • Demand visibility
  • Supply visibility
  • Strategy alignment
  • S&OP
  • Financial alignment
  • Sales and operations execution
  • Agility
  • Inventory health

If you’re missing just one of these components, planning fails and you aren’t able to provide a profitable service. For example, if you’re missing demand visibility you could end up with higher than optimal inventory levels, because you can’t see what you have, what you’re missing and what you’ll need in the near future. If you don’t have supply chain agility, you’ll face long lead times because you won’t be able to react and respond quickly.

Creating a continuous planning cycle

Leaders in advanced S&OP have some common traits. Chief among them is that demand and supply planning are continuous, not linear. Best-in-class companies also have automated transactional data and have delegated decision-making rights further down the organization, instead of only at the executive level. Exceptional S&OP processes ensure day-to-day decisions are dealt with automatically, whether that’s through automation or a pre-defined playbook, but also that critical issues can be dealt with on an ad-hoc basis without having to wait for the next S&OP meeting. So how can you get there? Spooner’s plan looks like this: Right now

  • Evaluate whether your S&OP processes are delivering value
  • Schedule time with your functional team leaders and internal sponsors to get their feedback

Next 90 days

  • Meet with your peers to create an S&OP vision
  • Educate partners on the critical role supply chain plays in realizing that vision and transforming the business as well as what’s required to ensure success
  • Identify which product lines and business segments are good candidates for advanced S&OP

Next 12 months

  • Align your corporate and supply chain strategies
  • Develop a plan to test, learn and implement
  • Execute that plan

Once you’ve mastered advanced S&OP, you’ll be well-equipped to take your company’s planning to the next level, where you’ll be able to develop plans that are simultaneously local and global and are orchestrated virtually. Even in limited use across your planning, advanced S&OP can drive real profitability for your company. You just have to get aligned. Is your company using advanced S&OP? If so, how? Let us know in the comments section below.

Additional Resources

  • S&OP frequently asked questions

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