I’ve been thinking a lot about an article I read recently. While it focused on procurement, I believe it also correctly points out the flaws in many companies’ supply chain processes—and S&OP specifically.
The article, which ran on Supply Chain Digest’s Website, explained that the rising cost of raw materials and other input costs are a significant and growing concern for corporate financial performance. One reason why, is that it’s increasingly difficult for companies to simply raise their prices as a means to cope with those growing costs.
The real obstacle, however, is that a lack of robust, integrated processes to deal with this price volatility often results in companies leaving profit dollars on the table, said Patricio Ibáñez, an associate principal at McKinsey & Company, in a recent article in Inside Supply Management magazine.
Traditional approaches to raw materials management often leave decisions in the hands of a single function at each step in the value chain, Ibáñez says. For example, product development makes decisions early in the cycle, procurement makes their decisions later, manufacturing decisions come after that, and so on. The net result is a host of problems, especially in a lack of alignment between contracts signed with suppliers and those with customers.
As is often the case with supply chain issues, the key to successfully addressing the situation is to improve cross-functional collaboration. So when contracts come up for renegotiation, for example, collaboration among the finance, procurement and sales functions is particularly critical, Ibáñez says.
Additionally, procurement should review supply contracts and, together with experts from finance, propose modifications that will protect the company against raw materials price spikes while simultaneously maximizing gains when prices fall. That requirement for improving cross-functional collaboration, however, is what reminded me of S&OP processes—and the barriers to their success.
To be sure, technology is a vital component of S&OP. Indeed, given the global nature of today’s supply chains, the ability to overcome both time and geographic barriers necessitates the use of IT. Furthermore, the level of cross-functional and cross-organizational process synchronization, collaboration and frequency that is required to achieve S&OP maturity simply cannot be achieved by simply using Excel spreadsheets.
Technology, however, is really more of an enabler. The real challenge--whether your company is trying to improve procurement capabilities to reduce margin volatility or improve S&OP processes to boost top line revenue--is change management. Lora Cecere, of Altimeter Group wrote a post the other month, where she stated that “The largest problem with S&OP is change management. Companies that tackle change management FIRST accelerate results. Their S&OP processes mature 3X faster.”
There is, after all, considerable difference between S&OP and mature S&OP, and advancing toward mature S&OP clearly requires changing mindsets and aligning goals. The reality is that at many companies, there simply isn’t much collaboration occurring in S&OP meetings. That’s because everyone’s objectives are different.
Consider, for instance, that remembering their commissions are built on revenue, sales and marketing want all orders to ship immediately. And manufacturing people, who concentrate on production output, want high inventory levels. At the same time, the finance team, which is interested in maintaining low levels of working capital, is driven to keep inventory levels down.
Consequently, collaboration is difficult, at best, because there is no way to reach consensus. It simply isn’t possible when all the players have different personal and departmental goals. Again I turn to a post Lora Cecere wrote, she made the analogy of someone training for a decathlon…
“In a Decathlon, there are ten events. The winner is judged by total performance, not by a single score in a single event. Because the athlete must do well in the four runs and six field events, he has little opportunity to perfect any one event. A decathlete trying to improve performance in one specific event is likely to deteriorate in another, because the physical demands of the various events are conflicting. His training is necessarily different as he strives to improve all techniques, gain strength without losing speed, and acquire the stamina to perform through a competition that lasts anywhere from 4 to 12 hours per day. In short, he trains to raise performance making trade-offs with the end in mind."
The goal, which, admittedly, is easier said than done, is to create an overarching set of end-to-end supply chain metrics that align with operating strategy. When there is executive sponsorship, organizational goals are properly aligned and players clearly understand the interdependencies of functions, they can collaboratively work to make the right tradeoffs (such as balancing cost and inventory against service levels) to win the race.