John Westerveld, a colleague of mine, wrote a great 2-part blog post titled “Top ten reasons YOU should be doing S&OP” in which he gives a great practical example of when S&OP can be of great benefit to an organization. The first reason John selects is alignment across different functions in an organization. This set me thinking on what are the fundamental reasons for a lack of alignment across functions. Of course, in today’s multi-tier outsourced supply chains, alignment is also an issue between organizations. Hau Lee at Stanford has written a lot about this in his concept of “Agility, Adaptability, and Alignment” which is driven by “extreme information exchange”, according to Lee. While trying to formulate my ideas about the causes of lack of alignment, I came across a set of postings by Dustin Mattison on his Logipi blog and on one of the LinkedIn discussions, which postulates that the problems at Toyota can be boiled down to organizational structure and culture. This has been manifested by power “fiefdoms”, lack of transparency, and therefore lack of alignment between different functions. There is a great section in "The Big Switch" in which Nicholas Carr traces the origins of organizational structures and their impact on performance. (I wish I had a more formal source, and I am sure some of our readers can point me to one.) Our organizational structures have been inherited from the military and really date from as far back as Roman times when there was no ability to communicate in real time. Imagine the time it took to get a message from Rome to Cairo? As a consequence, hierarchical structures were developed to ensure a process of central command and control. Loyalty was prized above all else and disloyalty was dealt with very harshly. The 20th century phenomenon of the corporation used the same organizational structures and same command and control attitudes, largely because the means of communications had not progressed since the Roman times, though the penalties for disloyalty (or poor performance) are considerably less harsh. The business process reengineering efforts led by Michael Hammer, Tom Peters, and Peter Drucker in the 1990's was the first attempt to correct this by "de-layering" management. But think about it: They were doing this before the wide-spread adoption of the internet, when faxes were still considered state of the art. While the enthusiasm for BPR has waned because when put into practice it focused too much on efficiency (read headcount reduction), the fundamental idea that business processes can be more effective - not just more efficient - has been carried forward by Lean and Six Sigma concepts. And the internet specifically, but technology more generally, is the enabler. This is what can/does provide/enable the transparency Richard Wilding of Cranfield University talks about in an interview with Dustin Mattison, which is so crucial in breaking down the power barriers to more effective sharing of information across functional and organizational boundaries. And yet we still have senior management (and professors in business schools) to whom IT in general, but the internet specifically, is a learned phenomenon. Before anyone thinks “Yeah, yeah”, let me point out that I am one of the people who have “learned” how to use the internet and I am still not comfortable with “tweeting” and “blogging”. In short, I am not comfortable with that level of personal “transparency”. At the same time, I am staggered at how many mid-tier managers, let alone senior managers, still receive paper-based reports, scribble all over them, and then send the scribbled notes back to an underling who is supposed to act on the scribbled notes. This is all about power and has little to do with effectiveness. They could have just as easily made changes to values in a system and annotated these with some comments. This information would be available immediately to anyone who had to take action or make further decisions based upon the inputs from the senior manager. Exacerbating the fact that much of senior management does not come from the “internet” generation is the difficulty of using existing IT applications and systems. The fundamental drawback of existing supply chain systems specifically, but operations systems in general, which prevents their wide adoption by senior management is that they lack the ability for people (read senior management) to perform quick and effective what-if analysis. It takes too long for them, and in truth it is also too complex, to create and analyze scenarios themselves, so they devolve this to more junior people who don't really understand what it was the senior manager wanted to investigate in the first place. More correctly, the senior manager is forced to take a structured approach to investigating and solving an issue whereas in reality problem solving is a very unstructured process governed strongly by exploration and discovery. Even when senior managers have monster spreadsheets available to them, there is:
- little to no connection to the current situation
- insufficient level of detail to get a realistic evaluation of the future consequences of their decisions on financial and operational metrics, and
- very limited ability to explore multiple scenarios.
They have to wait until the month end or quarter end to get a report on what has happened, and by that time it is almost impossible to deconstruct the cause and effect. While I realize the limitation of my thinking (fundamentally I am an operations person) and recognize the impact - both short term and long term - that Finance, and HR, as examples, can have on the performance of a company, in companies that sell, design, and/or manufacture a physical product, Operations is the core business process that determines the current and future success of an organization. All of this gets me to a brief discussion of Sales and Operations Planning (S&OP). There are many definitions of S&OP out there and also a lot of discussion on S&OP “maturity” models. At its heart and in its more simplistic form, S&OP is all about demand/supply balancing. In other words alignment between the demand and supply side of the organization. In a multi-tiered outsourced environment, this is not a simple exercise, so my use of “simplistic” is not meant to denigrate this level of S&OP adoption. The greatest long term benefit of S&OP, even if this is difficult to quantify, is increased transparency and alignment, as noted by John Westerveld and discussed by Richard Wilding. AMR Research calls this “East-West” alignment. And yet there are so many more benefits that are achievable by linking Operations to the Executive, by linking financial measures and objectives such as revenue, margin, cash flow to operational metrics such as orders delivered on-time and in-full, inventory turns, and capacity utilization. AMR Research calls this “North-South” alignment. A number of the analysts such as Ventana Research, Aberdeen, Gartner, and AMR Research (now part of Gartner) have referred to this North-South alignment as Integrated Business Planning. Tom Wallace and Oliver Wight have referred to this an Executive S&OP, and now Accenture is referring to this as “Profit, Sales, and Operations Planning”. Whatever we call it, there are lots of benefits. The principle barrier to tapping into these phenomenal benefits is the organizational power structures we have inherited from a previous era. These will not be easy to break down. But an S&OP process – however sophisticated or rudimentary – will start this process of greater transparency and alignment. I’ve been participating in 2 discussions on LinkedIn (Has Sales & Operations Planning (S&OP) improved your forecast accuracy? and What is your biggest S&OP pet peeve?, both of which require membership) and in both discussions there is consensus that the greatest contributor to the successful adoption of an S&OP process is Executive support because this is required to get everyone to “play nicely” with each other. Clearly this is simply a symptom of the organizational power structures. S&OP is challenging these power structures, which leads to resistance. There is plenty of technology out there to assist in this process, but ultimately you will need both for a truly successful S&OP process that contributes massively to your company’s future success. But there is no need to wait until you have organizational buy-in. As with all organizational change, showing the people how they will benefit for adopting new practices is the best way of getting their buy-in. So start small and give people information that is useful to them and over time you will be able to ask for information that is useful to you. If this is too slow for you, make a pitch to your executive team to make sure they back you up to get faster adoption. Either way, you should not wait. The benefit to your company is too great to ignore. Help us create the organizational structures of the future.