I, along with Bob Ferrari and Lora Cecere and about 300 other people, attended the IE Groups conference on S&OP and FP&A in Boston last week. Bob has commented on the conference here, to which Lora replied. I’ll come back to their comments later. What struck me was the debate about the level of detail that is required in the model used to generate a plan during an S&OP cycle. Bob Stahl was adamant that all that is required for executive S&OP is the so called volume level with very aggregate numbers for demand, items, constraints and constraint consumption. That was followed by a presentation by Kris Lutz , Director of Sales and Operations Planning for Staples. Kris stated that Staples needs to know the mix because it has a big effect on their space requirements and cost. He contrasted the space requirements – in-store and warehouse – for filing cabinets and memory sticks. After all they are both storage right. So you can make the case that they belong in the same product group. If Staples only planned ‘Storage Products’ at the volume level it would give them an insufficiently accurate estimation of shelf and warehousing requirements – too little for filing cabinets and too much for memory sticks. The counter argument could be that in this case they shouldn’t be in the same product family. Well, how is that different from saying that volume and mix planning is required to get a sufficiently accurate understanding of constraint utilization? They have to run several scenarios at the mix level to determine the boundaries of their shelf and warehouse storage requirements. I like the ‘Storage Products’ example because it illustrates the complexity of a number of other decisions made during an S&OP cycle that require diving into the mix level. The most obvious is new product introduction and product transitioning. Some may argue that at the product volume level these product portfolio issues are irrelevant. Try telling that to Apple. Not that I have a deep understanding of Apple’s S&OP, but from what I have read and heard, their mid-term plans are very granular. They most certainly don’t plan at the ‘Mobility’ and ‘Computing’ product levels, if they have such categorization. Perhaps somewhere Steve Jobs has a 5 year plan at this level, but I bet his plan for the next 4 quarters is a lot more granular than that. The reality is that aggregate planning just doesn’t cut it when there is a constraint. The manner in which the risk associated with the constraint can be mitigated depends very much on the mix. Currently, we are hearing from customers and prospects about electronic component shortages. While I agree that probably more than 75% of components are common across the product family, and that many of these are likely to be in short supply, if there is a big range in margin across the product family, without analyzing revenue, margin, and supply at a level deeper than the product family level, the results you arrive at will contain too much error on which to make a decision. It will definitely make the comparison between scenarios very difficult, maybe even meaningless. Since what-if analysis or scenario planning is so central to S&OP, you must be able to generate plans and results at a level of detail that allows for meaningful comparison. Some may argue that these decisions should not be made in S&OP but rather at the operational planning level. I can’t agree. We all know that as components become scarce, not only does the price go up, but the lead time extends too, impacting not only margin, but customer service too. We are hearing of 6 month lead times on committed purchases of some electronic components, which is well within the S&OP lead time. If you are going to do any level of demand shaping to try to claw back market share and margin, you will need to get to the item level of planning at least 6-9 months out. Even in more ‘normal’ times I have often run into the fallacy of running S&OP at the volume level only. It is only when Operations creates the mix plans that many constraints are surfaced, when, for example, it is realized that there is insufficient capacity to launch that new product because the equipment was only planned for next quarter. That won’t come out in a volume plan. I’m not suggesting that the executives view the S&OP plan at the detailed level or that the plan gets explained to the executives at the detailed level, but I cannot agree that generation of the plan can be performed at the volume level only. Bob Ferrari comments that there are four critical challenges that need to be overcome in an S&OP process:
- Time sensitivity and information complexity - … the need for constant updating and data refreshes can exceed the required S&OP process cycle time, which dilutes the credibility of the process.
- Realities of the clock-speed of business - ... Periods of maximum profitability are short, and supply chain participants change constantly.
- Virtual organization - ... The constant two-way transfer of planning information across cross-business barriers is best accomplished through tailored IT applications supporting the S&OP process.
- The broader end-goal - … If gaps in revenue, manufacturing or cash objective plans get discovered at the end of the (S&OP) process, it’s too late. He further noted that speed of the process equates to the fact that the process executes faster than how business circumstances change.
While Bob is commenting more on the need for technology to support the S&OP process than the level at which S&OP should be performed, his comments on the clock-speed of business and broader end-goal emphasize the fact that the S&OP process must be run at both the volume and mix level, incorporating both the long term and medium term. How is it possible in a high-tech/electronics organization to plan the very frequent new product introductions and end-of-life products without a granular representation of the items to capture component requirements and time-phased average selling price changes by item? After all, most high-tech/electronics companies will bring new products to market specifically to combat price erosion of older models. Commenting on Bob’s blog, Lora Cecere states that:
I think that a company can only successfully move forward without a S&OP solution, using the defacto solution of Excel if the following conditions exist:
- Regional player with no constraints and limited demand and supply variability
- Revenue less than 250 M and organizational size less than 100 people
- Very little new product launch activity
- Little to no supply chain complexity
- Single division or supply chain with little to no organizational complexity
My take away from Lora’s comment, while it is still focused on the issue of the need for technology in S&OP, is that the complexity and variability in today’s supply chains requires that we perform scenario planning or what-if analysis at the mix or granular level. All the complexity she describes cannot be accommodated at the volume level. While I do not question that a volume plan is a good method of eliminating some scenarios, I contend that a mix level S&OP must be created in order to surface constraints in the plan and to get a sufficiently accurate result so that comparison of alternative scenarios is meaningful. What do you think? Is the ‘direction setting’ level of S&OP carried out at the volume level sufficient? Would you report future performance projections to your management and perhaps to the market based upon an analysis carried out at the volume level only? All I can say is that our customers, some of which are in the list of AMR Top 25 Supply Chains, are telling us that with scenario planning, go deep or go home.