I had the pleasure of participating in a webinar which featured Lora Cecere, a preeminent speaker on all matters regarding S&OP. Lora has worked for at a number of CPG companies; Manugistics (a software vendor); was the most read analyst at AMR for a number of years; and is now at the Altimeter Group. If anyone can claim to have “been there, done that,” it is Lora. The title of the webinar was “What S&OP capabilities matter most?”. There is no question in Lora’s mind that this is fast and effective what-if capabilities. Lora has arrived at the conclusion that what-if capabilities are key to S&OP based upon a study she is conducting. As Lora stated,
“2009 was all about Demand. 2010 is all about supply.”
Of course in 2009 the issue was demand coming to a screeching halt, and 2010 is all about people scrambling to get supply to satisfy what demand there is given the tepid upturn in the economy. A number of polls were conducted as part of the webinar which not only confirm the growing importance of what-if capabilities, but also confirm demand volatility as a key driver. Over 70% of attendees indicated that there has been a big increase in the importance of what-if capabilities in S&OP. (It must be noted that the registrants and attendees covered a wide variety of industries from Retail to Pharma, and a broad range of company sizes too.)
Perhaps more surprisingly is the dominance of demand volatility as a driver for the need for what-if analysis. Perhaps we would have received a different result if we had used the term “Supply volatility” or “Supply availability” rather than “Supply reliability”. Most customers and prospects are telling us that they have real problems with supply shortages of both key and commodity items. Many of our existing customers are running what-if analysis on what could be built or what demand should best be satisfied based upon an available supply of key components, and therefore insufficient supply to meet all demand.
What was not surprising is that only 12% of respondents state that they have sufficient what-if capabilities, whereas over 40% of respondents state that their company is only just starting to use what-if analysis in the S&OP cycle, and 40% of respondents state that there is a large gap in what-if requirements and capabilities. While not surprised, I must admit to having been confused by these results because what-if and compromise across functional and organizational boundaries is a key tenet of S&OP. How are companies running an effective S&OP process without these capabilities? As Lora stated during the webinar,
“It’s not enough to connect numbers. You need to know which market drivers have greatest influence and to perform what-if’s on supply/demand using these market drivers.”
Let’s accept for now that demand volatility is the primary driver for the need for what-if capabilities, but dig a bit deeper into what this means. Much of forecasting is focused on creating a statistical forecast based upon past shipments. This works fine in a fairly stable market when demand is fairly predictable and everyone can afford finished goods inventories to buffer against demand fluctuations. What has caught everyone by surprise over the past 2-3 years is the rate of change. Demand volatility is no longer represented by historic demand patterns. This is a “rear view mirror” perspective of the market. And S&OP cannot be about the rear view mirror. It is all about looking far into the future when market drivers are very uncertain, let alone demand. Little is known about competitor activities. At least governments have to publish plans for recovery, even if the efficacy of their plans can always be questioned. I can think of no better way of evaluating the effect demand uncertainty has on the supply chain than a robust what-if capability, starting from range forecasting. Instead of a single number forecast, arrive at a best estimate but also test upside and downside scenarios to evaluate and mitigate against risks to which you company will be exposed. Which is worse, to be left with excess and obsolete components or to lose market share because demand is not being satisfied? What if we sourced from a more expensive supplier but they would provide shorter lead times and more flexibility on volumes? Would this provide us a lower overall inventory liability? These are the types of decisions you should be making during an S&OP cycle. I don’t know how they can be performed without what-if capabilities.
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