Thou Shalt Not... Misuse S&OP/IBP
Disruptions and rapidly changing circumstances have become the norm over the past few years. It makes sense that many companies have started to focus more on short-term management, closely monitoring the balance between demand and supply in short cycles. While a typical S&OP/IBP process is applied in a monthly cadence, many of our clients have shortened this to 1 or 2 weeks. They manage the short term more tightly to respond effectively to (signs of) change.
This was the right intervention, intended to be temporary. However, the necessity hasn't diminished—disruption is here to stay. That's why we've been working with our clients to think about the necessary structural adjustments. What is the best way to manage the short term? And what became of the original S&OP/IBP process?
Vicious Cycle
The S&OP/IBP process is not suitable for short-cycle short-term management. The process, which is designed for long-term supply chain management, has been crippled as a result of the intervention. Additionally, a proper short-term process is often not in place. We observed this at a multinational company where local demand is highly dependent on regional energy prices. A downward spiral ensued. The IBP process focused solely on the coming month and was no longer used to make tactical decisions. Consequently, there was no realistic and executable plan. As a result, a lot of short-term adjustments were necessary, and all time and energy were directed toward this. This led to insufficient attention to the long term...
Short-term management is done with Sales & Operations Execution (S&OE). S&OE bridges the gap between long-term/tactical planning of S&OP/IBP and daily transactions.
There needs to be a clear definition of where S&OP/IBP stops, S&OE begins, and how plans are transferred. The distinction between the two processes must be crystal clear. To emphasize this, we even recommend, where possible, that the processes be carried out by different people. However, this doesn't mean that they are two separate processes; they are interconnected and form one integrated whole.
The Setup
The total lead time determines the S&OE horizon: how quickly can you respond to new demand? For decisions with a longer horizon, you largely have the luxury of aligning supply with demand, which is done in S&OP/IBP.
Within the S&OE horizon, supply options are more limited. Where feasible at reasonable costs, supply is adjusted. If not, a commercial decision is made on the demand side.
An important part of S&OE is monitoring actual demand and current supply performance to detect deviations at an early stage, allowing for quick and effective response to reality.
Plan adjustments are made through a structured process, supported by business rules that transcend conflicts of interest.
No Unnecessary Luxury
Within S&OP/IBP, a relatively small number of tactical decisions are made at an aggregated level. In contrast, S&OE involves making a high number of operational decisions at a detailed level. This makes S&OE complex, especially for companies with a large number of products, sales channels, and production locations.
Since S&OE plans form the basis for order management, it is essential that they are always up-to-date. Recently, we've seen many companies struggling with shortages, leading to the need to allocate available products. In such cases, incoming orders are checked against the latest demand plan and are either accepted or rejected.
It is also crucial to have the right and as much real-time information as possible to ensure effective decision-making. For example, with our clients who have a Make-to-Stock production strategy, we closely examine the forecast consumption setup, which is important for an accurate inventory projection.
For all of this, a well-implemented ERP and/or APS system is an absolute must.
The Path to Improvement
A vicious cycle is difficult to break. On the one hand, the S&OP/IBP process needs to be overhauled to establish a solid foundation for the short term. On the other hand, a well-functioning S&OE process must be set up; otherwise, there will never be room to focus on the long term. Our experience has taught us that each company and situation is unique and requires a specific approach. When an organization can handle multiple changes simultaneously, it can implement these improvements in parallel.
The most important thing is to develop a sharp but realistic action plan, coordinate the process tightly, and ensure good communication with all parties involved during the transition.
Evelien Busschers is Senior Supply Chain Management Consultant at Involvation.
This ‘Preek’(preach) was published in Supply Chain Magazine 02 2023. ‘De Preek’ is a speech in which the speaker addresses his message for the discipline of supply chain management. A preach has the aim to educate, to encourage, to correct in order to let the readers grow in their belief and become strong mature supply chain professionals.
