More and more companies are finding that their monthly Sales & Operations Planning (S&OP) meetings largely revolve around the acute supply chain problems. As a result, they have hardly any time left to discuss medium-term issues. That’s why, during a recent Webinar Wednesday, consulting firm Involvation advocated an additional process that deals only with short-term issues: Sales & Operations Execution (S&OE).
Previously published by Supply Chain Media.
For its food ingredients division, DSM used to work with a single planning process for both the short and medium term. The sales teams were asked to create product-level forecasts with a horizon as long as 18 months. “That resulted in a process that required a lot of effort and seemed very accurate, but was actually just very detailed. DSM itself realized that it was demanding more of its sales teams than was really needed. There was virtually zero added value in that detailed forecast for sales, finance or supply chain,” said Hans van der Drift, partner at consultancy firm Involvation.
Involvation helps companies in the Netherlands and abroad to implement of sales & operations planning (S&OP). For this, many companies use planning systems that can easily calculate an 18-month forecast at the individual product level. “Those planning systems need that level of detail to generate a forecast. But many people make the mistake of thinking that they also need that level of detail in their S&OP process. They don’t. Nobody can predict what the demand per product per week will be 18 months from now.”
The DSM case illustrated Van der Drift’s key message: that it is important to distinguish between short-term and medium-term supply chain planning. “The S&OP process not only helps companies to achieve their annual plan, but also to realize their strategy. For the short term, you need a different process: sales & operations execution. This process is focused on executing the plans agreed upon during the S&OP process.”
The two processes are linked, Van der Drift explained, referring to the planning horizon again. Beyond a 12-month horizon, everything is possible. For example, companies still have plenty of time to expand production capacity if necessary, such as to make room for the introduction of new products. At Involvation, they call that the ‘liquid period’. “But the less time you have, the harder it is to change things. In the ‘slush period’ of the three to 12-month horizon, lots of things are more or less fixed – from key product groups to key customers. Even so, companies can still do plenty to better align supply and demand, for example. That’s what the S&OP process is for.”
Companies don’t have the luxury of time in the ‘frozen period’, which in most cases is the upcoming two to three months. In that period, the planning horizon is shorter than the lead times in the end-to-end supply chain, so any changes are relatively costly and only possible with drastic intervention. This means that any change directly impacts on the entire supply chain. For example, if a company suddenly decides to use its limited stock of raw materials for product B instead of product A, it directly affects customers of product A.
“As mentioned, the S&OE process is primarily aimed at enabling the plans to be executed,” Van der Drift stated. “But there is a second reason why S&OE is important: it allows the participants in the S&OP process to focus on the medium term. All too often, the monthly S&OP meeting only deals with the day-to-day problems related to executing the plans. That’s logical, because those problems require urgent attention. But it means that the medium-term decisions don’t get made.”
DSM ultimately decided to alter its S&OP process. Nowadays, the sales teams still have to make a product-level forecast, but now only with a six-month horizon – that’s the time frame for which that level of detail is necessary as the basis for the right decisions. “In addition, DSM has decided to generate medium-term forecasts for the three to 18-month horizon, without that level of detail – firstly because it isn’t possible, and secondly because it isn’t needed,” Van der Drift said.
Coffee producer JDE is another company that explicitly distinguishes between the short term and medium term in its planning process. The company used to have a single software system for the entire planning process, but began to wonder whether that was the best approach. Van der Drift: “The short term demand is influenced by various factors, such as the weather and also other indicators such as customer ordering patterns. JDE was unable to make use of those signals, so it implemented Garvis, a demand sensing tool. This tool analyses all the incoming data to spot demand trends before the demand actually occurs. That has significantly improved the company’s short-term forecasting.”
In effect, the Garvis tool merely generates a forecast for the ‘frozen period’. But this is crucial for JDE, because the manufacturer faces long lead times; coffee production cannot be ramped up overnight. “If they see demand changing, they can act immediately. If demand is higher than expected, does JDE still have enough stock to fulfil all customer orders? If not, which customers will receive their orders, and which won’t? With an S&OE process, the right people are seated at the table with the right data to make those kinds of decisions.”
Many companies are currently transforming their S&OP process into an integrated business planning (IBP) process, which includes the Finance department too. This allows the company to explore which decisions contribute to its revenue and profit goals in the medium term. According to Van der Drift, it is wrong to think that the financial perspective has no role in the S&OE process. “But in that case it’s about analysing the financial implications of various options. Should we fly in stock from the Far East or should we accept out-of-stock situations? The real question is which financial KPI you want to optimize: revenue growth or profit maximization? Considering the financial KPIs during the S&OE process can lead to different decisions.”
If you like to receive more information, or do you want to discuss your situation? Pease contact Hans van de Drift.