Sales & Operations Planning … Business Management in Near Real Time?

Analyst Insight: The sales and operations planning process has evolved from manufacturing conflict resolution in the late 1980s to data- and visibility-enhanced strategic demand and supply balancing for retail executives today. This is a remarkable evolution for a concept. As visibility continues to increase, could S&OP become the primary tool for managing supply chains or, for some, complete businesses? – Ralph Cox, principal, Tompkins International.

With increasing visibility and collaboration through demand-driven views – extending from customers’ customers to suppliers’ suppliers – S&OP has the potential to reshape supply chain management fundamentally. And this is true no matter what it is called: S&OP, SIOP (sales, inventory and operations planning) or IBP (integrated business planning) – the acronym is immaterial. The firms that exploit the concept fully will gain competitive advantage that most competitors cannot replicate by any other business strategy.

S&OP has come a very long way. It was developed to bring formal structure to hallway and email decision making for emergencies in manufacturing. Prior to the beginning stages of the evolution, some conversations between sales, manufacturing, planning and finance were as follows:

• Sales: “Just got this new customer order, stop producing A and change to B”;
• Manufacturing: “Just finished the set-up and are on-spec on A”;
• Planning: “Wait, we don’t want to be out of B next month”;
• Finance: “But we could use the margin now.”

Since that time, S&OP has evolved:

• From tactical to strategic
• From manufacturing to retail
• From operational to mid-management and executive
• From individual locations to supply chains
• From SKUs to product categories
• From situation-driven to planned and periodic

The best S&OP processes vary in the details due to the nature and needs of the businesses. However, the fundamentals are the same: Frequently rebalance supply and demand, to the needed extent, through structured operational-, managerial- and executive-level collaborative decision processes that reflect corporate objectives. The potential for increased competitive advantage and profit improvement is significant, especially in large firms that have disconnected demand planning and supply management organizations, as well as weak supplier relationship management programs.

There are a number of crucial keys to success and a significant potential for failure. In 2009, Gartner defined a solid four-stage view of the maturity of S&OP processes – reacting, anticipating, collaborating, orchestrating. At the same time, Gartner recognized that the majority of initiatives did not progress beyond the first or second stage.

There may be data challenges, especially for firms that have exceptionally disconnected demand planning and supply management. However, the larger challenges are managerial and cultural, particularly for firms that have limited collaboration experience. And, while suppliers do not have to be included, benefits can be maximized when key suppliers are involved. This is an especially difficult challenge when the foundation for supply chain collaboration has not been established and strengthened over time.

The S&OP process plays a major role in breaking down the walls of organizational silos. The process is explicitly designed to bridge from customer demand planning to supply management (i.e., manufacturing or purchasing) almost inevitably spanning white space on the organization chart. Reflecting this reality, Gartner accurately characterizes the effort as 60 percent change management, 30 percent process, and 10 percent technology.

On the other hand, the S&OP process can drive the desired collaboration, which has been more of an objective than a reality in the past. Or will it become the primary general management tool for businesses that have supply chains as their core competency?

The Outlook:

Manufacturers without an institutionalized process are far behind the leading-edge firms. And although distributors and retailers may be behind manufacturing companies, 2012 is a good time to begin utilizing S&OP. No one wants to be last.

Retailers Look Beyond Cost Cutting to Accent Growth, Annual Retail Supply Chain Report Says

There is a heightened urgency by retailers and supply chain management executives to shift from cost cutting to growth, and to meet increased consumer demand across multiple channels. These are among the findings of the third annual State of he Retail Supply Chain Report, just released by the Retail Industry Leaders Association.

The report, based on a yearly study by Auburn University, brings together leading retailers from North America to examine the year’s current trends, best practices and foremost issues impacting the strategy and planning of retail supply chains.

Findings from the study, sponsored by Accenture, reveal stronger SCM capacities post-recession as retailers adjust to the new environment. In contrast to last year’s priorities, the focus of SCM executives has shifted from surviving the recession to fast-tracking recovery in order to face what is on the horizon for the industry.

The theme of this year’s results can be summarized as cautiously optimistic. Highlights of the survey revealed that even though the recession is moving into the rear-view mirror, retailers still face some uncertainty on new issues. While SCM executives utilized cost-cutting strategies last year, the focus for the future is to balance costs while prioritizing growth and customer service.

New issues such as the increasing importance of multichannel operations, the expansion of global sourcing and demand shifts from store to online platforms have emerged as top-of-mind objectives for the coming year, as well as concerns over the impact of new transportation legislation, new motor carrier safety regulations, talent retention issues and turning sustainable practices into further margin enhancement.

The report can be downloaded from the RILA web site.

Source: RILA

Have You Figured ALL The Costs of Inventory?

Analyst Insight: Inventory working capital reduction is a wonderful concept; however, it is important to understand all of the potential financial impacts before beginning. – Ralph Cox, principal, Tompkins International

As senior management focuses more on reducing inventory working capital, it is helpful to understand how profit and free cash flow will be impacted by these decisions. Regardless of how the reduction is managed, any inventory can be viewed as having two components – safety stock and cycle stock – each driven by very different factors.

When cycle stock inventory working capital is decreased by minimizing forecast error, the balance sheet and profit and loss (P&L) are improved through reduced period inventory holding costs.

However, when cycle stock inventory working capital is reduced through reduced purchase or transfer order quantities (i.e., increased mean time between orders), the balance sheet is improved but the P&L can be negatively impacted by:

• Increased purchasing and expediting labor cost;

• Higher receiving labor cost due to the number of receipts;

• Growing warehousing labor costs due to dock congestion; and

• Missed shipments due to receiving delays.

When safety stock is decreased through reduced forecast error, shorter lead times or improved supply reliability (receipt order fill rate) while maintaining the level of customer service provided (order fill rate or SKU in-stock percentage), then the balance sheet and the P&L are improved through the reduction of period holding costs. Revenue remains unchanged.

For most businesses, when safety stock is reduced through a reduction of customer service, period revenue and margin can be reduced. This is a far riskier approach to reducing inventory working capital. The balance sheet may be slightly improved, but the P&L is almost always negatively impacted. Technically, the period inventory holding costs are decreased, but the drop in gross margin usually more than offsets any gain forming a net reduction.

To get the best cycle stock financial performance, reduce forecast error at the SKU-location level and determine order quantities so as to minimize total variable cost.

To get the best safety stock financial performance and the economically-optimum level of customer service, reduce forecast error at the SKU-location level and balance safety stock investment with gross margin. Assess the extent of the need for safety stock by addressing this question, “To what extent does the company lose sales – or alternatively, retain the sale but incur additional costs – when the location serving the customer is out of stock?”

The Outlook

In order to achieve the best possible inventory performance, improve competitive advantage and maximize profit perform the actions below:

• Educate personnel and collaborate;
• Apply appropriate enabling technology, such as inexpensive third-party modules;
• Refine business processes; and
• Measure inventory performance on a continuing basis.

The Demand-Driven CPG Enterprise Sees Maximized Revenue

Analyst Insight: Consumer packaged goods manufacturers are being squeezed by trends in customer purchasing and technology, coupled with pricing pressures, higher input costs, and fluctuating commodity prices. In today’s market, CPG companies have to integrate and collaborate with trading partners and better manage retail shelf space. Growing recognition that failure to innovate will result in poor performance, acquisition, or worse, is driving leading CPG companies to transform their operating models. – Ben Pivar, vice president, Supply Chain Technologies Practice, Capgemini North America Applications Services

To date, the typical focus for retailers and manufacturers has been on reducing overall operational cost. A new, integrated model for managing the shelf is helping CPG manufacturers and retailers to maximize revenue, margins and in-stocks while removing costs across the value chain − the so-called “Demand-Driven Enterprise.”

The new model was inspired by recent engagement with a large consumer products company having trouble managing retail customer relationships. Retailers changed their minds about promotions or placed/canceled large orders at the last minute. Resulting supply chain inefficiencies required extensive buffer inventories to support anticipated customer service levels. By integrating retailers’ POS data into the planning process, the company gathered better insights into consumer behavior and worked with retailers to manage orders, promotions and inventory more effectively – ultimately improving inventory turns by 50 percent.

Demand-Driven Enterprise integrates planning and execution more collaboratively across manufacturers and retailers. This drives revenue and margin increases by better supporting assortment optimization, space optimization, trade funds management and demand planning while streamlining the supply chain. Although it requires alignment with the overall value chain − Sales, Marketing, Product Development and Finance − the power lies in five core concepts:

* Collaborative Category Management

CPG companies have dedicated account teams that work with specific retailers to research consumer behavior, shopper affinity, and new product introductions. By leveraging this data, account management teams can embed category strategies into improved assortment and store-level plan-o-gram recommendations.

* Demand Planning Synchronization

Most CPG companies forecast distribution center shipments rather than actual consumption data at the shelf, causing discrepancies between true demand and available supply. By tapping into POS data directly from the retailer, accurate analytics can be performed by Sales, Marketing and Demand Planning departments and assist account teams to accurately analyze promotion effectiveness.

* Trade Promotion Management and Optimization

The Demand Driven Enterprise drives accurate sales planning, measurably increasing sales through promotion optimization. CPG manufacturers can model the impact of different types of trade promotions to better understand the ROI associated with each trade instrument and better collaborate with retailers for future promotions.

* Inventory Planning Synchronization

Improved forecast accuracy is combined with other key data points from the retailer to calculate time-phased net inventory requirements for each node within the supply chain. By synchronizing inventory strategy and logistics with retail partners, CPG companies better understand true inventory requirements and thereby minimize inventory buffers across the network. Identifying and prioritizing different types of demand signals, and deploying inventory from the most cost-effective supply location becomes simple.

* Supply Chain Execution Collaboration

Retailers and CPG companies must collaborate on-demand and shipment plans within the execution window. Visibility into the retailer’s inventory strategy and POS data enables CPG companies to manage inventory and resource constraints and to produce an executable deployment plan to meet projected consumer demand.

The Outlook

CPG manufacturers using the DDE model benefit from higher service levels, faster new-product introductions, improved margins and faster inventory turns. Implementing an enterprise approach can result in benefits in the following areas:

• Top-Line Growth

• Margin Enhancement

• Efficiency/Cost Reduction

• Working Capital Improvements

Moving quickly to a demand-driven model is imperative for maintaining competitive advantage in the crowded CPG marketplace as retailers are beginning to expect and demand these value-added services from their trading partners.


Thanks to SupplyChainBrain for their input to this posting