Sales and Operations Planning Maturity: What Does It Take to Get and Stay There?

Gartner RAS Core Research Note G00207249, Jane Barrett, Michael Uskert, 1 November 2010, R3535 12162011

Companies with mature S&OP processes testify to the predictability and transparency it brings to a business. While neither the process nor this revelation is new, the fact is that two-thirds of businesses do not progress beyond the first two stages of Gartner’s 4-stage maturity model. It’s in the mature Stage 3 and 4 where S&OP derives real business value. This report highlights findings that Stage 3 or Stage 4 companies go well beyond traditional S&OP methodologies that define supply chain process used to balance demand and supply (Stage 2). To achieve Gartner’s definition of Stage 3 or Stage 4 S&OP, these companies change not only the process and technology, but more importantly address ownership, culture, core beliefs and even the name of the process itself.

Key Findings

• BeyondStage2,traditionalS&OPmethodologyisnolongersufficientandtheprocessmustbetailoredtothespecificneedsofanorganization.

• Inmostorganizationstherewasacompellingbusinesseventthatprecipitatedthechangefromthetop,andgaveclaritytotheS&OPjourneyandvision.

• OncetheS&OPprocessmatures,itisnolongerownedbysupplychainbutbybusinessleaders.

• Momentumbuildsasbusinessleadersderivevaluefromtheprocessanditbecomestheprimaryforumfordecisionmaking.

• WherethetermS&OPwastainted,organizationsrenamedandrebrandedtheprocess.

Recommendations

• AssessyourlevelofS&OPmaturityinordertobuildaroadmaptoevolvethroughthestages.

• Haveaclear,executive-ledbusinessmotiveandcommonbusinessmetricsthattranscendsfunctionalareatobreakdownsilos,andthatdrivesactiveparticipationandinvestmentintheprocess.

2

• Identifycoachesandprovidetoolstohelpsustaintheprocessandmanagechange.

• Designtheprocesstofitthenuancesofthebusiness.Consideramultitierapproachtocatertodifferentplanninghorizonsandbusinessmodels.

• Determinetherightbalancebetweenprocessimprovementandenablingtechnologies.

ANALYSIS

Background to the ResearchInAugust2009,weanalyzedtheresultsfromastudyof182manufacturersandretailersandfoundthat67%ofcompanieswerestillinStage1orStage2ofoursalesandoperations

planning(S&OP)maturitymodel(seeFigure1).Thisinabilitytomatureoccursdespiteheavyinvestmentsmadeincontinuousimprovement,consultingandtechnology.Gartneranalystsinteractionwithclientsacrossmanufacturingandretailindustriesvalidatedthesesurveyresults.Usingthisinformation,wepublished“ConqueringtheSevenDeadlyChallengesofSalesandOperationsPlanning”wherewefocusedontheneedforchangemanagementinordertomovetheprocessforward.Butonespecificquestionkeptcomingup:“HowexactlydocompaniesmovebeyondStage2,andhowdotheysustainamatureprocess?”

Thisquestioninstigatedtheneedforfurtherresearchthisyear.EighteencompaniesthatwebelievedhadachievedS&OPStage3wereidentifiedandinterviewedtohelpusanswerthisquestion.Thesecompaniesarelargemanufacturers,whereeitheralltheorganizationorspecificbusinessunitsorregionshadachievedStage3orStage4S&OPmaturity.Theirrevenuerangedfrom

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Figure 1. S&OP Maturity Model

Source:Gartner(October2010)

Strategy Stage 1:Reacting

Stage 2:Anticipating

Stage 3:Collaborating

Stage 4:Orchestrating

Balance: S&OP

Section 1: Goals

Development of an operational plan

Demand and supply matching

Profitability Demand sensing, and conscious trade-offs for

demand shaping to drive an optimized demand response

Section 2: Cross-Functional Alignment

Supply Chain driven process with a strong sales or operational bias leading to imbalance. Lack of clarity as to the goal of S&OP.

Supply Chain driven process for purposes of achieving optimum forecast and supply response to demand

Supply Chain becomes the S&OP orchestrator and business functions take ownership of input, output and results, looking at financial impact of decisions

Business ownership at multiple levels with strong participation from executives and finance. Collaboration extends beyond the enterprise to achieve end-to-end value.

Section 3: Process and Technology

Emerging process, inconsistent and marginally effective. Often more of a sales review meeting. Tools are mainly Excel and ERP.

Formal, structured process. One size fits all approach. Tools extend to include forecasting, SC planning and inventory optimization

Process tailored to business model and needs. Dialogue, and start of use of tools, around what-if analysis for demand shaping, financial reconciliation and cost to serve.

Process becomes balanced, dynamic and event-driven. Strong connection to strategic planning and execution. Tools also support risk-value trade-offs, price optimization and complex simulation.

Increase in Organizational Balance

3between$2billionand$60billionandcamefromthechemical,consumerproducts/foodandbeverage(CP/F&B),apparel,hightech,industrialandA&Dindustrysectors.Itwasobviousinspeakingwiththesecompaniesthattheywereabletoclearlyidentifythematuritylevelofthevariousdivisionsorregions,andtheycouldrecitetheassociatedbenefitstheyachievedfromS&OP,aswellastellusthecharacteristicsandreasonswhysomepartsofthebusinesswereaheadofothers.Thefindingsfromthese18interviewswerefascinating,andtogetherwithinsightsgleanedfromtheAugust2009survey,formthebasisofthisreport.

Stuck in Neutral in Stage 2Asthesayinggoes,“inordertounderstandwherewearegoing,wemustfirstunderstandwhereweare.”Toaddressthisissue,weuseGartner’s4-stageS&OPmaturitymodeltodescribecharacteristicsofaStage2process.

AgoodStage2processtypicallyfollowsthetraditionalS&OPdemand/supplybalancingmethodologybasedonvolume.Itisastrongfoundationtosupportsupplychaindecisions.Atthislevelofmaturity,theorganizationhasalreadyaddressedtheneedtohaveaccurate,credibledatainvolume/units.Inmostcases,becausethedialoguecentersonvolume,SKUcapacityandleadtimes,S&OPownershipremainsstuckinsupplychain.

Demandplannershaveprogressedbeyondjuststatisticalforecasting,andelicitsalesandmarketinginvolvementtoprovidetheircustomerandmarketintelligenceasinputtothedemandplan.CommercialteamsandplannersinlateStage2havefiguredouttherightapproachtostatisticalforecastingtechniques,whatmanualtouchesaddvalueandhowtomeasuretheimpactofthesechangesastheforecastisreviewedthroughmultiplestages.Somehaveevenstartedmeasuringforecastvalueadd(FVA)percentagetomonitortheadditionalvalueofthesetouches.

Translationofdemandintosupplyplanstendstobeabitclunkyatthisstage,butpre-S&OPmeetingsinvolvingtherightpeopleandalotofmanualeffortmanagetogetthistaskcompleted.Constraintssuchasassets,materialsandresourcesaretakenintoconsiderationanddiscussedastheyrelatetomeetingthevolumeplan.AstrongStage2processhasformalgovernanceandgooddiscipline.

OneoftheissuesinStage2istheplanninghorizonaroundwhichdialogueanddecisionsshouldbecentered.Toooftenthediscussiondoesnotprogressbeyondtheshort-termplanninghorizon(0to3months).AnotherissuecompaniesfaceislinkingS&OPtoexecution.DecisionsandassumptionsmadeintheS&OPmeetingsdonotmaketheirwaydowntothelowerlevelprocesses.

What Does a Collaborative Stage 3 S&OP Process Look Like?InStage3,theS&OPprocessfocusesonamidtermplanninghorizon,typically3to24months(thiscandifferbyindustry).Thegoalistomaximizemarketopportunity,profitabilityandcustomersatisfactionwhileminimizingrisk.ButthisisafairlytypicalS&OPdefinition,anditdoesnotreallydescribethecharacteristicsofamatureprocess.WhilemostorganizationsuseatextbookstyleS&OPprocesstogettoStage2,Stage3organizationsfoundthatthetraditionalprocessonlyservedtoformthefoundationofamoretailoredprocesstocome.

TheStage3processisspecificallydesignedandpersonalizedtomaptothespecificbusinessorregionalneeds,planninghorizonsand,insomecases,evendifferentvaluechains.Thetraditionalapproachisadaptedwhereneeded,sometimesresultinginmultiplelevelsofprocesses.It’sapparentthattheone-size-fits-allprocessdoesnotpromotecompaniestoStage3.Theprocessneedstobeglobal—wheretherearesharedoroverlappingresources—butlocalwhereagilityoftheprocessneedstobemaintained.Insomecases,theoperationalprocessfocusedontheshorttermremainedatthelocallevel,whiletheglobalprocesswasaggregatedandaddressedamidtermplanninghorizon.NocommonalityofS&OPdesignstoodoutinthecompaniesweinterviewed,otherthanlayeringtheprocesstofitthematrixstructureandthescopebusinessesneedtodealwith.Theprocesswasclearlydesignedaroundthelevelatwhichgoodbusinessdecisionsneededtobemade.Thisiskey,becauseoncetheprocessmovestoStage3itisnolongerasupplychainprocess,butratheranalignedbusinessplanningprocess.

ItbecameclearfromourdiscussionsthatinStage3,S&OPistheforumfordecisionmaking,andbusinessleadersembracethemeetingsandactivelyparticipate.Theprocessgrowsbeyondsupplychainandencompassesalignmentofthefunctionsandline-of-businessownership.Itisusedtotranslateopportunitiesintheformofgo-to-marketstrategiesandsolutionsintoactionableandprofitableresponses.Evenwithout“what-if”technologyenablement,meetingshaveactivedialogueonclosingdemandgaps,“what-if”scenarios,risksandranges.Thekeypointisthatthisactivityanddecisionmakingoccursataseniorlevel.Thishappensbecausestakeholdersparticipateandthefocushasshiftedfromunitstorevenue,profitandthecustomer—whatthebusinesscaresabout.AsoneEuropeanS&OPteamexplained“werealizedourS&OPprocesswasgoodwhenpeopledefertoitastheforumfordecisionmaking.Businessfolksnowvaluetheprocess,thedialogueandopportunitytointeractwithpeersandmakegooddecisions.”Governanceanddisciplinedprocessensuresaccountabilityanddecisionrightsareclear.

Beingacoredecision-makingforum,theprocessmustalsobebalancedandefficient.Exception-basedanalysisanddialoguespeedsupthecyclesandsolvesthescope/speedparadox,reducingtheneedforlengthyandlaboriousmeetings.

Atthislevel,leadershaveinstitutionalizedrapidandeffectivecommunicationbetweenstakeholders.Forexample,inaStage3CPcompany,demandplannersreceivetimelyinformationontradepromotionsandadjustments,andaccountteamsunderstandtheneedforsupplychainplannerstohaveadvancednoticeaboutchangeswithintheiraccountstoincreaseon-shelfavailability.Inthecaseofamanufacturerofcomplexhigh-mixequipment,itwasaboutthesalesteamsrealizingthatsimplysharingquarterlyrevenuenumberswasoflittlehelptosupplychainandmanufacturing’sefforttodeliveraprofitableresponse.Thekeylearningwasthatadvancednoticetothemixwasjustasimportantasclosingtheaggregatedeal.Plannerscollaboratingmorecloselywithaccountteamsandkeycustomershelpedclosethisgap.

Stage3requiresmorefrequentcollaboration,bothinternallyandwithmajortradingpartners,thaninearlierstagestoimprovelong-termdemandinsightsandshort-termdemandsensingcapabilities.Thisgivesthesource,makeanddelivercomponentsofthebusinesstimetomovefromreactingtocustomerorders

4todeterminingthebestandmostprofitablewayoffillingorders.Theuseoftechnologiessupportingtradepromotionmanagement(TPM),vendor-managedinventory(VMI),collaborativeplanningforecastingandreplenishment(CPFR),supplierportalsandothervisibilitytoolshelptosupportthiscollaborationeffort.

Achieving S&OP Stage 3 MaturityOurresearchhasdeterminedasetofquantitativeandqualitativechangesthatenablethemovementfromStage2intoStages3and4ofS&OPmaturity.Thequantitativechangesrevolvearoundprocessorsystem-driveninitiativesthatneedtobeinplaceasenablersofmaturity.Thequalitativechangesaddressthecriticalaspectsofchangemanagement,culture,outlookandfundamentalbeliefsthatareneededtocreatea“pull”forceofchangewithintheorganization,facilitatingfasterS&OPmaturity.

Quantitative Changes

Translating the NumbersOneofthemostchallengingaspectsofS&OPistheabilitytosatisfytheinformationalneedsofdifferentbusinessfunctions(finance,sales,marketing,supplychain)basedoninputfrommultiplesetsofnumbersandforecasts.AtGartner,werefertothisabilityasTranslation.BuildingcapabilitiestotranslatenumbersisacorerequirementtomovefromStage2toStage3.Translationcanbecomplexandisrequiredinmultipleareas(seeFigure2).

Initially,translationcapabilityisheavilydependentuponbuildingtherightmarket-drivenhierarchiestomanagedemand,andthenbeingabletoadaptivelytranslatethisintosupplyplanningmodelsbasedonsupply-sidehierarchies(seeFigure3).CompaniesthathaveachievedStage3areabletodothistranslation,easily,butvolumetranslationisonlythestart.

Financial Integration and ReconciliationAbsolutelycriticaltomovingbeyondStage2demandandsupplymatchingistheactiveparticipationoffinanceintheS&OPprocess.Hereweseeextensiveuseoftranslationtoturnunit/volumeprojectionsintorevenueplans.ForsomeinStage3,thisformsthebasisoftheannualoperatingplans,withcontinueduseonamonthlyorquarterlybasistoensuretheplanismaintained.Thisintegrationandreconciliationgivesarevenueviewversusthetraditionalvolume/unitplans.Thisvieweffectivelycapturestheattentionofcommercial,financeandleadershipteams,asthefinancialimpactoftheplansandsubsequentdecisionsbecomeclear.

InStage3,duetoprofitimplications,thecapabilitytopredictmix,whetheritbeSKU,productlineorconfigurationmix,becomesmoreimportantthanjusttotalvolume.Salesparticipationisessentialinthisprocessfortheplanninghorizonwheretheycanaddvalue.Inenvironmentswherethesales-forceforecastsbasedondealsincurrencyvalues,companiescontinuallywrestlewiththe

Figure 2. S&OP Governance in Stage 3 and 4

Definition Sponsor Senior business leaders, in some companies the CEO

Coordinator Most commonly Supply Chain, occasionally Customer Service

Owner Line-of-business functions, sometimes joint ownership of key S&OP components

KPI focus Demand risk, customer service, profit, cash, market share

Performance focus

Ability to translate opportunities and demand into actionable and profitable response from make, source and deliver functions, understanding the trade-offs and financial impact, conscious choice on decisions

Output focus •3-18/24 month planning horizon •Consensus plans (demand, supply, inventory, product portfolio, mix, revenue) •Demand shaping to close gaps to budget and profit targets •Scenario analysis to understand financial impact of forecast risk, demand shaping, supply constraints, other risks •Investment decisions – inventory, assets, other resources •S&OP demand plan becomes the AOP, and starting point for strategic planning •Plan and related assumptions communicated to relevant stakeholders •Connection to execution through aligned planning processes and shared output

Source:Gartner(October2010)

5problemofthesalesforcehittingrevenuetargets,butthecompanymissingotherfinancialmetrics,likeprofit,duetounpredictedchangesinmix.

Inonecompany,theS&OPprocesshasbecomesotightlyintegratedinthefinancialplanningprocessthattheyarealmostindistinguishable.Here’swhattheprocesslookslike:

• Developmentofthefinancialplan(stepsatofhaverolesintheS&OPprocess).

• (a)Demandplaniscreatedandagreeduponduringthenormalmonthlydemand-consensusprocess(alongwithtradepromotion,pricing,etc.).Thisbecomesthebasisforannualoperatingplan(AOP)/financialbudgetingandstrategicplanning.

• (b)Supplyplaniscalculated,includingfinishedgoods(FG)inventorylevels,productionplansandraw/work-in-progress(WIP)inventorylevels.

• (c)ConstraintsareworkedthroughtheS&OPprocess.

• (d)Resultingvolumeisrunthroughmanufacturingplants/supplychannelstodevelopcosting.

• (e)Inventoryplansarefinalizedforuseincashflowcalculations.

• (f)Inventoryvolumeisplannedthroughthedistributionchannelstodevelopcosting.

• (g)Selling,generalandadministrative(SG&A)budgetsarefinalized.

• (h)Financerollsupthenumberstocalculateaprofitnumber(ifitisundesirable,changesaremadeinstepsatog).

Thisintegrationnotonlyenablestheorganizationtohaveadiscussiononamonthlybasisaroundtherisk-rewardtrade-offsofsupplyanddemand,butalsoenablesdiscussionofprofitimpactandvisibilityintowhetherthecompanyistrackingtoitsfinancialplan.Stepsdandfweretypicallyperformedonaquarterlybasisinsteadofmonthlyduetotheamountoftimeittooktocompletetheprocess.

ThegoalofaStage3/4S&OPprocessistoachievecompanygoals.Thisistypically“profitability,”butinsomecasesmarketsharemaydominate,e.g.,whereabusinessispushingtogrowinaparticularmarketorregion.Theterm“profitability”iswidelyused,butwithuncleardefinition,henceitdeservesfurtheranalysis.OurresearchhighlightedthatinStage3where“profit”isintroducedintotheS&OPdiscussion,itisgenerallycalculatedatagross-profitlevel(thedifferencebetweensalespriceandthecostofgoodssold).Thisisbecauseoftheeaseatwhichcostscanbetieddirectlytoproductcategoriesanditems.Therefore,thevastmajorityofcompaniesthatincludeprofitintheirS&OPdiscussionaretalking

aboutgrossprofit.Eveninmarketswheredrivingrevenuegrowthandmarketsharewereofutmostimportance,keepingcontinuousattentionondeliveringaprofitableresponsewasstillhighlyvalued.ThemainpointandgreatestvalueofdiscussingprofitwithinS&OPistoguidemanagementinmakingtrade-offsanddirectionaldecisions.

Stage2S&OPtypicallydoesnotventureintotheprofitdiscussion,butratherconcentratesongettingdemandandsupplyvolumerightfirst.Oncetheprocessmaturesandprofitabilitybecomesthefocalpointinthemeetings,theprofitdiscussionmustbeatthelevelinthebusinesswheredecisionsneedtobemade.Usingtimehorizonasanexample,intheshort-termplan,theyarediscussingtheprofitabilityoffillingspecificcustomerorders.Inthelong-termhorizon,thediscussionmovestotheprofitabilityofaregionorbusinessunit.Anothermajorfactoristheavailabilityofdata.TocalculatebeyondgrossprofitrequiresalargeamountofcostdatathatwouldneedtobedynamicallyadjustedthroughtheS&OPprocess.Fewcompanieshavemanagedtoefficientlycollectandmanagethedatarequiredtocalculatecost-to-serveordodynamicprofitcalculationsbeyondgrossprofit,withoutmakingmajorassumptionsforcostcategoriesbeyondcostofgoodssold(COGS),andusingtraditionalcostaccountingmethodsforallocationsandabsorptionofcosts.

EmergingcapabilitiesandthosenecessarytomovebeyondStage3are“totalcosttoserve,”orasonecompanycallsit“profitabletoserve.”Intheseorganizations,theyareshiftingtheirdiscussionof“profit”tomeanoperatingprofitorearningsbeforeinterestandtaxes(EBIT).Forexample,inaCPcompany,customer-levelplanningtakesintoaccountpricingtiersandtradepromotions.Goingtothislevel,however,requirestheinclusionofallselling,generalandadministrative(SG&A)andcustomer-specificcosts,whicharemoredifficulttodeterminethananappropriateitem-levelallocation.

Exactlywhatcanbemeasuredwhentalkingaboutprofitabilitytrulydependsonthelevelofdecisionmakingrequired,availabledataandmaturityleveloftheorganization.

Figure 3. Demand Translation Requirements

Source:Gartner(October2010)

SKU

Global

Units

Currency Profit

Customer Product Category

Plant

Demand Plan

Countries Regions

6Proper Alignment of Planning Horizons and Decision-Making ResponsibilityToenablethecorrectlevelofdiscussion,planninghorizonsareclearlydefinedandadheredtowithinStage3meetings.Toavoidthetemptationofslippingintodiscussionofshort-termexecutionissues(0to3months),manyofthecompaniesinterviewedimplementalayeredS&OPprocessfordifferentplanninghorizons.Inonemeeting,theplanninghorizoncateredtotheshort-termexecutionandoperationalissuesoccurringwithinthenextthreemonths,whileasecondprocesswasimplementedthatcoveredmid-tolong-termplanningissues(3to24months).Theyconsiderbothtobepartof“S&OP,”highlightingtheneedforacross-functionalprocessattheoperationallevel,aswellasmoreforwardlookingthatfocusesonalignment,profitabilityandmakingtherighttrade-offs.

Structurally,thesemeetingslookverysimilarandfollowthetraditionalformatofS&OP.Inmanycases,theywereorchestratedbythesameindividual—theS&OPleader.Themaindifferencewasthefrequency,levelofdiscussionandthedecisionmakers.Theshort-termmeetingsoftenoccurredmorefrequently,weeklyversusmonthly,anddiscussionstendedtobearoundunitsrather

thanrevenue/profit.Headsofbusinessattendedthemidtermmonthlymeeting.Wealsofounddifferentplanninghorizonsandstakeholdersfordifferentpartsofthebusiness.Thereneedstobeabsoluteclarityofthehorizonandassurancethattheydonotoverlap,thusintroducingundue“noise”atmultiplelevels(seeFigure4).

Notonlywerecompaniescreatingprocesslayersaroundthetimehorizon,butalsoarounddecision-makingresponsibility.Wesawcompaniesredesigntheplanningorganizationtorecognizetheneedtomanageglobalorchestrationwhilepromotinglocalexecution.Thismeantcreatingandmanagingalignmentbetweentheroleoftheglobalandlocalplanners.

AnexampleofatrulycollaborativeandlayeredS&OPprocessishowLowe’sHomeImprovementandWhirlpoolCorporationworktogether.BecauseWhirlpoolappliancesmakeupsuchahighpercentageofLowe’ssales,theyhaveaseriesofjointmeetingsintheirmonthlycycle,specificallyfortheLowe’s/Whirlpoolpartnership.Thesemeetingsarelayeredtocaterforthevariousplanninghorizons,withanintensefocusoncadenceanddiscipline:

Figure 4. Demand-Supply Translation Hierarchies

Source:Gartner(October2010)

7• OperationalplanningusingCPFRinthe0-to3-monthhorizon,

throughweeklymeetings.ForLowe’sthisisaboutstoreexecutionandlogisticsplanning.ForWhirlpool,itisaboutmanufacturingandlogisticssynchronization.Metricsincludeon-timefillrateandmeanabsolutepercentageerror(MAPE),andthepeopleinvolvedareforecastingteams.

• Merchandiseandoperationsplanningmonthlymeeting,lookingatthe3-to6-monthtimeperiod.Thisisatthemidmanagementlevel.Salesownstheforecastandthediscussioncentersonsellthrough,pricingandpromotionsandrootcausedrivers.ThisissimilartotheWhirlpoolcategoryreviewmeeting,butspecificallytailoredtotheLowe’saccount.

• Strategicaccountplanningfocusedonthe6-to12-monthhorizonbetweenseniorbusinesspartnersfrombothsides.Herejoint-businessobjectivesdrivejoint-strategicplanning.

• C-leveldiscussionstwiceayear,lookingouttwoyears

Whatarethebenefits,andhowdotheyknowtheprocessissuccessful?Peopleshowupandsalesmanagersstarttotakecontrolofthemeetings.Marketshareisimproving,andproductisavailableinthestores.Bothsidesarealignedaroundpromotionalactivities.Simplyput,“WhirlpoolisbuildingwhatLowe’sisselling.”

ManycompaniesthatremaintrappedinStages1and2haveunderestimatedtheneedtohavelayeredandtailoredS&OPprocessesandhowthisimpactstheneedtoredesigntheirplanningorganization.

Simplified Metrics — Measuring SuccessHowdoyoumeasurethesuccessofS&OP?Howdoyouknowtheprocessiseffectiveandimproving?Ultimately,itisthebusinessresultsthatprovethevalue,butalongthewaythereareindicatorstohelpyougaugeprogress.AstrongtrendwesawinorganizationsthatachievedStage3maturitywasthattheyweredatadriven,heldpeopleaccountablefordecisionsandresultsandtooktheemotionandpoliticsoutofthediscussionsbyalignmentaroundacommongoal.

Figure 5. Processes Aligned to Planning Horizons

Source:Gartner(October2010)

Sell Deliver Make Source

Strategic/Long-Term Planning (2 to 5 years)

Strategic Planning and Forecasting

Network Optimization, Strategic Risk Evaluation

Tactical/Midterm Planning (3 to 24 months)

Sales and Operations Planning

Demand Planning

Supply Planning

Inventory Configuration

Supplier Mgt.

Contract Mgt.

Operational/Short-Term Planning (1 week to 12 weeks) Vendor

Managed Inventory (VMI)

Distribution Req. Planning (DRP)

Inventory Policy

Transportation Mgt

Factory Scheduling

Material Req. Planning (MRP)

Sourcing

Execution (order duration to shipment)

Order to Cash Manufacturing Execution

Systems (MES)

Procure to Pay

Note: planning horizons differ by industry depending on product lifecycle and asset investments

Logistics

Execution

Operational Planning/Order Fulfillment

8Thesecompaniesfocusedonasimplified,reducedsetofmetrics.Theytookastepback,foundthose“truenorth”metricswhicharemeasuredattheC-levelanddefinetheoverallbusinessgoals,thencascadedthemdownthroughtheorganizationtodrivealignmentoffunctionsaroundacommongoal.ThereisvisibilityandtransparencyofKPIs,targetsandresultsacrossthecompany,basedonacoresetofstandardmetrics,typicallyincludingrevenue,profit,forecastaccuracy,customerservice,workingcapitalandcostsand,morerecently,aforecastvalue-addmetric.Atthislevelofmaturity,thediscussionhasmovedfromwhatsupplychaincaresabouttowhatbusinessownerscareabout.Thismeansyouhaveorarebuildingthecapabilitiestomeasuredetailedreturnonassets(ROA)oreconomicvalueadded(EVA),costtoserve,cashandforecastaccuracyandvalueadd.

Anelectronicequipmentcompanyestablishedfour“truenorth”metricsatthecompanylevel.Thesewerethentranslatedintoahierarchyofend-to-endmetrics,withcross-functionalownershipattheglobaloperations(supplychainwithabroadspanofcontrol)level.Thiscascadedfurtherintohierarchiesforthevariousfunctions,suchasplanning,manufacturingandprocurement,etc.Thishelpeddrivetherightdecisionsattheoperationallevelandensurealignmenttocompanygoals.

Traditionally,lookedatasanevil(necessaryornot),theroleofinventorychangesinStage3S&OPcompanies.Ittendstobecomeastrategictooltobufferdemandvolatilityorsupplyrisk.Thereisjointownershipofinventorydecisions,oftenthroughacross-functionalinventorycouncilorsteeringcommittee.

Tomeasuresuccessandimprovements,businessunitsand/orregionsarebenchmarkedagainsteachother.Todothis,asetofmetricswithcommondefinitionandaccuratedataareneeded,butalsotheunderstandingofhowdifferentsupplychainsbehavebasedontheirchannel,productandsupplycharacteristics.Wenolongerhear“weneedtobeefficient,agileandflexible”becauseStage3companiesrealizeyoucannotbeallthree,atleastnotinthesamesupplychain.Theyhavedonethesegmentationnecessarytogettothislevelofdifferentiatedsupplyresponse.

Last,butmostimportant,successcanbemeasuredbyalignmentofpeopleandtheshiftfrommakingdecisionsofflineoroutsidetheS&OPmeeting,torecognitionthatS&OPisthecriticaldecision-makingforuminthebusiness.Whenthishappens,youknowyouhavetheculturalfoundationforStage3sustainability.

Qualitative ChangesThefollowingrepresentsthechangesthatleadtoaneffectiveS&OPprocess,butaremoresubjectivethanthetopicspresenteduptothispoint.

Transfer of Ownership — What Instigated the Change?AbsolutelyessentialtogettingtothenextlevelinS&OPisthetransferofownership.Eveninorganizationswhereexecutivemanagementparticipates,Stage1and2S&OPtendstobeownedbysupplychain,mostoftensupplychainmiddlemanagement.InStages3and4,ourresearchhighlightednotonlyactiveparticipation,butactualownershipoftheprocessbyseniorbusinessleadership.Supplychainstillfacilitatestheprocessandexecutesonmanyofthedecisions,butseniorleadershipusestheprocessfordecisionmaking.Atthislevel,clearlythelinesof

business,notsupplychain,ownstheS&OPdecisionsandresults.

Whilewewouldliketosaythatthischangeofownershipoccurredbecauseofasenseofenlightenment,theunfortunaterealityisthatitismostoftenacompellingeventorfinancialcrisisthatcausedseniorleadershiptorecognizetheneedforabettercross-functionalplanningprocess,ownedbythebusinessleadersandnotjustsupplychain.Forapharmaceuticalcompany,ablockbusterdrugwassoontobethreatenedbyagenericequivalent.Foraconsumerelectronicsleader,revenueforamajorproductlinealmosthalvedyear-over-year.

Insomecasesitwaspurefrustrationonthepartofbusinessleadersthatthecurrentplanningprocesswas“outofwhack”—therewaspoorinternalcollaborationandcommunication,andtheywereunabletomovetheneedleoncriticalKPIs.Despiteallthischaos,theyalreadyhadaS&OPprocessinplace,andhadinvestedheavilyinforecastingtechnology,BItools,dataintegration,educationandmore.OneVPofsupplychainstated“IjustcouldnotcontinuetositinfrontoftheCFOeachmonthandadmitIdidnotknowwhatwasgoingoninmybusiness.”

Whicheveritwasthatinstigatedchange,arenewedfocusonanewlydesignedS&OPprocesswasfrequentlyaleadership“mandate,”definitelymorethanjustthecommonly-usedphrase“executivesponsorship,”whichisnecessaryeveninStage2.Thistop-downapproachautomaticallycreatesthecommongoalandvisionaroundwhichS&OPstakeholdersrally.Lackofthiscommongoalisoneofthekeybarriers.

Althoughwerefertoitasownershipinthissection,theword“ownership”seemsinadequateinStage3.Itismorethanjustowningtheprocess.Thereareactuallythreelevelstoconsider:

• Sponsorship—Top-downcommitmentandsupportfortheprocess,withtherightexecutivesactivelyparticipating.

• Ownership—Businessfunctionsowntheirparts.DependingontheS&OPdesign,itmaybesalesandmarketing,ortheGMofadivisionorVPofaregion,thatownsthedemandplan,closelyalignedwiththeplanningteam.

• Coordinator—TheS&OPVPordirector,whoinStage2ownedS&OP,nowownsnothingbuthasacriticalroleinorchestrating,orcoordinatingtheprocess.Thisroleisstillaprocesscoachandfacilitator(sometimescalledorchestrator),butisnotaccountableforanydecisionscomingoutoftheprocess.

TransparencyWhileconductingthisresearch,theword“transparency”wasfrequentlyusedtodescribeamatureprocess.InStage1and2,differingdegreesofgamingstilloccurwithindemand/supplyprojectionstomakemetrics“lookgood.”Whatcamethroughstronglyintheresearchwasthewordtransparencyasacorerequirement.Stage3requiresaculture,ledbyseniormanagement,whichembracestransparencyofwhatisreallygoingoninthebusiness,withtheintenttocollaborateandfixproblems.Onlythencantheorganizationgettotherootcausetodriveacultureofprevention,ratherthanfirefighting.AsoneS&OPleadersaid

9“S&OPisacontactsport.Ourexecutivemeetingsarenotpretty.Wemayallcomeoutbruisedandhurt,butwegoafterproblemsandnextmonthitisbetter.Andweonlyget12shotsatitayear,sowehavetoconfronttheuglytruthateveryopportunity.”Thecompanymusthavetheculturefromthetopdowntosharethenumbers,thebrutal,uglyfactsandthefinancialimpactofdecisionsbothverticallyandhorizontallythroughtheorganization.

Becausethefinancialimpactofdecisionsandgapsismoreclearlyunderstood,acomfortlevelshoulddevelopinmeetingstoenableopennessandsharing.Peoplenolongergametheirmetricstolookgood,butbringforwardthetruthinaculturethatrewardspreventionandtransparency,ratherthanfirefightingandfudgingthenumbers.Transparencyisdirectlyrelatedtoanopenandhonestcompanycultureandalignedincentiveprograms.

Thereistransparencyoftheplanningprocessandinputandoutputacrossthecompany.Alignmentandprocesscapabilitiesenablefastcommunication,andthemidtermS&OPplanningprocessisalignedtotheoperationallevelthroughevolutionofrapidplanningcapabilities,sharingassumptionsanddecisionsandsupportedthroughevent-andexception-basedalerts.

InanefforttoincreasetransparencybeyondthetraditionalinternalboundariesofS&OP,organizationsarereachingouttokeycustomersandsuppliers.Procurementisbeingincludedintheprocess,especiallyinsupply-constrainedenvironmentsorwherethereisacomplexsupplynetworkwithhigh-riskpotential.Motorolacallsit“SupplierS&OP.”Withinthisenvironment,demandplannerscollaboratedirectlywithprocurementandkeysuppliers,orthird-partymanufacturers.Thisenhancesthecompany-to-companyrelationship,givesbetterdemandvisibilitytothesupplierandsupplyvisibilitytotheOEMandreducesthelatencyofgettingsuppliersinformation.

The Evolution of Managing DemandWithinthefirsttwostagesofS&OP,demandislookedatassomethingthat“happensto”theorganization.InlaterstageS&OP,especiallyStage4,companiesviewdemandassomethingtheycreateandshape.However,excessivedemandshapingcanthrowabusinessoutofbalance.Themorecompaniesshapedemand,themoretheyneedtobuildthecapabilitiestomanagepotentiallyincreaseddemandvolatility(seeFigure6).

EarlystageS&OPfocusesonsalesforecastaccuracy.InStage3S&OP,weidentifiedtheevolutiontocontinuouslyimprovingthecapabilitiestopredictdemand,withclarityastowhatdemandsignalsareofvalueinthevariousplanninghorizons.Thesewerethecommonthemesacrossindustriesandbusinessmodelswheretherecanbevastdifferencesindemandmanagementbestpractices.InStage3,thereisclearrecognitionfromthecommercialteamsoftheimportanceofdemandplanning.Theyinvolvetheirsalespeople,beingmoredisciplinedinkeepingthepipelineuptodateatthemixlevel.Marketingandproductmanagementalsobecomescriticaltopredictmidtermdemand.

Managingdemandtakesonanoutside-inapproach.Somecallitmarket-basedforecasting,withfocusonwhatthecustomercaresabout.Companiesanalyzesell-throughdata,identifymarketshiftsandcaptureotherindicatorstopredictbuyingpatterns.Demandinsightsfrommultiplesourcesarecritical,whetherfromtradepromotiontools,customerinputorgovernmentstimulusplans,etc.WhileStage3companieshaveinsighttothesedemandsourcesandusethedataindiscussionsaboutthefuture,theadvancedcapabilitytopullallthisdataintoacommonplanandmodeloutscenariosisdesired,butstillaworkinprogress.ThiswillgetyoutoStage4.

Figure 6. Seven Levers of Agility

Source:Gartner(October2010)

10Granularityofforecastingdifferedacrosscompanieswespoketo,mainlydrivenbyindustrynuances.Insomecases,itwasraisedupaleveltotheproductfamilyandfocusedonmarket-basedmacroeconomicindicators.Inothercases,theybuiltoutverydetailedforecastsbySKU/customer.Whatwascommonisafocusontherightforecastingtechniques,dataintegrity,therightplanninghierarchies,ongoingattentiontoimprovethedemandsignalsandmanagingbiasandFVA.

Whatwealsonoticedwasthatnomatterthelevelofforecastdetail,whenlookingout12to24months,thefocusshiftedtosimplification,majortrendsandtheimportanceofcross-functionaldialogue,andnottogetcaughtupinbecomingtooover-analyticalwiththenumbers.

Change of Focus — What’s in a Name?Althoughthetermsalesandoperationsplanningisusedgenerically,40%ofthecompaniesinterviewednolongercalltheirprocessS&OP.Why?Overtime,thetermS&OPhadcollectedpoorconnotationsorwasconsideredtobepurelyasupplychainprocess.Manytimes,S&OPhadbeengiventhestigmaofaprocesswithtoomanymeetingsoflittlevalueandtoofocusedoncurrentquarter.InStage3,S&OPmustbeconsideredabroad,cross-functional,business-planningprocesslookingout12to24months.

InthecaseswheretheoriginalS&OPprocesswastooshorttermandoperationallyfocused,anewprocesswasimplemented,oftenwithanewname.Wealwaysgetasked“Whatdotheycallit?”SomemakeasubtleshiftfromS&OPtosalesandinventoryoperationsplanning(SIOP)orexecutivesalesandoperationsplanning(eS&OP),whileothersembracetermslikeintegratedbusinessmanagement(iBm),or<insertcompanyname>businessplanning.Somehaveveryspecificnames,withnoapparentlinktothetermS&OPorbusinessplanning,butitworkedforthem.

Asweconductedourresearch,onenamestoodoutasthemostinnovativeandimpactful.Foryears,DanonestruggledtotransformitsoperationalS&OPprocessintoakeybusinessmanagementprocess,valuedbythegeneralmanagersandcommercialteams.In2007,theCEOcreatedtheburningplatformforchange,statingthatpoorservicelevelswerecostingthebusinesssalesduringtougheconomictimes.TheprojectteamrecognizedamajorrebrandingofS&OPwasrequired.PreviouseffortstocalltheprocessiBmandadvancedS&OPhadlimitedsuccess.Introducingafour-stageframeworkalignedto“America’sCup”sailing(fromwreck,toamateur,toprofessionaltochampion),theprocesswasrenamedglobalplanningsystem(GPS)tomirrortheglobalpositioningsystemusedwidelyforsatellitenavigation.ThenameGPSwasanimmediatehit.Asexplainedtothebusiness,yourGPSknowswhereyouare,youtellitwhereyouwanttogoanditplansthebestroute.ButtherealvalueofGPSisthatitautocorrectswhenyougoofftrack.Whatmorecouldgeneralmanagerswantfromaplanningprocesstorunthebusiness?Quickly,thisrebrandingbecameamajorfactoringettingtheprocesstransformationoutofneutral.GPStargetsthestrategicambitionofthebusinessandpilotsitskeysuccessfactors,somovingfroma

focusonsupplychainmetricstowardsharedbusinessdecisionsoftheboard.Thisbusiness-pilotingscopeengagesandcommitsallfunctionstoGPSsuccess.InDanone,GPSisvaluedbythegeneralmanagers,ownedbytheboardandlivedbytheorganization.Increaseinprofitandservicelevelshasvalidatedthissuccessstory.

Thisnewprocesslookedoutfurtherandinvolvedhigherlevelbusinessstakeholdersandfocusedonhigherleveldecisions,butwaslinkedthroughmetricstotheoriginalprocess.ThisishowlayeredS&OPprocesseshaveevolvedunderthegeneralS&OPbannerinmanycompanies.Thenameisirrelevant;itisabouthowtheprocessesaredesignedtomeetthebusinessneeds.

Sustaining Stage 3 Maturity

Building the Right CultureAStage2processneedsconstantsupportandfocusoncontinuousimprovement,butthisfocuschangeswithmaturity.InStage2,supplychainisconstantlypushingandencouragingparticipationfromsales,marketingandotherbusinessleaders.Theprocesscaneasilyslipbackwardwithoutthisattention.MovingintoandthenthroughStage3isahugeshiftinmind-set.Butonceitgetsrollingandtherightbusinessleadersseethevalue,itcreatesitsownmomentumandisnolongerasupplychainpush,butaline-of-businessownerpull.TheattentionamatureStage3processthenrequiresistoembracethisactiveparticipationfrombusinessownersandworktomaketheirliveseasierthroughefficientworkflow,fastandeasyaccesstovalue-addedinformationandautomationwherenecessary.

Culturally,themovetoopenness,transparencyandrewardingtherightbehaviorrequiresongoingchangemanagement.Identifyinganddevelopingprocesscoachesandplanningpowerusershelpssustaintheprocessandknowledgelevelofindividualsinthebusinesses.Theseindividualsreducetherelianceonacenterofexcellence(COE)oronconsultants.Also,somehavecreateda“steward”roletostreamlinetheconnectionbetweenlocalandglobalmeetings.Thispersonneedsstronginterpersonalskills,businessacumenandanin-depthunderstandingofthenumbersandthevariouslocalbusinessesinordertofacilitateanyreconciliationandrealignmentrequired.IdentifyingtherightpeoplefortheserolesanddevelopingtheirskillswasamajorfactorinsomecompaniesgettingtoStage3.

Use of a Center of Excellence (COE)AnS&OPCOEiscommon,especiallyinlargerorganizations.TheroleoftheCOEistohelpthebusinessesandregionscontinuouslyimprovetheirS&OPprocessand,ultimately,businessresults.

WhereCOEsexist,wefoundtheyprovideself-assessmenttools,scorecardsandworkbookstosupporttheprocessandidentifytheneedforimprovementandassistance.Butonethingwasclearfromtheresearch:theCOEdoesnotpushitselfonabusinessthatmayclearlyneedhelp.ThebusinesshastowanthelpandpulltheCOEresourcesin.COEresourcesaretooscarcetoputeffortintoagroupthatisculturallynotreadytomoveforward.

11AleadingchemicalcompanyhasHRresources,knownas“humanperformancespecialists,”intheCOE.Wheretherearesignificantculturalandpeopleissuesinabusiness,andifthebusinessrecognizestheneedtoaddresstheseissues,thesespecialistsarepulledintoassist.

Talent ManagementThemorestraincompaniesputontheirS&OPprocesses,themoretheyarerealizingthattheyneedtoconsiderthehumanaspectoftheprocess.S&OPcanbeveryemotionalandrequiresaspecialsetofskills.Leadersinthisareahavediscoveredvalueincreatinganenvironmenttorecruitanddevelopstrongleadership,planningandanalyticalskills,andgivetheseindividualsacareerpathtoretainthem.

Organizationsneedtotakestockintheindividualscurrentlyinplacetomakesureofthefollowing:

• Rolesandresponsibilitiesareclearlydefined.

• Skillsetsmatchthoserolesandresponsibilities.

• Thecurrentorganizationalstructureisalignedtosupporttheindividualsandexpectedchange.

• PropermentorsandexecutivecoachesareinplacetofacilitatetheS&OPjourney.

• Arealizationexiststhattruechangecomesfromthetop.

Alltoooften,companiescreatearevolvingdooroftalentedindividualsbynotunderstandingtheamountoforganizationalchangerequiredtoestablishandmatureanS&OPprocess,andintheenddonotsurroundtheindividual(s)involvedwiththeneededsupporttofacilitatethatchange.

The Role of TechnologyWhiletechnologyalonewillnotbethekeytomaturingtheS&OPprocess,itplaysacriticalrole.TogetfromStage2toStage3requiresgood,clean,credibleplanningandmetricsdataanda“singleversionofthetruth.”Sothereisaneedforunderlyingtechnologyandsystemstosupportthis.TypicalStage2toolsarestatisticalforecasting,supplychainplanningandinventoryoptimization.Foundationalelementsaredataquality,masterdatamanagement(MDM)andthenecessaryintegration.

AstheculturematurestowardStage3andthereismoretransparencyandbusinessownerparticipation,theprocessmustbesupportedbytheabilitytomakedecisionsfasterthroughtimelyinformation,andmoreefficientlythroughexceptionandalert-basedworkflows.Typically,technologyisrequiredforthis.InStage3,thedialogueshiftstowhat-ifandscenarioanalysis,andtoadvancethesecapabilitiesandgetintoStage4requiresanalyticsandmodelingtools.Theterm“rapidplanning,”aswellasthetoolstosupportit,isemergingasarequirementtogetthroughStage3.

Twocompanieswespoketosaidthattheyfocusedontheprocess,notthetechnology,andnowthelackoftechnologyisholdingthembackfromgettingbeyondearlyStage3.ButwhatgotthemintoStage3wasallaboutchangemanagementandthecriticalculturalshift.

ConclusionS&OPmaturityisajourney,and,asoneVPofS&OPdescribedit“acontactsport.”Donewell,itbecomestheprimarydecision-makingforumforthebusiness.ResearchshowstheprimarybenefitofS&OPisincreasedrevenue.Thisisnotsurprising;ifyouplantherightproductsandtheyareavailable,theywillsell.