Despite decades of conversations around sales & operations planning, a winning formula remains elusive. And last month, as I sat in an overly air-conditioned conference room in Barcelona to facilitate a roundtable discussion, a dialogue took place amongst a group of 18 supply chain veterans that only served to highlight the ongoing search for answers.
A necessary evil?
Words such as “apathy” and “stale” featured regularly in the early exchanges as participants described their internal sales & operations planning (S&OP) practices. Significantly, such terms compounded recent data from SCM World’s Future of Supply Chain study this past autumn, which itself revealed somewhat sceptical opinions around S&OP procedure.
On all aspects of the current state of S&OP, ranging from overall process through to enabling technologies, roughly one-third or more of practitioners actually considered such facets a “necessary evil”. Maybe the lack of technology support for almost one-fifth suggests a missing design element that could, if identified, begin to leverage some of the new tools beginning to impact performance (though this is a separate column in itself). Nonetheless, change seems necessary in the way S&OP operates, and the question of governance is probably the best place to start.
Supply chain-led S&OP: a tension across KPIs
In a previous SCM World study, we sought to identify which business unit is leading S&OP efforts within the company’s four walls, and supply chain emerged as the clear frontrunner.
Advocates of this structure will point to, amongst other advantages, the natural affinity of supply chain towards dealing with the complexity of supply-demand planning. Nonetheless, with supply chain (or even supply/demand planning) driving the S&OP conversation, metrics can invariably focus on inventory performance, and such a limited perspective can lack consideration for wider trade-off decisions around more business-oriented requirements on margins. Additionally, plans around purchasing and demand may not align with the sales plan, resulting in multiple numbers (and confusion across the organisation), as well as conflicting incentives across different departments.
This latter point was an overwhelming theme during the roundtable discussion in Barcelona. The differing KPIs and priorities between sales/commercial and operations makes conflicting tension inevitable. Silos are the result, where operations people perceive sales are closing business without consideration for production capacity, but the sales teams argue that they are simply striving to hit their numbers.
No doubt this is where S&OP needs to evolve to a more fully integrated business plan (IBP) which better aligns the different parts of the business – we all know that, of course. However, what companies should consider in addition is moving the spotlight from supply chain and towards an initiative driven by general management or business leadership.
This doesn’t mean that supply chain loses its voice in leading the business. Rather, the aim here is to more effectively tie S&OP to the core of the business. According to our previous data, only one in ten organisations operates a business-led S&OP platform; but, nonetheless, fruitful examples of this approach do exist. Under Armour, the rapidly growing global sports apparel icon, has transformed IBP into a profit-driving business vehicle by positioning regional P&L leaders at the helm and, in the process, moving to a single business plan which it calls the “latest estimate”. The company has effectively moved the conversation away from reducing inventory, cost or risk and, in turn, removed much of the internal tension with other business functions.
Similarly, Mölnlycke Health Care, the Sweden-based medical devices manufacturer, moved ownership of its IBP process – Mölnlycke Business Management – to the business leadership level, with close involvement of finance. The latter’s ownership of reporting enabled the IBP platform to become the basis of quarterly financial forecasts and budgeting, and the company was able to effectively translate data into ongoing evaluation of business performance.
A step change in mindset
Referring back to my conversations in Barcelona, those in the session recognised that it’s a matter of changing mentality, mindset and language. S&OP is one of few instances where the business collectively makes decisions about strategy and direction, with diverse functions all in the same room and at the same time. Setting objectives purely around inventory turns will not align a wider business to this end. We need to build a culture that will not only remove the silos, but will also allow S&OP to facilitate long-term profitability and growth.