Sales & Operations Planning (S&OP) is traditionally defined as a cross functional process designed to balance supply and demand. The main players traditionally involved in this process are demand forecasting, manufacturing, sales and marketing, finance, new product development, and executive management. In most S&OP processes, transportation and warehousing folks do not have a seat at the table, and indeed are lucky if they are even told what the agreed-upon demand and supply plans are.
So when I heard a speech by Jerry Toliver, Global Service Manager at Baroid Industrial Drilling Products (a division of Halliburton) at the Sales & Operations Planning conference in Boston, highlighting how the transportation folks were at the heart of the company’s S&OP process, I was very pleasantly surprised. Baroid is a very large, global distributor of industrial bulk supplies for oil fields. The company purchases goods globally from over 600 suppliers. The goods flow into warehouses where they are treated and their quality is certified, and then they flow out to oil fields all over the world as needed. Because these are bulk products, the goods move by ocean, rail, trucking, and in rush situations, by air. A core part of Baroid’s value proposition is that customers will always have products when they need them, which is why Baroid sometimes uses air transportation. But, of course, this is a very expensive way to ship pallets that on average weigh 2,500 pounds.
This is a supply chain with long lead times. It takes 30 days for goods to ship across an ocean and get to Baroid’s warehouse, up to 10 days to certify the products at the central warehouse, and then up to 40 days to ship the goods to overseas locations. And yet Baroid promises customers 30-day deliveries. Not surprisingly this was a supply chain with a lot of inventory and sales people making just-in-case bulk orders for more inventory than they needed. The supply chain team never knew when those orders would be placed.
When Baroid moved to S&OP, which it calls “level loading,” the company told the sales folks that if they don’t participate in the forecasting process, their orders will not be honored. This was not strictly true, but it caused the sales folks enough grief that was easier for them to just participate in the forecasting process. Sales people do forecasting at the oil rig level.
The supply chain folks from Baroid admitted that their S&OP process is still maturing. They only began their journey to S&OP excellence within the last couple of years. Forecast accuracy, for example, is only 53 percent. Sales orders placed inside lead times, which drives high transportation costs, still occurs 63 percent of the time (it was 83 percent before S&OP).
Despite this, Baroid has achieved tremendous results and recognizes that it should have initiated S&OP long ago. Key supply chain metrics are improving. Inventory turn rates have improved, and indeed there is an increased ability for local stock points to pull inventory from other stock points in the region. Supplier shortages have decreased because the company shares its forecasts with suppliers. The on-time deliveries metric is improving and lead times are going down.
These improvements in supply chain metrics translate into a better bottom line. Cost of goods sold as a percentage of revenue is decreasing; in other words, on an order by order basis, the company is more profitable. And transportation savings are the key reason for that. There are far fewer less-than-container loads going out by ship. With S&OP, Baroid can aggregate orders and do far more full container shipments. And finally, partly because it is a more reliable supplier, the company’s revenues are increasing.