Many companies have a sales & operations planning (S&OP) process where they are forecasting at the product level what is apt to be ordered by their customers in the coming months. Then companies seek to examine whether they have the manufacturing capacity to actually make what they believe will be ordered by their customers. The result is an operating plan for what will be produced in the coming month.
But companies often do not achieve their revenue, market share, service level, or profit goals. A new process – called sales & operations execution (S&OE) – is being promoted as a process that will allow companies to better achieve the goals set forth in the S&OP executive meetings. Hexion is one of the only companies I’ve talked to that is formalizing the S&OE process. I interviewed Javier Invernizzi, the Vice President of Global Supply Chain at Hexion, about this process that ties longer-term plans to day-to-day execution more optimally.
Hexion Inc. is a privately held company headquartered in Columbus, Ohio with $3.4 billion in revenues last year. The company produces specialty chemicals for the Coatings & Composites and Adhesives market segments which are used in a wide variety of industries. Hexion’s customers are other manufacturers.
Hexion has 45 production sites around the world with roughly an equal number of global warehouses. The company engages in both make-to-order and make-to-stock production. Hexion mainly sells directly to customers, but some contract manufacturing and distribution is handled by toller partners.
Mr. Invernizzi made it clear that people and processes are more important than tools. Nevertheless, tools are important decision support enablers. One of Hexion’s key decision support tools is AspenTech’s production scheduling application.
Each plant has at least one scheduling application. But production scheduling is much more complex in the chemical industry than most others because of the need to model tank and pipe throughputs and complex sequencing dependencies. Consequently, some plants have several instances of scheduling for managing different parts of the production process. In an industry where manufacturing accounts for a very high percentage of total costs, production planning and scheduling are critical applications. But Hexion is very happy with the collaborative platform that AspenTech developed to support S&OE. “AspenTech,” Mr. Invernizzi said, “has been a close implementation partner for many years.”
AspenTech’s collaborative platform allows the demand, inventory, production planning, capacity planning, and quality teams to interact and create better production schedules based on the inevitable disruptions that are occurring. Mr. Invernizzi explained that “S&OE is all about the management of change. How you respond to the inevitable upsets and then manage to those upsets.” By upsets, Mr. Invernizzi is referring to the day-to-day events that can cause the work that needs to get done to diverge from the initial plan. These things can include disruptions such as carrier delays in inbound or outbound transportation, production quality issues, machines on the factory floor breaking down or working at less than optimal throughput, and customers changing the size of their orders or asking for rush orders.
Last year Hexion emerged from a Chapter 11 restructuring with much less debt and better prepared to compete more profitably in the specialty chemical market. Its senior leadership team has made it clear that the company will continue to improve profitability through operating leverage and investments designed to enhance productivity.
That term – “operating leverage” – is important. Operating leverage measures the degree to which a firm can increase operating income by increasing revenue. A business that generates sales with a high gross margin and low variable costs has high operating leverage.
But disruptions to the longer-term S&OP plan hurt the company’s ability to achieve operating leverage. The longer term plan maximizes production sequencing synergies; longer production runs are possible, which allows for greater throughput; more time allows transportation to be secured at a lower cost; and finally, if the longer-term plan could be adhered to, inventory levels can be kept at targeted levels. As companies diverge from that sales & operations plan, costs inevitably go up.
As Mr. Invernizzi makes clear, S&OE is about dealing with these inevitable disruptions in a more optimal way (but still not as optimal as if the longer-term plan could be adhered to). “Our company has a tremendous focus on efficiency and optimizing resources.” The supply chain organization is a key part of Hexion’s turnaround efforts. The supply chain organization is focused on sales and operations execution that ties their day-to-day activities more tightly to their longer-term operational plans while also improving agility.
Customer break-ins are perhaps the most difficult exceptions to face. In the past, when a customer changed their order, the company would largely look to see if they could fulfill the order while not disrupting their commitments to other customers. Now, they are working to better understand the financial impacts of these break-ins.
They are using an agile methodology to deal with operational exceptions. Agile has largely been used in product development of software products. It has since been adapted to improve other processes. Mr. Invernizzi believes the methodology is a good fit for S&OE. Agile is a quick, iterative, and incremental framework for managing complex work. Rather than doing product development for a long period of time and then releasing the product, work is done in short bursts, and then given to those that will use the product so they can make sure the product being produced is what they want. The framework challenges the traditional, sequential approach to product development. Hexion is applying that same methodology to Supply Chain processes.
“Agile allows us to pivot quickly, to manage to exceptions, and to focus on what is important and deliver the most value to our customers,” Mr. Invernizzi explained. “Otherwise you are constantly fighting fires. That should not be the norm.” A Kanban board is used to help teams focus on differing levels of priority items while also giving a team clear visibility into items such as impediments other teams are having. “It’s all about increasing collaboration, velocity, and quality of delivery of a process.” Scrum meetings and, daily standups, are used to kick off the sprint. Hexion aligns demand with supply every day, not in the monthly cycle so common in S&OP.
These agile sprints are used to resolve an operational problem. But they are also used to put together playbooks. Playbooks are based on common scenarios – for example a late shipment from a supplier or an unusually large order from a customer – and then figuring out the steps involved in rectifying that problem. The playbook allows these kinds of disruptions to be handled more efficiently when they next occur.
Based on the huge operational disruptions caused by the pandemic, never has the need for a robust sales & operations execution process been more important.