Logistics Viewpoints

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5 Recommendations towards a Resilient S&OP

S&OP | By •

S&OPSales & Operations Planning (S&OP) as a process has been around since the 1980’s. While the terminology evolved, the underlying thesis of S&OP has stayed the same, i.e., bridge the divide between sales forecasts and operational plans while respecting the budget. In general, S&OP consists of a New product review, Demand Review, Supply Review, Management Review and some level of reconciliation between these steps. The process as is implemented in many companies focuses on balancing demand and supply based on preestablished rules and policies that serve as guardrails for the planning process. More recently the technology has evolved to a point where such processes can be conducted at a faster cadence than a typical monthly cadence that was the norm. Rapid scenario planning is increasingly being touted as a way to counter the disruptions that seem to increase in frequency and intensity.

Then the process was put to test in recent times, as increasing demand and supply side shocks caught companies flatfooted. As product flows rapidly shifted and hard baked assumptions about lead times and sourcing locations were put to test, users across many organizations bypassed their planning systems and turned to excel sheets, internal data science teams or non-traditional supply chain vendors who could deliver AI based solutions at a faster turn. In fact, even prior to the pandemic, questions were being raised about the effectiveness of the S&OP process. In the research conducted by Supply Chain Insights, only 35% of the respondents rated their S&OP process as effective or extremely effective in 2019 compared to 65% for the same in 2016. Does this mean at some point in time we move on from S&OP? While it is good to entertain such provocative points of view, let us acknowledge that S&OP when done correctly is very cross-functional and provides the platform for enhanced collaboration and communication. Hence, it serves us well to focus on making the S&OP process more resilient in addressing disruptions. Supply Chain Design wherein nodes, modes, flows, and policies driving a supply chain are reviewed and realigned to business objectives is emerging as a discipline to build resilience into S&OP. Here are some recommendations based on our experience in engaging with companies that are leading the way:

  • Match the Supply Chain Design frequency and cadence to that of S&OP: Traditional view of Supply Chain Design was to conduct this as an episodic exercise wherein an internal expert(s) or an external consultant approaches design as a special project. One off recommendations are made about facility locations (i.e., nodes), flows of the products between origin-destination pairs, and policies (inventory, replenishment, asset utilization etc) with no clear accountability on how the recommendations make their way into planning and execution. This can result in a messy supply chain network and flows that adversely impact cost-to-serve as can be seen in figure 1 in case of a distribution intense company we worked with. As shown in the map, the company has 4 distribution centers wherein each location is shipping to several places across the US (for the sake of simplicity we are not showing the manufacturing and sourcing locations here). This network evolved over a period of time as the company went through significant shifts such as acquisitions and launching of several new products. However, given the intense focus on demand-supply balancing in S&OP, the company never questioned the design showing in figure 1. The planning processes assumed the origin-destination pairs as implied in this figure.

S&OP

Upon reviewing their network, a recommendation was made to realign the network as shown in figure 2, which resulted in significant savings in cost-to-serve. However, making this recommendation alone did not suffice. The company chose to incorporate reviews of its flows as a part of its ongoing reviews supported by a Center of Excellence (CoE). With over 30% of its revenues coming from new product launches, such dynamic reviews of the network and flows is becoming increasingly a necessity for the company.

S&OP

  • Turn the planning processes outside in: The S&OP processes in most companies consider an inside out view relying on internal data. For example, forecasts are generated using the past three years of history, implicitly assuming history repeats. However, this fundamental assumption was proven wrong in recent times. From a demand perspective, considering external causal factors such as weather, consumer spending, employment levels, construction starts, or consumer price indices in our experience have delivered double digit percentage improvements in forecast accuracy. From a supply perspective with the severely constrained transportation networks, port congestions, and stretched lead times, one needs to factor these into dynamically adjusting the supply assumptions. AI can be of significant help here in mining through the transactional and operational data and help correct these assumptions.
  • Make Business Continuity Planning a part of the scenario playbook: While scenario planning is increasingly a part of the S&OP process, oftentimes scenarios tend to be too simplistic, such as what if the demand is up or down by 10%. Instead using the discipline of the flow modeling as mentioned in #1 above, S&OP should incorporate:
    1. Identification and testing of specific points of failure, quantified impacts on the supply chain from these failures, and mitigation of the same
    2. Strategic placement of inventory buffers to ensure sufficient ability to absorb shocks. Traditional inventory optimization implementations often assume fixed network and flows. However, reviewing the inventory target setting in tandem with Supply Chain Design where the flows are becoming increasingly dynamic will be a necessity
    3. Key capacity constraints will need to be effectively and optimally managed before pursuing expansion opportunities. Rules based approaches that are inherent to constrained capacity planning as part of S&OP will not uncover the best opportunities to defer capital expansion projects. Optimization based technologies can maximize the leverage from existing assets before considering expansion.
  •  Engage sourcing team to ensure supply continuity: Supplier mix for many organizations we work with is becoming increasingly dynamic. Several factors contribute to this such as ESG (Environmental, Social, and Governance) initiatives by companies opting to conduct business with suppliers with more sustainable practices, or push by the governments for domestication or near shoring of supply chains. Ensuring Sourcing and Supply Chain are tightly integrated ensures avoidance of any surprises that adversely affect customer service and fill rates, by being proactive about launching sourcing events.Beyond addressing these sourcing needs, Procurement needs to have a seat at the table. A close alignment between Procurement and Supply Chain can also yield several very interesting use cases that will help turbocharge your business. The time-phased visibility afforded by S&OP processes will be very beneficial to the Chief Procurement Officer’s organization in better leveraging this visibility to win-win engagements with the supply base. CSCO and CPO, both can benefit from a closer collaboration. S&OP can serve as a vehicle towards that.
  • Include and report on Sustainability metrics as part of the S&OP cadence: Given the investor pressures and evolving consumer choices, sustainability is a rising priority with many companies pledging to be Carbon neutral within the next decade. Rapidly changing regulatory environment provides the impetus to accelerate sustainability initiatives. Given that the bulk of the carbon footprint for companies results from supply chain, the CSCO has a huge interest in supply chain sustainability. However, that interest doesn’t necessarily translate into lower levels in the organization. Given that supply chain teams can significantly impact sustainability, whether through reducing the number of miles traveled, or through consolidating shipment loads or through reducing the inventory levels without impacting services levels, at the least, the teams should be measuring and reporting on sustainability metrics as part of the management review. Given the cross functional nature of both supply chain and sustainability functions, S&OP can be an effective platform for monitoring sustainability impact KPIs along with Operations and Financial KPIs.

By implementing the aforementioned recommendations, organizations can not only ensure a more reliable and efficient demand supply balancing, but also ensure the S&OP continues to stay relevant in a world where resilience and sustainability are gaining prominence. If not, S&OP can risk becoming increasingly irrelevant!

Dr. Madhav Durbha is the Vice President of Supply Chain Strategy Coupa Software, where his team helps customers and prospects solve various supply chain challenges. Prior to Coupa, Dr. Durbha held positions at LLamasoft, Kinaxis, JDA Software and i2 Technologies, Inc. With more than 20 years in the supply chain industry, Dr. Durbha has broad experience in strategy & process consulting, supply chain software, program management, software application development & deployment, machine learning and data science. He received his Ph.D. in chemical engineering from the University of Florida and his bachelor’s degree in chemical engineering from the Indian Institute of Technology at Madras.

Understanding New Supply Chain Concepts

S&OP | By •

new supply chain conceptsThe Executive Interviews conducted at the virtual ARC Industry Forum elicited interesting perspectives on the digital transformation journey in a post-COVID world. In a freewheeling interview, Patrick Van Hull, Industry Thought Leader with Kinaxis and Steve Banker, VP, Supply Chain Service at ARC Advisory Group, discussed the changing vocabulary in supply chain management and the concepts attached to them, the distinction between various terms, the impact of COVID on supply chains, and concurrent planning. This blog captures the salient points of their conversation on new supply chain concepts. It can also be viewed on YouTube.

Difference Between S&OP and IBP

“Many involved in the supply chain are familiar with the term sales and operations planning (S&OP), so using that as the starting place could you describe the difference between S&OP and integrated business planning (IBP),” asked Steve. Patrick responded that the answer to that would depend on who you ask! If you ask somebody who’s failed at implementing S&OP, they might try it again and call it IBP. There are instances where it’s just a matter of semantics and the terms mean the same; but in some other instances there are distinguishing levels of maturity. In simple terms, at the core both of these are about demand and supply reconciliation. Historically, this has been a sequential process – demand review – supply review – mid-management meeting – executive level. From the standpoint of the maturity level it is being able to integrate your business decisions into your supply chain behavior.  Patrick explained that we are at a point in time where the supply chain can add value and drive overall business success. When you integrate the supply chain into business decision making, pertinent decisions can be taken that help shape the direction of the business going forward. During COVID times many supply chains were using S&OP and IBP types of processes to accelerate the learning curve and act quickly.

Transitioning to a Newer Term

Explaining the transition from the term S&OP to sales and operations execution (S&OE), Patrick said that it’s not a full-blown planning cycle, it’s about how you connect with the orders you have in hand – for example, available supply, what is arriving shortly, and connecting those to fulfill customer requirement. Also, it’s an opportunity to look at and do things in a shorter time horizon and tie back into the overall strategic business direction. “So, it’s not a disconnected process from those other types of processes, it’s focused on the here and now, but it does dovetail into the others very nicely.”

Concurrent Planning

Kinaxis is known for concurrent planning along with a few other supply chain planning vendors. Concurrent planning and sales and operation as execution go together pretty well, commented Steve.

The single version of truth is a great theory and many companies struggle to implement it as the data is obsolete and there is only one person presenting his version of the truth, and that is accepted, opined Patrick. Whereas concurrent planning is a dynamic, real-time process. It is about being able to pull together all of the stakeholders on the same platform, look at the same data, be there at the same time, and drive decision-making based on business priorities. Supply chains extend their value creation for the entire business by helping them to make the “best possible decision every possible moment.” He gave concrete examples of how concurrent planning provided real-time information to make optimal decisions during the pandemic.

Why Supply Chain Agility Needs to be the Next Normal

Guest Commentary | By •

supply chain agilityThe rug has been pulled out from beneath us. Doing things the same way we’ve always done them will no longer serve us, so we can’t simply put it back in its place. In fact, the definition of pulling the rug out from underneath someone is that doing so causes their plans to fail, because they have little recourse or time to respond adequately. It’s a fitting metaphor for the world’s supply chains, which have always had to figure out how to respond rapidly in the face of rug-tugging disruptions, although none at the scope of the current one. We can count on disruption occurring again, in some form, so the only way to respond is to build in the supply chain agility necessary to be able to respond more effectively next time our rug is yanked.

But we also don’t have to put the same rug back in the same place. Similar to moving into a new home and finding that many household goods no longer fit their intended purpose, the rigid, linear supply chains of old do not fit today’s needs. In spite of them no longer serving their original purpose well, like that old rug that doesn’t fit and no one even likes anymore, antiquated supply chain systems endure.

Rigid, linear supply chains are not agile

The drive for greater cost efficiencies drove supply chains to operate as lean as possible. And S&OP was built to work within the constraints of structures and systems, all aiming at producing the perfect plan. These constraints led to silos cascading information in a linear, sequential fashion, via disconnected spreadsheets from demand to supply to inventory and finally capacity. But handoffs between these silos cause latency, and systems limited by processing speed and storage can take days to compute plans. By the time the plan is completed it is hopelessly out of date.

Adding to that, how do you even forecast in a time like this, when the historical data that would normally be used to predict demand is not indicative? As McKinsey reports, in consumer goods the swings in demand have been most visible and prominent. For example, Nielsen data from March showed a 76% increase in household supplies like laundry and paper products but a 36% drop in cell phone accessories. It doesn’t take a data scientist to understand that if a statistical demand forecast uses past data to predict future trends, sales from April 2019 will be useless for April 2020, which will then be useless for April 2021. And even near-term the data will be problematic because as McKinsey points out, demand patterns will continue to vary based on whatever shape consumption takes as the economy recovers.

When demand and supply are fairly stable, forecasting algorithms approach a useful accuracy, and your planners can operate closer to cruise control, relying on automation to flag only the exceptions worthy of attention. But when we live in times like these, exceptions may be the entire day. Our supply chains have always needed agility to respond quickly, but especially once they sense disruption. The most accurate prediction we can make for the future is that times of disruption are the new normal. Which means agility needs to be the new normal.

What makes a supply chain agile?

When asked what about the current situation would make their company better in the long run, 72% of CFOs ranked better resiliency and agility as the number one trait, according to PwC’s COVID-19 CFO Pulse Survey. So what makes a supply chain agile?

I offer three capabilities essential to an agile supply chain – visibility, concurrency, and collaboration.

  • Visibility means being able to view the entirety of your supply chain, so you can plan across all the network and not just in functional silos. It means sensing problems immediately, with alerts that monitor your data, flag exceptions, and show the impact.
  • Concurrency means being able to make and manage synchronized plans across time horizons, business processes and organizational boundaries at the same time. With concurrent planning, a change in one part is reflected real-time across the entire supply chain – supply is not surprised by a change in demand, because it is visible instantly across the connected network without latency.
  • Collaboration is about bringing the right stakeholders together, in real-time, to evaluate alternative scenarios against your most important corporate metrics. When you can run scenarios across a connected supply chain instantly, you can create hundreds or even thousands ready for various what-if questions. With the best scenario in hand, your team can collectively move forward in a common environment, without triggering a prolonged chain of emails.

Disruptions pull the rug out from under us, but we don’t have to put it back the same way. I cleaned house as part of my own recent move, because just like many of today’s supply chains, what served yesterday’s needs won’t be useful going forward. Lean supply chains without subtier supplier visibility oriented toward a monthly planning process simply no longer work as designed. As we move from crisis management to the new normal, let this be a wakeup call for the supply chain of the future.

We can’t be sure of the near-term future: will it be shaped like a U, V, W or L (the alphabet soup economists use to predict the shape of the recovery curve)? Nor can we know what the new, or next normal will be in the mid or long-term. What we can be sure of is change, disruption, and volatility. Agility, especially supply chain agility, is the surest capability we can develop to help us navigate these times.

Polly Mitchell-Guthrie is the VP of Industry Outreach and Thought Leadership at Kinaxis, the leader in empowering people to make confident supply chain decisions. Previously she served in roles as director of Analytical Consulting Services at the University of North Carolina Health Care System, senior manager of the Advanced Analytics Customer Liaison Group in SAS’ Research and Development Division, and Director of the SAS Global Academic Program.

Mitchell-Guthrie has an MBA from the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, where she also received her BA in political science as a Morehead Scholar. She has been active in many roles within INFORMS (the Institute for Operations Research and Management Sciences), including serving as the chair and vice chair of the Analytics Certification Board and secretary of the Analytics Society.

Supply Chain Planning (SCP) Software Market’s Increasing Sophistication

Cloud/Software-as-a-Service | By •

In September I began, in February I reflected on, and this week I completed ARC’s Supply Chain Planning Global Market Research Study. I’m going to take this opportunity to summarize some of the study’s key findings.

scp

Supply Chain Complexity Meets Planning Intricacy
Global supply chains continue to be increasingly complex. This is not only due to outsourcing and an ever extending supply chain, but also due to competitive forces such as shorter product lifecycles and a proliferation of SKUs. At the same time, practitioners’ planning processes are becoming more sophisticated. Finally, SCP applications, supported by technology improvements such as data availability and computing capacity, are themselves becoming more sophisticated with more complex and holistic supply chain models, that are being run more frequently, with larger volumes of data representing a more granular level of detail. For example, sales and operations planning (S&OP) was the most frequently mentioned SCP application noted as a sales growth driver during my discussions with SCP vendors. In general, integrated business planning is a process that it a top priority for business executives and this is translating to increased sales of the software solutions that support the process. The pace at which S&OP and rapid analytics is being adopted is reflected in the 15 percent annual growth rate of Kinaxis over the last 3 to 4 years. And SCP suppliers’ plans for it in the future can be seen in SAP’s investment in its Integrated Business Planning for S&OP and HANA. The move to more holistic planning can also be seen in the widespread adoption of multi-echelon inventory optimization (MEIO) and the acquisition of MEIO applications by SCP software suite providers,  such as SAP and LLamasoft, to extend their offerings to include this essential capability.

SaaS-a-Fras
SCP applications have been one of the slower supply chain software categories to transition from on-premise, perpetual license sales to the Cloud, or SaaS. But it appears that the transition has reached critical mass. ARC’s research shows SaaS revenues to be the fasted growing segment of the market as newer vendors such as Kinaxis increase market share and larger, more entrenched market participants such as SAP, Oracle, and Infor increase the number of SCP applications they offer in the cloud and transition clients from perpetual license sales to SaaS. However, I want to note that it is still difficult to confidently determine if the transition from perpetual licensing to SaaS with have a net growth effect on the SCP market as a whole. A software company’s revenue typically suffers a setback during this process because perpetual license revenue is recognized upfront, while SaaS revenue is recognized ratably over the subscription periods. As a rule of thumb, it takes approximately 5 years of subscription revenues to equal revenue from a perpetual license. In this sense, SaaS serves as a drag on SCP market growth. However, SaaS also has the effect of transitioning the software supplier’s role to one of an ongoing partnership with customers. This has the potential to extend customer retention and potentially lead to greater long-term revenues for the particular vendor, and potentially increase overall revenues of the market. At the same time, the lower upfront costs reduce barriers to purchase and can encourage small and mid-sized businesses to make the “investment” in the technology, leading to greater market penetration and higher overall revenues for the market.

Summary in a Sentence
The global SCP market continues to grow, driven by the increased complexity of supply chains, the sophistication of planning processes, and the ability of suppliers to develop and practitioners to adopt more capable, sophisticated, and efficient SCP applications. For more information on ARC’s SCP study; including market segment sizes, market shares of leading suppliers, and growth rates of applications types and sales to end user industries, visit http://www.arcweb.com/market-studies/pages/supply-chain-planning.aspx.

 

S&OP and Analytics at Forefront of Supply Chain Planning Initiatives

Supply Chain Optimization | By •

In September 2015 I began the update of ARC Advisory Group’s global supply chain planning (SCP) market study. In a Logistics Viewpoints article published at that time, I discussed some of the major changes in SCP over the previous decade.  I am now concluding this SCP market study update. I have spoken with the vast majority of large SCP software suppliers within the market, discussed their companies’ SCP product roadmaps, learned about the evolving requirements of their customers, and reviewed recent sales patterns. Two of the widest-reaching and greatest overarching trends within the marketplace are as follows:

  • The shift from perpetual license to SaaS (cloud) is finally gaining momentum
  • Practitioners and vendors are “building off the foundation” of SCP. Meaning the greatest user adoption and supplier sales growth is coming from solutions – namely S&OP and analytics – that leverage core SCP functionality in a way that provides practitioners with a more holistic and valuable view of operations.

SCP Diag
SaaS (Finally) Hits the Main Stage
I believe myself to be one of the more hesitant analysts to jump on the “cloud” bandwagon (see The Cloud Conundrum: Is SaaS Always Best?). I believe that SaaS solutions can be a superior option to perpetual licensing for some customers in some cases. However, I don’t believe that SaaS is the panacea to all enterprise software ills. Historically, SCP applications have been one of the slower supply chain software categories to transition from on-premise, perpetual license sales to the Cloud, or SaaS.  However, ARC’s current SCP research shows that SaaS adoption of SCP applications has accelerated considerably. SaaS adoption has increased substantially, and a number of suppliers are investing heavily in their SaaS offerings to make SCP through the SaaS model even more appealing. Although I cannot disclose information from private conversations, I can point to public information that serves as example. The most visible example of SaaS growth in SCP is Kinaxis’ revenue growth at a 15 percent CAGR over the last three years.  Other SCP software suppliers are experiencing a substantial uptick in SaaS sales as well. In general, vendors see the SaaS model as a strong match for the needs of smaller customers that may be hesitant to put forth the large upfront investment often associated with enterprise-wide perpetual licensing.

S&OP and Analytics Reign Supreme
Three years ago the adoption of S&OP software solutions and supply chain analytics were already on a strong growth path. But today adoption and use of these solutions has reached critical mass. ARC’s diagram of the SCP software applications categorizes S&OP and Supply Chain Analytics as Extended SCP (see above). We categorize these solutions as extensions because they leverage the data and capabilities of the “core” SCP applications such as manufacturing, inventory, and demand planning, and provide users with more holistic visibility and the capability to run scenario analyses in an integrated, holistic fashion. As planning practices as companies mature, they are placing greater value on responsiveness and agility, are running analyses more frequently, and are interested in obtaining not just data, but actionable intelligence with an understanding of alternative actions and the likely results of pulling those operations levers.
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For more information on ARC’s forthcoming Supply Chain Planning Global Market Research Study, please view the abstract and table of contents from the 2012 base year study, as the sections and format will be similar.

The Next Global Recession

Global Trade | By •

At this point, experts are not saying that China has slipped into recession. But recessions are defined in the rear-view mirror, after they have already occurred. Further clouding the issue is the fact that leading economists have long questioned how accurate China’s GDP data really is. Companies would be well advised to start doing contingency planning assuming that China is in recession.

Further, companies need to also ask not just how a Chinese recession impacts their China business, but whether a Chinese recession, or even just a substantial slow down, will tip the world’s economy into recession. Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management says that a continuation of China’s slowdown in the next years will likely drag global economic growth below two percent, a threshold he defines as a world recession. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010.

Recessions

One of the worst things a company can do when the world is tipping into a recession is to react too slowly. The key process for matching supply to demand is the sales & operations planning (S&OP) process. But if companies are using order history to forecast demand, they will be stuck with too much inventory. Demand driven companies, companies that have visibility to demand at the point of sale (POS), can sense downturns in demand much, much quicker. But accessing POS data is difficult in the US, only a few very large retailers provide this data. Accessing it in China will be all but impossible for many companies.

Companies that can spin their S&OP process more quickly will be better positioned to deal with a downturn. Many companies, do S&OP on a monthly basis. Increasing numbers of companies are beginning to do this process on a weekly basis. A few companies, actually match supply to demand in leading product segments on a daily basis.

Daily S&OP is beyond what many companies can do. But at an inflection point like this, some sort of daily planning is imperative. After the last global recession, I talked to one company that had implemented daily inventory planning meetings. In December 2008, it told all of its suppliers to stop all shipments for four weeks until it had a chance to recalibrate its demand plan. The company also moved quickly to resize the company by laying off workers, slowing production, and shutting some factories. As a result of these actions and its new supply chain applications, the company was able to come within five percent of its financial plan every quarter, even during the worst of the downturn. The company’s stock price, like many others, tumbled with the recession. But following the recession, the company’s fiscal discipline led to much stronger stock performance that its peers.

The next generation of S&OP is called integrated business planning. It is focused more tightly than traditional S&OP on how particular demand/supply balancing decisions impact revenues, profits, and cash flows. But during a recession, “Cash is King.” The cash conversion metric becomes an increasingly important KPI for the global supply chain team. To be successful, a Cash is King Initiative needs to drive performance not only in the global supply chain organization but also across the sales and finance teams. This end-to-end effort helps to insure that Inventory turns, Days Sales Outstanding, and Days Payables Outstanding targets are met with a goal of driving down the cash conversion cycle.

But in a recession, you have to be careful about this kind of initiative’s impact on key suppliers. If you slow down how fast you pay them, their financial integrity may be impacted. In a recession, companies have more to worry about than just demand. They also need to carefully monitor the financial health of their suppliers. One fairly simple tool companies use is a two by two matrix where on the vertical axis, a company places suppliers in boxes based on total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates. On the horizontal axis, the company assesses the financial robustness of its partners. If suppliers are placed in the top right hand corner of the matrix (high supply risk/high financial risk), procurement executives should require these suppliers to develop and present business continuity plans. And like with demand, companies should be monitoring these companies’ financials more frequently.

In conclusion, companies with flexible, responsive supply chains will weather a global recession better. These companies will be posed to buy distressed assets at bargain basement prices, grab market share when the recession ends, and outperform their competition in financial markets.

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