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Leveraging Risk Management in the Sales and Operations Planning Process Yanika Daniels and Timothy Kenny 21 MAY 2008 Advisor: Larry Lapide

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Page 1: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Leveraging Risk Management in the Sales and Operations Planning

Process

Yanika Daniels and Timothy Kenny

21 MAY 2008

Advisor: Larry Lapide

Page 2: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 2

Agenda

• What is Sales & Operations Planning (S&OP)?

• What is Risk Management?• Why is Risk Management needed in

S&OP?• Research Methods• Risk Management Findings

Page 3: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 3

What is S&OP?

Step #1Data

Gathering

End of Month

Step #5ExecutiveMeeting

Decisions &Game Plan

Conflict Resolution, Recommendations &Agenda for Exec. Mtg.

Sales Actuals, Statistical Forecasts

&Production Actuals

Step #2DemandPlanning

Step #4Pre-S&OPMeeting

Capacity constraints2nd-pass spreadsheets

Management Forecast1st-pass spreadsheets

Step #3Supply

Planning

Page 4: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 4

What is Risk Management?

• Identify Risk • Assess Risk• Mitigate Risk

Page 5: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 5

Why is Risk Management needed in S&OP?

• Global Expansions• Increased Lead Times• Capacity Constraints• Supplier Reliability

Page 6: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 6

Research Methods

• Case Reviews• Expert Interviews• Industry Survey • Onsite Visit

Page 7: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 7

• Demand Shaping• Variable Customer Service Level Promising• Product and Customer Segmentation

• Varied Use of Fixed, Variable, and Spot Rate Supply Contracts• Dual Sourcing Key Supplies• Product and Customer Segmentation

• Inventory Buffers• Component Commonality• Product and Customer Segmentation

• Lock-in Supply of Scarce Materials and Components• Varied Use of Centralized and Decentralized Inventory• Product and Customer Segmentation

• Postponement of the Final Steps in Production• Range and Scenario Planning• Product and Customer Segmentation

• Maintain Reserve Production Capacity• Range and Scenario Planning• Product and Customer Segmentation

Demand Side RiskManagement Techniques

Supply Side RiskManagement Techniques

CapacityRisk

InventoryRisk

TimeRisk

Risk Management Techniques

Page 8: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 8

Risk Framework

Step 1: Business Importance Scorecard by Product and/or Customer

Step 2: Business Importance vs. Demand Forecast and/or Order Lead Time segmentation

Decision Making: Implement Tactics

Page 9: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 9

Step One: Business Importance ScorecardCustomer Business Importance Scorecard

Score AttributeRevenue ContributionLength of RelationshipStrategic Importance

Potential for Sales GrowthPortfolio Expansion

Total

Product Business Importance Scorecard

Score AttributeRevenue and Margin Contribution

Stage in Product LifecycleLead Time

Growth PotentialProduct Type

Total

Page 10: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 10

Short Long

Capacity/Inventory/Time Tactics:

1) Widen (Pad) Delivery Window

2) Centralized Inventory

Capacity/Inventory/Time Tactics:

1) Widen (Pad) Delivery Window

2) Centralized Inventory

Capacity/Inventory/Time Tactics:

1) Demand Shaping

2) Mix Centralized / Decentralized Inventory

Capacity/Inventory/Time Tactics:

1) Demand Shaping

2) Mix Centralized / Decentralized Inventory

Capacity/Inventory/Time Tactics:

1.) Reserve Capacity

2.) Decentralized Inventory close to customer

Capacity/Inventory/Time Tactics:

1.) Reserve Capacity

2.) Decentralized Inventory close to customer

Step 2 - Risk Management Tactics: Customer

Bus

ines

s Im

porta

nce

Tier

1

Order Lead Time

Tier

2Ti

er 3

Page 11: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 11

Capacity/Inventory/Time Tactics:

1.) Pre-Build Inventory

2.) Component Commonality contracts

Capacity/Inventory/Time Tactics:

1.) Inventory Buffer

2.) Multi-sourcing supply

Capacity/Inventory/Time Tactics:

1.) Pre-Build Inventory

2.) Component Commonality

Capacity/Inventory/Time Tactics:

1.) Inventory Buffer

2.) Multi-sourcing supply contracts

Capacity/Inventory/Time Tactics:

1.) Use Inventory as the Main Mitigation Strategy as Inventory Write-offs are Low Probability

2.) Maintain Excess Production Capacity

Capacity/Inventory/Time Tactics:

1.) Range Planning; Produce to Low Demand Confidence Levels, Maintain Flexible Production Capacity for High Demand Confidence Levels

2.) Postponement of Production Steps

Step 2 – Risk Management Tactics: Product

Bus

ines

s Im

porta

nce A-L

evel

ForecastabilityLow High

B-L

evel

C-L

evel

Page 12: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 12

EXECUTIVEMEETING

DEMANDPLANNING

DATA GATHERING

OPERATIONSPLANNING

PRE-EXECUTIVE MEETING

BusinessImportance

Forecastability orOrder Lead Time

Tactics (Range

Planning)Analyze

DetermineStrategy

RISK MANAGEMENT

Format Source: SemiCo

EXECUTIVEMEETING

EXECUTIVEMEETING

DEMANDPLANNINGDEMAND

PLANNING

DATA GATHERING

DATA GATHERING

OPERATIONSPLANNING

OPERATIONSPLANNING

PRE-EXECUTIVE MEETING

PRE-EXECUTIVE MEETING

BusinessImportance

Forecastability orOrder Lead Time

Tactics (Range

Planning)Analyze

DetermineStrategy

RISK MANAGEMENT

Format Source: SemiCo

Page 13: Leveraging Risk Management in the Sales and Operations ...ctl.mit.edu/sites/ctl.mit.edu/files/library/public/... · Strategy as Inventory Write-offs are Low Probability. 2.) Maintain

Daniels & Kenny 21 May 2008 13

Thank You!


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