s&op scm world

Kevin O’Marah Head of FacultySCM World

RESEARCH REPORT

NOVEMBER 2012

FULFILLING THE VALUE OF S&OP

2 RESEARCH REPORT


EXECUTIVE SUMMARY

In August 2012, SCM World conducted an online survey among almost 400 supply chain and operations executives worldwide. The aim of this research was to unbundle the concept of sales and operations planning (S&OP), identify where companies have made progress and how much value awaits those who extend S&OP to its full potential. Our conclusion is that S&OP is currently miles away from this but that the rewards are there, particularly for those that are able to change the dynamics between trading partners.

In the survey, we attempted to look at S&OP maturity along two dimensions: its penetration inside the business (its depth); and how comprehensively it covers the supply/demand balancing problem at a value chain level (its breadth). On the depth dimension, we found that S&OP processes in supply management are slightly more advanced than in either demand management or product management, with an average maturity score of 6/10. On the breadth dimension, while internal alignment and buy-in to S&OP appears to be relatively strong, external alignment lags well behind, with a score of just 5.1/10. Information visibility – the third component – sits between the two.

While S&OP has significantly improved day-to-day operations in most companies, fewer have been successful at engaging their trading partners, especially on the customer side, to improve the performance of the entire value chain. By a ratio of 6:1, survey respondents agree that they have “absolutely” made progress in deepening S&OP processes in the past five years, compared with 3:1 who say the same about broader S&OP.

The benefits have come most strongly in basic areas such as supply availability and on-time delivery, and to a lesser extent in more strategic, longer-term areas such as lowering total supply chain cost or boosting revenue. A fifth of respondents say they have seen a “significant” improvement (50%+) in on-time delivery as a result of better S&OP, for example, compared with just 6% who say the same about revenue.

Looking ahead, we asked participants to speculate on the additional value that could be achieved in these areas over the next five years. Overall, the view was that at least moderate (~20%) gains are possible, but again these are expected to come most strongly from better forecast accuracy, supply availability and on-time delivery. Around a fifth predicts “significant” improvements in total supply chain cost and revenue as a result of broader/deeper S&OP. The data suggests that the biggest payback from S&OP in future is likely to come from improving external alignment with trading partners. Only 1 in 10 respondents believes that more than half of the potential value has been captured in this area so far, compared with a majority who say it is either less than 10% or none at all. Practical steps that companies wanting to improve their record here could take include:

• identifying and promulgating better metrics around customer or channel profitability;

• developing a better cost-to-serve model that is capable of quantifying the cost of flexibility;

• targeting a handful of their bigger, more sophisticated customers in a bid to drive better demand transparency backwards toward the supply base.

3NOVEMBER 2012


This document is the result of primary research performed by RaptureWorld Ltd. RaptureWorld’s methodologies provide for objective, fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the

entire contents of this publication are copyrighted by RaptureWorld Ltd and may not be reproduced, distributed, archived or transmitted in any form or by any means without prior written consent by RaptureWorld Ltd (6443794).

© 2012 SCM World, a RaptureWorld Company. All rights reserved.

CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

S&OP BASICS

CURRENT LEVELS OF MATURITY

THE VALUE OF S&OP

THE FUTURE: BUILDING ON GAINS TOMAKE A BETTER VALUE CHAIN

CONCLUSIONS & RECOMMENDATIONS

REFERENCES

ABOUT THE RESEARCH

2

4

4

14

11

13

15

16

16

4 RESEARCH REPORT


INTRODUCTION

Sales and operations planning (S&OP) has been around for decades now and most supply chain practitioners have made at least some progress toward installing it in their organisations. Despite this, many feel the extended supply chain has not improved as much as it should have. Recent incidents such as the flooding in Thailand, which exposed so many in the hi-tech industry to shortages of disk drives, illustrate how limited our ability as a value chain really is to cope with disruption. Better alignment and visibility between trading partners could have reduced the impact of this disaster by more transparently assigning inventory according to business value rather than relying on point-to-point communications to match supply and demand.

The whole idea of S&OP is to consider all variables at once when looking for the best possible balance of supply and demand. Why has S&OP not evolved to the point yet where this happens not only within organisations but also between them? This research was designed to unbundle the broad concept of S&OP and identify two things: first, where progress has been made and where it has lagged; and second, how much value awaits those able to extend S&OP to its full potential.

S&OP BASICS

Alive and well, but still largely a supply chain initiative

In principle, good S&OP should be a balanced exercise of finding the right plan to match sales’ demand with operations’ supply, and ideally for the purpose of maximisng profit. Many pundits will even go so far as to say that finance or general managers should own the process – as is the case at Mölnlycke Healthcare, where finance uses the output of its integrated business planning (IBP) process to generate the quarterly forecast1. The company’s process, known internally as “Mölnlycke Business Management” is a relatively mature IBP process built over several years on top of an existing set of S&OP meetings spread throughout the company’s business units.

In practice, however, this isn’t happening in most organisations. In two-thirds, according to our recent survey of more than 380 supply chain professionals, it is supply chain or operations that runs the process. Encouragingly, 10% say sales or marketing run the process, but only a small minority (6%) have S&OP processes run by finance or general management. One implication of this is that any extension of S&OP outside the organisation is far more likely to be backwards to suppliers than forward to customers. If true, such extra-enterprise collaboration is likely to be unbalanced and more a process of supply adjusting to swings in demand than customers collaborating to dampen volatility.

Figure 1: Who runs S&OP Figure 2: How S&OP is organised

10

16

68

6 Finance/General Management

Sales/Marketing

Supply Chain/Operations

Other

% of respondentsn=387

Decentralised

Centralised

Somewhere in between


33

20

47

5NOVEMBER 2012


Another dimension of S&OP maturity involves whether the function is centralised or decentralised. On the one hand a decentralised process allows for relatively quick response to local needs. On the other, a centralised process permits a wider resource pool to be tapped when looking for supply/demand balancing solutions. One-on-one interviews around this topic suggest that many of the most mature organisations do some of both, with roll-ups of different levels as a way to provide a complete view of the business both in the immediate period and over the medium term. In a recent SCM World webinar, Nike’s global S&OP process owner, Mohit Loomba, offered an excellent description of how the footwear and apparel giant thinks about and manages these trade-offs to maximise profits2.

Our data shows that almost half of companies are operating with a centralised approach to S&OP, but that a third is doing some of both. The following quote from one supply chain executive is typical of those businesses where multi-level S&OP is in place: “We have two levels of S&OP: the operational S&OP led and managed by our supply chain team; and the executive S&OP, led by our finance manager. The scope and impact of both meetings is different.”

Outside the four walls: the role of contract manufacturers

In today’s global supply chain the use of contract manufacturing is fairly widespread, and in some industries like hi tech it is ubiquitous. The role of contract manufacturers can be critical in S&OP as they often represent some or all of the supply side of the equation. Among our survey base only 12% say they manufacture exclusively in house, meaning that the great majority has at least some dependence on contract manufacturers for their supply. This reliance may be intense, with close working relationships between manufacturing engineers from both the CM and the brand owner co-located at the CM’s site. Apple, for instance, is known for its extremely tight operating relationship with Foxconn. In such cases, the line between in-house and outsourced can become very thin indeed.

Given the data and the potentially critical role CMs may play in the supply side of businesses reliant on them, one might expect at least 40% of our respondents to engage their CMs in the S&OP process. The data corroborates this with a slight majority (52%) saying that CMs have a limited role and fully 22% saying CMs play “a substantial role”. This means that, for most, S&OP is already extending outside the organisation. The question is: how well is it working?

Figure 4: Role played by contract manufacturers in S&OPFigure 3: How companies manufacture

10

16

68

6 Primarily in-house

Exclusively through contract manufacturers

Primarily through contract manufacturers

Exclusively in-house


A limited role

None

A substantial role


23

51

26

Using an equal mixture of the two

12

10

20

10

6 RESEARCH REPORT


CURRENT LEVELS OF MATURITY

Many S&OP maturity models detail procedural elements around participation, balance, timing and information availability. These are essential to practitioners working to educate their colleagues and improve the S&OP process, which one SVP of supply chain in diversified industrial products describes as a “journey”. In our research, however, we attempted to look at S&OP maturity not only in terms of its penetration inside the business (in other words, its depth), but also how comprehensively it covers the supply/demand balancing problem at a value chain level (its breadth).

Depth of S&OP into supply, demand and product management

To get at the first dimension, we broke S&OP down according to how deeply the process engages each of three essential management domains of the business: supply, demand and product. Our survey asked respondents to place themselves on a 10-point maturity scale for each of these areas and provided example definitions of what it looks like to be high, low or in the middle of the scale. Each of the three is portrayed below.

As usual with such self-graded scaling questions, it is common for respondents to gravitate to the upper mid-range, and indeed our data does cluster around 6 and 7. The variation visible in responses is typically reflected in proportionally higher scores for 8 and 9 and lower scores for 2 and 3 when greater overall maturity is present in the population, and the reverse for immaturity. The critical understanding is that respondents were provided with a qualitative definition of how the scale reflects differences in detailed operational activities as one moves up the maturity scale (see Figure 5).

When all 387 responses are charted together on a single graphic, the first thing that emerges is a reasonably even spread across all three domains, meaning that most respondents feel the depth of their S&OP processes are similar in supply management, demand management and product management. One implication is that S&OP generally takes account of all its degrees of freedom when trying to balance supply and demand.

This result is surprising, primarily in the degree to which practitioners believe that they have penetrated and begun to influence product management and demand management. It suggests that there is understanding and acceptance of a model that is capable not only of scrambling to ship orders, but also of making business trade-offs beyond just supply chain. Examples of such depth include well-known hi-tech manufacturers like Lenovo and Cisco Systems, both of which have substantial control over their product bill of materials alternatives when looking for supply/demand balancing solutions, or Nike, whose demand-shaping efforts help to move inventory in-period as business units work to make targets for the quarter.

101 2 3 4 5 6 7 8 9

Demand management

Product management

Supply management

n=387Maturity scale (10 = highest)

Nu

mb

er o

f res

po

nd

ents

70

60

50

40

30

20

10

0

Figure 5: S&OP maturity in supply, demand and product management

7NOVEMBER 2012


Figure 6: S&OP maturity level definitions – depth dimensions

SUPPLY MANAGEMENT

1 2 3 4 5 6 7 8 9 10

Only looks at singleDimension (plant, unit) production plan for supply.

Looks at all plants with common products and any FG in 3rd party plants. Can do re-planning of internal plants.

Looks at all capacity, internal and 3rd part, with visibility to all inventory (RM, WIP, FG) regardless of location or stage of production.

Does not look to next tier for in bound material availability.

Looks to next tier for inbound materials and planned deliveries.

Has complete n-Tier supply capacity and cost visability.

Has only standard unit cost information. Has some elements of delivered cost information including standard transport rates and unit productions costs.

Has complete total-landed cost visibility for all supply commits to customer.

1 2 3 4 5 6 7 8 9 10

Only looks at sales plan figures for revenue.

Able to represent demand forecasts in productions terms across common supply resources.

Captures total demand picture across direct and channel sales. Able to shape demand with various levers.

Does not consider downstream demand drivers at all.

Able to use market intelligence as input for demand forecast refinement. Can consider promotions or other demand shaping tools.

Uses known demand drivers from sales and marketing to consider and orchestrate various demand scenarios.

Uses historical sales:units conversion to feed supply plan.

Can develop demand plans in the medium term to enable reservations on capacity or other resources.

Able to plan across near, medium and long term demand for all product families. Can lock in customers for long term demand.

Builds on a first-come, first-served assumption with manual “special expedite” orders as override.

Able to systematically prioritise demand according to executive decisions on which customers need precedence.

Can use price sensitivity and/or customer assurance offers to prioritise demand for strategic business.

DEMAND MANAGEMENT

1 2 3 4 5 6 7 8 9 10

Only able to consider the as-is product bill of materials (BOM) in planning production.

Can use product BOM information to proactively manage alternatives for components or production procedures.

Total product family visibility available for planning purposes. All variants and/or substitutes are know with cost information attached.

No visibility to future product pipeline. Planned new products are known and implications for tooling, materials and conversion are included in planning decisions.

All current and future product plans are available to planners who can systematically phase out old product and launch new product with minimal obsolete inventory.

Can only plan for finished goods SKU’s. Able to offer some postponement options based on product platforms with assembly close to customer.

Able to manage product platforms strategically with key customers and suppliers and to employ product complexity reductions for lower costs/more aglity.

PRODUCT MANAGEMENT

8 RESEARCH REPORT


Upon closer investigation it is evident that supply management is generally more mature in terms of its S&OP depth than demand or product management. The overall average maturity score for supply management, for instance, is 6.0, while those for demand management and product management are somewhat lower (5.9 and 5.8 respectively). At the extreme, supply management was far more frequently scored as a “9” than product or demand management. Some of the best examples of deep S&OP penetration into supply management come from the automotive sector, where tight synchronisation with tier 1 supplier operations assures unit-level sequenced deliveries of major components such as seats to assembly plants, as described by Yves Caracatzinis, VP of Global Supply Chain at Renault3.

Breadth of S&OP’s internal and external alignment, and information visibility

The other key dimension we wanted to understand was how broadly S&OP has reached across the wider value chain. This breadth dimension was broken down into three areas representing how well aligned the business is internally around S&OP, how well aligned it is externally with trading partners, and how visible information is across all concerned parties. Using the same maturity scale approach described above, we asked survey participants to rank their current maturity across these three breadth dimensions. These maturity scales are shown in Figure 7.

When the responses are charted together, we see a substantially different story in terms of maturity on the breadth dimensions than on the depth dimensions. It is clear that S&OP internal alignment is strong, while external alignment

Figure 7: S&OP maturity level definitions – breadth dimensions

1 2 3 4 5 6 7 8 9 10

Localised groups of S&OP practitioners driving process from supply side to ease production planning.

Senior functional leaders from both sales and operations accept and embrace S&OP discipline as appropriate venue for business decision making in the short to medium time horizon.

Senior business leaders (CEO sometimes) sponsor S&OP process with functional leaders committed as peers to optimize market opportunities.

Operations staff reactively uses S&OP principles to explain sales driven cost overruns.

Functional leaders educate each other on the cost and/or revenue implications of compromises made when plan and reality diverge.

Senior leaders use the process to direct activities across functions with a goal of creating and shaping demand and reducing costs.

Finance sees only a cost control initiative.

Finance sponsors S&OP and validates data inputs as well as plan outputs.

Finance looks to S&OP as an appropriate venue for due diligence on essential capital investment decisions.

INTERNAL ALIGNMENT

1 2 3 4 5 6 7 8 9 10

None. A handful of key trading partners are engaged in some degree of co-planning in either a pilot or otherwise limited scope relationship.

Selected important customers and the majority of the Tier 1 supply base are actively engaged in regular collaborative planning.

Surprises are common to both the upside and the downside.

Trading partners are conscious of “bullwhip effects” but rely largely on sales rep-to-buyer relationships to communicate into the S&OP process.

Trading partners align dedicated operational planning personnel with your planning personnel to synchronize information and decision making.

Little or no concept of the business as part of a wider value chain. Very internally focused.

Clear understanding of the role your operations play in the business success of your customers. Some appreciation of the impact your operations have on the cost and quality of your suppliers’ business.

There is an established picture of how your business fits in the wider value chain. Key trading partners accept the definition of this value chain and share value created willingly.

EXTERNAL ALIGNMENT

9NOVEMBER 2012


1 2 3 4 5 6 7 8 9 10

Disconnected spreadsheets and local information are manually manipulated to create production plans.

A common supply-demand planning system exists and is fed with data pulled from various enterprise systems.

A complete picture of both demand and supply with ready conversion across units of measure, time, BU and any other relevant nomenclature.

There is regular disagreement between plan and actual, sales and production, shipments and revenue.

Orders and shipments are regularly and reliably reconciled against a common S&OP process and one-number plan.

The information system supporting S&OP is seen as the “single version of the truth” and acts as the basis for the business‘ Annual Operating Plan.

Local systems provide minimal access beyond local owners.

The common S&OP process acts as a single point of visibility for all players (internal and external), but is not a perpetual instantiation of any particular information system.

The S&OP information system is cloud-based or otherwise open access and maintains a permanent live record of all supply-demand balancing data.

INFORMATION VISIBILITY

Figure 8: S&OP maturity in internal and external alignment, and information visibility

External alignment

Information visibility

Internal alignment

Nu

mb

er o

f res

po

nd

ents

n=387Maturity scale (10 = highest)

Upon examination, the data shows a clear lead for internal alignment maturity with an overall average of 5.9 against only 5.1 for external alignment and 5.6 for information visibility. At the extremes, too, internal alignment is twice as likely to be scored a 9 or 10 than is external alignment and half as likely to be scored a 1 or 2. Also telling is the fact that internal alignment had a mode of 8 – meaning that the most common response was well up the maturity scale.

It is evident that most supply chain organisations have persuaded the various functions within the business that S&OP can make a real difference in everything from customer satisfaction to cost control. The example of Mölnlycke Healthcare described above corroborates this more evolved level of internal alignment. It is also clear that most have made substantial progress in reconciling different data streams from various systems, as is seen in the case of data storage specialist Citrix, which merges supply system data from Baan and SAP with demand forecast information consolidated in Hyperion4.

On the other hand, comments from many supply chain executives point to a breakdown externally. One SVP of supply chain in consumer electronics, for instance, characterised external alignment as “very immature”. This executive went on to describe a dynamic of hidden demand information, gaming of inventory requirements, and unnecessary volatility. Further up the chain, an executive in the components industry talked about the poor appreciation of customers for long lead time production processes. Such views are common, especially in the hi-

70

60

50

40

30

20

10

0101 2 3 4 5 6 7 8 9

80

10 RESEARCH REPORT


tech sector, pointing to a systemic breakdown that many businesses feel in their working capital budgets and in big write-offs of excess and obsolete inventory.The implications of this research are that internal buy-in is there but that true collaboration with external trading partners is often not. Considering that three-quarters of our respondents say their contract manufacturers play at least a “limited role” in their S&OP process, it is clear that many have made steps toward better external alignment. One wonders, however, whether this engagement is too one-sided, with a supply-only relationship hampering performance of the overall value chain. The solid normal distribution of answers on information visibility suggests that the problem is not a matter of tools, but instead a lack of balanced business relationships in both the upstream and downstream directions.

Progress is being made

We did ask whether respondents felt that progress had been made over the past five years in either deepening or broadening their S&OP processes. The responses show substantial confidence that both have improved, but it is clear that more saw gains along the depth dimensions than the breadth dimensions. By a ratio of almost 6:1 respondents felt they had “absolutely” made progress toward deeper S&OP processes, but only just over 3:1 could say the same of broader S&OP.

Again, the research points to some real progress on the “journey”, as so many seem to call it, but a significant drag on improvement at the critical handoff between the customers’ buying organisation and the suppliers’ salespeople.

THE VALUE OF S&OP

Having gained an understanding of S&OP’s penetration into the functions of the business, as well as its reach across the value chain, we wanted to link improvement in the process to business metrics that create value for customers and/or shareholders. We asked first whether the movement towards better S&OP had impacted any of six key operating metrics.

What we found in aggregate was solid confidence that gains have been made in some of the lower level, more clearly causal metrics such as on-time delivery and supply availability, but less certainty about impacts on top-level things such as revenue and total supply chain cost. Nearly half of all respondents, for instance, felt that better S&OP had “absolutely” improved on-time delivery and supply availability (see Figure 10).

Figure 9: Successful move to deeper and broader S&OP processes over the past five years

Probably

Not really

Absolutely


51

34

15

Supply, demand and project management Internal and external alignment, information visibility

62

11

27

11NOVEMBER 2012


These survey numbers are borne out in practice at retailer OfficeMax, where S&OP efforts translated into a 60% reduction in daily out-of-stocks, a 40% reduction in owned inventory, clearly measurable cost savings in transport and logistics, and a 67% elimination of forecast error5. In another case an SVP of supply chain in the medical devices industry was able to clearly quantify more than $1 billion of inventory savings achieved while maintaining a 95% service level.

Total supply chain cost, on the other hand, is seen as having “absolutely” improved by just over a third of respondents, while nearly half could only say that this metric has “probably” improved. The numbers for revenue are even worse, with just over a quarter claiming absolute certainty that this metric has been positively impacted – nearly the same share who say it has “not really” improved. Forecast accuracy and inventory turns – two metrics that are among the most regularly scrutinised and well understood – have both improved as a result of deeper and/or broader S&OP processes, according to our survey respondents. These two scored lowest against the “probably” improved criteria, indicating less ambiguity around these metrics.

The implications of this data suggest that S&OP has indeed worked, but primarily to improve operational handoffs within the business. Better on-time delivery, for instance, is more a matter of meeting promises on day-to-day operations, while supply availability, its corollary, reflects cleaner communication about stock levels in the as-is business. More strategic, longer-term impacts such as total supply chain cost and revenue, which reflect better orchestration of supply/demand balancing, have been harder to get at. It is possible that these results reflect the lower levels of maturity seen above for breadth of S&OP, especially where that means engagement with the customer side instead of just the supply side.

To put some rough order of magnitude against gains on these metrics, we asked respondents to assess their degree of improvement on each since S&OP initiatives began. What we see in aggregate confirms the top-level data shown in Figure 10 – namely, that basic and relatively narrow metrics have generally seen at least “moderate” (~20%) improvement, while higher- level and more sweeping metrics have seen “marginal” (<10%) improvement. The best overall gains were seen in on-time delivery, where the average improvement is 20% and the largest proportion of respondents by far say the impact has been “significant”. Also scoring well is supply availability, which showed an average gain of 19%.

Absolutely Probably Not really

27

Figure 10: Improvements as a result of deeper/broader S&OP processes

47 45 8

46 41 12

1344 38 19

18 27 331417

20 32 2714

15

n=383% of respondents

42 41

38 47

2227 51

Supply availability

On-time delivery

Forecast accuracy

Inventory turns

Total supply chain cost

Revenue11

9

6

Figure 11: Improvement from S&OP processes to date

20 40 33

15 49 29

334512


7

7

10

11

8

11

41

35

37

37

47

46

On-time delivery

Supply availability

Forecast accuracy

Inventory turns


Revenue

Significant improvement (50%+)

Moderate improvement (~20%)

Marginal improvement (<10%)

No improvement

11

9

6

12 RESEARCH REPORT


THE FUTURE : BUILDING ON GAINS TO MAKE A BETTER VALUE CHAIN

S&OP is a fundamental process for making supply chains work. The results of our survey suggest that this is well understood and that S&OP has significantly improved day-to-day operations fairly deeply in most companies. It is also clear that while supply chain professionals are still doing most of the driving, the rest of the business is happily on the bus. Where we seem to be lagging is in reaching outside the four walls of the company to engage our trading partners, especially on the customer side, to improve the performance of the whole value chain. In practical terms, this means that customers who dictate their needs for inventory placement, capacity commitments, delivery windows or price are ruining it for everyone. Meaningful gains in on-time delivery lose some of their punch if they don’t translate somehow into more revenue, at lower total cost.

Looking ahead then, we asked our respondents to speculate on how much improvement they believe is possible against each of the six metrics discussed above. What we found was that they expect the past to predict the future. Participants were most bullish on gains in areas where they have already done well, including supply availability and on-time delivery. In each case the aggregate view was that efforts over the next five years should yield at least moderate (20%) improvements.

Interestingly, there is also a belief that meaningful gains will be made on forecast accuracy, with more respondents saying they expect a 50%+ jump over the next five years in this area than on any other metric. This may be wishful thinking, but it implies some hope that customer-side engagement will improve.

Where our respondents are more conservative is again in terms of impacting profit directly – either with top-line improvements or total cost savings. These bigger goals obviously demand a more holistic approach to balancing supply and demand, including probably broader participation in S&OP processes, especially with customers. The biggest bang for buck should come from the area that has seen the least exploration to date – namely, customers willing to moderate their demands in return for less friction and waste in the value chain as a whole. Obviously, the customer will need and deserve compensation for such reasonable behaviour.

A second, and complementary, report based on this research explores an approach that may offer such compensation and, in the process, create a marketplace for flexibility that works with the incentive realities of sales organisations on the one hand and purchasing departments on the other6.

Figure 12: Expected improvements from S&OP processes in next five years

29 47 22

28 47 24

284427

Significant improvement (50%+)

Moderate improvement (~20%)

Marginal improvement (<10%)


7

2

2

2

2

23

21

19

52

50

48

22

27

31

Forecast accuracy

Supply availability

On-time delivery

Inventory turns


Revenue

No improvement

2

1

13NOVEMBER 2012


Payback depends more on better external alignment than anything else

The final set of questions we asked was around how much value remains to be harvested with deeper and broader S&OP. Using the maturity scale definitions we offered earlier in each of three areas along the dimensions of depth and breadth, we asked respondents to speculate as to how much of the total potential value had already been captured.

In terms of going deeper into the business, it appears that supply management has already given up much of what it can to the cause. Almost 75% of respondents believe they have already captured at least 20% of the potential gains out there, with a quarter claiming that over 50% of the benefits are already in the bank. Demand management, in contrast, is seen by only 19% of respondents to have been tapped to the tune of at least 50%. Most think they are just at the beginning of this journey.

One supply chain executive we interviewed, for instance, described his business as being “about a third of the way through it” and speculated that lead times could probably be cut by another 30-35% while removing an additional 25% of inventory from the chain. In this case, an institutionally mature S&OP process has delivered benefit, but promises more payback in the future.

Finally, on the breadth dimension we studied the same issue with the same approach. The data confirms much of what has been argued so far – namely, that most of the big payback from better S&OP lies in improving external alignment. The highest degree of certainty that we’ve taken most of the value off the table already sits with internal alignment. Just over a third of respondents say they have already “identified and captured” over 50% of the potential value of S&OP associated with better internal alignment. In stark contrast, our respondents see almost the exact opposite situation with their companies’ external alignment. In fact, more people believe they have seen none of the potential value yet than say they have achieved 50% or better. In the case of the third breadth element, information visibility, it appears that respondents believe there may still be some business case justification for additional investment here, but that they are by no means operating in the dark.

The following quote from a supply chain VP in electronics typifies the hope that better external alignment can dramatically improve the value chain: “In my mind,” he says, “we’re not even part way there… it’s a huge gap.”

Figure 13: Value captured so far – depth dimensions Figure 14: Value captured so far – breadth dimensions

29 47 3

12 46 41

22

50 27 4

18 27 3317

279


42 41

15 35

Supply management

Demand management

Product management

19

40

A lot (50%+)

Some (~20%)

A bit (<10%)

None

35 43 2

12 46 41

20

42 28 4

1817

2711


42 41

10 42

Internal alignment

Information visibility

External alignment

26

37

A lot (50%+)

Some (~20%)

A bit (<10%)

None

14 RESEARCH REPORT


CONCLUSIONS & RECOMMENDATIONS

The net message here is that S&OP, while well understood and fully operational in most businesses, is miles from fulfilling its potential. Part of the opportunity that remains lies in pursuing deeper penetration of S&OP principles in areas of the business outside of supply management. By far the biggest payback, however, seems to await those who can master external alignment as part of broadening their S&OP processes. In practice, this means persuading customers to engage in S&OP with an open and flexible mindset looking for higher-level business impacts such as more sales and better margins. Our research data suggests that the rewards are there and even (for the most part) the information tools needed to do the job. It may be simply a case of changing the dynamics between trading partners.

Organisations looking to improve their S&OP processes should:

• Maintain a commitment to documented and formalised processes around supply and demand planning, as well as a reconciliation process for identifying and making the right business decisions on unavoidable trade-offs. This includes engagement of business owners (general management) at regular intervals to make the tough decisions within the process framework. It also means dedicating at least some full-time process owners to define, promote and navigate adoption of the process as it embeds in the business.

• Identify and promulgate meaningful metrics that approximate profit impacts of trade-off decisions made in the S&OP process. Forecast accuracy, perfect order and the like are useful diagnostics, but not enough to convince business owners that consistency in decision-making around trade-offs can affect profits. Consider setting baselines around customer or channel profitability as a way to monitor progress toward better supply/demand balancing.

• Work toward a better cost-to-serve model that is capable of quantifying the cost of flexibility. Much of S&OP has focused on improving forecasts, which is difficult in the face of institutional resistance in the sales organization on one side and purchasing people on the other. Good cost to serve modelling will help differentiate truly valuable flexibility from bluster and may help both sides get more value from the trading partner relationship. This also may help break the deterministic optimization habit that most supply planning is based on, leading to more agility in the supply chain.

• Seek out the handful of bigger, more sophisticated customers that are probably already engaged in operations-to-operations collaboration at levels above sales and purchasing. These few accounts generally have the resources and business case to justify investing in better demand transparency backwards toward their supply base. This could lay the groundwork for better external alignment, which appears to offer so much benefit to all parties.

15NOVEMBER 2012


REFERENCES

Leveraging integrated business planning to align supply chain with corporate objectives – Don Harding, head of supply chain AsiaPac, Mölnlycke Healthcare; SCM World webinar, S&OP series, 28 August 2012.

S&OP: The invisible engine of profitable growth in sports footwear/apparel value chain – Mohit Loomba, global processes manager, sales & operations planning, Nike; SCM World webinar, S&OP series, 12 June 2012.

Ensuring production agility and realigning inventory at Renault – Yves Caracatzanis, vice president, global supply chain, Renault; SCM World webinar, 13 March 2012.

Re-architecting the Citrix supply chain – Fred Tiso, vice president, global supply chain operations, Citrix Systems; SCM World webinar, 22 February 2011.

Supply chain transformation at OfficeMax through CPF&R and S&OP integration – Nikhil Sagar, vice president, retail inventory management, OfficeMax; SCM World webinar, S&OP series, 17 April 2012.

See The Missing Link in S&OP: Flexibility Pricing, SCM World, December 2012 (forthcoming).

1

2

3

4

5

6

16 RESEARCH REPORT


ABOUT THE RESEARCH

Invitations to complete an online survey were sent to corporate members of SCM World’s global community and to other supply chain and operations practitioners on our database in August 2012. In total, 387 completed responses were received during the two-week survey period and the key demographics of this sample are as follows.

16

15

1112

15

12

9

10

13 34

18

7

3317

27149

% of respondents n=386

42 41

15

Hi-Tech

Food & Beverage

Industrial

16

40

Chemicals

Healthcare & Pharma

CPG

Logistics & Distribution

Retail

Professional Services

Utilities & Energy

Agriculture & Mining

Software

Paper & Packaging

Metals

Fabric & Apparel

Automotive

Media & Telco

7

3

2

2

2

2

2

2

2

1

29

7 VP/Director

Manager/Head

Other

SVP/EVP/Board Level


14

50

Asia & Australia

North & South America

Rest of the World

Europe, Middle East & Africa


1

17

33

$1bn - $5bn

$5bn - $10bn

$10bn - $25bn

- $1bn


18

25

12

20

7

18

$25bn+

Undisclosed

Geography: Almost half of the respondents are based in the EMEA region, with a third in North and South America and just under a fifth in Asia-Pacific.

Industry sector: Hi-tech, food and beverages, industrial and chemicals firms drew the largest number of respondents. The healthcare/pharmaceutical, consumer packaged goods and logistics and distribution sectors also each comprised at least 7% of the sample.

Company size: In terms of revenue, almost 4 out of 10 respondents work for companies with more than $5bn in annual sales, with a quarter in firms less than $1bn. Just under a fifth of the sample did not disclose revenue information.

Job level: Just over a third of respondents are at senior executive, vice president or director level, with half at manager or head of department level.

15

17NOVEMBER 2012


SCM World, a RaptureWorld company, is the leading global community and think-tank for senior level supply chain executives. Hosting a dynamic and interactive annual programme of end-user and academic-led webinars, events and research projects for its members, SCM World is the de-facto benchmark for forward-thinking supply chain leaders and their global teams to stay current through cutting-edge content. Organisations from across multiple industry verticals use SCM World to further enhance supply chain learning and development, including the likes of HP, Nestlé, Tyco, RIM, Nike, GlaxoSmithKline, Cisco, Schneider Electric, Shell, Motorola, The Dow Chemical Co, BASF, Applied Materials and many more.

www.scmworld.com

Contact:

Geraint JohnSenior Vice President, Research+44 (0) 20 7357 [email protected]

ABOUT SCM WORLD

s&op scm world

Documents