Procurement has a key role to play in ensuring that sales and operations planning processes deliver the goods for their organisations
Sales and operations planning (S&OP) is not a new phenomenon. Processes to regularly balance supply capacity against market demand have been around for decades. Traditionally they have been designed around a series of separate demand and supply meetings, attended by sales, marketing and operations, but owned by the planning function.
However, with rising pressure to manage longer and more complex supply and distribution networks, many companies are revisiting their approach to S&OP. Chief procurement officers are increasingly focused on S&OP as a significant mechanism to ensure that suppliers add strategic value and protect competitive advantage.
Among the pressures that today’s organisations contend with are an increasingly complex product range to accommodate global market needs and support legacy customers; multiple demand sources, with differing demand profiles, often via intermediaries; and increasing product commoditisation, which places huge pressure on margins and demands that every opportunity be exploited.
Business leaders want consolidated business and supply chain plans that:
- enable better business decision-making to maximise profit and manage supply chain risk;
- meet revenue targets;
- forecast profit and loss performance;
- identify product portfolio profitability so action is taken to exploit every market opportunity to increase profitability and minimise the impact of market losers;
- use third-party capacity to better effect and competitive advantage.
But research by Atos Consulting and Aberdeen Group among 380 companies worldwide found that whereas 92 per cent of firms have an S&OP process, 62 per cent were not achieving any quantifiable benefit from it. Furthermore, less than 10 per cent of companies are aggregating their sales and operations plans across the entire supply chain. By constraining their S&OP process to the internal supply chain, they are forsaking the opportunity to deliver the best-in-class supply chain performance of companies that fully employed S&OP and leverage the benefit of their external sourcing activities (see figure 1).
Common limits for S&OP maturity
At the vanguard of S&OP development there is a wave of initiatives capitalising on new technologies and developing a financial focus for these activities. But for many organisations it is limited to tactical demand and supply planning. There are a number of reasons for this, including:
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S&OP being limited to internal manufacturing facilities. Frequently, S&OP is a factory-centric activity, limited to internally made products and ignoring the impact of both material suppliers to manufacturing and externally sourced goods. Consequently, key suppliers are given less information on the future shape of demand and are less able to anticipate movements in demand. Supplier schedule adherence can suffer and excess inventory is frequently used to compensate.
- As supply chain lead times are extended – for instance, through procurement from East Asia – and pressure on margins reduces inventory, the ability to manage the supply risk of external suppliers is often more vital than the internal supply chain.
- By considering the capacity of key external suppliers – in terms of specific tooling, for example – and communicating future demand scenarios, it is possible to simultaneously reduce risk, reduce cost and improve supplier relationships.
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S&OP being applied too rigidly to respond to circumstances. Pulling together data to configure S&OP plans can be a time- and resource-intensive task if you don’t have easy access to the right information. The complexity of data from a variety of sources can mean S&OP is limited by data availability and time constraints. It becomes a rigid, monthly process, unable to cope with the rapidly changing landscape of fast-moving markets, and a supply-side tactical planning tool with no impact on profitability.
- Whereas all S&OP processes will be based upon a regular “drumbeat” of meetings, effective processes can identify significant discontinuities within the marketplace and respond to them in real time. A good example of S&OP being applied to resolve a fast-evolving mismatch of demand and supply can be found at the British manufacturer and retailer Boots, where its ability to rapidly model and evaluate internal and external supply capacity enabled the company to capitalise on a major market opportunity.
Case study: Boots
When the BBC reported that an independent body had confirmed that Boots’ Protect & Perfect Serum started to reverse the signs of ageing, demand exploded. Sales increased by 2,000 per cent, with one bottle selling every 10 seconds. At the peak, 24 weeks’ worth of Protect & Perfect was delivered into stores overnight, only for it to sell out by the end of the next day.
We co-ordinated an immediate meeting of representatives from each department to identify Protect & Perfect Serum supply issues, understand the impact on other products and develop a supply plan based on volume projections. By putting a planned and controlled set of S&OP systems in place, the team ensured enough product was made to meet demand.
Other products were also identified that were likely to sell in increased volumes alongside Protect & Perfect. The same S&OP process was applied to these “halo” products to ensure an unbroken supply.
Today, 24,000 bottles of Protect & Perfect are made every day to support the continued demand of one bottle selling every eight seconds. Thanks to the improved S&OP process, this is now nothing but good news for Boots.
Case study: Ministry of Defence
The Defence Logistics Organisation (DLO) procures equipment and support services for the British armed forces. It manages an asset base of £15 billion and has a resource allocation of about £9 billion, putting it in the same bracket as many companies in the FTSE 100.
Year-on-year budget pressures and labour-intensive (and fragmented) financial and equipment planning processes created a serious gap between financial budgets and equipment requirements plans. As a result procurement teams were failing to achieve service levels and other business targets.
It was difficult to track monthly expenditure and prioritise requirements, with much time and resources being consumed trying to align materials requirements with financial plans at each month end. Furthermore, senior management had insufficient visibility to identify and address budget and operational constraints.
We created a comprehensive S&OP planning tool and supporting process so that procurement teams could create one set of numbers that defined both the demand and the financial plan. This enabled the investigation of opportunities to optimise inventory and improve process performance by monitoring a number of key criteria that significantly affected performance. Integration with operational planning was achieved by setting appropriate planning rules to ensure that day-to-day purchase decisions were aligned with the financial plan.
The system enables senior management to identify the optimum budget, easily track in-year expenditure and decide where to deploy funding to best effect. As a consequence, service levels are increasing and inventory falling relative to funding.
Both case studies show that S&OP’s role in business management is increasingly significant. The supply chain impact of externally supplied materials is frequently greater than that of internally supplied products. There is now a clear requirement for CPOs to lead the involvement of their own teams, and for key external suppliers to actively participate in S&OP. The benefit is an increased ability to manage risk and profitability, and to fully leverage the competitive advantage offered by external suppliers.
CHECKLIST:
Advice for CPOs
1. Lead by example – ensure CPO presence at all S&OP executive review meetings, and make each meeting meaningful.
2. Communicate the importance, relevance and position of S&OP to all members of the procurement function.
3. Ensure the procurement function is represented at all key S&OP meetings by senior personnel – this is a critical business management process.
4. “Delegate up”. If staff can’t attend, their senior manager must go in their place.
5. Identify key suppliers and engage them to ensure their active participation within the S&OP process – including modelling of their capacity.
6. Create communication channels for non-key suppliers so they understand the output of the S&OP process.
7. Include supplier performance metrics in the S&OP review process.
8. Ensure supplier lead times are maintained within planning systems.
Lee Timmins (lee.timmins@atosorigin.com) is lead partner for supply chain at Atos Consulting in Leeds, UK
