Demand

Don’t Let the Old Horse Die

by Lora Cecere on August 30, 2014 · 0 comments

Sales and operations alignment. It is the promise. For many this seems like an old horse to ride. It is tough because operations and commercial teams are not naturally aligned, and the implementation of an S&OP process is not a quick fix.

The processes of S&OP are now over 35 years in evolution. In many ways they are quite different, and in many they are the same. Let me explain.

What Is Different?

They are different because in today’s organization, there is not one S&OP process. Instead there are usually four to six. Each needs to be developed and refined.

Organizations are also more complex. With the evolution of global organizations, decision processes are more matrixed and the processes of planning are more complex.

The technological challenges are also greater. The average company has three to five ERP systems, and the data for S&OP comes from an average of 15 systems. There is a growing need for a visualization layer across the matrixed organization and the many technologies that need to support the S&OP process.

These are the new challenges.

What Is the Same?

The challenges for S&OP are steeped in organizational alignment and culture. The best S&OP processes are aligned and balanced with clear goals. This is more difficult that it seems. As can be seen in Figure 1, 68% of processes are out of balance. When a process is balanced the drivers of go-t0-market plans are aligned with the goals of the operations. When there is balance, S&OP improves the potential of the organization to perform on the Effective Frontier—to balance growth, profitability, cycles and complexity.

Figure 1.

The organization is not naturally aligned to the same goal. As shown in Figure 2, the greatest gaps in the organization are between operations and sales. The processes of S&OP can improve alignment.

Figure 2.

This happens more quickly if the process meets three conditions:

  1. The S&OP process should report to the profit center manager.
  2. The focus needs to be on driving a balanced portfolio of metrics that goes across the organization. Team members need to be held equally accountable for growth, inventory, profitability, customer service, and forecast accuracy. The process needs to be very disciplined.
  3. S&OP planning needs to be tied to execution. Reliable processes build trust. This happens through the development of playbooks and weekly reviews of the S&OP plan with corrections based on the playbooks. (Planning should not be confused with execution.)

Why It Matters

Today, most companies are struggling with the ability to improve operating margins and reduce inventory levels. One in nine companies are stuck at this intersection, and as can be seen in Figure 3, more companies have seen a deterioration in inventory performance rather than driven improvement.

Figure 3.

An effective S&OP process improves alignment between sales and operations. (To understand how we measure alignment, and the impact of alignment from S&OP maturity, reference our report on Supply Chain Alignment.) Based on the work we’ve been doing on the Supply Chain Index, and gauging supply chain improvement, we wanted to understand how improvement in alignment improved inventory turns. To do the analysis, we cross-tabbed multiple studies that we completed in 2013 and 2014 and then enriched the data with our financial ratio data base. The goal was to track the impact of improvements in alignment on financial ratios. We find that improvement in alignment can drive up to a 10% improvement in inventory turns; whereas the lack of alignment can result in a negative impact on inventory turns of 2%.

Balance drives alignment. Alignment drives balance sheet improvement. Keep riding the horse….

It is morning in London, and I spent the week with a client working on the implementation of the SAP IBP technology built on HANA. It is great to see this product being used by clients.

Next week I will be in Stockholm discussing European clients’ progress on the Effective Frontier at the Optilon Conference.  With only two weeks left before the Supply Chain Insights Global Summit, the team is hard at work on putting the finishing touches on new research and insights for the Supply Chain Innovator. Join us at the conference to hear us launch  The 15 Supply Chains to Admire. This analysis is based on both performance and improvement of companies within their peer group on growth, Return on Invested Capital (ROIC), Operating Margin and Inventory Turns. It will conclude a two-year research project. If you cannot make the summit, join us through the live stream via our ustream broadcast.

I hope to see you in my travels.

 

dave biegger headshot

Over the course of the last two years, we at Supply Chain Insights have worked on a methodology to gauge supply chain improvement. We named it the Supply Chain Index. We have found that supply chain metrics are gnarly and complicated. During the last two months, we have been interviewing supply chain leaders to get their views on the methodology.

We believe that a supply chain leader is defined by both the level of performance on the Effective Frontier (balance of growth, Return on Invested Capital, Profitability and Inventory Turns) and driving supply chain improvement. We think that it requires a focus on both total performance and measured supply chain improvement. We also believe that it needs to be based upon their peer group. Supply Chain Excellence as defined by a methodology where all companies are put into a spreadsheet and compared across industries is meaningless.

In this blog, we share an interview with Dave Biegger, SVP of Campbell Soup. Dave will be speaking on his journey along with other supply chain leaders at the Supply Chain Insights Global Summit in Scottsdale, Arizona on September 10th and 11th These interviews of supply chain leaders will be collated into our fourth book on supply chain excellence which will publish at our conference in September 2015.

Background on the Supply Chain Index

During the period of 2006-2012, Campbell Soup Company outperformed its peer group on the Supply Chain Index. The Index is a methodology developed by Supply Chain Insights LLC, in cooperation with the Operations Research Team at Arizona State University (ASU), to gauge supply chain improvement. In the Index, corporate progress is calculated on balance, strength and resiliency improvements. The balance factor tracks progress on both year-over-year growth and Return on Invested Capital (ROIC), and the strength factor is based upon improvement in both operating margin and inventory turns. Resiliency is the tightness of the pattern, or the reliability of operating margin and inventory turns results. Together, the three factors form the Supply Chain Index.

The Supply Chain Index methodology is based on three principles. The first is that the supply chain is a complex system that has increasing complexity. It needs to be managed holistically as a system. The second principle is that the supply chain needs to be managed cross-functionally, end-to-end, from the customer’s customer to the supplier’s supplier; and as such, it cannot be viewed as just another function. The third principle is that the supply chain is a significant contributor to corporate performance, and that supply chain improvement can be tracked and measured based upon public financial statements.

Figure 1. Food and Beverage Company Performance on the Supply Chain Index for the Period of 2006-2012

On July 24th, I interviewed the Campbell team –under the leadership of Dave Biegger, SVP of Global Supply Chain, to gain insights on the Index, and their journey. Dave joined Campbell Soup Company in 2005 after a 24-year career in product supply at Procter & Gamble.  Dave asked his team to join him for the discussion. Here are the notes from that discussion:

What has Campbell done to demonstrate such strong performance over the last 6-year measured period?

Eight years ago, we started with a focus on Total Delivered Cost (TDC) and elevating our cost savings program performance, as well as eliminating sub-optimized cost efforts that might have helped in one specific area, but hurt our overall performance. We took a holistic approach to accomplish this goal by developing training programs and tools to ensure that all employees had an accurate picture of total cost and how to drive improvements. We built these into continuous improvement programs such as Lean Six Sigma, while also setting goals to drive breakthrough cost savings to supplement continuous improvement savings.

I strongly believe diversity of experience and thought leads to improved performance. This is why our next step was focused on building an effective supply chain team by developing people and leveraging their talent. We wanted to create the best mix of people with the right skills and experiences and put them into the right positions. The key was to build upon the tremendous experience that already existed within Campbell, as well as attract great talent from other world-class companies and supply chain organizations. That blend has been key in helping us to make significant improvements.

Any time you make a significant change or improvement, it’s essential to understand the culture of your organization when developing an approach. At the beginning of this journey, we tended to behave more in silos in parts of the company, both across the plant network and across functions. This obviously made it more challenging to implement new concepts in a standardized way and to reapply great solutions.  It became clear at the time that starting small with pilots to prove concepts was an important way to build support and alignment at Campbell. We began with a focus on operational reliability; making products right the first time with no waste in a reliable manner. We needed to ensure that we had a strong and predictable base capability to build upon. This work was organized under an Operations Excellence program, a pillared approach supported with clear leadership and matrix teams.  Our next focus was to introduce produce-to-demand as an operating strategy, or the implementation of demand-driven concepts. We’ve made great progress, and I am proud of how well the organization now works together through improved communication and shared resources. We simplified our SC strategy and communicated in a straightforward, one-page document that laid out primary goal areas.  Our intention was to maintain constancy of purpose and continuity. These strategy areas remain important today, while our priorities and tactics evolve as we make progress.

How did you approach your cost savings program?

As with all supply chain organizations, when we focus on big cost opportunities, we normally deliver savings in those areas. But we created a model to ensure that we were systemic and structured in how we approached cost savings. To drive the sustainable savings program at a best-in-class level, and to ensure that we could reduce costs faster than the cost of inflation, we implemented specific standards. In our program, cost avoidance, while desirable, does not count towards the metric. In addition, a one-time cost savings does not count either. As a team, we agreed to count only recurring savings that offset inflation. Our aim was to maintain a 3 to 3.5 percent savings as a percent of year-over-year total deliver costs. We set a goal that 50% of our target would come from continuous improvement and the other half would come from breakthrough innovation and thinking. We’ve developed a clear model with specific accountabilities to ensure success in delivering strong cost savings performance year after year. Our approach simply breaks accountabilities and goals across the areas of Manufacturing, Logistics/Network Optimization and Ingredients/Packaging.

What have you learned?

It’s important to recognize the interdependencies of capabilities and programs. Each focus area alone is important and can bring great value; but, if key focus areas and programs are managed together holistically versus independently, the opportunity becomes much greater. Campbell’s programs included Operations Excellence to build a strong base, Network Optimization, Product and Process Simplification, Visibility/Orchestration of the SC network (including S&OP), and implementing an Operating Strategy consistent with Demand-Driven Supply Network capabilities. As we improve in each of these areas, we also open up opportunities in the remaining areas.

As we became more efficient with our assets and began building more flexibility into our plants, we improved cost and service results, along with creating an opportunity to streamline operations, which fell under our Network Optimization program. This has led to almost a 50% reduction in the number of plants across Campbell’s global footprint, and although each decision has been difficult, the cost impact has been significant and important.

Through our common platform/postponement initiative, we simplified product designs by eliminating non-value-added flavors or ingredient dice sizes. This also improved the consistency of our product quality, reduced costs and inventory, and enabled improved reliability through the resulting simplified process. This is challenging work because it is highly dependent on cross-functional collaboration. We would not have succeeded without a team effort across R&D, the business leaders, and SC disciplines of engineering, procurement, and manufacturing. This dedicated team of 20, a majority being R&D resources, was self-funded due to its ability to quickly drive savings. Most important about this effort was that we were clear on our principles that quality was more important to us than cost. This meant that every change we made had to result in equal or better quality at equal or lower cost.

In addition to quality, we’ve created capabilities that will support improved customer solutions and enable growth for the business. Flexibility is not just about asset rationalization, but also about unleashing growth in different product formats, packaging sizes, etc. It’s not just flexibility within the line, but across the entire production system. After five years, we’ve nearly completed implementation of our simplification effort, Soup Common Platform, which consisted of three phases:

  1. Start with formula (recipe) simplification.
  2. Focus on process simplification (We were able to eliminate unnecessary processes, which not only made it easier and more cost effective to make the product, but also improved quality by minimizing the impact on ingredients through the process).
  3. Equipment and plant design (Our focus was on the plant of the future. We reduced 40 percent of assets and still make the same amount of product with greater flexibility. Our final implementation of this program is happening next year).

We started these improvement efforts in the center of the supply chain with an emphasis on building manufacturing capability, reliability and flexibility. We now have the ability to focus more on materials management and suppliers upstream, and distribution and customer solutions downstream, to drive optimization. While we are nearing the end of our work on the Soup Common Platform, we continue to focus on strengthening relationships and ensuring greater cooperation with our suppliers and customers.

Were there any improvement efforts that did not go well?

One of our opportunity areas was to improve our planning processes and make the proper investment in Advanced Planning Systems. We needed to make the investment because our system was aging and we wanted to invest in a way that supported our demand-driven agenda. However, we simply attempted to do too much too fast, expecting we could quickly move ahead with integrated planning. S&OP also presented challenges, but we have since changed to a more structured approach to drive greater business ownership. While the implementation was a challenge overall, we’ve moved beyond it.

Over the last year, we focused on ensuring that our systems and tools were delivering as expected. On the S&OP side, we haven’t done anything that’s drastically different from all the textbooks. Where we’ve put particular emphasis and made a step change was in adapting the culture to have a shared understanding of how we run the business. S&OP success depends on a strong culture that supports a cross-functional process. We have a good cooperative effort and understanding from marketing, sales and supply chain on how to make decisions that ensure the success of S&OP. We continually reinforce this within our culture, as well as maintain ongoing process improvement.

Why do you think Campbell will fall on Index ratings in the future?

We had about seven consecutive years of constant improvement in our supply chain at Campbell, across virtually every result area. While I was surprised to see us at the top of the list for that period knowing there are so many strong supply chain organizations in our industry, it also matched what we had been experiencing with all of the results improvements we had delivered. Assuming the measure is generally effective at recognizing improvement, I have to assume we will fall on the list over the next few years. Some of the decline in ranking will be due to the issues I mentioned above with the planning system implementation and the impact that had on results. The bigger impact will come from a conscious choice we made. As part of our Network Optimization program, we consolidated our supply chain network in the U.S last year. While the driver for this move was excess capacity, as well as a compelling cost savings benefit, we also knew there would be a two-year hit on our inventory performance until the flexibility was created at other sites to allow the inventory levels to fall and resume the improvement trend we had been following. Finally, we all understand that margin is not fully controlled within supply chain. We have two things that have challenged margins recently at Campbell:

  1. Mix due to the addition of recently added high-growth business acquisitions that come with a lower margin rate
  2. Trade investments that will return to more historic levels in the future.

As we move past some of the challenges we had over the past year or two, and return to the inventory improvement path we had been delivering, I expect that we will see solid improvement in Index ratings.

If you had to do it all over again, what would you do differently?

We have enjoyed excellent results over most of the last several years, but there are a few things I would change if we could go back. We tried to do too much too fast. As a team, we committed to implementing demand planning and supply network planning all within the same year, followed by inventory optimization and demand sensing.  We also underestimated the organizational investment it would take to achieve our desired results. In the end, we experienced important learnings, built critical capabilities, and will now be able to generate more results improvements in the future because of that effort. More broadly, we could have been more balanced in our approach to integrating an already aggressive supply chain agenda with a rapidly increasing product innovation agenda.

Despite some of our recent challenges, we feel very good about the contributions that the supply chain team has made at Campbell for a meaningful stretch of time. Without a longer-term vision, and a willingness to take risks by embracing big opportunities and committing to big results improvements, we would have only made incremental progress. If I had to simplify what has been most important for us, I would say the two keys have been people (leadership) and an integrated approach. It’s no surprise that strong leadership and great people make the difference, especially when the organization is engaged and collaborating both within the supply chain and across all other functions. The power of an integrated approach, connecting multiple complex improvement efforts, has clearly driven much stronger results progress than we would have seen from independently driven initiatives, even if all had been successful individually.

Conclusion:

Figure 2. Supply Chain Index Rankings for 2006-2013

As we can see in Figure 2, the impact of Campbell’s aggressive supply chain projects in 2012-2013, in conjunction with some changes in the business, as Dave predicted, had a deleterious impact on Campbell’s rankings on the Supply Chain Index.

The good news is that the team was aware of the results and feel that they have righted the ship in 2014. The lessons of the team in the trials and tribulation of building supply chain excellence apply to all. It takes many years to build a culture to improve supply chain excellence, and many well-intended technology or plant design projects can quickly take a supply chain team off guard. Luckily for Campbell, this supply chain team had the right stuff to self-correct and put the supply chain back on course.

We look forward to getting your thoughts on the Supply Chain Index. To learn more, join us for our webinar on the Supply Chain Index for the Industrial Sectors of consumer electronics, automotive, automotive suppliers and semiconductor manufacturers August 12th at 11:00 EST. Additionally, at our Supply Chain Insights Global Summit on September 10th and 11th, we will publish the results for all industries for the periods of 2006-2013 and 2009-2013 in a report, The Supply Chains That We Admire. The Supply Chains That We Admire report will have a detailed analysis, by industry, on supply chain performance on operating margin, inventory turns and ROIC, along with the analysis of year-over-year improvement. It will also include some analysis of companies like Campbell Soup that are willing to share their stories.

I have found it quite exciting to look deeply at the results of all public companies over these periods and reflect back on the work that I have done with many of them over my 12 years as an analyst. I firmly believe that supply chain matters to corporate performance, and I am proud that I can now tell the story. I had a call this morning with a group of financial investors that are adopting the Supply Chain Index in their rankings, and Supply Chain Management Review in the fall will feature a monthly article on industry sector results. We look forward to connecting with you and your team as the concepts take hold.