Encore. This month, I gave a repeat performance. I gave it again the month before. And, the month before….
The S&OP IE Group asked me to present the same presentation that I gave on January 20th in Las Vegas at their new Integrated Business Planning (IBP) conference in Atlanta. I was also asked to present the presentation at the Extended Supply Chain Conference in London. Seems that my article–ENOUGH!—got some attention and caused some industry tongues to wag (reference blog article http://www.supplychainshaman.com/supply-chain-planning/enough/). The presentation link (from Slideshare) from the last conference is (http://slidesha.re/fyPua1). So, an encore it is!
So, what did I present in Vegas?
Clearly, what happens in Vegas should not stay in Vegas. As a contrarian, I am pushing back on the concept of Integrated Business Planning (IBP). It seems to now be all the rage. For more insight into my presentations, reference the video links:
http://ie.arcticfoxtv.com/216/letter-perfect-practice-imperfect – Boston 2010
http://ie.arcticfoxtv.com/298/letter-perfect,-practice-imperfect – Vegas 2011
http://ie.arcticfoxtv.com/301/letter-perfect-practice-imperfect – Atlanta IBP
A Contrarian View
This is a contrarian view. I am swimming upstream against the populist analyst opinion. Why, I am doing this? When I was a Gartner analyst in 2002, I gave the market what I feel was bad advice. I wrote an article recommending that companies tightly integrate the S&OP plan to financials. Through subsequent research, I found that I was wrong, and I feel bad about it. My goal is to prevent others from incurring the same pain.
So, again, why I am I pushing a contrarian view? Simply said, it is because it is the right thing to do. I care about my clients and want them to be successful. I have worked now with over 400 clients on S&OP. Here I share my argument. Please let me know what you think.
Getting past the Nuance
To get started, let’s get beyond the nuance of the debate. This debate is not about the TERM. I REALLY don’t care what term is used or what process is called. I agree with Shakespeare, “A rose by any other name would smell the same….” But, I don’t agree with the conventional views on Integrated Business Planning (IBP) in three areas: focus, emphasis and readiness.
Before we get started with the argument, let me get the obvious out of the way. Yes, of course I believe that we should include financial information into the tactical planning process! And, similarly, I believe that we should include finance input in the S&OP process. To do this, does not necessitate a name change. However, to me, it also does not mean tight integration with financials. I find this as a common mistake with customers.
The number one change management issue with S&OP is and continues to be the role of the budget. If the company wants to maximize opportunity, the budget should be an input into the process, but not constrain the process. Likewise, the S&OP plan should be an input into the financial forecasting process. Why? The financial budget is usually anything but, market-driven, is outdated the moment that it is published and is not a good basis to begin modeling the issues of the supply chain of mix, constraints and variability.
What I think we are talking about is maturation of the process (see figure 1). As the process matures, both supply chain and financial modeling inputs change to support the goal. Likewise, the modeling technologies for what-if analysis mature.
Figure 1: Maturation of S&OP Planning Processes
Yes, this is different than the S&OP definition of 25 years ago. And, it is different than most definitions that I see of IBP. However, this is where I see business leaders focused.
Focus: From Demand Driven to Market Driven
Supply chain disruption is everywhere: cataclysmic events in Japan, the Great Recession, scarce commodities, and the meteoric price rise of gasoline. The unpredictable, but rising demand in China coupled with the tightening of supply and turmoil in the Middle East. It goes on and on. Supply chains are reeling. Where is the recovery from the worst recession of our lifetime? When will supply chains start to settle down? It is clear that that it will not be anytime soon. Successfully managing the supply chain through change, will define today’s leader.
When I mention “commodity costs” to supply chain managers, they will often twitch. Their jobs are on the line. Supply is tight, expensive, and unpredictable. The pressure on price is intense. When supply chain management technologies evolved, Advanced Planning Systems (APS) improved visibility for manufacturing constraints and enabled better management and allocation of resources. However, as the constraints move from manufacturing to sourcing, there is little –often no –integration between supply chain management and sourcing technologies to better manage commodities.
While the commodity may vary by industry –whether the pressure is coming from aluminum, cotton, corn, gold, oil, or other agricultural products—companies all agree is that in 2011 sourcing strategies matter. Today, it is more about sourcing than transactional procurement. To combat rising pressures, supply chains need to connect horizontally market-to-market to plan to orchestrate the demand signal from the buy-side market to sell side decisions and to infuse supply chain commodity risk into decisions on go-to-market strategies.
Figure 2: Market to Market Tactical Planning to Sense, Shape and Respond to Demand
My issue with most definitions of both S&OP and IBP are that they are inside out not outside-in. To combat market drivers, there is a need for a horizontal set of processes that can sense demand—variation, market drivers, risk and competitive activity—and translate this demand across the vertical silos of the supply chain (sell, deliver, make and source). Likewise the process needs to sense supply-side risks, commodity price volatility and availability to determine hedging strategies, raw material sourcing strategies and contract manufacturing network design and translate this risk horizontally and bi-directionally across the supply chain. As companies become demand-driven, they realize that traditional process definitions are not sufficient. They learn that processes need to move from inside-out to be outside-in connecting market to market. The process needs to be bi-directional to answer questions like:
- Marketing/sales: How should a company best shape demand based on market conditions (buy and sell side markets)? This is not trivial. Over 50% of promotions are based on history, and 52% of promotions are never evaluated. With commodity uncertainty, a bad decision in this area can be costly. Now is a bad time to promote a product with a high priced commodity or material constraints. Del Monte, a leader in this type of activity, runs a Monte Carlo simulation each week to determine the risk profile for each product to determine their promotion strategy.
- Logistics: Based on what is happening in the market, how should I manage inventory builds? Manage carrier relationships? (for additional insights on transportation reference the blog “Keep on Truckin”). With rising prices, inventory builds may be necessary to hedge against inflation or to ensure supply. Inventory policy changes abound.
- Supply: Based on market conditions, what are the best formulations to use? Where should I source? How should I hedge? Should I pre-buy materials to hedge against stagflation?
Emphasis: Tactical Planning
The hype over which name has added to the confusion on how to plan. When I was in London facilitating roundtables on S&OP, the greatest issue for the executives that I was working with was how to pick the right planning horizon. The second largest issue was the defining a supply chain strategy given a business strategy. There is a level of granularity required for tactical planning of the value chain that is often missing in organizations. Companies are not clear on what is supply chain excellence and have not clearly defined the planning horizons to enable a successful planning process.
The need is effective tactical planning across functions to drive alignment to maximize the value-based outcomes. The process is tactical (12-18 months based on the decisions that can be affected). It will vary by industry. However, it is not strategic planning (long range planning of 3-5 years), and it is not operational planning (less than 6 months). However, there is a need to have a parallel S&OP execution process to take the monthly S&OP decisions and enable them throughout the month.
I find that when many of my clients speak about tight integration with financials, they are talking about operational planning or budget management in the short-term horizon. While there is a need to tie tactical planning to execution, there is no substitute – no matter what the given name of the process– for great tactical planning processes.
Readiness: Technologies Evolving.
The data models for financial data modeling are in their infancy. While there are data models that enable financial modeling –Acorn Systems, Jonova, Riverlogic, and Portfolio Decisions—they are not widely used and poorly understood. Most of these financial modeling tools are also complimentary, not competitive to each other. This adds to the confusion. I also find through discussions with clients that there are currently no strong financial modeling tools in the war chests of the major Enterprise Resource Planning (ERP) vendors like Oracle or SAP.
As a result, the ability to drive what-if analysis on financial decisions requires multiple technologies and iterative analysis. The modeling has to be iterative between constraint-based supply planning technologies, revenue management planning technologies, inventory optimization analysis and financial data modeling tools requiring the work/collaboration of both finance and supply chain resources.
Getting to this end state requires clarity on supply chain excellence, and availability of data for modeling. There is no one tool or vendor that offers all of these options. Typically, there is a different model and technology to determine the answer to these five financial trade-offs:
1) The probability of a new item’s success (margin and profitability)
2) Ideal product portfolio mix
3) Fixed versus variable accounting options with changing networks
4) Tax efficient supply chain planning
5) How to improve cost to serve to improve channel management
6) Value-add analysis on multi-tier cost of capital
So, Encore it is! Whatever name you chose to use, get on with tactical planning. Focus on it. Get good at. Prosper in these times of uncertainty.
I look forward to your comments. What is your experience on the inclusion of financial imformation into tactical planning?
For additional information on S&OP check out recent blog posts in this area:
- S&OP Letter Perfect. Practice Imperfect. http://www.supplychainshaman.com/supply-chain-excellence/sop-letter-perfect/
- What if: Focus on the & with the End in Mind. http://www.supplychainshaman.com/supply-chain-economic-recovery/what-if-focus-on-with-the-end-in-mind/
- Make Money turn your Supply Chain on its Ear. http://www.supplychainshaman.com/uncategorized/make-money-turn-your-supply-chain-on-its-ear-go-horizontal/
- Mirror ,Mirror on the Wall, Who has the Best Supply Chain of All? http://www.supplychainshaman.com/uncategorized/mirror-mirror-on-the-wall/
{ 3 comments… read them below or add one }
S&OP needs to move to a market-savvy approach. What is not needed is another big IT systems push.
I discuss the new market-savvy approach in my latest blog.
blog.on-pointgroup.net write to me for more details……
I agree with you completely.
As you know, I was there in Las Vegas when you presented at the S&OP IE Group Conference. Given my 26 years of experience prior to working at the SAS Institute Inc. and the last 8 years working with companies across all industries I clearly fall in the “Contrarian” View camp.
Given Integrated Business Planning (IBP) is more of a financial planning process it should be separate and take place after the S&OP Process. I personally believe that companies should tightly integrate their financial plans to the S&OP Process because the final constrained supply plan (not shipment forecast) agreed to during the S&OP Process review should drive the financials, not the financials driving the supply plan. This is not to say that finance doesn’t plan a critical role in the process. We should keep in mind that the original purpose for the S&OP Process is to match supply to demand, not demand to supply based on financial budget. In fact, the financial budget should not be an input to the S&OP Process. As companies take the journey from being Supply-Driven to becoming Demand-Driven, and then, ultimately Market-Driven their focus changes from selling into the channel to selling through the channel. Not only do true market-driven companies focus on the dynamics of the marketplace identifying market opportunities through sensing demand signals and using those demand signals to shape demand, but also align supply through inventory optimization shaping supply based on alternative supply capabilities. In both cases there needs to be a tight integration with demand and supply with a focus on financial implications that drive revenue and profit. As a result, the financial role changes to focus on assessing the financial implications regarding shaping demand and supply with an emphasis on matching supply to demand in the most profitable way possible. The financial budget, sales targets, and other related processes should be driven by the results of the S&OP Process. So, the input (role) by Finance in the S&OP process is to assess the financial impact of sales/marketing programming, which is used to influence demand during the demand shaping process, and also, to assess the financial impact of supply shaping to meet that demand with supply. The financial budgeting process should be a separate process that feeds off the S&OP Process identifying gaps and assessing the risks (exposure) of the current supply plan based on the financial budget.
S&OP and the roles of Finance need to evolve and adapt to this newly created “Market-Driven” company framework. We should actually change the term S&OP to SM&OP (Sales, Marketing & Operations Planning) putting equal emphasis on sales/marketing (demand), as well as operations planning (supply). For years the focus has been on operations planning and the supply-side. Now that the dynamics of the marketplace has changed (e.g., globalization, stretched lead times, volatile demand, and others) companies can no longer rely on lean supply chains unless they can identify, shape and predict demand effectively. The focus needs to be on selling through the channel in the most profitable way possible, and react to that demand with supply in the most efficient way possible reducing costs and synchronizing demand and supply across the supply chain. The SM&OP Process is clearly a separate process that occurs first, and then, feeds the IBP process.
I strongly agree that the number one change management issue with S&OP is and continues to be the role of the financial budget. If a company wants to maximize opportunity, the budget should be an input into the process, but not constrain the process. Subsequently, the S&OP plan should be an input into the financial forecasting process. The financial budget is normally not market-driven, is outdated the moment that it is published and is not a good basis to begin modeling the issues of the supply chain mix of constraints and variability. As companies transition from demand-driven to market-driven frameworks will require change management along with a redefinition of Finance’s role for the S&OP Process.
I agree with your view of how the constraints will move from manufacturing to sourcing, requiring better alignment and integration between supply chain management and sourcing technologies to better manage the costs of commodities. Also, that companies sourcing strategies matter as they transition from demand-driven to market-driven. To better manage the rising pressures, supply chains will need to connect horizontally market-to-market to plan to orchestrate the demand signal from the buy-side market to sell side decisions and to infuse supply chain commodity risk into decisions on go-to-market strategies. Your Figure 2 is a great illustration of the market-to-market tactical planning process, but can also be used for operational (mid-term) and Strategic (long-term) forecasting.
I also agree that in order to combat market drivers, there is a need for a horizontal set of processes that can sense demand signals (other than trend and seasonality)—variation, market drivers (e.g., price, advertising, in-store merchandising, competitive activates, economic factors and others), determine risk—and shape and translate demand across the vertical silos of the supply chain (sell, deliver, make and source). Likewise the process needs to sense and shape supply-side risks, commodity price volatility and availability to determine hedging strategies, raw material sourcing strategies and contract manufacturing network design and translate this risk horizontally and bi-directionally across the supply chain.
I also agree completely based on my experiences with several corporations that over 50% of sales/trade promotions are based on history, and 52% of those promotions are never evaluated, particularly by Finance to determine whether they are profitable, or just subsidizing brand loyal consumers. This process has turned many products into commodities where consumers buy from promotion-to-promotion driving pantry loading. Also, given the current economic climate it is not good time to promote products whom have a high priced commodity or material constraints. Finally, I agree that logistics/supply should be based on market conditions, best formulations to use, and where and they should source those materials.
What we’re seeing in the industry is that everyone is moving to short-range tactical demand sensing (forecasting 1-6 weeks into the future) with a high level of granularity. Those same companies are realizing that it is not a clear definition of supply chain excellence and have not clearly defined the planning horizons to enable a successful planning process. As a result, they are now asking for enabling solutions that can sense demand signals and shape demand at the tactical (1-6 weeks), operational (1-18 months), and strategic (3-5 years) levels with the same highly granular level. In fact, we have a CPG customer who is shaping demand using sales promotions down to the channel/DC level, and plans to move to the channel/customer/DC level. So, there is a need for effective tactical, operational, and strategic planning to drive alignment by customer. As a result, many companies are now implementing weekly tactical S&OP processes at the channel/customer levels, as well as monthly S&OP meetings to enable them over the next one to three months and beyond. This requires tight financial integration with sales/marketing, operations planning, and management for the short-term horizon, but not the other way around.
As a result, companies are requesting the ability to implement what-if analysis (demand shaping) to drive financial decisions which requires more advanced technologies and iterative analysis capabilities. The modeling has to be iterative between demand shaping and supply shaping with the ability to apply constrained optimization across demand and supply with the focus on revenue optimization, inventory optimization requiring data and more advance modeling tools. Not to mention a lot of hard work and collaboration by both finance and supply chain resources.
In closing, I agree that the S&OP Process is too manufacturing and supply focused at most companies today. In fact, they need to be more sales/marketing focused with more emphasis on Marketing. The SM&OP Process should be based on sound financial assessment holding sales/marketing accountable, and as such, the primary role of Finance is to assess the revenue and profitability of their programs. However, the financial budgeting and planning process should not drive the SM&OP Process; rather than SM&OP Process should drive the financial budgeting and planning process.
Laura:
It has been awhile since we have spoken (while you were at AMR) and producing the S&OP Handbook ! It is great to see you presenting what I would call the conservative, no hype, no software BS market message. We could not agree MORE !
I often have said my favorite quote is attributed to Ben Franklin… “If I had more time I would have written you a shorter letter”. We have had alot of time and the privledge of assisting hundreds of clients with improving their business using supply chain concepts / S&OP.
My short response if the fundamental core problem is GAAP accounting and thus most companies Cost accounting is fundamentally flawed. There is no real emphasis on working capital reduction / management and true Stern Stuart EVA cashflow calculations (unless you get to a tresury department… always independent of accounting) and if it is used all of this is historial not forward looking.
So what is S&OP it really is an alternative working capital, cash flow measurement and projection system that if you believe accounting is flawed cannot be tighlty coupled as would never get done…. but MUST be reconciled back for the accounting and risk functions to learn and grow into the S&OP thinking
In our experience the proper use of time phased algorithms around inventory and injection of dynamic variable for transport time in EOQ inventory or build times is the strategic and tatical “what is different” and what is so enabling. If you water down S&OP to IBP this gets lost and you are back to a 30 year jaunt of the “silly walk” of one more Executive Dashboard . But an Executive Dashboard fundamentally driven by netting demand and supply with the proper time phased algorithm done dynamically with great visibility and one that is dyanmic and fast to take into an S&OP meeting… Now that is not ony powerful but more FUN then the latest Tom Clancy Black Ops video game
Lets catch up soon our office phone 214 352 0868 and website http://www.DCRASolutions.com
We recently received 27 patents on our S&OP and real time S&OP Order Commit solutions and would be eager to review these with you
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