S&OP encompassing broader financial and performance parameters

Say there’s a software application that models some common business process or function. Over time, the solution’s footprint traipses around like a veritable Pac-Man, swallowing up neighboring functional areas at a fearsome pace as vendors add features they believe will lead to greater using-management mindshare.

Is the application in question enterprise resources planning, product life-cycle management, or supply chain management? While all three—ERP, PLM, and SCM—have been through just such an evolution, in this case it’s about sales & operations planning (S&OP).

S&OP has evolved from a way to balance supply and demand into the potential means for driving financial goals related to sales and profit into operations that include forecasting, production, and distribution. The inability of finance and operations to speak the same language is a perennial challenge in manufacturing enterprises, and can lead to the kinds of misunderstandings that ruin careers.

This souped-up S&OP, says Colin Snow, a director with San Mateo, Calif.-based Ventana Research , “is new for most people. The driver is the need for a better end-to-end view of supply within more dynamic and global networks, and financial accountability and regulatory compliance related to material issues.”

S&OP’s expanding role in improved demand management, profitability, and accountability means it now transcends the boundaries of other “planning” applications such as materials requirements planning or advanced planning & scheduling. For one, it requires a wider range of input, which, given the disparity of systems involved, means that data collection is one of the most often cited challenges associated with S&OP. The answer for some is to come at it from the business intelligence (BI) world to address the data collection and cleansing task.

Cognos , for example, the BI vendor recently acquired by IBM, offers the Cognos Sales & Operations Planning Performance Blueprint, which supplies to its users pre-configured data, process, and policy models based on best practices.

Given the important decisions involved, it’s not surprising that automating the S&OP process and integrating the inputs should be a prime goal.

According to David Johnston, VP of supply chains for JDA Software , “Tier 1 companies are making S&OP a global process—rather than one decentralized by region or division—which eliminates literally hundreds of separate S&OP processes and spreadsheets. What you end up with is something that could be more legitimately identified as integrated business planning.”

In somewhat like manner, i2 Technologies today talks about “total planning,” and at SAP, which, not coincidentally, recently purchased BI vendor Business Objects, the emerging conceptual framework is referred to as “business planning and consolidation.”

Becoming centralized and strategic, Johnston says, changes S&OP in multiple ways:

Customers and suppliers are involved, so they better understand demand and capacity.

An understanding of costs is needed to derive profit projections.

A premium is placed on “what-if?” and scenario modeling to derive solutions for presentation to senior management.

Key performance indicators (KPI) and other S&OP metrics are being aligned with compensation targets of C-level executives.

Automated workflows for operations execution enforce executive planning decisions.

Scorecards track the outcome of assumptions made during the S&OP process—e.g., did demand grow as we thought it would based on our merchandising decisions?

But even for companies with extensive S&OP processes, the challenge can be found in what comes afterward.

“S&OP is a target-setting device,” says Snow. “Once you decide on a plan, you have to disaggregate it. If you don’t have the technology to do that, you’re handing the plan to the master scheduler and leaving it to him to break down those product families and everything that follows.”

Facing the facts

The Ventana Research study, published in late 2006, looked at S&OP use in nearly 500 companies, with near 35 percent of those being manufacturers. All companies responding said they have an S&OP process, although what that actually means varies widely.

For instance, nearly 60 percent of the companies studied either don’t have formal meetings to review supply and demand, don’t address multiple lines of business in those meetings, or don’t have strict agendas for top-level S&OP meetings. Only 16 percent of companies are judged by Ventana as being innovative—meaning the process is “performance-based.“

These top-performing companies include plan-versus-actual reports in the process, create monthly plans that span 18 months or longer, and adjust their finance and sales & marketing plans based on S&OP. The single most significant contributing factor to success, according to the study, is alignment of financial plans with S&OP—judged by respondents as leading to “overwhelming” financial gains.

Tom Dadmun is VP of supply chain operations at ADTRAN, a Huntsville, Ala.-based manufacturer of network access devices. ( See March 2007 for coverage of ADTRAN’s use of i2 solutions.)

“We do a monthly S&OP process,” says Dadmun. “We bear down in the third month of every quarter, looking to the next quarter. At what point a new product will ramp up is a complex calculation that brings in suppliers that won’t be present for the more formal meeting.

“Getting to a mature S&OP process takes time, but it’s worth it, and it should be led by the finance people to ensure the plans reflect the needs of the stockholders,” Dadmun concludes.

As proof, Ventana’s Snow says that while only 42 percent of reporting companies include finance in the S&OP process, the clear majority of companies reporting S&OP-based gains in revenue, gross margins, forecasting accuracy, and customer satisfaction are those very companies that do in fact include finance in the process.

The typical workflow for creating sales & operations plans begins with executive management and works through sales, finance, manufacturing, and functional organizations. The financial implications of the resulting strategy are modeled in finance, and ultimately finalized by the executive team.

Aerospace & defense and computer hardware makers have the most mature S&OP users, and they are most likely to make new product introductions and strategic initiatives part of S&OP.

While initiating such a complex and ambitious planning process as that described for leading companies may seem daunting, nothing could be more basic to a company’s success, says Snow, than having a single demand forecast, and ensuring that finance and operations are singing from the same hymn sheet.

While companies have been doing rigorous financial accounting for more than a century, S&OP has only been around 25 years. And while accounting reports on the past, S&OP looks to the future, considering revenue, mix requirements, inventory levels, asset use, profit, and customer satisfaction.

Banking on BI

More than half of Ventana study respondents say they use software applications for S&OP. They also identified difficulty in doing “what-if?” analysis as the No. 1 concern with S&OP software. Weakness in the ability to integrate supporting applications was No. 2.

In another Ventana study published in 2007—this one concerning supply chain BI—respondents cited simplified data integration from all sources as the most desirable feature of so-called BI systems since multiple instances of supply chain systems make such integration difficult.

The most important use of such systems is to understand demand (84 percent). S&OP ranked fourth, but still selected by more than 75 percent of respondents.

Based on these responses, it must be assumed that attaining anything like “integrated business planning” remains a challenge for most companies, as companies remain mired in use of Excel spreadsheets for what is really a collaborative process.

Paul Hoy, global manufacturing industry director at Cognos, says the vendor’s S&OP performance blueprint “goes beyond balancing supply and demand to coordinate activities across sales, manufacturing operations, marketing, finance, and purchasing.”

The framework includes capabilities for planning, metrics, and reporting. Workflow enforces process compliance, and the system constitutes a single source of information across disparate systems.

In fact, the S&OP performance blueprint is based on Cognos 8 Planning, a Web-based, high-participation enterprise solution for modeling, budgeting, and forecasting in manufacturing industries. By way of the solution, management defines the process, models, and content required. Web-based templates are distributed to data contributors, and reports and analyses are based on product sales, new product introduction costs, inventory levels, machine and labor capacity, transportation and logistics costs, and projected revenues.

“The key outputs of our S&OP model are the sales, forecast, capacity, build, purchase, and financial plans,” says Hoy.

The sales & operations plan transcends the concerns of more tactical planning engines to reflect the primary concerns of executive management.

Software vendors like it when the scale and scope of their solutions evolve to become an enterprise concern. They are apt to say, when it comes to the enterprise functions they automate, “It’s about the process, not the application.”

And again, for S&OP, this truly is the case. Regularly scheduled and escalating meetings are the primary means for moving S&OP forward, as conflicts unearthed in operations meetings are resolved at the executive level.

Says Dadmun, “It starts in chaos. The goal is just to get a handle on supply and demand. As you mature, your concerns shift to monitoring alerts, addressing problems, and recommending solutions that can be affirmed in the more formal meetings.

There will be confrontation in meetings,” Dadmun adds. “Will the product be released on time? Will the customer’s need be met? What is the history of our ability to meet this deadline? The difference is you’re setting a priority or expectation that creates responsibility.”

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