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SAP INSIGHT
Business Process Innovations




SALES AND OPERATIONS
PLANNING :
THE KEY TO CONTINUOUS
DEMAND SATISFACTION
Table of Contents
Executive Agenda                                            1

The Trouble with Planning When Information Is Not Shared   3

Learning from the Best S&OP Practices                      5

Defining the Five-Step Review Process                      7

Taking S&OP to the Next Level                              9

About the Sources                                          10
SALES AND OPERATIONS
PLANNING
THE KEY TO CONTINUOUS
DEMAND SATISFACTION

by Arnold Mark Wells, SAP America Inc.
and John Schorr, Oliver Wight Americas
EXECUTIVE AGENDA
All companies do some form of sales and                 The following examples illustrate how three
operations planning (S&OP) to synchronize               global companies are putting this strategic process
market data with production output. But most            into practice.
practice a planning process based more on logistics
                                                          Brown-Forman Corporation believes its
than strategy. Demand is forecast based on last
                                                          approach to S&OP is a better way to align
month’s numbers, and historical performance               supply and demand with the company’s
leads the analysis. Companies rarely solicit a cross-     business requirements, build better internal
section of perspectives from different functional         communications, and plan activities to meet
areas or supply chain partners. The practice is           customers’ needs.
static and insular, disconnected from the reality of      ExxonMobil Chemical leverages sales and
today’s complex supply chains. As a consequence,          operations planning to improve customer
sales and operations planning becomes almost              service while controlling costs.
dysfunctional, lacking the communication and the
                                                          Procter & Gamble credits its own version of
insight into market demands required to carry out
                                                          S&OP with creating a single set of sales and
business plans and achieve strategic goals.               supply plans to optimize resources to support
Taking a more strategic approach, however, the            the company’s business objectives – assessing the
sales and operations planning process can be              financial implications of the plan as well as its
designed to bring a company’s marketing, finance,         impact on both supply and demand.
sales, and operations departments together              While companies like these are reaping the benefits
to continuously monitor and meet customer               of effective S&OP, many others continue to take a
demand. As the separate departments collaborate,        more static approach. By using a five-step review
they create business plans with the latest and most     process, however, companies can review and
accurate data and begin to develop and measure          evaluate new products in development and future
a common set of metrics. With integrated S&OP           plans in the context of demand, supply, financial
processes, companies are better able to synchronize     reconciliation, and management analysis. The
supply and demand, improve revenue, decrease            result is an S&OP process that begins to follow
costs, and increase customer satisfaction.              the model of the companies that are leaders in
                                                        this process.




                                   With integrated S&OP processes, companies are better able to
                                   synchronize supply and demand, improve revenue, decrease costs, and
                                   increase customer satisfaction.




                                                                                                              SAP Insight| 1
The best sales and operations planning process                  Management evaluation and analysis.
                 creates the framework for five integrated and                   Evaluate the results of your activities to decide
                 interdependent business reviews to ensure that                  how to run the business moving forward. This
                 tactical plans align and support the company’s                  includes an evaluation of planned versus actual
                 strategy. This framework helps develop the                      results, an analysis of profitability by customer,
                 consensus among stakeholders necessary to                       channel, and product, and a look at perfect
                 continue the planning process, allows for                       order, cash-to-cash, and asset performance.
                 management understanding and analysis, and                    While this approach to S&OP creates an invaluable
                 forms the basis for the tactical plans necessary to           foundation for clear-sighted decision making, the
                 satisfy demand with an integrated and responsive              process adds the most value when integrated with
                 supply chain. Companies perform specific activities           other core business processes including inquiry
                 within each process as outlined below:                        to order, procure to pay, order to cash, and new
                                                                               product introduction and development. With a
                   New product review. Analyze the potential
                                                                               full-fledged S&OP program in place and integrated
                   for new products to impact the market,
                                                                               throughout operations, a company can expect to
                   considering elements such as rationalization
                   with channels, pricing and margin implications,             do the following:
                   ramp-up projections, and both incremental and                 Speed up the commercialization of new
                   cannibalized demand.                                          products and improve time to value
                   Demand review. Anticipate total market                        Make budgeting less complex and more accurate
                   requirements for all offerings from all
                                                                                 Enhance sales organization effectiveness
                   perspectives, using sources such as quantitative
                   forecasts, input from sales and marketing, and                Create greater supplier effectiveness, reducing
                   what-if analysis – balancing orders and                       cycle time and procurement costs
                   demand and achieving consensus on various                     Concentrate more thoroughly on building
                   demand scenarios.                                             customer loyalty and greater satisfaction
                   Supply review. Review the supply chain                        Improve collaboration between the company
                   capacity, including inventory requirements,                   and its external partners
                   procurement policy, and logistics, to make                    Lower operating costs and reduce order
                   certain that there is sufficient manufacturing                fulfillment times
                   and distribution capacity. In this step you can
                                                                                 Increase inventory turns and reduce cash-to-
                   identify any potential decision points such as the
                                                                                 cash cycle times
                   need to outsource for additional capacity.
                                                                                 Improve return on net assets
                   Financial reconciliation review. Translate
                   the supply and demand plan into financial                   This SAP Insight discusses the problems faced
                   terms of revenue, margin, and working                       by most S&OP programs, how some
                   capital requirements. Then balance supply                   companies succeed, and the key to the
                   and demand, making decisions with regard to                 five-step review process.
                   potential supply issues and contingencies for the
                   range of possible demand scenarios.




2 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
THE TROUBLE WITH PLANNING WHEN
INFORMATION IS NOT SHARED
Most companies have implemented some form of             In addition, many S&OP processes are incapable of
sales and operations planning for quite some time,       reconciling the perspectives of sales, marketing,
but few are satisfied with the current process. As       manufacturing, and logistics or extending
a result, they are encountering more and more            the supply-chain decision process to include
problems, particularly as their supply chains            customers and suppliers. When each part of a
become more complex – and can suffer from the            company is operating separately and lacking
“four stages of planning grief” (see Figure 1). In       effective communications that share updated
stage one the status quo seems fine, but symptoms        data, stakeholders make decisions independently
of future problems begin to show up – such as            without recognizing the broader impact. Instead,
mounting back orders. In stage two, the symptoms         stakeholders need aggregated data presented
intensify as the company institutes planned              according to different dimensions that are
price increases while introducing new products,          meaningful to them: time, organization, product,
effectively cannibalizing its own market. In stage       geography, unit of measure, and so forth, Thus,
three, demand increases, but manufacturing               the company’s S&OP process can link decisions
capacity can’t keep up – and competitors begin to        at the strategic level, align tactics with strategy
capture the unmet market demand and increase             and goals, and allow decision makers to adapt to
their market share. Finally, in stage four, the          changing circumstances as they develop.
competitive trickle becomes a flood of competing
products, ultimately depleting working capital and
affecting financial performance.




                                                                                        18 months out
                            S&OP provides future planning
                                                                                           Unexpected levels of
  Figure 1                  to avoid surprises . . . What can
                                                                                           working capital required
                            be done differently now?

 The Four Stages            Sales and operations planning                                Demand exceeds capacity
 of Planning Grief          integrates into a single                                     Unexpected plant shutdown
                            operating plan for the                                       Competition grows capacity
                            next 18 months.

                                                                                  New product intro and cannibalization
                                                                                  Impact of planned price increase

                                            Supply       Inventories
                                                      S&OP
                               Today                 Process               Things seem OK at the moment
                                            Demand          New            Back orders are high
                                                           Product         Not all shipments are on time


                                                                                                                  SAP Insight| 3
INADEQUATE TECHNOLOGY                                         New product introductions fall flat. The
                 SPELLS DOOM                                                   successful commercialization of new products
                 Some companies approach the S&OP process using                mandates close coordination between research
                                                                               and development, marketing, sales, production,
                 spreadsheets and simple tools for rudimentary
                                                                               supply, and logistics. An information or
                 collaboration. The spreadsheet technique, while
                                                                               communications failure between any of these
                 a low-cost option in the short term, presents
                                                                               links can result in lost market share because of a
                 several challenges, including different versions              tardy or ineffective commercial launch of a
                 of the same data and an inability to integrate                new product.
                 and reconcile S&OP with underlying business
                                                                               Supply mix does not meet market demand.
                 processes. Data becomes outdated very quickly,
                                                                               Many large companies must support a complex
                 hampering collaboration, while team members get
                                                                               supply web and balance their multifaceted
                 frustrated trying to piece together the picture of            supply mix with the requirements of diverse
                 the company from faxed or e-mailed spreadsheets.              customers, channels, and regions. Without
                 The consequences of this approach can be                      sufficient information, these same companies
                 costly and far-reaching, for some of the                      may have difficulty adapting their supply chains
                                                                               to meet the constantly shifting demands of
                 following reasons.
                                                                               their best customers, opening more productive
                   Product supply and the market are not                       channels, or negotiating for access into new
                   reconciled. Repeated stock-outs cause                       geographic regions.
                   distributors to switch to other manufacturers
                   for the same product. Distributors show little
                   mercy in making up for any slowdown in
                   getting stock through their pipeline.
                   Excess inventory dilutes prices. Excess
                   inventory is the mirror image of the stock-out.
                   For example, when an electronics manufacturer
                   bet on the wrong style of MP3 player,
                   production capacity and demand were out of
                   sync for more than six months. The company
                   wound up with excess capacity that it had to
                   dump on an unsuspecting market, taking a big
                   financial loss.




4 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
LEARNING FROM THE BEST S&OP PRACTICES
Companies like Brown-Forman, ExxonMobil                         The supply side of leading S&OP processes
Chemical, and Procter & Gamble are taking sales                 emphasizes out-of-the-box thinking, and the
and operations planning to a new level where it                 analysis incorporates the availability of finished-
harnesses the most effective technology, enables                product inventory. More important, the
communication, and creates comprehensive                        entire manufacturing process also becomes an
business plans based on both experience and                     integral part of the supply review process from
expectations. The best S&OP focuses on demand                   procurement through production, and including
as much as supply, differentiates between what is               data on imports, outside purchases, and inputs
viable and what is not, fosters real communication              from contract manufacturers.
between all parts of the value chain, and as a
result, anticipates and avoids unwelcome surprises.             CREATING COMMUNICATION
                                                                BETWEEN DEPARTMENTS
SAP research has found that the best S&OP process
creates an unrestrained demand forecast by                      A growing understanding of the importance
accomplishing the following:                                    of S&OP has led to efforts to ensure that the
                                                                process enables communication between different
  Accounting for internal factors – The process                 departments of the company. Randy Isdahl, supply
  should consider elements such as price changes,               planning manager for Brown-Forman, puts it this
  lead times, sales plans, product promotions, and              way: “One of the biggest benefits is the fact that
  new product launches.
                                                                the process has resulted in an open, unfettered
  Accounting for external factors – The process                 conversation across all our Brown-Forman
  should consider elements such as customer                     functional groups … the results are astonishing.”
  input, the competition’s activities, the trajectory
  of the economy, regulatory considerations, and                As a result of this inclusive conversation, finance
  market trends.                                                members share their perspective in terms of
  Considering a product’s complete life cycle–                  revenues, margins, and working capital; marketing
  This begins with introduction and ramp-up and                 members talk in terms of channels and brands;
  continues through final phase-out.                            and the manufacturing and logistics members
                                                                bring their thinking on products, sources,
                                                                capacity, and destinations (see Figure 2).




  Figure 2                     Supplier
                               (Products and Sources)
                                                                                              Customer
                                                                                              (Products and Destinations)

 Differing                                                           All departments
 Perspectives                                                          can see the
 Among                         Manufacturing & Logistics             same data at the         Research & Development
 Stakeholders                  (Products, Sources, Capacity                                   (Channels and Brands)
                                and Destinations)                    same time from
                                                                         their own
                                                                       perspective.
                               Finance                                                        Sales & Marketing
                               (Revenues, Margins and Working
                                                                                              (Customers and Product Families)
                               Capital)




                                                                                                                            SAP Insight| 5
David Sharp, supply chain process leader at                   Increasingly, the best S&OP processes rely on
                 ExxonMobil Chemical, remarks, “Because we’re                  software that allows all stakeholders to see the
                 working with a single [information] systems                   same data, at the same time, but each in their own
                 platform, the same information is available to                terms. Software that supports S&OP integrates
                 everyone, allowing us to better align our supply              the data and information flow of the parts of
                 plans with ExxonMobil Chemical’s worldwide                    the organization that will be relevant to the
                 business strategy. Also, the common systems                   company’s need to manage risk and uncertainty.
                 platform makes it easier to transfer supply chain             The company has access to the right data
                 best practices around the world.”                             and insights to make smarter decisions across
                                                                               all participating functions (sales, marketing,
                 The architects of these superior S&OP processes
                                                                               procurement, manufacturing, distribution,
                 recognize that higher-quality decisions in less
                                                                               and finance).
                 time require intelligent leveraging of today’s
                 best information technology. Today, companies                 The most sophisticated software applications
                 want decision support for scenario planning in                encompass scenario capabilities that allow a
                 addition to industry-specific capabilities and the            company’s senior executives to test their various
                 capacity to include global market and supply chain            assumptions about demand and supply in a virtual
                 requirements.                                                 environment. They can also examine the impact of
                                                                               untried strategic and operational ideas for change.
                 LOOKING TO THE PAST AND                                       This type of process provides a global view of the
                 ENVISIONING THE FUTURE                                        business that allows supply, sales, marketing, and
                 These types of capabilities also allow a company              manufacturing to collaborate on a consistent basis
                 to compare plan assumptions with actual results,              to maximize customer satisfaction.
                 so that future plans can be revised to be more                Most important, the right information technology
                 effective. Procter & Gamble, for example, uses                can provide the contextual information necessary
                 the results of the S&OP process to create more                to maximize the impact of decisions on business
                 effective plans by looking backward and forward.              value creation – to help increase profitability and
                 First, a team evaluates a past plan: where the                achieve strategic goals. The company can adapt
                 business went right, where it went wrong, and                 its actions to changing conditions without
                 what needs to change. The teams compare current               decreasing performance.
                 plans with historical trends and other data such as
                 market size and consumption to determine if the               Dick Clark, the demand planning global process
                 assumptions of the new plan make sense.                       owner for Procter & Gamble, concurs that the
                                                                               company’s S&OP process has helped maximize
                 AVOIDING RISK AND UNCERTAINTY                                 resources to achieve better financial results. As he
                                                                               put it, “Our monthly S&OP meetings allocate and
                 Companies often experience difficulties in
                                                                               align company resources to a single set of sales and
                 foreseeing uncertainties in their supply chains.
                                                                               supply plans. Our goal is to optimize resources to
                 This can be disastrous in the long run. Figure 1
                                                                               support the company’s business objectives. This
                 demonstrated how the process can easily get out
                                                                               includes assessing the financial implications of the
                 of control at the end – creating a real traffic jam
                                                                               plan as well as its impact on supply and demand.”
                 that could have been avoided through an effective
                 S&OP process.




6 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
DEFINING THE FIVE-STEP REVIEW PROCESS
A five-step review process is an integral part of    The best new product review process rationalizes
the best S&OP because it structures the flow of      the information about customer needs with
collaboration and information sharing. It starts     channel potential and ideas for new product
at the highest practical level of management         offerings. But the process does not stop there. It
business review, which is then reconciled with the   analyzes the structure of supply chain costs and
lower-level product management, supply, and          determines the need for facilities or capacity,
demand reviews. Brown-Forman, for example,           facility consolidation or outsourcing, and the right
implements both strategic and tactical supply        set of key performance indicators.
chain planning processes because of the long time
frames associated with wine and spirit production.   2. DEMAND REVIEW
The company’s S&OP process creates an 18-month       The purpose of each of the demand reviews is
consensus forecast (most companies now create a      to lend an aspect of integration to a process that
24-month plan) for demand planning, near-term        typically takes place in isolation. The demand
inventory planning, and production planning and      review does not simply rely on quantitative
scheduling (see Figure 3). The following outlines    forecasting, for example, but instead balances
in detail each of the steps in the process.          orders and demand through what-if analysis,
                                                     achieving consensus among the various
1. NEW PRODUCT REVIEW                                stakeholders all along the supply chain.
In analyzing the feasibility of a new product,
                                                     The best demand reviews not only ensure that
the company uses inputs from management
                                                     the statistical forecast is based on the best data
and statistical analysis to align new product
                                                     and model, including marketing assumptions, but
development and introduction with corporate
                                                     also compare and incorporate sales and customer
financial and strategic goals. The analysis takes
                                                     forecasts and include input from operations. The
into account product life cycles, seasonal
                                                     demand review also incorporates the results of the
influences, promotions, and rebates and creates a
                                                     new product review, proposed promotions, and
multiperiod business plan.
                                                     their demand impact. It incorporates real-time
                                                     demand signals to monitor the plan assumptions
                                                     and planning cycle so that demand can be
                                                     adjusted accordingly.




  Figure 3                                  Management
                                             Business                            Product
                                              Review                            Management
 An Integrated                                             Latest View and        Review
 S&OP Process                                              Recommendation
 (Source: Oliver                                             Strategy
 Wight Americas)                                           Business Plan
                                                           Performance
                                                       FinanciaReconciliation
                                                       Integrated
                                                                  l Appraisal
                                            Supply       Financia
                                            Review               l Appraisal    Demand
                                                                                Review




                                                                                                            SAP Insight| 7
3. SUPPLY REVIEW                                              5. MANAGEMENT EVALUATION AND
                 The supply review includes manufacturing                      ANALYSIS
                 capacity, inventory, procurement, and logistics               At this point, management reviews the S&OP
                 planning. The supply review considers potential               results and plans and compares assumptions,
                 material shortages in the supply chain as well                identifying any problems and their root causes.
                 as the capacity for the company to develop
                                                                               The best management evaluation processes use
                 excess inventory.
                                                                               a number of leading practices such as waterfall
                                                                               analyses of forecasts and supply plans and the
                 4. FINANCIAL RECONCILIATION
                                                                               precise measurement of actual demand to the
                 REVIEW
                                                                               demand plan. The analyses include profitability by
                 At this point, the strategic S&OP process diverges            customer, channel, product, and supplier, as well
                 from current business practice by creating a                  as backlog and lead-time trends. The management
                 forward financial forecast of the previous three              review also addresses any high-impact exceptions
                 reviews. The supply and demand reviews are                    to the plan, such as perfect order, cash-to-cash,
                 balanced by taking a close look at the product mix,           and asset performance.
                 conducting what-if analysis, filtering it through
                 constraint management, and allocating supply to
                 demand. Most important, all stakeholders in the
                 process must reach consensus on the business and
                 financial impact of the assumptions that have gone
                 into the financial reconciliation.
                 The best financial reconciliation optimizes the
                 supply chain to avoid problems down the line,
                 and then compares the optimized supply chain
                 plan to the demand plan. While the financial
                 reconciliation makes certain that the S&OP
                 plan hits targets for revenue and margin, it also
                 considers whether the company’s budgets remain
                 consistent with the assumptions. The process
                 validates potential demand spikes and supply
                 disruptions, adds in forecasts for future financial
                 profit and loss statements, and identifies gaps
                 between the current S&OP and the company’s
                 future business plan.




8 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
TAKING S&OP TO THE NEXT LEVEL
Brown-Forman, ExxonMobil Chemical, and              When more companies follow the lead of these
Procter & Gamble have all changed their approach    three best-practice corporations, they will take
to S&OP with world-class results. Perhaps           their S&OP process to the next level – aligning
the greatest testimony to the need for more         their supply and demand, creating better
sophisticated S&OP is a comment by Randy Isdahl     internal coordination, and maximizing their
of Brown-Forman: “We will extend [this new          global effectiveness.
approach to] S&OP wherever business value can
be enhanced by leveraging S&OP to maximize our
supply chain effectiveness.”
David Sharp of ExxonMobil Chemical maintains,
“[S&OP] provides us with a multidimensional view
of how the business is doing on a global basis.”
And Dick Clark of Procter & Gamble adds, “S&OP
is the key process for information sharing within
the business. It’s helping us meet our goal of
better business decisions through an improved
mutual understanding of demand, supply, and
financial information.”




                                                                                                       SAP Insight| 9
ABOUT THE SOURCES
                 ABOUT SAP                                                      ABOUT THE AUTHORS
                 SAP is the world’s leading provider of business                Arnold Mark Wells is a solution principal with
                 software.* Today, more than 38,000 customers in                SAP America Inc. For more than 20 years, he has
                 more than 120 countries run SAP® applications                  committed himself to enhancing the value of
                 – from distinct solutions addressing the needs of              organizations through improved business practices
                 small businesses and midsize companies to suite                and enabling technologies. He has contributed
                 offerings for global organizations. Powered by the             from within industry, as a supply chain
                 SAP NetWeaver® platform to drive innovation                    consultant, and as part of a software development
                 and enable business change, SAP software                       organization. Wells has worked on supply chain
                 helps enterprises of all sizes around the world                solutions with many companies across a broad
                 improve customer relationships, enhance partner                array of industries. He holds memberships in
                 collaboration, and create efficiencies across their            the Council of Supply Chain Management
                 supply chains and business operations. SAP                     Professionals and in APICS, which has certified
                 solution portfolios support the unique business                him since 1989. He holds an MBA from Drexel
                 processes of more than 25 industries, including                University.
                 high tech, retail, financial services, healthcare
                                                                                John Schorr of Oliver Wight Americas
                 and the public sector. With subsidiaries in more
                                                                                contributed to the executive agenda and the five-
                 than 50 countries, the company is listed on several
                                                                                step review process content of this SAP Insight.
                 exchanges, including the Frankfurt stock exchange
                                                                                Schorr has been with Oliver Wight Americas since
                 and NYSE under the symbol “SAP.” For more
                                                                                1978. He has served as president of Oliver Wight
                 information, please visit www.sap.com.
                                                                                International and on the Board of Directors of
                 * SAP defines business software as comprising enterprise       Oliver Wight Americas and is a principal. He was
                   resource planning and related applications such as supply
                   chain management, customer relationship management,
                                                                                president of Oliver Wight East, which is now
                   product life-cycle management, and supplier relationship     part of Oliver Wight Americas. As a consultant
                   management.                                                  and educator in the areas of enterprise resource
                                                                                planning (ERP), manufacturing resource planning
                 ABOUT OLIVER WIGHT AMERICAS                                    II (MRP II), integrated supply chain management,
                 Oliver Wight Americas is a global management                   sales and operations planning, and demand
                 consulting firm that specializes in helping                    management, Schorr has assisted many companies
                 manufacturing organizations to work smarter,                   in attaining class A performance. He is recognized
                 faster, and better than their competitors. The firm            as one of the leading experts in the areas of sales
                 includes leading business process improvement                  and operations planning and the interface of
                 specialists who educate, coach, and mentor                     purchasing with ERP. Prior to consulting, Schorr
                 people to lead and sustain change on the journey               served as vice president of operations at Haworth
                 to business excellence and outstanding business                Inc. and as director of purchasing at Steelcase Inc.
                 performance.                                                   He is the author of two books, Purchasing in the 21st
                                                                                Century and High Performance Purchasing. He holds a BS
                                                                                in chemistry from the University of Iowa.




10 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
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Sales And Operations Planning The Key To Continuous Demand Satisfaction

  • 1. SAP INSIGHT Business Process Innovations SALES AND OPERATIONS PLANNING : THE KEY TO CONTINUOUS DEMAND SATISFACTION
  • 2. Table of Contents Executive Agenda 1 The Trouble with Planning When Information Is Not Shared 3 Learning from the Best S&OP Practices 5 Defining the Five-Step Review Process 7 Taking S&OP to the Next Level 9 About the Sources 10
  • 3. SALES AND OPERATIONS PLANNING THE KEY TO CONTINUOUS DEMAND SATISFACTION by Arnold Mark Wells, SAP America Inc. and John Schorr, Oliver Wight Americas
  • 4. EXECUTIVE AGENDA All companies do some form of sales and The following examples illustrate how three operations planning (S&OP) to synchronize global companies are putting this strategic process market data with production output. But most into practice. practice a planning process based more on logistics Brown-Forman Corporation believes its than strategy. Demand is forecast based on last approach to S&OP is a better way to align month’s numbers, and historical performance supply and demand with the company’s leads the analysis. Companies rarely solicit a cross- business requirements, build better internal section of perspectives from different functional communications, and plan activities to meet areas or supply chain partners. The practice is customers’ needs. static and insular, disconnected from the reality of ExxonMobil Chemical leverages sales and today’s complex supply chains. As a consequence, operations planning to improve customer sales and operations planning becomes almost service while controlling costs. dysfunctional, lacking the communication and the Procter & Gamble credits its own version of insight into market demands required to carry out S&OP with creating a single set of sales and business plans and achieve strategic goals. supply plans to optimize resources to support Taking a more strategic approach, however, the the company’s business objectives – assessing the sales and operations planning process can be financial implications of the plan as well as its designed to bring a company’s marketing, finance, impact on both supply and demand. sales, and operations departments together While companies like these are reaping the benefits to continuously monitor and meet customer of effective S&OP, many others continue to take a demand. As the separate departments collaborate, more static approach. By using a five-step review they create business plans with the latest and most process, however, companies can review and accurate data and begin to develop and measure evaluate new products in development and future a common set of metrics. With integrated S&OP plans in the context of demand, supply, financial processes, companies are better able to synchronize reconciliation, and management analysis. The supply and demand, improve revenue, decrease result is an S&OP process that begins to follow costs, and increase customer satisfaction. the model of the companies that are leaders in this process. With integrated S&OP processes, companies are better able to synchronize supply and demand, improve revenue, decrease costs, and increase customer satisfaction. SAP Insight| 1
  • 5. The best sales and operations planning process Management evaluation and analysis. creates the framework for five integrated and Evaluate the results of your activities to decide interdependent business reviews to ensure that how to run the business moving forward. This tactical plans align and support the company’s includes an evaluation of planned versus actual strategy. This framework helps develop the results, an analysis of profitability by customer, consensus among stakeholders necessary to channel, and product, and a look at perfect continue the planning process, allows for order, cash-to-cash, and asset performance. management understanding and analysis, and While this approach to S&OP creates an invaluable forms the basis for the tactical plans necessary to foundation for clear-sighted decision making, the satisfy demand with an integrated and responsive process adds the most value when integrated with supply chain. Companies perform specific activities other core business processes including inquiry within each process as outlined below: to order, procure to pay, order to cash, and new product introduction and development. With a New product review. Analyze the potential full-fledged S&OP program in place and integrated for new products to impact the market, throughout operations, a company can expect to considering elements such as rationalization with channels, pricing and margin implications, do the following: ramp-up projections, and both incremental and Speed up the commercialization of new cannibalized demand. products and improve time to value Demand review. Anticipate total market Make budgeting less complex and more accurate requirements for all offerings from all Enhance sales organization effectiveness perspectives, using sources such as quantitative forecasts, input from sales and marketing, and Create greater supplier effectiveness, reducing what-if analysis – balancing orders and cycle time and procurement costs demand and achieving consensus on various Concentrate more thoroughly on building demand scenarios. customer loyalty and greater satisfaction Supply review. Review the supply chain Improve collaboration between the company capacity, including inventory requirements, and its external partners procurement policy, and logistics, to make Lower operating costs and reduce order certain that there is sufficient manufacturing fulfillment times and distribution capacity. In this step you can Increase inventory turns and reduce cash-to- identify any potential decision points such as the cash cycle times need to outsource for additional capacity. Improve return on net assets Financial reconciliation review. Translate the supply and demand plan into financial This SAP Insight discusses the problems faced terms of revenue, margin, and working by most S&OP programs, how some capital requirements. Then balance supply companies succeed, and the key to the and demand, making decisions with regard to five-step review process. potential supply issues and contingencies for the range of possible demand scenarios. 2 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
  • 6. THE TROUBLE WITH PLANNING WHEN INFORMATION IS NOT SHARED Most companies have implemented some form of In addition, many S&OP processes are incapable of sales and operations planning for quite some time, reconciling the perspectives of sales, marketing, but few are satisfied with the current process. As manufacturing, and logistics or extending a result, they are encountering more and more the supply-chain decision process to include problems, particularly as their supply chains customers and suppliers. When each part of a become more complex – and can suffer from the company is operating separately and lacking “four stages of planning grief” (see Figure 1). In effective communications that share updated stage one the status quo seems fine, but symptoms data, stakeholders make decisions independently of future problems begin to show up – such as without recognizing the broader impact. Instead, mounting back orders. In stage two, the symptoms stakeholders need aggregated data presented intensify as the company institutes planned according to different dimensions that are price increases while introducing new products, meaningful to them: time, organization, product, effectively cannibalizing its own market. In stage geography, unit of measure, and so forth, Thus, three, demand increases, but manufacturing the company’s S&OP process can link decisions capacity can’t keep up – and competitors begin to at the strategic level, align tactics with strategy capture the unmet market demand and increase and goals, and allow decision makers to adapt to their market share. Finally, in stage four, the changing circumstances as they develop. competitive trickle becomes a flood of competing products, ultimately depleting working capital and affecting financial performance. 18 months out S&OP provides future planning Unexpected levels of Figure 1 to avoid surprises . . . What can working capital required be done differently now? The Four Stages Sales and operations planning Demand exceeds capacity of Planning Grief integrates into a single Unexpected plant shutdown operating plan for the Competition grows capacity next 18 months. New product intro and cannibalization Impact of planned price increase Supply Inventories S&OP Today Process Things seem OK at the moment Demand New Back orders are high Product Not all shipments are on time SAP Insight| 3
  • 7. INADEQUATE TECHNOLOGY New product introductions fall flat. The SPELLS DOOM successful commercialization of new products Some companies approach the S&OP process using mandates close coordination between research and development, marketing, sales, production, spreadsheets and simple tools for rudimentary supply, and logistics. An information or collaboration. The spreadsheet technique, while communications failure between any of these a low-cost option in the short term, presents links can result in lost market share because of a several challenges, including different versions tardy or ineffective commercial launch of a of the same data and an inability to integrate new product. and reconcile S&OP with underlying business Supply mix does not meet market demand. processes. Data becomes outdated very quickly, Many large companies must support a complex hampering collaboration, while team members get supply web and balance their multifaceted frustrated trying to piece together the picture of supply mix with the requirements of diverse the company from faxed or e-mailed spreadsheets. customers, channels, and regions. Without The consequences of this approach can be sufficient information, these same companies costly and far-reaching, for some of the may have difficulty adapting their supply chains to meet the constantly shifting demands of following reasons. their best customers, opening more productive Product supply and the market are not channels, or negotiating for access into new reconciled. Repeated stock-outs cause geographic regions. distributors to switch to other manufacturers for the same product. Distributors show little mercy in making up for any slowdown in getting stock through their pipeline. Excess inventory dilutes prices. Excess inventory is the mirror image of the stock-out. For example, when an electronics manufacturer bet on the wrong style of MP3 player, production capacity and demand were out of sync for more than six months. The company wound up with excess capacity that it had to dump on an unsuspecting market, taking a big financial loss. 4 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
  • 8. LEARNING FROM THE BEST S&OP PRACTICES Companies like Brown-Forman, ExxonMobil The supply side of leading S&OP processes Chemical, and Procter & Gamble are taking sales emphasizes out-of-the-box thinking, and the and operations planning to a new level where it analysis incorporates the availability of finished- harnesses the most effective technology, enables product inventory. More important, the communication, and creates comprehensive entire manufacturing process also becomes an business plans based on both experience and integral part of the supply review process from expectations. The best S&OP focuses on demand procurement through production, and including as much as supply, differentiates between what is data on imports, outside purchases, and inputs viable and what is not, fosters real communication from contract manufacturers. between all parts of the value chain, and as a result, anticipates and avoids unwelcome surprises. CREATING COMMUNICATION BETWEEN DEPARTMENTS SAP research has found that the best S&OP process creates an unrestrained demand forecast by A growing understanding of the importance accomplishing the following: of S&OP has led to efforts to ensure that the process enables communication between different Accounting for internal factors – The process departments of the company. Randy Isdahl, supply should consider elements such as price changes, planning manager for Brown-Forman, puts it this lead times, sales plans, product promotions, and way: “One of the biggest benefits is the fact that new product launches. the process has resulted in an open, unfettered Accounting for external factors – The process conversation across all our Brown-Forman should consider elements such as customer functional groups … the results are astonishing.” input, the competition’s activities, the trajectory of the economy, regulatory considerations, and As a result of this inclusive conversation, finance market trends. members share their perspective in terms of Considering a product’s complete life cycle– revenues, margins, and working capital; marketing This begins with introduction and ramp-up and members talk in terms of channels and brands; continues through final phase-out. and the manufacturing and logistics members bring their thinking on products, sources, capacity, and destinations (see Figure 2). Figure 2 Supplier (Products and Sources) Customer (Products and Destinations) Differing All departments Perspectives can see the Among Manufacturing & Logistics same data at the Research & Development Stakeholders (Products, Sources, Capacity (Channels and Brands) and Destinations) same time from their own perspective. Finance Sales & Marketing (Revenues, Margins and Working (Customers and Product Families) Capital) SAP Insight| 5
  • 9. David Sharp, supply chain process leader at Increasingly, the best S&OP processes rely on ExxonMobil Chemical, remarks, “Because we’re software that allows all stakeholders to see the working with a single [information] systems same data, at the same time, but each in their own platform, the same information is available to terms. Software that supports S&OP integrates everyone, allowing us to better align our supply the data and information flow of the parts of plans with ExxonMobil Chemical’s worldwide the organization that will be relevant to the business strategy. Also, the common systems company’s need to manage risk and uncertainty. platform makes it easier to transfer supply chain The company has access to the right data best practices around the world.” and insights to make smarter decisions across all participating functions (sales, marketing, The architects of these superior S&OP processes procurement, manufacturing, distribution, recognize that higher-quality decisions in less and finance). time require intelligent leveraging of today’s best information technology. Today, companies The most sophisticated software applications want decision support for scenario planning in encompass scenario capabilities that allow a addition to industry-specific capabilities and the company’s senior executives to test their various capacity to include global market and supply chain assumptions about demand and supply in a virtual requirements. environment. They can also examine the impact of untried strategic and operational ideas for change. LOOKING TO THE PAST AND This type of process provides a global view of the ENVISIONING THE FUTURE business that allows supply, sales, marketing, and These types of capabilities also allow a company manufacturing to collaborate on a consistent basis to compare plan assumptions with actual results, to maximize customer satisfaction. so that future plans can be revised to be more Most important, the right information technology effective. Procter & Gamble, for example, uses can provide the contextual information necessary the results of the S&OP process to create more to maximize the impact of decisions on business effective plans by looking backward and forward. value creation – to help increase profitability and First, a team evaluates a past plan: where the achieve strategic goals. The company can adapt business went right, where it went wrong, and its actions to changing conditions without what needs to change. The teams compare current decreasing performance. plans with historical trends and other data such as market size and consumption to determine if the Dick Clark, the demand planning global process assumptions of the new plan make sense. owner for Procter & Gamble, concurs that the company’s S&OP process has helped maximize AVOIDING RISK AND UNCERTAINTY resources to achieve better financial results. As he put it, “Our monthly S&OP meetings allocate and Companies often experience difficulties in align company resources to a single set of sales and foreseeing uncertainties in their supply chains. supply plans. Our goal is to optimize resources to This can be disastrous in the long run. Figure 1 support the company’s business objectives. This demonstrated how the process can easily get out includes assessing the financial implications of the of control at the end – creating a real traffic jam plan as well as its impact on supply and demand.” that could have been avoided through an effective S&OP process. 6 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
  • 10. DEFINING THE FIVE-STEP REVIEW PROCESS A five-step review process is an integral part of The best new product review process rationalizes the best S&OP because it structures the flow of the information about customer needs with collaboration and information sharing. It starts channel potential and ideas for new product at the highest practical level of management offerings. But the process does not stop there. It business review, which is then reconciled with the analyzes the structure of supply chain costs and lower-level product management, supply, and determines the need for facilities or capacity, demand reviews. Brown-Forman, for example, facility consolidation or outsourcing, and the right implements both strategic and tactical supply set of key performance indicators. chain planning processes because of the long time frames associated with wine and spirit production. 2. DEMAND REVIEW The company’s S&OP process creates an 18-month The purpose of each of the demand reviews is consensus forecast (most companies now create a to lend an aspect of integration to a process that 24-month plan) for demand planning, near-term typically takes place in isolation. The demand inventory planning, and production planning and review does not simply rely on quantitative scheduling (see Figure 3). The following outlines forecasting, for example, but instead balances in detail each of the steps in the process. orders and demand through what-if analysis, achieving consensus among the various 1. NEW PRODUCT REVIEW stakeholders all along the supply chain. In analyzing the feasibility of a new product, The best demand reviews not only ensure that the company uses inputs from management the statistical forecast is based on the best data and statistical analysis to align new product and model, including marketing assumptions, but development and introduction with corporate also compare and incorporate sales and customer financial and strategic goals. The analysis takes forecasts and include input from operations. The into account product life cycles, seasonal demand review also incorporates the results of the influences, promotions, and rebates and creates a new product review, proposed promotions, and multiperiod business plan. their demand impact. It incorporates real-time demand signals to monitor the plan assumptions and planning cycle so that demand can be adjusted accordingly. Figure 3 Management Business Product Review Management An Integrated Latest View and Review S&OP Process Recommendation (Source: Oliver Strategy Wight Americas) Business Plan Performance FinanciaReconciliation Integrated l Appraisal Supply Financia Review l Appraisal Demand Review SAP Insight| 7
  • 11. 3. SUPPLY REVIEW 5. MANAGEMENT EVALUATION AND The supply review includes manufacturing ANALYSIS capacity, inventory, procurement, and logistics At this point, management reviews the S&OP planning. The supply review considers potential results and plans and compares assumptions, material shortages in the supply chain as well identifying any problems and their root causes. as the capacity for the company to develop The best management evaluation processes use excess inventory. a number of leading practices such as waterfall analyses of forecasts and supply plans and the 4. FINANCIAL RECONCILIATION precise measurement of actual demand to the REVIEW demand plan. The analyses include profitability by At this point, the strategic S&OP process diverges customer, channel, product, and supplier, as well from current business practice by creating a as backlog and lead-time trends. The management forward financial forecast of the previous three review also addresses any high-impact exceptions reviews. The supply and demand reviews are to the plan, such as perfect order, cash-to-cash, balanced by taking a close look at the product mix, and asset performance. conducting what-if analysis, filtering it through constraint management, and allocating supply to demand. Most important, all stakeholders in the process must reach consensus on the business and financial impact of the assumptions that have gone into the financial reconciliation. The best financial reconciliation optimizes the supply chain to avoid problems down the line, and then compares the optimized supply chain plan to the demand plan. While the financial reconciliation makes certain that the S&OP plan hits targets for revenue and margin, it also considers whether the company’s budgets remain consistent with the assumptions. The process validates potential demand spikes and supply disruptions, adds in forecasts for future financial profit and loss statements, and identifies gaps between the current S&OP and the company’s future business plan. 8 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
  • 12. TAKING S&OP TO THE NEXT LEVEL Brown-Forman, ExxonMobil Chemical, and When more companies follow the lead of these Procter & Gamble have all changed their approach three best-practice corporations, they will take to S&OP with world-class results. Perhaps their S&OP process to the next level – aligning the greatest testimony to the need for more their supply and demand, creating better sophisticated S&OP is a comment by Randy Isdahl internal coordination, and maximizing their of Brown-Forman: “We will extend [this new global effectiveness. approach to] S&OP wherever business value can be enhanced by leveraging S&OP to maximize our supply chain effectiveness.” David Sharp of ExxonMobil Chemical maintains, “[S&OP] provides us with a multidimensional view of how the business is doing on a global basis.” And Dick Clark of Procter & Gamble adds, “S&OP is the key process for information sharing within the business. It’s helping us meet our goal of better business decisions through an improved mutual understanding of demand, supply, and financial information.” SAP Insight| 9
  • 13. ABOUT THE SOURCES ABOUT SAP ABOUT THE AUTHORS SAP is the world’s leading provider of business Arnold Mark Wells is a solution principal with software.* Today, more than 38,000 customers in SAP America Inc. For more than 20 years, he has more than 120 countries run SAP® applications committed himself to enhancing the value of – from distinct solutions addressing the needs of organizations through improved business practices small businesses and midsize companies to suite and enabling technologies. He has contributed offerings for global organizations. Powered by the from within industry, as a supply chain SAP NetWeaver® platform to drive innovation consultant, and as part of a software development and enable business change, SAP software organization. Wells has worked on supply chain helps enterprises of all sizes around the world solutions with many companies across a broad improve customer relationships, enhance partner array of industries. He holds memberships in collaboration, and create efficiencies across their the Council of Supply Chain Management supply chains and business operations. SAP Professionals and in APICS, which has certified solution portfolios support the unique business him since 1989. He holds an MBA from Drexel processes of more than 25 industries, including University. high tech, retail, financial services, healthcare John Schorr of Oliver Wight Americas and the public sector. With subsidiaries in more contributed to the executive agenda and the five- than 50 countries, the company is listed on several step review process content of this SAP Insight. exchanges, including the Frankfurt stock exchange Schorr has been with Oliver Wight Americas since and NYSE under the symbol “SAP.” For more 1978. He has served as president of Oliver Wight information, please visit www.sap.com. International and on the Board of Directors of * SAP defines business software as comprising enterprise Oliver Wight Americas and is a principal. He was resource planning and related applications such as supply chain management, customer relationship management, president of Oliver Wight East, which is now product life-cycle management, and supplier relationship part of Oliver Wight Americas. As a consultant management. and educator in the areas of enterprise resource planning (ERP), manufacturing resource planning ABOUT OLIVER WIGHT AMERICAS II (MRP II), integrated supply chain management, Oliver Wight Americas is a global management sales and operations planning, and demand consulting firm that specializes in helping management, Schorr has assisted many companies manufacturing organizations to work smarter, in attaining class A performance. He is recognized faster, and better than their competitors. The firm as one of the leading experts in the areas of sales includes leading business process improvement and operations planning and the interface of specialists who educate, coach, and mentor purchasing with ERP. Prior to consulting, Schorr people to lead and sustain change on the journey served as vice president of operations at Haworth to business excellence and outstanding business Inc. and as director of purchasing at Steelcase Inc. performance. He is the author of two books, Purchasing in the 21st Century and High Performance Purchasing. He holds a BS in chemistry from the University of Iowa. 10 | Sales and Operations Planning: The Key to Continuous Demand Satisfaction
  • 14. www.sap.com 50 083 603 (07/03) Printed in USA. 2007 by SAP AG. All rights reserved. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, Duet, PartnerEdge, and other SAP © products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.