The Stream by River Logic

Five Key Questions a Successful S&OP Process Strategy Should Ask

October 24, 2018 | By Carlos Centurion

Sales and operations planning has been around for decades. At the time it was created, the emphasis was on setting up a process that would facilitate collaboration between the commercial departments (e.g., sales, marketing) and operations (e.g., manufacturing, procurement, inventory, distribution). The objective of this collaboration was to agree on one plan, such that the company made the products it was planning to sell in the most efficient manner.

Existing silo-based technology was adapted to support the S&OP process. Whether it was the early spreadsheets, demand/supply planning systems that incorporated more advanced algorithms, or collaboration tools that act as a system of record, the focus was on driving sequential refinement of decisions along the process.

The more advanced tools enabled companies to work more efficiently against one plan, and recently to consider different scenarios and translate the output into aggregated financials.

Times have Changed: Current S&OP Process Falls Short

However, today’s highly competitive landscape is not the same as when S&OP was originally created. Firms must constantly innovate and deliver products that recognize fast changing localized preferences (or at least adapt to moving price points and complex global contracts with customers in B2B) while they manage regional or global supply chains efficiently. Supply chains have evolved into multi-enterprise, demand-supply networks. These networks must deal with multiple risks and even take on new objectives such as sustainability. Every enterprise that is part of this complex web needs to look at ways by which they can add value both to their customers and to their trading partners.

In this new competitive landscape, S&OP is the key driver of decision-making in the tactical 3 to 18 months timeframe and can have a transformational impact on a company’s ability to create a competitive advantage within their value chain.  Management must redefine the objectives of S&OP to maximize the value generation for shareholders while appropriately balancing strategic objectives and risk. 

Against the critical mission of driving a competitive advantage, current S&OP falls short. Column two of the following table shows questions that a less effective, outdated S&OP strategy typically asks. In column three, we provide the modern alternative to these questions. Below the table, you’ll find a more in-depth description of each.

Group

Traditional Questions 

Modern Questions

One

  • Which demand should we fulfill?
  • Which demand should we proactively drive?
  • With which products and at which channels/customers?  

Two

  • Can we supply this demand?
  • What is the most efficient way to do it?
  • Which demand should we supply?
  • What plan maximizes overall value?

Three

  • Can we support this customer contract?
  • Can we support a last-minute promotional campaign?  
  • Should we build up our inventory of complex products?
  • How can we structure a customer contract to maximize value?  
  • What is the profit impact of last-minute promotions?
  • Does inventory build drive improvement in profit, cash flow, and ROIC?

Four

  • How do we manage new product introductions for volume?
  • What volumes do we assign to strategic customers?
  • How can we optimally drive new product introductions, and what is the value expected over time, including opportunity costs?
  • What is the impact of sustainability targets on demand, supply and financial performance?
  • Where is our network suboptimal and how do we optimally allocate investments?

Five

  • How does an approved S&OP plan translate into P&L and cash flow forecasts?
  • What plan optimizes profitability?
  • What plan optimizes cash flow?
  • What plan optimizes ROIC?
  • What is the right amount of working capital and its impact on business outcomes?

Five decisions that modern S&OP should enhance

1. How can I proactively drive value through demand?

Traditional S&OP has primarily focused on forecast accuracy versus driving value and asks things like: Which demand should we fulfill?

When demand plans are considered as inputs, modern S&OP is able to ask questions like:

  • Which demand should we proactively drive?
  • With which products and at which channels/customers?

Example Impact on a Business

A CPG company that adopted a focus on demand/product mix optimization was able to identify promotional campaigns that would earn an ROI well below the company’s cost of capital, and shift the funds to products and channels where the ROI would be on target.

2. How can I solve against demand in order to maximize overall value?

Supply planning has traditionally focused on delivering against the demand plan by asking questions like: Can we supply this demand?  What is the most efficient way to do it?

By simultaneously solving against demand to maximize profitability, S&OP can refocus its questions to ask things like: Which demand should we supply? What is the plan that would maximize overall value?

Example Impact on a Business

A coal mining company changed the focus of supply planning from minimizing cost to maximizing profit by tying the supply plan to the product/customer mix. The supply plan thus recognized which blends would be most profitable to ship each of their 800 customers while adjusting the Mining, Washing, Blending, Inventory and Transportation plans accordingly.

3. How can we explicitly consider customer contract trade-offs to maximize ROIC?

Traditionally, S&OP has been more focused on helping practitioners optimize their choices against the strategic and financial impact on the company, asking questions like:

  • Can we support this customer contract?
  • Can we support a last-minute promotional campaign?
  • Should we build up our inventory of complex products?

By instead explicitly considering trade-offs, modern S&OP begins to consider questions like:

  • How do we structure a customer contract to maximize value?
  • What is the profit impact of last-minute promotions?
  • Does inventory build drive improvement in profit, cash flow, and ROIC?

Example Impact on a Business

A company in the Natural Resources space discovered that a customer which represented 24% of their revenues was at best net neutral to their profitability.  After much negotiations, they dropped the customer and have since picked up more profitable customers resulting in 2% of revenue translated into additional profit.

4. How can we truly align S&OP with our company’s strategic objectives?

A traditional approach to S&OP uses heuristics to assume alignment with a company's strategy, considering things like:

  • How can we manage new product introductions for volume?
  • What volumes should we assign to strategic customers?

By explicitly considering the company’s strategic objectives, S&OP strategy is able to instead address things like:

  • How can we optimally drive new product introductions and what is the value expected over time, including opportunity costs?
  • What is the impact of sustainability targets on demand, supply, and financial performance?
  • Where is our network suboptimal and how can we optimally allocate investments?

Example Impact on a Business

A utility wanted to target a 50% reduction in carbon emissions by 2020.  By embedding these targets into their S&OP process, they discovered that would require at least 30% more capital expenditures and would increase their rates by at least 25%.  Ultimately, they adopted a target that was still aggressive but more achievable by the business and also acceptable to shareholders. 

5. How can we optimize to financial outcomes?

An S&OP strategy commonly involves aggregating plan results into financial impact, and usually address things like: How does an approved S&OP plan translate into P&L and cash flow forecasts? 

By considering financials as an input into the S&OP process, a modern strategy is able to focus on the following:

  • What plan optimizes profitability?  
  • What plan optimizes cash flow?  
  • What plan optimizes ROIC?
  • What is the right amount of working capital and its impact on business outcomes?

Example Impact on a Business

An Oil & Gas midstream company was able to change their planning approach by focusing on the plans that would maximize their total NPV, which improved their asset investment decisions to tie them closely into S&OP and overall NPV contribution

Closing Thoughts

S&OP has the potential to drive truly transformational impact by not only driving consistency against the process but by incorporating value explicitly into the decisions it supports and not only aligning with but also informing the company’s overall strategy. We have seen companies realize up to 5% of revenue in additional profitability from refocusing their S&OP questions while reducing the time to make decisions from weeks to as little as one meeting.  With higher profits and agility, they can invest more in R&D, improve their manufacturing footprint faster and outmaneuver the competition in the market.

What questions does your S&OP process answer today? Is your approach in line with modern S&OP strategy?

New Call-to-action

You May Also Enjoy Reading
5 Survivor Secrets to Boost Quality Production Planning…(Read More)
What is S&OP and Why Should Finance Care?…(Read More)
Integrated Business Planning: Why It's Top of Mind for C-Levels…(Read More)
    Topics

    Posts by Topic

      Supply Chain Brief