How the “Big Kids” Do
Sales and Operations
Planning
By John R. Dougherty
Senior Partner, Partners for
Excellence
When we were
little kids, we always looked up to the big kids (our siblings, the
neighborhood kids) as guides to what was fun and cool. As we grew and changed, so did our guides –
school chums, cousins, and kids from other neighborhoods. As adults we learned that it wasn’t always
the older, bigger, flashier people who made the best role models. We saw the need for substance as well as
style. These life lessons are true in
the business world as well.
“Best
Practice” model companies aren’t just the biggest, oldest, most famous
organizations. They are companies with
valuable, proven experiences in particular processes
or behaviors. These organizations have
figured out how to get the most out of the latest “hot” management
approaches. And they’ve done it in an
institutionalized, sustainable manner that produces real business results.
In this
article, we’ll look at the Sales and Operations Planning (S&OP) experiences
of several “Best Practice” companies, with particular emphasis on how S&OP
works with other business processes and approaches.
But
first......
S&OP – What’s In a Name?
As in any
field, over time, the use of terms and acronyms gets sloppy. Some people will expand a term to include new
meanings beyond the scope of the original concept. Others may narrow a term to focus on one particular
aspect of its original meaning.
For example,
today some see S&OP as primarily focused on maintaining and improving
forecast accuracy – this narrows the meaning.
Others are beginning to use it in an expanded sense to include the
functions of tactical market planning, customer order management, master
scheduling and detailed weekly planning.
Because this
is confusing, still others have tried to coin new terms to try to clarify
communication. Some of these new terms
include “Enterprise S&OP”, “Executive S&OP”, “Integrated Business
Management” and “Sales, Inventory and Operations Planning (SIOP)”.
There are
several very good reasons for sticking with the original term “sales and operations planning (S&OP)”:
1)
All
of the new terms have essentially the same meaning as the original, traditional
term. Using a new term to describe the
process simply encourages others to use the old term incorrectly.
2)
Most “Best Practice” companies in our
experience use the traditional terminology and haven’t found a need to redefine
(narrow or expand) the term, or invent a new one.
3)
The
simplest way to communicate (and the one consistent with the body of knowledge
of this over twenty year old process) is to continue to use the term that has
been used for most of those twenty years.
In this
article, as in my other writing, I continue to use the original term, whose
scope and meaning (as defined below) has remained relatively unchanged over the
years.
S&OP – A Refresher
S&OP is
a business process that gives management control based on a current knowledge
of the market and the company’s internal capabilities, while fostering
effective and timely cross-functional communication and decision-making.
This is done
by monitoring and managing demand and supply at a family, volume level. S&OP acts as the linchpin to pull
together and reconcile other separate, distinct but connected business
processes including strategic planning, sales and marketing planning, financial
planning, detailed sales forecasting, customer order management, master
production scheduling, distribution resource planning, and rough cut capacity
planning.
There is
typically a five-step monthly process comprised of Data Gathering and Review,
Demand Planning, Supply Planning, Partnership Meeting(s) and Executive
Meeting(s).
The end
result, when done properly, is excellent customer service, well managed
inventories and properly utilized resources.
And it ensures institutionalized communications so that the entire
organization is informed of the latest business decisions related to supply,
demand, inventory and customer backlogs.
Let’s now
take a look at how some “Best Practice” companies use S&OP in different
business environments.
Coca-Cola
This is a regional
manufacturing division of Coca-Cola located in
72% of their
product volume is completely produced and handled by third party fruit juice
processors. Here juices are delivered from the processors directly to Coca-Cola
bottling operations, third-party packers and other customer locations. For these products, CCM provides sourcing,
specialized analytical testing of juice samples prior to shipment, and
logistics coordination services.
Supply Chain Management
ERP and
S&OP were implemented at CCM when the plant was started in 1991. Coca-Cola Midi sees S&OP as the backbone
for all planning, manufacturing and supply-chain activities. This is especially true of their extensive
supply chain coordination efforts to synchronize the flow of product from all their
suppliers and manufacturing partners to all the canning and bottling locations
that use their product.
In fact,
there are monthly “Operational Meetings with Suppliers”
which occur after the final executive
S&OP meeting. Face-to-face meetings
cover four suppliers representing 71% of total juice volume. Volume changes are implemented based upon
agreed-upon time limits within select time frames. These meetings also address:
o
Inventory
and demand management issues
o
Product
in QA quarantine
o
Service
defect rates and corrective actions
o
Improvements
planned and requested
An Early Start (And
Finish) To S&OP
CCM’s
monthly S&OP process actually begins ten days before the month end, when
preliminary demand data is updated based on the requirements from sister
Coca-Cola divisions. This data is
updated over the next two weeks as actual results occur. This allows the whole S&OP process to be completed four days into the new month!
S&OP
enables disciplined and formalized communications across the company, and between
all their suppliers, partners and customers.
It also has facilitated a transition from a low mix/high volume
environment to a high mix/medium volume environment. Continuous improvements in customer service,
inventory management, obsolete products, and freight costs have been the result
of S&OP coordinating all their improvement efforts.
A Major Medical Company
This company
generates over three quarters of a billion dollars in sales of medical devices
and consumable products annually.
Their headquarters
and four plants are in the
There were
extensive efforts in the company to standardize and synchronize each S&OP
process into one common company-wide process.
A team with representatives from all five businesses and all functions
analyzed the best practices from each of the five pre-existing businesses. They then reconciled and incorporated the
“best of the best” into one company-wide process design, to ensure consistent
practices and easily integrated data throughout the organization.
S&OP was
seen as the “glue” to bring the five different businesses together. It also is a vital management communication
and decision-making process that supports their matrix management approach to
managing multiple business lines in multiple regions across the globe.
Matrix Management
The
company’s management processes have evolved and improved based on a very
effective, cross-functional, team-based, global, “matrix management”
approach.
To keep the
appropriate individuals focused on their respective product issues, there are
ten S&OP Partnership meetings reviewing all the supply, demand and
inventory data covering 27 product lines or categories. Many of these meetings are held consecutively
on the same day. They last three to six
hours and have director level participants.
Five
Executive S&OP meetings (typically three hours long) are conducted by
“Product Teams” for each of the five business lines, encompassing all products,
including consumables, supplies and medical devices. However, unlike many companies where the
business leader responsible for the executive S&OP meeting has the title of
general manager or CEO or COO, in this company there are no business unit or
product team general managers or “executives in charge”. Instead each team is comprised of a
cross-functional group of vice presidents, with a designated facilitator
(sometimes a marketing person, sometimes an operations person) who guides the
process.
Generally
all of these teams reach consensus on the decisions that need to be made. In those rare cases where this doesn’t
happen, the issues are forwarded to corporate headquarters for final
resolution.
Though
difficult, this management approach works because the participants are fully
committed to team principles, values and standards of behavior, and because
there is a well defined S&OP process to guide the teams’ communications and
decision-making.
Lean Manufacturing
In this medical
company vigorous efforts have been underway over the past years to implement
lean manufacturing for shorter leadtimes, lower costs and improved
flexibility. Lean manufacturing has
streamlined, simplified and shortened the S&OP process. In turn, S&OP governs the lean
manufacturing plant processes and provides the medium to long-term planning
view that is missing in a lean execution system. The S&OP process is used to target areas
for lean manufacturing implementation and to monitor progress of those
projects.
Lean and
S&OP together have driven customer service levels above 98% and helped
reduce inventory by over $100 million over the past years. Supply chain and customer leadtimes have been
drastically reduced, with an increase in flexibility throughout the supply
chain.
Eli Lilly & Company
This global
pharmaceutical company has over $14 billion in sales with 37,000 employees, and
inventories of $1.7 billion. Their 65
products are sold in 8000 different SKU’s, into markets in 146 countries, through
130 sales affiliate divisions.
Each of
these sales affiliates maintains forecasts and inventory replenishment orders
over a 24 month horizon. This demand
planning data is summarized into four regional areas on a monthly basis, and
reviewed and approved by senior sales and marketing managers.
More Supply Chain
Management
Lilly has 22
global manufacturing sites in 12 countries, grouped into four global
“Networks”, each with different manufacturing technology and types of
product. Many of their eighty 3rd party
manufacturers in 33 different countries are managed as part of two “hubs” in
North America and
A corporate
Supply Chain organization guides the planning processes that include
manufacturing resource planning (MRPII) or enterprise resource planning (ERP),
distribution resource planning (DRP), and an advanced planning system (APS)
used to schedule their manufacturing sites in a way that avoids overloads and
minimizes inventories and leadtimes.
This complex
supply chain requires extensive efforts in the area of global supply chain
management, with S&OP guiding the demand and supply management efforts, and
providing a forum to manage, improve and communicate change effectively.
New Products
Much of
Lilly’s business success can be attributed to the most productive new product
development pipeline in the industry (10 new products in three years, five
times the industry average). As one Lilly manager said: “The value of S&OP at Lilly has been
the ability to launch all of our new products in a very complex environment
without adding significant cost, resources or inventories. We have managed a strong customer service
performance metric while controlling our growth in assets.”
S&OP has
provided the vision, communication and decision-making mechanism to carefully
plan and execute the launch of their new products across multiple markets in a
time-phased fashion. It also has been a
major planning method for making decisions on products coming off patent, which
are often outsourced to third party manufacturers, thus freeing capacity in Lilly
plants to produce the new products being introduced.
Lilly has
maintained customer service close to 98%, while reducing inventory $500
million, even though the product portfolio has grown rapidly.
Summary
Ten other
“Best Practice” companies in our study have realized benefits similar to these
three companies. Improvements in
customer service, inventory management, and cost management,
as well more effective implementation of other business process improvements
can be directly tied to S&OP. And
customer relationships have been enhanced with better visibility and planning.
The lessons
learned have been consistent as well.
The key is people: top management leadership, cross-functional
participation and teamwork. Accurate information
in standard display formats is a key cornerstone, along with performance
measurements or key process indicators (KPI’s), and education and training in a
step-by-step implementation process.
This is enhanced based on a widespread attitude seeking continuous
improvement, which often leads to a lowered level of decision-making,
and streamlined processes.
The best
practice companies all agree: S&OP means better control, through the power
of knowledge, with a regularly updated vision, and an effective
cross-functional communication and decision-making process.
John Dougherty, is a founding senior partner
of Partners for Excellence, specializing in hands-on consulting and tailored
education in S&OP, and other demand and supply management processes. With Christopher Gray, he authored the book, Sales & Operations Planning – Best
Practices, Lessons Learned from Worldwide Companies. Contact John @ jrd1@partnersforexcellence.com