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.
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 Column two of the following table shows questions that a less effective, outdated S&OP strategy typically asks.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 |
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Two |
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Three |
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Four |
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Five |
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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:
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.
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?
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.
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:
By instead explicitly considering trade-offs, modern S&OP begins to consider questions like:
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.
A traditional approach to S&OP uses heuristics to assume alignment with a company's strategy, considering things like:
By explicitly considering the company’s strategic objectives, S&OP strategy is able to instead address things like:
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.
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:
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
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?