In the first post of the series, Strengthening the S&OP Process with What-if Analyses – Demand Shaping, I discussed that the key underlying requirement for maximizing value capture is the support for multi-dimensional analysis on a forward-looking basis. This multi-dimensional analysis capability allows decision makers to examine a business plan from multiple angles.
Within the second post of the series, Strengthening the S&OP Process with What-if Analyses – Product Mix, I discussed how embedding Product Mix analyses as part of the S&OP process represents a significant opportunity to improve performance.
In this post, I’ll recommend ways to enhance strategy planning that will allow you to identify, run, and evaluate integrated analyses that tie into financial outcome.
Supply Planning and What-if Analysis
Supply-side what-ifs include evaluation of different supply planning strategies, including manufacturing, inventory, procurement, and logistics. Users alter constraints (e.g., safety stock policy, manufacturing run lengths), introduce new possibilities (e.g., additional straight time capacity, outsourcing) and manipulate objective functions to create realistic supply scenarios to identify supply options that maximize revenue, profit, working capital, and customer service performance. A best practice analysis sequence would include:
- Start by understanding the base plan – which ideally includes an integrated supply and financial plan. The base plan should highlight the key constraints impacting the supply plan. It should go beyond the operational view to quantify the financial impact of these constraints, in the form of lost revenues and lost profits. In addition, it should calculate the opportunity value (the net system-wide marginal impact) of removing a unit or bottleneck (e.g., an hour, a shift, a policy constraint, etc.). This analysis will lead supply planners to zero-in on the key opportunities for improving the supply plan.
- Define the what-if analysis. Scenarios are typically defined by editing min-max constraints or through a scenario wizard that allows users to only enter the necessary variables. Typical analyses are targeted beyond the frozen period (typically 3-6 months out, but this varies by industry and company), and they include strategy, policy, and planning level analyses.
- Strategic and policy analyses guide the planning and short-term operational decisions. These include manufacturing strategy (e.g., sourcing, MTS/MTO), inventory policy (e.g., safety stock, cycle stock), procurement decisions (e.g., single/multi-sourcing), and logistics policy (e.g., distribution, customer service). In addition, some companies will include capital expense allocation scenarios as part of their strategic S&OP analyses.
- At the planning level, users evaluate the impact of altering more tactical constraints. These include build-ahead, use of over-time, manufacturing run length, changes to maintenance schedule, special deals on procurement, and many other levels that can impact the business.
- Once the scenario is entered, users re-create the plan considering all the constraints in the system. Since the scenario involves changes to the business representation, it is essential to re-optimize the supply plan (to maximum profit or minimum cost) to get a realistic picture of the impact and to analyze and compare multiple scenarios under “the best possible outcome.” This allows a more realistic, apples to apples comparison as well as saving significant time vs. simulation-based strategies (as in those available in Business Intelligence/BI systems).
- The re-optimized plan will establish the impact on operational and financial performance. Users should be able to see P&Ls by business unit, product, facility/asset type and function. In addition, users should be able to compare the impact of the scenario vs. the base plan at the same level of detail.
- Typically, there will be deeper questions as users will want to know why scenarios report a given outcome – remember that your system as a whole behaves in a non-linear way and this will often result in counter-intuitive findings. Root-cause analyses help determine the key drivers of performance. Users may want to see why a certain strategy or policy change yields a different outcome than expected. To do this, they may need to dive into operational plan reports that tie with detailed cost forecasts (akin to Activity Based Costing but on a forward-looking basis). Accessing detailed reports that combine operational and financial information is critical to understanding the impact of a given what-if scenario.
- A final evaluation of a scenario must include opportunity values (i.e., the net system-wide impact of selling an additional unit of product or adding a unit of capacity) by product and by asset. Opportunity values point the way towards additional upside potential by quantifying the value of removing the new constraints, thus helping users identify new what-if scenarios to evaluate.
As outlined in this series, demand shaping, product mix, supply, and financial what-if analyses can provide significant upside to the S&OP process. The key requirement for capturing this upside is the ability to conduct these multi-dimensional what-if analyses on a forward-looking basis. Executives need the ability to evaluate the effect various strategies, policies, and tactics have on business plans. Technological advances have enabled companies to eliminate departmental/business unit planning silos to better evaluate financial, operational, and service-level trade-offs. The Sales and Operations Planning process has evolved into true Integrated Business Planning (IBP). Via IBP, revenue goals and budgets are validated against a bottom-up operating plan and that operating plan is consistent with financial goals. Decision makers can make changes to tactical and strategic plans that optimize the balance between financial performance, customer service, and risk. IBP provides the optimal outlook for an enterprise.
