Part 2: An S&OP Q&A with SCM World’s Kevin O’Marah
In Part 1: An S&OP Q&A with SCM Worlds Kevin OMarah we discussed the drivers impacting S&OP, the value of the process and the changing rhythm of S&OP meetings. In Part 2 we will talk about the changing role of S&OP, the difference between tactical and strategic S&OP and the benefits a robust, mature process can bring to your organization.
Part 2: Ownership and Engagement
Karin: When you look across industries, what are the two or three qualities that standout amongst the leaders? What is in your conversations with them that is different from those who are just starting and S&OP process?
Kevin: The most common quality is visibility to the outside world, customers and suppliers. When customers are involved in the S&OP process, it drives tangible supply chain improvements. These companies are more mature on all levels and the reason is actually quite simple, these companies have to explain / describe their processes at a level others can understand. They are not able to use their internal lingo; all data is consistent across the board.
The second area is balance, and balance is not always there. Many companies rely on a spreadsheet-driven S&OP process. When you have a room three-quarters filled with supply chain people and the other quarter is a combination of sales, marketing, finance, etc. you are going to be unbalanced. Those with more balance in their S&OP process are likely have a better handle on cost to serve for instance. They are much more likely to perform scenario analysis around capital expansion or, in a more long-term sense, around their IBP process. These organizations end up with a better grip on the measurements of tradeoffs, cost to serve, capital spending decisions, and inventory costs.
A third area is data quality. One issue we see that hinders success is access to decent data. A lot of times the weaker S&OP processes are the ones where a person or team is tasked with constantly cleaning or normalizing data. Ideally, you want information that is easily accessible that ensures everyone is looking at the same units, same time horizons, same customer definitions, and so forth. Commonality of information is another marker of those who have their act together.
Karin: What are the two or three benefits you see these leaders typically achieve?
Kevin: The two key benefits we see most consistently impacted are supply availability and on-time delivery. Interestingly, forecast accuracy is actually not one of the top benefits of S&OP, it is critical to the process but just doesnt move as much as the other metrics. Total cost of supply chain is another metric that does not move as quickly as many would think. However, both do see improvements.
In a new S&OP environment you will see forecast accuracy improve quickly, then it will stabilize. Customer service and availability are metrics that continue to improve as the process matures. Typically, companies with a more mature S&OP process will say, “It’s one thing to get the forecast right, it’s another to engage with the customer.” The idea here is to inform them about what’s going on and what is being done to improve the situation, if warranted. This level of engagement doesn’t happen anywhere near as much as it should.
Karin: Who typically owns the S&OP process? Do you think ownership is aligned correctly within organizations?
Kevin: S&OP is typically owned by supply chain. After all, supply chain feels the pain first. Sales, or other departments, don’t traditionally feel the pain of a misaligned S&OP process the way supply chain does. Supply chain, by nature, is better at understanding the tradeoffs of service versus the cost. I see this as an appropriate mentality. SCM World conducted a large field survey to answer this question and, interestingly, being run by sales or P&L owners did not equate to improved performance. In principal, it ought to, however P&L is not the one that owns the tradeoffs. Instead, supply chain talent is temperamentally inclined to assess a tradeoff and propose alternatives. They sit in the middle of the various tradeoff functions and tend to have better access to information systems that are required to run a more mature S&OP process.
In parallel, we see the supply chain function beginning to grow in stature and sit in this operating role where they are pretty well positioned to represent the business unit objectives in adjusting tradeoffs. When IBP supports a more strategic horizon we see the P&L owner leading the process.
Karin: What advice would you give executive management regarding how they should be engaged in the S&OP process?
Kevin: Empower your supply chain leaders to run your meeting. They know what’s going on with tradeoffs; they can be your eyes and ears on the ground when it comes to responding profitably to the business. Supply chain leaders will only help you look better in your position. These are the ones that will flag a problem and they are better positioned to deal with uncertainty than anybody else. So if you empower them they will naturally balance the already powerful sales side of the organization.
We often see, whoever brings in the most revenue is the big man on campus. The imbalance in power in S&OP is when we see sales come in and say, “Just get it done.” Supply chain does their best, but it’s a lot more difficult than sales thinks. In an imbalanced situation they’re going to be in trouble and the business ends up incurring costs to make a sales person happy, which in turn, hurts margins. When supply chain is empowered, they can be in a position to say, “Here is the cost of that request.” In other words, they are able to help get the sales team start thinking about the consequences of the deals they are proposing.
Karin: Along those lines, many would argue that sales is the most accountable group in any company because you have an historical record of their performance for the past month, quarter, year, etc. What are your thoughts on having the S&OP team accountable for a set of shared metrics?
Kevin: Shared metrics make sense. An underlying issue to this whole discussion is that sales has a single focus when it comes to metrics, making the revenue number. Sales is focused on the top line and this can often create problems for a business downstream. If possible, I would rather set my sales organization to deliver profitable orders, not just orders. Traditionally, we have been taught to secure an order at any cost and then figure out how to deliver it at the least cost. We need to flip this mentality and think about the cost to serve. I would rather use metrics that have cost to serve and top line dollars so I know whether or not I’m making money. This does not exist as often as many believe. We’re close to the point where we are able to report profitable orders at the time of quarter booking and if that’s true than I’d rather the S&OP team shares those metrics as their performance goals.
Karin: Anything else you would like to add?
Kevin: There is an opportunity for multi-enterprise S&OP that is a total breakthrough, simply because S&OP, as many understand it, is contained within the four walls of the enterprise. Even though there is a lot of information within the proverbial four walls to help drive the forecast, you’re still guessing all the way through how a customer is going to react to the plan you develop. Whatever problem you are going to solve, you are doing it without the customer’s involvement and you are leaving their half of the discussion off of the table. If you can engage the customer in your company’s S&OP process, you will see improvement. For example, no matter what you manufacture, you have certain constraints in your supply chain. If you are not speaking with your suppliers or customers you are just guessing as to what the demand will be and that you will be able to profitably fulfill that demand. If you let the customer and suppliers be a part of that discussion you’re going to find better solutions and better balance points. No one does this very well yet. There is a little happening at the very high end where capital equipment is involved, but that is about it.
There are gigantic gains possible for those that engage in multi-enterprise / intercompany S&OP.
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