The current surge of interest in Sales and Operations Planning-a discipline which has been around for years-is indicative of companies' growing awareness that improving their supply chain is imperative for gaining or maintaining a completive edge.
Businesses, of course, are at various stages along the path to effective S&OP. Some are beginning from scratch, with no formal processes or tools in place. Others have software "pieces" like demand planning and/or supply planning. Such enabling tools are necessary for all but the simplest of businesses-necessary, but not sufficient. Tying these "pieces" together in an effective S&OP process will exponentially increase the benefit provided by the tools alone and allow your supply chain to truly become a competitive advantage.
What is S&OP?
Sales and Operations Planning is a continuous, structured process for managing the supply chain so that supply is balanced with demand in accordance with the business strategy.
It incorporates Demand Planning, Supply/Demand Balancing, and Inventory Management sub processes which meet monthly and interact continually to create and execute a single set of integrated plans.
It provides continuous monitoring of performance vs. plan and a disciplined way of responding to changes to minimize disruptions and maximize the bottom line.
Traditionally, S&OP has been seen as a way of reducing costs - and indeed, it does that admirably. A study by consulting firm PRTM showed that best-in-class companies typically run with 50-80% lower inventories than the median, while providing 15% higher on-time deliveries and 40-64% shorter cash-to-cash cycle times. Sunsweet Growers, the world's largest producer of dried fruit, reduced its production overruns from 30% to 12% after implementing a full S&OP solution. In addition, they eliminated costly overtime, improved schedule stability, and decreased changeovers.
Perhaps more importantly, S&OP is now being seen as a way to increase the top line as well as to cut costs. Rhodia Eco Services, a $230 million dollar division of global chemicals giant Rhodia, Inc., implemented a full S&OP process which enabled it to improve its overall capacity availability from 85% to over 90%. The increased capacity allows Eco Services to respond more quickly to last-minute changes in demand and to gain market-share.
Aberdeen Group, in its March, 2005 "Investing in S&OP: High Value Opportunities," reported that its research indicates that a typical $500 million revenue/year business investing in upgrading its S&OP processes can gain an average of $25 million/year in gross margin.
One of the greatest intangible benefits of a well-run S&OP process is the increase in organizational effectiveness - and corresponding decrease in unnecessary pressure on individuals in supply chain functions. Instead of firefighting, these professionals now have time to think proactively about continuous improvement opportunities.
Crises occur much less frequently than before, because the planning process itself creates visibility of potential problems far enough out that alternatives can be developed and contingency plans evaluated and approved.
This is key to the "competitive advantage" we mentioned: it's difficult to put a dollar value on preventing the train from wrecking, but it's far, far better and cheaper than cleaning up after it. You didn't disappoint a customer. You didn't miss your numbers because of out-of-control inventories. As a result, your stock price didn't fall. It's difficult to put a number on being proactive, but it's not at all difficult to recognize the benefits.
Sometimes, once things are running very smoothly, someone will ask, "Why do we need to keep having these monthly meetings?" The answer, of course, is that the process which culminates in the monthly meeting and the consensus path forward which comes out of it are precisely what keeps everything running smoothly.
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About Supply Chain Consultants
Supply Chain Consultants, founded in 1993, is a software and consulting company with headquarters in Wilmington, DE, and European operations in Antwerp, Belgium. The company provides a wide range of technology and process solutions for enhancing productivity and reducing operating costs in the supply chain. Such major corporations as Hexion, Terra Industries, Sunsweet Growers, Atheros Communications, Innovene and Akzo Nobel use SCC's Zemeter products to optimize their supply chains.
For more information
Phone: 302-738-9215 or 877-722-7627
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