Bob Bowman: What's going on with sales and operations planning, S&OP? We're going to find out in my conversation today with KC Quah. He is research director with Gartner. KC, welcome.
KC Quah: Thank you.
Bob Bowman: You know, S&OP is not a new concept by any means but what's going on with it today? What does a S&OP process look like today?
KC Quah: You know, the reality is, you're right. S&OP has been known over 30 years. Most people forget that. And the interesting thing is, it hasn't changed. It's still the same process. It's still about making sure you have enough demand with backed up by supply to support the revenue or financial goals at a company.
Bob Bowman: Well, why do one at all?
KC Quah: Well, that's great question. And I think that question comes up because the first problem is, people think it's a supply-chain process. And S&OP is actually not a supply-chain process. It's a business process. Go back to the definition I just said, it hasn't fundamentally changed because companies today still want to know do I have enough demand to support and supply to support the revenue goals at a company. And that's fundamentally something I say and repeat because it takes a while to sink in. It's like, wait, so where's supply-chain? Well, supply-chain is about figuring out what the forecast might look like working with other groups in a company, it is about understanding supply and inventory and all that. But ultimately, it is about how a company runs, how a company can make money, and how a company can balance cost versus service.
Bob Bowman: Well, you say it hasn't changed all these years. Should it have changed? I mean, what is happening these days in the supply chain that suggested maybe companies are to take a fresh approach to S&OP.
KC Quah: Okay. So a little history lesson maybe. So S&OP I should say evolved a little bit in the early 2000s. It lost a little shine because companies were having difficulty implementing a full-blown S&OP process and we can talk about how difficult that is. And so this thing called integrated business plan came about. And you're nodding because everybody says IBP and they use it interchangeably with S&OP. But really, it isn't. It was a rebranding, first of all, of S&OP but it rebranded with a couple of nuances. The first nuance is IBP introduce strategic planning. Before, sales and operations plan was about planning and execution but it kind of missed that whole strategic longer-term look, two to five years, two to 10 years. IBP added that element of strategic planning up to five, 10 years.
The second thing IBP started to talk about and emphasize was the integration of the layers, how the strategic layer informs the planning layer, how the planning layer informs the execution layer, and how when things actualize, it actually feeds upwards as well.
The third thing is the whole idea of you have to monetize your demand. Because talking about units is not what a company is about. It's about making money, at the end of the day. And so if you don't monetize your demand, you really don't know how close you are to those goals. And so this term of IBP kind of did evolve and more S&OP and I think to your question, should it evolve. I think it has changed some, but the fundamentals are still there. The change is mainly technology driven and the pace of business. And people talk about clock speed being faster and faster. And so I think the ability of S&OP to sense and respond has gotten a lot faster over the years.
Bob Bowman: You talk about the pace of change. Is it even possible these days to predict anything with accuracy five to 10 years out?
KC Quah: It's never been possible to predict anything five to 10 years out.
Bob Bowman: And yet it's a desirable goal all the same. I don't understand the disconnect there.
KC Quah: Well, just because it's hard, doesn't mean you shouldn't do it kind of thing, right? And there're a couple of concepts that Gartner talks about. The first is range planning. Any point forecast is wrong because nobody's crystal ball is absolutely perfect. And so the first thing you have to recognize is there's a range of possibilities. And so first thing, so one of the things you focus on is how do you do range planning? What are the upside opportunities, what are the downside risk? What assumptions and indicators lead you to think that one versus the other scenario is more likely to become true? So that's one thing, the ability to do range planning further out.
The second is this idea of ... I kind of tongue in cheek call it approximately accurate versus precisely wrong. And there's some research that a colleague of mine has written on this but it's about aggregating up to the point where you have an approximate understanding of what's going to happen and the important parts of it versus planning to such level of detail that you're precisely off track and wrong. Because you're right, the visibility out that far is just not there.
Bob Bowman: But as companies seek to achieve more agile supply chains and react to actual consumer purchasing patterns of the moment, don't they feel the need to shrink the planning horizon of S&OP to the point where instead of looking five to 10 years or one year, even six months, they need to look in a small, in a shorter periods of time, what's going to happen in the next couple of months, what's going to happen in the next month, what's going to happen next week. Is that also part of a S&OP process?
KC Quah: Yes, it is. And actually, when I talked about clock speed, there is some of that happening. And it's an interesting polarization, if you will. On one hand, you have to think strategically, on the other hand, you have to react faster. But they're not in opposition. Let me give you some examples. When you think strategically, you're not trying to figure out what are people buying. I mean, in terms of bookings or orders. What you're trying to figure out is will I have enough capacity, will I have the right network structure, will I have the right ecosystem and partners to allow me to be successful five, 10 years out?
That's a different conversation than if you pull it all the way into an execution horizon of what are buying patterns today, what are orders and booking that are coming in? In what periods are they coming in? What is the flavor or customization being requested and how do I respond to that? Both things are happening. And I think the whole idea of technology and the digital supply chain is actually helping both areas out which is a big topic as well.
Bob Bowman: Where would you place S&OP today in terms of Gartner five-stage maturity model?
KC Quah: So based on a couple hundred companies that we've talked to and looked at, over 70%, maybe even over 75% of those companies, the numbers move around, are between stage two and stage three.
Bob Bowman: That's all?
KC Quah: That's all.
Bob Bowman: Wow, they got a long ways to go.
KC Quah: Yes. And there's a reason for that. Stage three ... it's not a linear maturity model, first of all. Even though there's five stages, moving from stage one to stage two is actually not too hard, relatively. Moving past stage two is still okay, but stage three is a pretty big jump. Stage three has a lot of characteristics that start to come together in that period, in that stage, sorry, that make it really difficult to get to, things like the ability to look outside in meaning you're not focused on how the company is doing, inside out, you're focused on how you're servicing the customer, outside in. So that's a mind change, mindset shift.
The other is the thing that we just talked about earlier which is S&OP, the shift is culturally which is S&OP is not a supply-chain process, it's actually a business process. That's a bigger leap of culture and imagination sometimes for certain companies. The other is this horizon we also just talked about which is they need to be distinct. You need to deal with execution as execution, planning as planning, and strategy as strategy. The objectives are different, the metrics are different, the processes run at different frequencies and clock speed. Most companies that are low in maturity mash all those together and as a result that the tyranny of the urgent happens and everything becomes tactical in nature. The ability that distinct allows you to protect yourself by understanding what's coming down the pipe.
Bob Bowman: Yeah. Tyranny of the urgent, I like that a lot. So what would you describe as the biggest gaps right now in supply-chain planning?
KC Quah: Here's a big gap and almost a front-end of a lot of issues. What we just talked about, demand forecasting. Demand sensing, call it what you want, demand management. But that whole demand piece is a difficult area because there's a lot of uncertainty you have to deal with. That's one. Most companies have gone global in nature, bigger companies. And so there're a lot of different geographies, factors, that have to be taken into account.
Years ago there was this whole idea of mass customization which sounds like an oxymoron. But it basically says now you're selling things in large quantity but customized in a lot of different ways. That makes it very difficult to predict forecast what you have to actually make and what people are buying. And then there's this whole idea of the fact that how do you even know your forecast is good. You can create a forecast but how many companies actually have good metrics in place, metrics being forecast accuracy. And maybe it's weighted by volume, weighted by revenue, but they have some intelligence on there. The bias of the forecast, is it positively bias, is it negatively bias, is it more balanced. And then the volatility of the forecast itself, in what period and how much is it changing. All those things help you understand basically how good your forecast accuracy. And that's the front-end and also the beginning of a lot of goodness if your forecast accuracy is high, and it's the front-end of a lot of bad things if your error or your forecast accuracy is low.
Bob Bowman: Okay. Well, KC, thank you so much for helping us and bringing us up to date on the state of S&OP today, where it has to go as well. Thanks very much for being with us.
KC Quah: Thank you for having me.
Bob Bowman: I have been speaking with KC Quah of Gartner. Thanks very much for watching.
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