The past couple of years have not been the best years for manufacturers in India primarily due to frequent policy and tax changes, rising cost of raw material and a global economic slowdown leading to inconsistent demand, driving margins down for manufacturers across sectors. In addition, according to a FICCI (Federation of Indian Chambers of Commerce and Industry) survey of manufacturers in India for the quarter January – March 2011, the sentiment and expectations of the manufacturers has seen a dip as compared to the last quarters.  However, manufacturers now know that inconsistent demand brings unpredictability and high-risk decisions.  To stay afloat, manufacturers are turning to a new generation of sales and operations planning (S&OP) solutions that not only cut costs, but also engineer ways to drive profit.

The secret to this double whammy is to align operations with demand.  Technologically speaking, this is a new area.  Traditionally, the supply chain was driven by point solutions.  Holistic approaches to planning and scheduling the entire supply chain were non-existent.  What is needed now is an entirely new way of thinking; one that aligns manufacturing, sales, finance, and operations around the most profitable and achievable business plan.

Global change and local impact

There are further complications on the global scale.  Manufacturing businesses are facing increased competition from abroad, leading to more pressure to bring products to market more quickly and innovate faster. Relying solely on shorter lead-times is no longer enough, especially in the process manufacturing sector, which is generally slower to move offshore than the discrete sector.  Even for those enterprises that do move manufacturing offshore, a paradigm shift is required to become an effective distributor.

This is placing huge challenges on planning as organisations factor in elements such as a longer product supply lead-times. These businesses find themselves having to commit to supply decisions sometimes 60 or 90 days earlier than when supply was local. In order to take full advantage of revenue and margin opportunities in this climate, companies must be able to quickly and accurately align their operations to shifting market signals.

The benefit and challenges of S&OP

A good sales and operations planning process provides a consolidated view and synchronisation across the entire business.  This includes, but is not limited to sales, production, inventory, customer lead time (backlog), new product development, strategic initiative, and financial plans.  Faced with the need for such scope, a major roadblock in successful sales and operations planning has been the lack in evolution of traditional S&OP solutions.  This meant they remained reactive in nature, cumbersome and disconnected.  This has frustrated results.

For instance, an Aberdeen report recently found that a majority of companies report that S&OP has helped improve forecast accuracy and improved cross-departmental communication, but that most companies have failed to see improvements in gross margin and customer retention.

In a business environment where flexibility and the ability to react quickly to changing economic, market or environmental conditions is essential to continued success, old style S&OP solutions are losing their usefulness.  They lack the flexibility and integration of workflows to provide the tools and information needed to quickly make the most profitable decisions.

Beyond the balance: Next Generation S&OP

There are a number of elements crucial to success that take sales and operations planning beyond simple demand-supply balancing.

#1 Build different demand – supply scenarios.    Most sales and operations planning processes start with a view of demand – a forecast – but it’s worth remembering that a forecast is not a number – it’s a probability.   A forecast of 3,719 units in December 2011 may be precise but not necessarily accurate.   In actuality, sales will be higher or lower than this figure, so model your upside and downside forecasts and capture your assumptions accordingly.   Similarly, there is never just one way to supply against that forecast.   You can ship from different warehouses, different manufacturing sites, make it, buy it, run over-time, etc.  As a result businesses need to model different supply scenarios matched to the different demand profiles.  This ‘what-if’ analysis is a critical component of a mature sales and operations planning process and is lacking in many organisations.

#2 Include the financial component in your planning process.    If there is one thing that separates traditional S&OP from today’s best practice, it is the ability to view demand and supply plans in financial terms – the impact of your decisions on sales, costs and profit.   A good S&OP plan is one where supply adequately meets demand and leads to higher customer service.   An outstanding S&OP plan is one that does this whilst also maximizing your profit.   The two are not always the same.

#3 Manage the process.    S&OP is a process first.   It is collaborative, crosses multiple functions within the business and increasingly spans multiple geographies as well.  Bringing it all together to gain consensus on the plan requires collaboration, workflow and capturing of assumptions, so that you have a clear record of what decisions were taken and why.

What is the role of technology in all this?    Whilst advocates insist that S&OP is about the business process and is (too frequently) managed with spreadsheets, there is no doubt that technology has a key role in a number of important ways:  facilitating the number crunching for those ‘what-if’ scenarios, incorporating financial numbers to assess plan outcomes, bringing trends to life with powerful graphical capabilities, and managing a collaborative process with workflow.     

A new approach

What’s emerging is a new approach to S&OP, one that combines traditional demand-supply balancing with a financial view of the business to better align operational decisions with strategic ambitions.    It is collaborative, holistic and - whilst still owned or championed by the Supply Chain Director – S&OP, has been elevated to the Executive ranks of the business.   S&OP leaders are taking advantage of modern technologies that support and enable the process and combine powerful analytics, scenario management and process support to give a new approach to manufacturing.

 
Note: The author is VP Sales and Managing Director, Infor India