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Challenge: Demand and Supply Balancing
How to turn Sales & Operations Planning into a
successful tool for synchronizing Demand and
Supply?
www.roce.com
TABLE OF CONTENTS
Introduction .............................................................................................................................................. 3
Executive Summary................................................................................................................................. 3
Challenges in Demand and Supply Balancing ........................................................................................ 4
Background Framework of S&OP ........................................................................................................... 5
The Eight Step Implementation Model .................................................................................................... 6
Case Study .............................................................................................................................................. 8
Adjustments and Effects ........................................................................................................................ 10
Organization .......................................................................................................................................... 11
Meetings and Collaboration ................................................................................................................... 12
Measurements ....................................................................................................................................... 13
Information Technology ......................................................................................................................... 14
S&OP Plan Integration .......................................................................................................................... 14
About ROCE Partners ........................................................................................................................... 15
Appendix A: S&OP Integration Framework ........................................................................................... 16
Copyright ROCE Partners 2009. All rights reserved.
2
INTRODUCTION
With the ever increasing dynamics of today’s markets, handling the balance between demand and
supply becomes more important than ever. Historically, companies have planned their operations
based on factory capacity and asset utilization, but often neglected the whole picture and the
importance of cooperation between sales and operations. Common symptoms recognized as a
consequence of unsynchronized demand and supply plans are high inventory levels, low customer
service, forecasting errors, and missed sales opportunities.
Sales and Operations Planning (S&OP) is considered the prime business process to overcome silo
cultures and taking control of the demand and supply balancing. An ideal S&OP process is action
oriented, event driven and aims to aggressively resolve problems in the supply chain. However, many
companies have realized that in the real world S&OP meetings can be a minefield of office politics,
weak commitment and biased interests. This White Paper guides you around the pitfalls and describes
how to turn S&OP into a successful tool for synchronizing demand and supply, leveraging internal and
external collaboration and ultimately increasing the company´s competitive edge.
EXECUTIVE SUMMARY
Two different types of factors must be handle to
balance demand and supply; external factors
such as volatile demand patterns and
seasonality, and internal factors such as high
level of globalization and high growth rate of the
enterprise. Companies operating in the consumer
goods industry are heavily affected by the
external factors and have been forced to develop
a more mature process for balancing demand
and supply. Larger global companies have also
reached a higher maturity level in their
processes, mainly as a consequence of the need
for more advanced systems and processes to
handle complex internal factors. Balancing
demand and supply is a tactical level process,
handled mainly with S&OP.
Implementation and development of the S&OP
process is in most enterprises made without a
clear structure. We have developed the eight
step implementation model that illustrates a
sequence of actions that companies should focus
on in order to achieve a well functioning S&OP
process, enabling the company to balance
demand and supply effectively:
Choose a leader to develop the S&OP
process
Analyze the product and business
requirements
Decide on an approach for development
of the process
Set the frames for the S&OP process
Appoint the team to be involved in the
S&OP process
Decide on meeting frequency and
agenda
Agree on a set of metrics for the process
Ensure that the appropriate IT system is
in place to support the process
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3
CHALLENGES IN DEMAND AND SUPPLY BALANCING
The issues in balancing demand and supply can
be derived from two different types of factors,
internal and external factors.
Manufacturers in the consumer business, where
retail companies are the dominant players in the
supply chain, are heavily affected by external
factors such as volatile demand patterns,
seasonality, short product life cycles, a high
frequency of campaigns and short shelf life.
Large and global companies are affected
additionally by complex internal factors driving
imbalance. Internal factors are those that the
company may affect themselves, such as high
level of globalization, high growth rate and a
complex product range. However, all the factors,
both internal as well as external, have to be
handled with the tactical level process Sales and
Operations Planning (S&OP).
TABLE 1. FACTORS CAUSING
IMBALANCE
External Factors
Internal Factors
Volatile demand
pattern
Level of
globalization
Seasonality
Growth rate
Short product life
cycles
Complex product
range
Many campaigns
Short shelf life
Based on our analysis we have created a model
of eight steps, which companies should focus on
in order to achieve a balance between supply
and demand. Details around each step are
further described in the section ‘’The Eight Step
Implementation Model’’.
ABOUT THE STUDY
ROCE Partners has together with Linköping Institute of Technology conducted a survey of how
manufacturing companies in Sweden and Finland manage to balance their demand and supply.
The study includes a review of the latest research on the topic as well as case studies with ten
companies in different industries and of different size.
The companies participating operate in the following industries; consumer goods, mechanical,
medical equipment and paper. The companies’ turnovers are in the range of 50 millions - 10 billions
EUR.
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4
BACKGROUND FRAMEWORK OF S&OP
FIGURE 1: PLACEMENT OF S&OP
Strategic Planning
Strategic Planning
Business Planning
Business Planning
Disconnect!!!
S&OP
Detailed Planning,
Scheduling, and
Execution
Detailed Planning,
Scheduling, and
Execution
S&OP is a planning process for balancing demand
and supply on an aggregate level. It is a crossfunctional process occurring on multiple levels in
the company and it connects overall business
plans to the operative level as the input are long
term business plans and output are rough plans
and limitations that are later used for more detailed
planning. This is illustrated in Figure 1.
FIGURE 2: THE S&OP PROCESS
Financial
Review
The S&OP process consists of several steps, or
sub-processes. Except for the actual S&OP
meeting it requires that certain preparations are
made to secure that quick and informed decisions
can be made during the meeting. After every
meeting controls and follow-ups are necessary,
see Figure 2.
S&OP
Meeting
Start
Strategies
Resources
Supply
Review
Performance
Measures
Product
Review
Demand
Review
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5
THE EIGHT STEP IMPLE
IMPLEMENTATION MODEL
The implementation and development of the S&OP process is in most enterprises made without a
clear structure. In this section we present a model covering all aspects that your company needs to
take into account when developing an S&OP process.
The eight step model illustrates a sequence of actions that companies should focus on in order to
achieve a balance between supply and demand, see below. Each step is described further in the
following section.
FIGURE 3:: THE EIGHT STEP MOD
MODEL
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6
1. Choose a leader to develop the S&OP process
The leader can be regarded the core of the process and should preferably have strategic insight and be
unbiased. Without strategic insight, there is a risk of the meeting not getting the right focus. S&OP is the
connection between strategy and operations and sets the boundaries for how the strategic plans should be
executed. Furthermore, since S&OP aims to avoid sub-optimization it is important that the leader is
unbiased. He or she should preferably be the supply chain manager or have another coordinating role
between Sales and Operations.
2. Analyze the product and business requirements
Evaluate the particular situation for the company in terms of both external and internal factors causing
imbalance.
3. Decide on an approach for development of the process
Decide whether the process should be implemented vertically – implementing all parts of the process at the
same time starting at local level and then advancing to regional and global level – or horizontally – creating
one sub-process at the time starting with for instance demand review and then advancing to supply review
etcetera.
4. Set the frames for the S&OP process
Formulate guidelines for the S&OP process based in the analysis of product and business requirements.
How should plans be created and by whom? How should the plans be communicated between functions?
What time horizon to be covered by the S&OP plan and how often should it be updated? In what unit should
plans be expressed and communicated?
5. Appoint the team to be involved in the S&OP process
An extensive analysis of the specific business requirements should set the guidelines as to who should be a
member of the S&OP team. It should not only be cross-functional but also involve executives, as executive
participation increases understanding and contributes to the whole process getting the right focus.
Integrating executives is also a way of saying that demand and supply balancing issues are important.
6. Decide on meeting frequency and agenda
Decide on meeting frequency and set the agenda for the cross-functional S&OP meeting. Both the frequency
and the agenda should be adjusted to the business environment evaluated in step 2 above. Also determine
how the decisions that are made are to be distributed across the organization. This concerns the order of
distribution as well as to whom it should be communicated. The objective is maximum impact of decisions.
7. Agree on a set of metrics for the process
Performance measures aligned with overall company goals should be defined together with targets for each
measure. Performance measures could include Forecast Accuracy, Service Levels and Lead Times etc. In
addition diagnostic measures should be included for evaluation of the process itself. An example of a
diagnostic measure is the number of master data updates as a consequence of decisions taken in the S&OP
meetings. All metrics should be relevant, reconcilable and constantly reviewed.
8. Ensure that the appropriate IT system is in place to support the process
Make sure that the appropriate IT system to support the process is in place. This largely depends on the
level of globalization, the number of sites etcetera. IT support must be adjusted to fit business requirements.
Preferably this step starts by a review of existing IT support and its advantages and disadvantages.
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CASE STUDY
The investigation of companies’ maturity in S&OP showed that all companies have some sort of S&OP
process, but that the level of maturity varies. As basis for the study an S&OP maturity framework was
used. None of the companies has yet reached stage 5, where the process focuses on profit
optimization for the whole company.
Figure 4 illustrates a framework of S&OP maturity
and the area where all of the interviewed
companies’ S&OP processes are today. See
Appendix A for the original version of the S&OP
Framework including explanations of categories
and maturity sizes. Certain patterns in maturity
linked to industry and size of the companies can
be seen. As the figure illustrates, the maturity of
consumer goods companies are higher in all
categories relevant in S&OP. The reason for this
is that the factors causing imbalance have forced
them into implementing a process for handling
these issues. Without a well functioning process
companies in this industry will not be able to
compete since the demand patterns and product
life cycles are so complex. The factors that
mechanical companies are struggling with are not
as volatile and fast moving as the ones in the
consumer goods industry, and it is just recently
that these companies have realized the need to
improve the internal processes for balancing
demand and supply. What drives the mechanical
enterprises’ imbalance is the company and
product range complexity, leading to difficulties in
getting the different plants to act as one common
group.
FIGURE 4: MATURITY LEVEL OF CONSUMER GOODS COMPANIES AND MECHANICAL
COMPANIES
Stage 1
No S&OP
Process
Stage 2
Reactive
Stage 3
Standard
Stage 4
Advanced
Stage 5
Proactive
Meetings and
Collaboration
Organization
Measurements
Information
Technology
S&OP Plan
Integration
MECHANICAL
CONSUMER GOODS
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There is also a significant pattern of large
companies having more advanced processes
than smaller companies, see Figure 5.
Reasons for this are the challenging internal
factors such as more complex company
structures, a wider product range, and a larger
amount of plants and volume of data affecting
larger companies. Consequently, they need a
more developed process for balancing demand
and supply. The complexity in data handling
and in standardizing a wide product range as
well as the difficulties in communicating over
boarders are all factors that difficult the
balancing process and are therefore factors
that influence how well developed the process
needs to be.
FIGURE 5: MATURITY LEVEL IN THE LARGEST AND SMALLEST COMPANIES
Stage 1
No S&OP
Process
Stage 2
Reactive
Stage 3
Standard
Stage 4
Advanced
Stage 5
Proactive
Meetings and
Collaboration
Organization
Measurements
Information
Technology
S&OP Plan
Integration
TURN-OVER < 0.35 BILLION
To create a well functioning process for balancing
demand and supply it is important to understand
which of the factors are most challenging in your
company. The S&OP process is then to be
TURN-OVER > 1 BILLION
adjusted accordingly, by considering each of the
categories that S&OP is built from. How this
should be carried out is explained in the next
section.
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ADJUSTMENTS AND EFFECTS
The maturity of the category “S&OP Plan Integration” indicates how well the plans are integrated and
accordingly how well functions are balanced. The study showed that the other four categories in the
framework are all enablers or supporters of the balancing process. The two categories that enable
integration are “Meetings & Collaboration” and “Organization”. “Measurements” and “Information
Technology” are categorized as supporters, helping the company reach more advanced levels of the
demand and supply balancing process.
TABLE 2: ENABLERS AND SUPPORTERS
Enablers
Supporters
Meetings and Collaboration
Measurements
Organization
Information Technology
S&OP Plan Integration
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ORGANIZATION
The organization behind the process has proven to be of outmost importance when initiating the
S&OP process. The effect that can be achieved with a well balanced organization is a process that
has its focus on the whole picture at the right level, has the ability to develop and connects with the
overall strategic goals. The additional effect with balanced organization is a process that supports the
current business and all its issues in S&OP.
As mentioned earlier the leader is the core of the
business and is consequently highly important in
the initiation and development of the process.
Where the leader is unbiased, with no
accountability for either the demand or supply
side, it has been proved that the process holds a
proper focus on the tactical level.
In contrary, where the leader is biased the
process tends to get more operative. Unbiased
leaders also tend to be more concerned about
development of the process as a whole.
Furthermore, the S&OP team has to consist of
managers from all relevant functions of the
enterprise which in many companies includes
managers from Marketing, Sales, Operations
(including
Procurement,
Production
and
Logistics), Finance, Product Development and
in some cases Customer Service. The S&OP
team should not only be cross-functional, it also
needs executive participation.
A common issue in the process today is the lack
of understanding, interest and involvement in
S&OP. Integrating executives in the team is a
way of telling the organization that the issues
concerning S&OP are in centre of interest for the
whole company. This puts it in focus and
employees are more likely to take interest in and
participate actively in the process. The executive
participation also brings strategic insight to the
tactical process and the study proved that the
companies involving executives in the team all
reach a higher maturity level.
Important
Factors
Effects
• Unbiased leader with
strategic insight
•Focus on the right level,
process development
• All relevant functions
represented in the team
•Supporting the current
business and all its
issues in S&OP
• Executive participation
•Strategic insight,
employees involvement
and interest in the
process
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MEETINGS AND COLLABORATION
The organization sets the conditions for how well the meetings and collaboration can be carried out.
The effects to be achieved with efficient meetings and collaboration are cross-functional
understanding, involvement and interest in the process, improved process development as well as a
process that furthers informed decisions.
Fundamental to achieve the effects are regularly
held meetings and clear agendas. Except for
being clear, an agenda should be pre-published,
agreed to, and with all the roles understood to
avoid surprise topics.
S&OP Agenda
Macro business review
Customer service
performance
New products
Family-by-family review and
decision
Production/procurement rate
changes
Collective impact in business
plan
Recap of decisions made
Critique of meeting
terms of budget and monetary units, while
production uses units such as volume and
pieces. In order to make the meetings decisionmaking and not a forum for discussions pre-work
is a pre-requisite. All these factors contribute to
effective meetings that enable plan integration.
Except previously mentioned factors, meeting
frequency is important to consider. Depending on
the environment and demand patterns the
frequency should vary between different
companies. For example, in a highly volatile
market and if campaigns shape the business the
meeting frequency should be higher. Where
meetings are not regularly held with a proper
frequency, and where participants lack interest,
the integration between supply and demand will
not work sufficiently and the company will not be
able to adjust their process to market
surroundings, eventually leading to demand and
supply out of balance.
Important
Factors
Naturally, the agenda should be adjusted to the
market requirements and process development.
Even though most companies have agendas for
each meeting it is in many cases not accepted by
all participants, since some do not see the
meaning of having meetings or come poorly
prepared. One reason for this is the lack of
understanding between the departments, which
partly is a consequence of the functions
“speaking different languages”. Sales often talk in
• Regularity , clear
agenda
• Preparations
• Right frequency
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Effects
• Cross-functional
understanding,
involvement and
interest in the process
• Decision-making
meeting
• A flexible process
12
MEASUREMENTS
Finally, to further enhance the process, the enabling categories, Measurements and Information
Technology should be developed. Measurements assist in counteracting sub-optimization, in creating
understanding and interest for the process and it also furthers continuous improvements of the S&OP
process.
Effects that have been noticed as a result of
S&OP implementation are better delivery service
levels, reduced inventory, shorter lead times and
better decisions made at operational level.
Metrics make effects like these clear and easy to
absorb, which in turn increases understanding for
the S&OP process. What is measured can also
be improved and companies that are evaluated
on performance are likely to perform better that
those that are not.
metrics are used and evaluated. There needs to
be an understanding of why the metrics are there
and why they are relevant. If there are no
incentives connected to the measurements
employees are not likely to be concerned with
improvements.
Important
Factors
• Relevant measures
• Updating of measures
To be relevant, measurements should reflect
business strategy, and for maximum impact they
should be communicated to management level
as well as operational level. However, crucial is
not only what is measured and how, but also how
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Effects
• Increase
understanding and
counteract suboptimization
• Continuous
improvements of the
S&OP process
13
INFORMATION TECHNOLOGY
Among the studied companies there are differences in how advanced the IT systems are, but this is
not correlated with the maturity level of the S&OP process in general.
In many of the studied companies, communication and collaboration is not working satisfactory, which is one of the biggest issues in the
balancing process of supply and demand. When
departments work towards their own set of
objectives, an information technology system
itself will not solve the problems in balancing the
process, it will only help to centralize data. IT
systems are expensive to implement and each
and every company need to evaluate their
processes in order to see what competitive
advantages can be reached to justify the
investment. Information technology systems can
facilitate the forecasting, planning and follow up
procedures, and in many cases they are
absolutely crucial to handle large data volumes
and complex planning problems. However,
without the proper organization and processes in
place, the effects of implementing a supporting IT
system will be low.
Important
Factors
• Implementation of an
IT system
Effects
• Centralizing and
visualizing data
S&OP PLAN INTEGRATION
In order to balance supply and demand, high plan integration is essential, both at multiple levels as
well as cross-functionally. How well the supply and demand plans are integrated depends on the
process for creating plans and how parties cooperate. The goal is to create plans concurrently where
both demand and supply constraints are considered.
This is however not the case in today’s market,
where the majority of companies have a
sequential process where demand forecasts
drive supply, or the other way around.
Regardless of which function is responsible for
creating forecasts, there are often mismatching
incentives complicating the plan integration.
Operations may be too far from the market to
pick up on market changes and Sales may inflate
the numbers in order to always have high
inventory available. The conclusion is that if
operations are the owner of the forecasting close
collaboration with sales is essential and if sales
are the owner, measurements on forecast
accuracy has to be applied.
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ABOUT ROCE PARTNERS
Founded in 1997, ROCE Partners is the leading Supply Chain Management consulting company in
the Nordic countries. ROCE Partners’ mission is to maximize our clients’ Return on Capital Employed
(ROCE) by optimizing their supply chains with help of effective Supply Chain Management Solutions.
Offices are located in Finland and Sweden.
Over the years our experienced consultants have helped international manufacturing and distribution
clients in a large number of assignments. Being one of the few consulting companies specialized in
SCM solutions, we believe in fact-based analysis and in-depth knowledge about SCM processes,
organizations and technological solutions.
ROCE Partners was chosen as one of the world’s 10 Coolest Supply Chain Management Boutique Consultants by ARC
Advisory Group, the thought-leader in manufacturing, logistics and supply chain solutions.
“ROCE Partners – Boutique consultants that implement Supply Chain Planning solutions are rare. For this reason, I’ve
selected two consulting companies in this category. ROCE Partners, which has offices in Stockholm, Sweden and
Tampere, Finland is our choice for the European market.”
10 Coolest SCM Boutique Consultants, July 19, 2007, by Steve Banker, ARC Advisory Group
ROCE Partners contact details
Villa Sandsund, Valumallinpolku 12
33100 Tampere, Finland
Phone: +358-3-345 8228
Fax: +358-3-345 0015
Hornsgatan 52, 2tr
118 21 Stockholm, Sweden
Phone: +46-8-33 26 10
Fax: +46-8-33 26 19
Tekniikantie 14
02150 Espoo, Finland
For more information, please visit www.roce.com.
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Copyright ROCE Partners 2009. All rights reserved.
•
Information
Technology
S&OP Plan
Integration
•
Measurements
•
•
•
•
•
•
•
Organization
Meetings &
Collaboration
No formal
planning
Operations
attempts to
meet incoming
orders
Individual
managers
keep their own
spreadsheets
No
consolidation
of information
No
measurements
No S&OP
organization
Silo culture
No meetings
No
collaboration
Stage 1
No S&OP
Processes
•
•
•
•
•
•
•
•
•
•
Sales plan drives
operations
Top-down
process
Capacity
utilization
dynamics
ignored
Some
consolidation, but
done manually
Many
spreadsheets
Measure how
well operations
meets the sales
plan
No formal S&OP
function
Components of
S&OP are in
other positions
Discussed at top
level
management
meetings
Focus on
financial goals
Stage 2
Reactive
•
•
•
•
•
•
•
•
•
•
Some plan
integration
Sequential process
in one direction
only
Bottom up-plans –
tempered by
business goals
Centralized
information
Revenue or
operations
planning software
Stage 2 + sales
measured on
forecast accuracy
S&OP function is
part of other
position: Product
Manager
Staff Pre-Meetings
Executive S&OP
Meetings
Some
supplier/customer
data
Stage 3
Standard
•
•
•
•
•
•
•
•
•
•
•
•
Plans highly
integrated
Concurrent &
collaborative
process
Constraints
applied in both
directions
Batch process
Revenue &
operations
optimization
software – link to
ERP but not
jointly optimized
S&OP
workbench
Stage 3 + new
product
introduction
S&OP
effectiveness
Formal S&OP
team
Executive
participation
Supplier &
customer data
incorporated
Suppliers &
customers
participate in
parts of meetings
Stage 4
Advanced
•
•
•
•
•
•
•
•
•
•
Seamless integration
of plans
Process focuses on
profit optimization for
whole company
Integrated S&OP
optimization software
Full interface with
ERP, accounting,
forecasting
Real-time solver
Stage 4 + company
profitability
Throughout the
organization, S&OP is
understood as a tool
for optimizing
company profit.
Event-driven meetings
supersede scheduled
meetings
Real-time access to
external data
Scheduled when
someone wants to
consider a change or
when supply/demand
imbalance is detected
Stage 5
Proactive
APPENDIX A: S&OP INTEGRATION FRAMEWORK
TABLE 3: S&OP Integration Framework
(Grimson, J.A. & Pyke, D.F., 2007. Sales and operations planning: an exploratory study and framework, The International
Journal of Logistics Management, [online], 18 (3), p322-346.)
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