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Companywide view key to manufacturing S&OP process

Companies are implementing S&OP processes that link financial performance to traditional demand-supply balancing, shifting the focus beyond operations to strategic business planning.

Sales and operations planning (S&OP) is a decades-old, cross-functional, consensus-driven planning process dutifully performed by middle management. But as companies seek a competitive edge amid global volatility, manufacturing S&OP is fast becoming an executive imperative.

S&OP replaces the ad hoc guesswork that characterizes planning in many organizations with a regimented approach designed to balance market demand and supply, allowing businesses to make strategic adjustments on the fly. While enthusiasm for manufacturing S&OP projects has waxed and waned over the years, the discipline is back in favor. Interest has been fueled by concerns about continuing economic uncertainty along with the recent string of natural disasters such as the Japan earthquake and tsunami, which disrupted global supply chains. In fact, S&OP software ranked among the top three planned application purchases for 2010, according to a survey of 265 manufacturing firms conducted by IDC Manufacturing Insights, a research firm based in Framingham, Mass.

What contrasts the S&OP process of today with the S&OP process of earlier years is a more sophisticated view that brings financial data into the picture, shifting the emphasis beyond the operational to strategic business objectives. "If you go back to what S&OP was supposed to be when it was first defined as a process, it was supposed to connect strategy all the way down through execution, but it never got there," said Michael Uskert, managing vice president at Gartner Inc., a research firm based in Stamford, Conn. "It was implemented into the business as a mid-manager type process very much focused on demand-and-supply matching."

A staged approach to manufacturing S&OP

Gartner's maturity model for S&OP comprises four stages. Stage one is all about creating forecasts to convert demand into a supply response, while stage two adds the element of collaborative forecasting, in which companies perform true demand planning and constraint-based supply planning to anticipate problems before they happen. This is the level of maturity of most companies' S&OP processes and what Uskert defines as a mid-management initiative. Incorporating the financial aspect and using S&OP to develop an annual operating plan -- what some industry observers are calling integrated business planning -- takes it to the executive level. So does the fourth stage of maturity, in which S&OP becomes the de facto decision-making vehicle across all functions within the organization.

Before a company can leap to a strategically driven S&OP process, it must establish a solid foundation in demand-and-supply planning. "You've got to earn your stripes in the first stage of S&OP in order for the commercial side of the business to buy into and validate the overall process," Uskert said.

The first order of business is to conduct a blueprinting process to determine what information is available and the level of S&OP that will have the most impact. Once the initial scope is determined, experts say it's critical to garner cross-functional support with representation from a wide range of constituents -- not just from the supply chain ranks and sales and operations, but also from marketing, finance, and even research and development.

An executive-friendly S&OP process

Sponsorship at the executive level is another requisite of S&OP success. As the discipline evolves beyond the operational level, the concept of the project champion must also evolve beyond the supply chain executive to an executive-level manager who has profit-and-loss responsibility -- potentially a general manager, divisional head or even the CEO. "You need to have clarity of purpose," said Lora Cecere, a partner and analyst with Altimeter Group, based in San Mateo, Calif. "You can't start S&OP from a functional area and get organizational alignment. It needs to be sponsored at a level where profit decisions are made."

Keeping the executive ranks engaged and invested in the S&OP process over the long term can be a challenge. The traditional, operations-driven S&OP process is typically a cycle that winds through an examination of last month's approved plans, a review of the product portfolio, a drill-down into the demand picture and an evaluation of the supply chain, including supply-demand balancing, all the way through a complete financial review that considers the global health of the company in a specific time frame. 

It's a lot of detailed work, which can be a turn-off for executives looking at the process through a more strategic lens. Therefore, experts say S&OP leaders must package the content and tune the S&OP review process so it's presented in language that resonates with top executives, who are concerned more about the bottom line and risk mitigation strategies than with the logistics of moving inventory around.

Even so, not all S&OP meetings should be conducted at the executive level. "There's strategic S&OP, executive S&OP and operational S&OP," explains Simon Ellis, director of supply chain strategies at IDC Manufacturing Insights. "You do strategic S&OP once or twice a year, and with executive S&OP, you define the strategic objectives for the year, then chase them with operational S&OP. That's where the gap-closing activities come in. It's probably unrealistic to think a chief supply chain officer will participate in a semi-weekly process."

Beth Stackpole is a freelance writer who has been covering the intersection of technology and business for 25-plus years for a variety of trade and business publications and websites.

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