Managing in a Recession
Does your Business Need a General Petraeus? Five Tips for Implementing a Successful S&OP Process
When it comes to implementing an effective S&OP process, do we need a hard-driving commander or a consensus driven committee? After all, S&OP is about collaboration, right? Well, yes and no. An S&OP process must be collaborative. But the implementation need not be heavily committee-based.
The Tony award winning musical Memphis includes a song titled “Change Don’t Come Easy”. Oh how true that is. In social norms and in business, change can be slow and painful. So what’s a successful recipe for S&OP change? Although every enterprise has its own unique characteristics that will influence its approach, here are five observations we see when assisting clients to employ best practice S&OP processes and tools.
Top Management Support: Do your senior executives know what S&OP is? Do they understand the value of S&OP? How committed are they to making S&OP truly ingrained in the culture of your organization? When S&OP implementations fail, often the root cause can be traced back to a lack of senior leadership. At all levels of the organization, it must be clear that the whole organization is committed to making necessary changes.
Company Goals Above Individual or Department Goals: What’s the goal of S&OP? It should be to drive strategic business decisions that benefit the entire company NOT one employee or department. Too often personal goals conflict with the greater good. Strive to minimize such incentives that detract from the overall goals.
Make Decisions and Keep Moving Forward: Cross functional representation is required to get buy-in from all business disciplines. One person will not implement S&OP on her own. Assemble a group of knowledgeable doers who have the company’s interests at heart and know their functional area well. When this group reaches an impasse, a single S&OP sponsor/leader should step in and make key decisions. Keep moving forward. Don’t let anything stop progress. S&OP is an iterative process and changes you make today may need to change again later. Keep moving forward.
Clear Expectations: What is S&OP? Why do we need this? What’s wrong with what we’re doing today? If your employees are asking these questions, you better have the answers. Make sure all participants see the forest. What are the major benefits to collaborative planning? What is each person’s role in the process? How will S&OP make us better at our core responsibilities, drive demand, supply and financial plans and increase profitability? Employees should feel empowered by the process not burdened.
Training: Make sure that ample training is provided to solidify new processes and tools. What ‘sticks’ is often what has been practiced. Comfort with the new process and tool comes with experience. Create those initial experiences through training.
Tips to remember:
- Change don’t come easy
- Top management support is required
- One person will not do it alone
- Cross-functional participation is mandatory
- Make decisions and keep moving forward
- Paint clear expectations
- Solidify change through training
Lora Cecere: MIRROR, MIRROR ON THE WALL….
by LORA CECERE, Altimeter Group, www.altimetergroup.com
In the movie Snow White, the Queen possesses a magical mirror that answers any question, to which she often asks: “Mirror, mirror on the wall, who in the land is fairest of all?” …to which the mirror always replies “You, my queen, are fairest of all.”
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Companies want to know “who has the best supply chain?” Unfortunately, there is no supply chain magic mirror; however, each June we can get summarized financial data. While not a perfect mirror, it is a partial reflection. It is definately more accurate than mistakenly believing that each supply chain is as good as it gets (e.g. the Queen’s magic mirror in Snow White).
The normal cycle of financial reporting makes June a perfect month to review the past year. So just as students gather around bulletin boards at the end of the school term and check their grades, in June, I scour websites to understand how supply chains stack up. Luckily, two articles –the CFO Magazine’s Working Capital Survey (http://www.cfo.com/article.cfm/14499542) and the CSCMP Annual State of Logistics Report (http://cscmp.org/memberonly/state.asp)– are published in June to serve as year-over-year guideposts to answer the question, who does supply chain best?
2009. A Year in Review
2009 was a true litmus test. It was the height of the recession. Aggregate volume declined 23% and fundamental demand shifted. Despite investments in technology, in aggregate, the supply chain response was slower in this recession than in the prior 2001 recession. There is a growing gap between leaders—companies that really understand and practice the concepts of supply chain management—and laggards. Companies that excelled at supply chain management sensed demand changes 5X faster and realigned network decisions than their peer groups (http://www.supplychainshaman.com/category/supply-chain-economic-recovery/).
For many, 2009 was a working capital hangover as companies reeled in the recession aftershocks. It was the worst year ever, in this writer’s history, for working capital management. For 68% of the Fortune 1000 companies, Days of Working Capital (DWC) grew. Facing new market obstacles in collections, payables and inventory management, companies buckled their belts and scrambled for cash. As inventory levels climbed during the first part of 2009, tension grew in supply chain discussions. This was the most problematic –even desperate– for companies when high asset utilization was mistakenly defined as supply chain excellence.
The tightening of credit through 2010 put the spotlight on inventory management (even for companies that had never cared about inventory before). The bloated inventories of 2008 through early 2009, sent a shock wave through executive discussions; and even though business inventories dropped for the first three quarters of 2009 and rebounded in the fourth quarter below pre-recessionary levels, executive teams remain on edge. As the curtain rises for the last half of 2010, the links in the supply chain are weakened. Capacity is tightening and prices will rise. The termsdemand sensing, demand shaping, and demand orchestration have a new meaning for battle-weary supply chain veterans.
2009: How did we do?
The good met the test. The average and poor supply chain processes were not equal and succumbed. What made a difference? Companies focused on traditional supply chain planning and tight integration of planning processes to Enterprise Resource Management (ERP) did the poorest. Companies with an outward-focus on market drivers and building strong what-if analysis to understand demand uncertainty did the best. Leaders have the right stuff. Laggards have a new respect for supply chain excellence.
Let me preface this analysis with a caveat. I do not believe that you can throw all industries in a spreadsheet and declare a supply chain victor. Since value drivers within each industry are different; I think that true supply chain leadership can ONLY be seen when you compare companies within peer groups.
In this downturn, supply chains experienced a seismic shift. Using the earthquake analogy, it was an eight or nine on the rector scale. As I thumbed through the CFO magazine results, I considered many; but settled on three stories:
Containers & Packaging:
Suppliers, at the end of the supply chain, are whipped hard by economic downturns. When it comes to fighting this bullwhip effect, supply chain excellence matters. Contrast the stories of Sonoco Products and Owens Illinois. Sunoco Products, a 3.6 billion dollar company, located in South Carolina, manufacturers packaging film for the consumer products industry. The company has been on a four-year journey to become more demand driven with a strong focus on S&OP. Owens Illinois (OI), a manufacturer of glass containers with US headquarters in Ohio, has been more focused on transactional efficiency, procurement and IT standardization. Sunoco has outpaced OI in learning how to be a supply chain leader. Their 2009 numbers speak for themselves.
Table 2: Comparison of 2009 Results of Sonoco Products and Owens Illinios
| DSO | DIO | DPO | DWC | |
| Sonoco Products | 43 | 31 | 38 | 37 |
| Owens Illinois | 67 | 49 | 45 | 71 |
| Industry Average | 42 | 42 | 31 | 63 |
High Tech & Electronics
When it comes to high tech & electronics, my favorite story of a company successfully navigating the downturn is Cisco Systems. Cisco took its bumps in the 2001 downturn, did a mea culpa with a 2.25 billion dollar inventory write-off and swore never again. They redefined supply chain processes under the banner of Customer Value Chain Management (CVSM), successfully integrated 138 acquisitions over 15 years, and built systems to mitigate risks—simulation of 4300 inputs by a team of 10 people—and build supply chain resiliency in the supply chain from the outside-in. Motorola, on the other hand, has focused more on IT standardization and procurement excellence. The numbers speak for themselves.
Table 3: Comparison of 2009 Working Capital Results for Cisco and Motorola
| DSO | DIO | DPO | DWC | |
| Cisco | 48 | 11 | 7 | 52 |
| Motorola | 65 | 22 | 40 | 46 |
| Industry Average | 57 | 23 | 27 | 53 |
Semiconductor
Intel is my pick within the semiconductor industry. Their focus on supply chain talent development and steadily improving supply chain capabilities helped them through the recession. They made a conscious choice to not be aggressive on DPO to ensure a strong supplier base. This focus on supplier development built resiliency into the supply chain. Again, supply chain excellence matters. Contrast Intel with Fairchild Semiconductor. Fairchild Semiconductor has a strong focus on IT systems, is building supply chain talent and is early in the execution of S&OP. Likewise, while Texas Instruments has a deep legacy of supply chain planning excellence, their focus has been more vertical (source/make/deliver) than horizontal (e.g. Sales & Operations Planning, order to cash, etc). Consider the working capital impact of three companies in the same industry at very different points in supply chain maturity.
Table 4: Comparison of Intel, Freescale Semiconductor and Texas Instruments
| DSO | DIO | DPO | DWC | |
| Intel | 24 | 30 | 20 | 35 |
| Fairchild Semiconductor | 41 | 58 | 37 | 63 |
| Texas Industries | 45 | 42 | 18 | 69 |
| Industry Average | 50 | 44 | 33 | 61 |
What is next?
The only thing certain for 2010 is uncertainty. The litmus test—2009 results at the height of the recession—supports that true supply chain excellence matters. However, the best working capital numbers do not make the best supply chain. It is about conscious choice. Just as Intel made a choice about paying suppliers quicker to improve reliability, companies need to make similar choices about the alignment of working capital targets into supply chain strategy, setting targets for each and active management of the horizontal process that underlies each of the metrics. For leaders it is deliberate; for laggards it is largely uncontrolled.
These lessons are even more important as the recession hangs over us like a black cloud with the possibility of a double dip recession. No doubt about it, we are writing case studies in supply chain excellence. If only there was a magic mirror…. I hope that you do not become a supply chain casualty.
What do you think? Did I miss a great story in the data published by CFO magazine? Is there a story of supply chain excellence that you would like to share? Please share your thoughts with the over 2000 readers of this blog.
Footnote:
Definitions of Days of Working Capital (DWC), Days of Sales Outstanding (DSO), Days of Inventory Outstanding(DIO) and Days of Payables Outstanding (DPO) and the numbers contained in this article are sourced from CFO Magazine’s June 2010 article on Fortune 1000 company working capital performance.
The stories shared on these supply chain leaders are based on publically available information: investor calls, public presentations, and public forums. While I have personally worked with all seven of the supply chain teams listed in the article; and there is much more to share on each of these stories, I have limited my comments to publically available information.
The names of specific technology providers are deliberately omitted from this article
Note: This article provided by courtesy of Lora Cecere, Altimeter Group, www.altimetergroup.com
Lora Cecere on the SAP Insider Event: Where is SAP APO headed?
Those following Supply Chain Industry Analyst Lora Cecere’s new Supply Chain Shaman blog (http://www.supplychainshaman.com) have read with keen interest her observations about SAP’s progress in the area of Supply Chain Planning. Lora points out that while SAP has made tremendous progress in many areas it is also struggling with integrating its many components – specifically Lora says that the “integration of business intelligence and performance management is moving [too] slowly.” Her notes on the growing disappointment with SAP APO – from within and outside the SAP organization – are also worth noting (http://www.supplychainshaman.com/2010/04/inside-insider:
“I leave the event with two major disappointments. The first is that the integration of business intelligence and performance management is moving slowly. …too slowly for this curmudgeon analyst. I was hoping to see the results of the Teradata/SAP Business Objects integration and the launch of a new generation of predictive analytics. While there is some progress in Performance Management, it is largely traditional reporting/dashboards.
The second is that SAP APO—SAP’s supply chain planning suite—was largely business as usual. At the event, I saw small, incremental changes, but no major innovation like I saw in MII, PLM and transportation management. I keep crossing my fingers. I would love to see SAP have the courage to blow up APO and start again. Who knows if it works for PLM, maybe there is a chance to bring innovation to a solution — and the larger Supply Chain Planning (SCP) market– that sorely needs to be redefined.”
As SAP friends and partners know, SAP has some truly outstanding employees and the SCM Product Group continues under the brilliant leadership of Lori Mitchell-Keller. Yet, overcoming legacy products and dated, mis-guided inertia is difficult for even the most effective of executives. The great news is that a whole new generation of cloud-based supply chain planning and S&OP applications that integrate tightly into the SAP suite are now available. These applications are changing the game and will ensure that SAP users are well supported well into the next generation or whenever it is that SAP is finally able to overcome its legacy and move forward.
Three Key Steps in Effective S&OP Change Management
Implementing an effective S&OP process requires effective management of personnel, systems, and process issues. Of these three areas, the change management aspects of personnel issues are often the most challenging. Organizational change strategies fail most frequently due to the inability of management to lead their teams through the transition process. Are supply planners and demand planners communicating? Is sales operations providing timely input? Are issues being resolved in a timely manner? How will disagreements be resolved?
As a corporate process, S&OP requires strong leadership and a keen understanding of change management.
Understand Change
There are two elements to organizational change: Personal transitions and Organizational transitions.
An old paradigm in change management was that it was only the organizational that was going through the change, de-emphasizing the personal aspect. But an organization is made up of a triad of people, process and technology. We understand that the only part of that triad that might have resistance to change is the personal. As a result, an organizational change strategy must focus not only on organizational transitions; it must also focus on personal transitions. From a leadership perspective, this means proactively understanding the affect on various stakeholders and leaders, for example looking at:
• Who in the organization is going to gain and lose power – S&OP team? Supply team? Demand Team? Sales. Has a fully powered S&OP team been created?
• Who in the organization might experience a positive or a negative careers move
• Who might be exposed when the changes show how poorly things were done in the past
• Who has the most to risk by making these changing and why
In order to understand, from each of their perspectives the perceived risk, time should be spent conducting interviews as well as a leader and stakeholder analysis. The reason this is critical to building sustainable change is that you will then know what the objections are and how best to be proactive in handling those.
From this process one can gain buy-in with the people who can give or decline support for the project. If the stakeholder or leader feels as though you have their best interest in mind, they are more likely to support suggested changes down the road. If they do not feel included, they can block the project altogether, even if the changes make good business sense. The leader interviews and analysis is a process that needs special attention, unique planning and tailored action to ensure that more resistance is not created
Next, leaders need to understand the three phases of personal transition, none of which can be skipped or discounted if they want a positive return on the investment. The three phases include:
• Endings
• The Neutral Zone
• New Beginnings
Many leaders ignore the first two, expecting employees to be in the new beginnings stage right after a change is announced. However, this means ignoring how humans process change. Since all humans go through this process, it needs to be acknowledged as part of the leadership activities.
The financial impact (business performance/productivity and project time line) to the transition phases can be significant. The depth (loss of productivity) and width (increased time line) of the transition phases is directly proportional to how well the change is handled by leaders. If leaders do a poor job of leading change, the Valley of Despair will widen and deepen, meaning that the project will run over budget, over schedule and the scope will creep. However, if leaders have been trained in change management, research shows they can skillfully lead employees through the transition phases with the least amount of impact to the project.
The stages of managing the personal transitions include employee:
• Awareness and Understanding
• Buy-in
• Ownership.
When leaders have mastered leading personal transitions, they can lead the overall organizational transition. When they have mastered organizational change leadership, they will be able to reduce the time and productivity dip as seen in Figure 2. The goal with teaching leaders to lead change is to reduce the personal transition dip and thereby reduce the organizational transition dip.
Pursue Transformational Leadership Skills
In order to be successful with transformational scale change, leaders must deploy different skills, some of which they may need to add to their current skill set. Some leaders may also need to evaluate their attitude and beliefs about how to handle change. Through an edification process, leaders can begin that shift.
We have found that the leadership skills required for leading large-scale change versus day-to-day management are in fact very different. One of the first aspects of leading change is to understand that 80 percent of any group will resist change. The other 20 percent are those that will get behind the change and pull the other 80 percent along. In order to motivate those 20 percent and eventually enroll the other 80 percent, a leader may need new leadership skills. What you don’t want is to create resistance in the 80 percent group, because no matter how excited the 20 percent group is, negative group-think is nearly impossible to overcome.
Research also shows that one of the primary reasons that so few programs produce the expected results is that change leaders don’t understand the distinction between asking versus telling, when they lead. The traditional methodology used for leading change projects requires these steps:
1. Identify the problem
2. Tell people how to do their jobs differently
3. Spend huge amounts of time, energy and money trying to overcome resistance and recover from decreased morale
Many leaders tell people what they need to do differently, versus spending the time to enroll and engage the employees in an interactive dialogue where they are asked what they think. The telling is part of what puts people in a threatened mode I it is easier when someone else, especially an expert, gives us the answer. The problems come later when resistance develops and someone else’s approach does not work for us. Asking versus telling is one of the keys to reducing the resistance to change.
An effective leader of change also understands that change naturally creates conflict. A leader’s ability to handle conflict will directly impact their effectiveness in leading change. As agents of change, a leader’s responsibility is to take the change, which is normally thought of as crisis, and communicate it as an opportunity. In order to do that, they need to have an understanding of what makes the conflict improve and what makes it worse.
3. Develop an Leadership Engagement Action Plan
With an understanding of how change works and the skills necessary for effective transformation, Project leaders and executives can assess their own change leadership skills and create an engagement action plan for the lifecycle of the initiative. This plan should deal with clearing organizational resistance, participating in early visioning sessions, supporting the project delivery team, communicating clearly and repeatedly on the reason for change, articulating and supporting the business case and truly being engaged in the transformation effort.
Experience has shown that leaders get actively involved when there is a crisis in an S&OP project are able to quickly resolve issues. A reflective and pro-active leader in this situation should recognize that earlier involvement – real involvement and engagement many times can prevent serious issues. However, a formal change management process properly initiated early is the best way to prevent such issues from occurring.
Constrained vs Unconstrained Demand and S&OP
Through the S&OP process, the organization sets a projected business level that balances expected sales and production capabilities with financial and inventory implications. The constrained demand plan reflects a demand plan aligned with the supply plan.
Do we need both?
Many companies find it useful to distinguish and track the gap between unconstrained and constrained demand plans. An increasing gap may indicate lost opportunity to realize sales that exceed current capacity. Companies should scrutinize unconstrained demand signals to verify demand is real versus “pie-in-the-sky”. Long term capital improvements aimed at increasing capacity need to be aligned with realistic projections of future demand.
Finally, the constrained demand plan feeds a consensus plan to which the organization agrees to execute. Our Sales and Operations VPs need to stop fighting and starting aligning. S&OP facilitates this necessary collaboration.
Reduce Surprises. Reduce Inventory. Improve Operational Efficiency. Increase Sales.
Steelwedge Successfully Completes SAS70 Audit
SAS70 has become the gold standard for the auditing of service organizations, especially for providers of Software as a Services (SaaS). Steelwedge, the leading provider of Cloud based Sales and Operations Planning (S&OP) Services, has successfully completed the SAS70 Type II audit.
The SAS70 Audit is performed in two steps, each resulting in a report that’s issued by an independent and certified auditor.
The Type I Report describes the control objectives and controls that have been put in pace by the SaaS provider. The auditor renders an opinion on whether these objectives and controls are suitable for the type of operation the SaaA provider is offering. As Steelwedge’s controls and objective have been based on relevant ISO and COBIT guidelines, a positive SAS70 Type I report was easily issued in August 2009.
The Type II Report investigates actual compliance with Type I controls. In the Type II Report, issued to Steelwedge in January 2010, the auditor confirms Steelwedge’s adherence to established and documented industry standard processes. The auditor’s opinion was formed over a five month period through on-site visits, investigations and reviews.
The SAS70 audit offers piece of mind for our customers, knowing that their data is secure with Steelwedge. Our data center, our applications and our processes conform to the highest level of industry standards, and will continue to do so as Steelwedge continues to undergo Type II Audits in regular six month intervals.
Steelwedge customers and prospects alike can rely on the opinion of a certified and independent auditor to ensure compliance with their internal data and security needs. This eliminates the need to conduct individual custom audits, saving both time and money.
Steelwedge’s regular SAS70 Audits do more than simply check the box on the currently popular topic. As the business world evolves and security requirements continue to increase, Steelwedge empowers its customers to stay ahead of the curve.
Also, Business Continuity Planning (BCP) and Disaster Recovery Process (DRP) have increasingly gained significance over the last six to twelve months in the SaaS world. Companies continue to trust Steelwedge with their S&OP needs due to our ability to provide a rapid fail-over solution in the unlikely event of disaster, enabling them to continue to run their business on Steelwedge.
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