Indeed, as a global community there is much to be lauded, much to be learned and much to be leery from 2011. Cultural revolutions from the Middle East to Wall Street to Main Street; regional economic fissures, that have produced a global network of fiscal fault lines; and a heaping helping of Mother Nature’s wrath have both threatened and united us. It is the same in our industry, where finance, sales and operations teams are increasingly aligning to better recognize, respond and recalibrate to these same global dynamics. We are all learning the lessons of better alignment and agility in our ability to thrive.

Like it or not, VUCA (volatility, uncertainty, complexity and ambiguity), is our “new normal.” Nassim Nicholas Taleb, the author of one of my favorite books, The Black Swan, explores the idea that an event—positive or negative—that is deemed improbable, like the appearance of a Black Swan, can cause massive consequences.

I am inspired by what I’ve seen in 2011 from our customers, from our peers and from our Steelwedge team in approaching and resolving their own Black Swans. I’ve seen 100-year-old businesses face recession-driven loss in demand, and realign to come out tighter, stronger and better; I’ve seen consumer electronics powerhouses stare down the reality of ever-shortening product lifecycles with laser-focus on smart new product development; I’ve seen a Phoenix rise from the ashes of the automotive industry through powerful focus and improved management; I’ve seen manufacturers rebound after losing a supplier of 90% of a core part in the devastating tsunami; and I’ve seen hard choices made clearer, and sooner with better empirical data.

So, though we may not know the next Black Swan coming just around the corner in 2012, I raise a cup of kindness to what we’ve seen, what we’ve done and who we’ve met that have changed us for the better in 2011.

We too have paddled in the stream,
from morning sun till dine;
But seas between us broad have roared
since auld lang syne.
And there’s a hand my trusty friend!
And give us a hand o’ thine!
And we’ll take a right good-will draught,
for auld lang syne.

In this blog post, Tom Wallace answers some key questions from his perspective.

Q. Is S&OP ideal for large organizations which have their own manufacturing, inventory & products? Is S&OP applicable to a service company?

Yes to both. Some of the most successful users of S&OP are large organizations with manufacturing, inventory and product: BASF, the largest chemical company in the world; Procter & Gamble, the largest consumer packaged goods company; and Staples, a very large on-line retailer. S&OP has been shown to work well in organizations that don’t make physical products as well: banks, central engineering staffs, IT departments and the like.

Q. Should the same forecast drive both manufacturing and profit and loss?

Absolutely. The forecast, once authorized, becomes the one and only one statement of future demand. Only with this can you achieve a “one-number process,” which means running the business internally with one set of numbers.

Q. How do you balance continuous improvement to the S&OP process against over-engineering the process?

Listen to the people actually using the process, including senior management. The best way I know to drive continuous improvement is, at the end of each executive meeting, ask each person present to rate the meeting on a scale of 10 and give 50 –or fewer– words why, finishing with the leader of the business. Those people will tell you where to improve and where not to.

Q. What is the best approach to organize promotional activities in the forecast process?

Within the 5-Step Process of S&OP, Step 2 is Demand Planning; this includes the addition of promotions and related activities by people from organizations like Marketing, Sales Promotion, and Merchandising. The promotions are added to the forecast early, well in advance of the consensus forecast going to Step 3, Supply Planning.

Q. What are the main pitfalls if you are in an S&OP process implementation?

The primary pitfall, much greater than all others, is to fail to educate the people in S&OP. Note the use of the word “educate” rather than “train.” That’s deliberate: training tells people how to run the software; education addresses how to run the business using this new tool.

Please write to us at info@steelwedge.com should you have any questions or need elucidation on any of the concepts mentioned in this blog.

Have a Happy New Year!

Q. If Sales is more focused on opportunity conversion, who should build sales forecast and revenue plan? Is that Finance?

A. Sales should definitely focus on building the sales forecast based on opportunity conversion. Finance should focus on building the revenue plan.

In the near-term, Sales should be able to leverage the opportunity pipeline as a somewhat rationalized basis for the sales forecast. Beyond the opportunity pipeline horizon another basis for sales forecast is needed. Depending on accuracy this can take the form of the marketing forecast, the demand plan or in some cases the stat forecast. This also applies to industries that are not opportunity driven. Whatever the basis, it’s important Sales participates in building the sales forecast and has an ownership interest in it. There is no better way to bake the ‘field’ perspective into the forecast.

To reiterate the point expressed in the webinar, S&OP/IBP should really start at the first stage of the order lifecycle. This will bring greater engagement from the sales team.

Q. You mentioned integrating the Third Party Logistics providers into the S&OP process, could you please share with us an example of this and the benefits achieved?

A. An example of this is industries such as apparel which involve a short life cycle in terms of fashion changes or season changes but also involve offshore manufacturing which results in long lead-times. In-transit inventory plays a critical role in these industries because if the demand for products in the short term is greater or less than expected, any action that has to be taken to balance supply and demand should include in-transit inventory. 3PLs are the entity that have access to the in-transit inventory.

Q. Some relatively new and growing buzz in the Financial (FP&A) crowd is the concept of using Rolling Forecasts versus using the traditional annual budgeting processes.  This process seems more in line with what a traditional S&OP process suggests,  rolling forward forecasts over a 18-36 month time fence.  Thoughts?  Are you seeing client companies modifying annual financial planning processes to a more fluid rolling forecast process for all functions to use (Demand, Supply, Finance, Leadership)?.  (Note:  Let it Roll, Why More Companies Are Abandoning Budgets in Favor of Rolling Forecasts, about organizations including Unilever modifying their current annual processes to a rolling forecast process, seems to suggest that the monthly S&OP output gains much more importance and forces integration.)

A. We agree with this statement – Integrated Business Planning involves taking the output of the process and feeding it to the FP&A process in a rolling fashion. Due to Sarbanes-Oxley regulations we see existing customers adopting some intermediate steps to cleanse the S&OP data and incorporate it into the FP&A process.

Q. If one doesn’t have a time phased price definition, do you still recommend monetizing S&OP using current price and cost? Or is it better to start with a non-monetized S&OP?

A. The answer depends on the industry – are the prices highly variable across time buckets (maybe greater than +- 10%)? If so, then adopting an average price and cost will result in incorrect results. It is better to adopt a non-monetized S&OP in this case. If the price fluctuations are not as high, then we can adopt a current price and cost.

Q. We have a heterogeneous supply side organization, with complex supply networks in some areas and independent supply structures in other areas. On what level should one fix its S&OP process in terms of local, regional or global?

A. S&OP process needs to be driven more by the customer facing situation than the supply side. If there is a need to maintain a single face to a customer across multiple divisions and geographies then it is better to adopt a global S&OP process. If each business division has a separate customer base which is completely different (for instance commercial versus defense) then a regional S&OP process is sufficient.

On the supply side, if there are critical components that are shared across multiple divisions then allocation of the supply should be done to ensure that the material constraints are met.

Q. I want to follow-up on your experience with IBP in non-manufacturing environments. Any cases in upstream oil & gas? If so, which companies?

A. IBP is an effective methodology for any industry. While the measures may be different, the need to align supply, demand and finance is the same. In addition to manufacturing companies we have seen IBP used successfully in process, agriculture and service organizations.

Q: Do we need to have a customer forecast for every customer?

A. No, Steelwedge provides a forecastability analysis wherein we identify the key customers, products and regions for which statistical forecasting has to be done and where collaborative processes could be adopted.

In general, only the high priority customers require a customer level forecast.

Q. How to convince sales force that statistical approach can help versus them dealing with sku level forecasting based on a same-as-last-year approach?

A. It is difficult to convince sales about statistical forecasting approaches. A better approach would be to perform demand policy optimization to identity the SKUs for which statistical forecasting should be done. For the other SKUs, a collaborative process can be adopted with sales involvement. This will ensure that the sales team will focus on the SKUs that require their input.

Q. Can you expand on decisions analyzed by Solver optimization models?

A. Steelwedge provides a solver based approach to perform Rough Cut Capacity Planning versus a heuristic based approach. The following are some of the capabilities and decisions taken:

• Allocation/Supply Balancing – user selectable rules for allocating global demand to multiple markets
• Basic Constraints – lead times, batches, minimums, increments
• Load Levelling – slotting the demand into the gaps in the capacity plan, load levelling forward or back
• Supply Calendars – setting up work calendars for each resource

Q: Much of S&OP is product related. Do you agree that services (which are product-like) too could be supported by the S&OP process?

A. Yes. Any situation that requires the ability to balance demand with supply can be supported by the S&OP process. For example, an engineer-to-order environment supply includes the engineer’s hours available to perform engineering tasks and demand includes custom projects which require the engineer’s expertise.

Lisa has over twenty years of executive experience scaling services organizations for supply chain software companies.  Previously, Lisa ran the global services organization for ModelN, Navis, Savi, and Extricity.  Lisa has also worked as a Senior Production & Materials Planner and as a Senior Manufacturing Engineer at Harris RF Communications where she helped drive their Sale and Operations Planning process. Lisa holds an MBA in Supply Chain Management from the Rochester Institute of Technology (where she completed her Master’s Thesis on “Demand Planning”) and a Bachelor’s Degree in Manufacturing Engineering.  She and her husband reside in the hills above Silicon Valley where she serves as a volunteer Firefighter and Emergency Medic.

Q. Why did you choose to join Steelwedge?

Lisa: Supply chain, S&OP and IBP run through my blood and have been in my DNA for 30 years.  Both my Bachelors degree (Industrial/Manufacturing Engineering with minor in Operations Research) and Masters thesis were all around Demand Planning and Demand and Supply matching.  The first 10 years of my career were in manufacturing playing all types of roles that are significantly impacted by how well a company understands and executes integrated business planning.  I have personally experienced poor planning as both a vendor and supplier and wanted to join Steelwedge, the leader in the market, in order to help solve this critical global issue.

Q.  What business problems are customers solving everyday with the help of Steelwedge’s process consulting and technology?

Lisa: Our services and products are helping customers on many fronts.  We offer business process definition and IBP roadmap planning sessions for newcomers to S&OP to help them plan and execute a people, process and technology roadmap that fits their business needs and challenges. We offer change management and extensive training options to help users of all levels understand the benefits of S&OP and how they fit into the journey and how important the movement is for their company and them personally. Our product suite is the icing on the cake that automates process, ensures data and decision security, provides real life scenarios and detailed analysis. Simply put, we provide timely and accurate information to make excellent decisions for the entire supply chain related to a company.

Q.  You’ve focused on building a team comprised of consultants with real-world S&OP and IBP expertise.  Why is this an important benefit for our customers?

Lisa: Our customers demand experience and excellence from every single services and support team member.  Our goal must be to be one step ahead of our customers and partners and show them the way to mastering IBP. One step ahead means that we all understand S&OP and IBP and that we are keenly aware of all of the best practices already offered within Steelwedge’s products so we can keep the process, technology and change simple, yet extremely effective.  If we can look, act, and speak the role of any customer user, we can lead them successfully through the journey of S&OP and IBP leadership.

Q.  What steps has the Services team taken under your leadership to help Steelwedge customers realize faster time to value and greater ROI?

Lisa: Over the past year we have been focusing on simple and effective solutions with a crawl, walk, run project rollout methodology.  We also now deliver with an iterative approach to get our solution and benefits in front of users as soon as possible. This allows for customers to understand the vision of S&OP, get some momentum and excitement built up with process and solutions definition and see the benefits early on with specific functions and/or business units. We also have solution design and project reviews as part of our standard operations that enable us to stay on track and get expected value to our customers as soon as possible.

Q.  Steelwedge recently announced the launch of the Service Delivery Platform (SDP), what benefits can Steelwedge customers expect to realize from this new technology?

Lisa: Our customers and partners are very excited about the concept and first delivery of SDP this past August.  SDP will allow and enable certified members to be able to perform changes and own project work that is currently only handled by our services and support team.  By enabling customers and partners to be more self sufficient and creative with our product and its valuable reports, scenarios and dashboards, we can focus on providing critical strategic services, being our customer’s trusted advisor on S&OP and IBP and focusing on how we can be the robust but low cost solution for all industries for S&OP.

A very interesting statistic – the Purchasing Managers Index (PMI) for August 2011 – caught my eye this morning. This metric tracks the financial activity of purchasing managers connected to their acquisition of goods and services. It is calculated on a monthly basis through a survey conducted by the Institute of Supply Management (ISM).

Surprisingly, the statistic concluded:

“Economic activity in the manufacturing sector expanded in August for the 25th consecutive month, and the overall economy grew for the 27th consecutive month,” say the nation’s supply executives in the latest Manufacturing ISM Report On Business^®.”

A visual representation of the metric is below. Please note that the way the metric is captured, any value above 50 percent is an improvement and a 100 percent value indicates that everyone in the survey indicates an improvement. The degree of change month-over-month is reflected in the actual value. For instance, 65 percent PMI for a month is a bigger change than 55 percent PMI.

Figure: PMI for 2010-2011

Source: Institute of Supply Management

So what does this mean for the supply chain executive who is looking at S&OP and IBP initiatives?

1. Need for Operational Efficiency: According to the ISM survey, the overall sentiment is one of concern and caution. In this sort of a situation, increasing operational efficiency and reducing waste in the end-to-end value chain is the best approach that companies can take. S&OP and Lean are two weapons that companies can adopt in this endeavor. In fact ,we see that these two initiatives dovetail into one another when the S&OP plan needs to be executed.

1. Multi-business S&OP: According to the ISM survey, respondents in general are reporting reduced domestic sales and increased international sales. This implies that large multi-national companies need to look carefully at balancing their supply towards demand and look at their S&OP process as more of a multi-enterprise/multi-business process rather than within their silos; for instance, being able to position supply in tax efficient countries and moving it closer to customer when the demand signal arrives (looking at building capacity in Eastern European countries, etc.). IBP processes should allow visibility not just at the divisional level but at the corporate level too .

1. Working Capital Management: According to the ISM survey, respondents are reporting that their inventories are in general higher than their customer’s inventories. This is of course a result of network wide inventory reduction efforts that have gone on for many years. What it has really resulted in is pushing out of inventory upstream into the supply chain where every node believes that they are at the receiving end with respect to holding inventory. Companies need to really look at inventory from a working capital standpoint and as part of the IBP process. The working capital is dependent on the customer sales, supplier purchases and inventory – the IBP process is the only process that provides visibility to all three. These three variables have to be looked at holistically and not in silos. So, implement IBP processes that  can model supply, demand, finance and inventory in a holistic fashion

Figure. ISM Inventory Index for Manufacturers and their Customers

What are your thoughts? Do you agree with the analysis? Also, more importantly, why are the unemployment numbers so high when manufacturing is apparently growing? I have thoughts on this but would love to get your feedback.

Steelwedge recently announced that we’ve expanded our management team to support rapid growth and ensure a high level of customer satisfaction.  We will be profiling each of our new executives starting today with our Vice President of North American Sales, Pier Barattolo.

Pier comes to Steelwedge from Right90 where he Vice President of Sales and drove rapid customer growth. Prior to Right90, Barattolo was Vice President of North American EPM sales for SAP Business Objects, where he helped grow annual license revenue by 82 percent, and Vice President of Sales at IBM Cognos Adaytum where he drove sales from $1 million to over $64 million.  Pier has also held executive positions at Rolls Royce and General Electric.

Steelwedge: Why did you choose to join Steelwedge?

Barattolo: I was impressed with Steelwedge’s market leadership and deep S&OP and business planning expertise.  The Integrated Business Planning (IBP) and sales and operations planning (S&OP) technology space is exploding as companies continue to focus intently on perfecting their demand-supply planning in response to recessionary pressures.  The opportunity to help Steelwedge quickly scale its sales organization to meet market demand presented an exciting challenge.

Steelwedge: What is driving the adoption of IBP and S&OP technology?

Barattolo: As I talk to business leaders across the country, it is evident that the recent economic turmoil exposed the unfortunate fact that many companies lack the processes and technology to cope with unexpected events — whether good or bad.  The lack of an integrated operational and financial planning approach meant that executives lacked an early warning system and could not adjust quickly to changing circumstances.  The financial, operational and customer satisfaction implications of this shortfall have been huge.  Now, as companies are forced to do more with less, they must become more efficient and effective in managing their limited resources to take advantage of any market opportunity.  IBP is fast becoming the tool of choice to help solve this problem.

Steelwedge: Why are companies looking to leverage the cloud?

Barattolo: Faster time to value, a lower total cost of ownership, and the ability to do more with fewer internal resources are the biggest factors driving companies to embrace cloud computing.  In our fast-changing environment, companies can no longer waste time and money with lengthy ERP-type deployments.  Expectations around time to value have increased dramatically and the dearth of internal IT resources means that the cloud is often the best and most realistic option.  Also, the pay-as-you-go model that characterizes cloud-based software-as-a-service (SaaS) offerings compels the vendor to drive value through the application day-in and day-out – not just before the sale.

Steelwedge: What should companies consider when evaluating S&OP solutions?

Barattolo: Given the highly collaborative and complex nature of the S&OP process, companies should partner with a technology vendor that brings deep domain expertise and knowledge of best practices.  It is the right balance of people, process and technology that ultimately will make the S&OP process successful in an organization.  From a technology standpoint, companies should distinguish between a purpose-built solution versus one that is stitched together — as this would clearly impact time to value, overall complexity, project risk and total cost of ownership.  When companies scratch below the label all will be revealed.  Companies also have to rate user adoption high on their criteria list as end users will naturally prefer a solution that leverages a familiar and intuitive UI.