S&OP
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
Forecast Accuracy Measurement
What’s your forecast accuracy telling you? Stop and ask a few questions
Forecast accuracy is an important performance metric in any effective S&OP process, but it can be measured in various ways. Comparing your company’s accuracy to an industry standard will be difficult to impossible if you don’t know the details behind the measurement. More importantly, the metric needs to resonate within your organization as a meaningful indicator of forecast relevance. So then…
What details should one consider for forecast accuracy measurement?
Here’s the Steelwedge Top Six:
1. Aggregation level: Are you measuring accuracy at a product SKU or family level? What about other hierarchy levels? Odds are your accuracy will appear to be better at an aggregated level such as family. This happens because variability of forecasts and actuals tend to cancel out one another as data is combined. The result is a smoothing of results and lowering of error calculations. Recommendation: Measure accuracy at the same level as the majority of forecasts are captured.
2. Error Calculation: In its most basic form, accuracy is a measure of the difference between a prediction and what actually happened. How far off were we? Error is equal to the difference between forecast and actual. Often, this is captured as a percentage value called percent error. Mean absolute percent error (MAPE) calculates the average of errors. Since we don’t want positives and negatives to cancel out each other, we use the absolute values of each error. There are other methods, but MAPE is fairly common. Weighted MAPE is a method used to give greater importance (weight) to items with greater activity. Amount of activity may be defined as the proportion a particular item is of the total. Recommendation: Keep it simple. Make sure people understand the measurement and how they can impact it.
3. Unit of Measure: “We forecast in both units and dollars. Which should we use for measuring accuracy?” Weighted accuracy measures, such as weighted MAPE, will give greater influence to items that constitute a greater portion of the sales volume. Higher dollar but low unit volume items will contribute much more to a measurement in dollars. Conversely, high unit volume, low dollar items will factor in more prominently using a unit based forecast. Which is preferable? It really depends on your business. Recommendation: Consider important business decisions made in the Executive S&OP meeting. Are they usually focused on $ or units?
4. Offset period: If we measure accuracy using the most recent forecast for a given period, it will likely be more accurate than a forecast made three months prior to a given period. That’s because we have better information as we get closer to the current period. But, how valuable is a forecast made in the very near term if the organization cannot act upon that forecast? It has virtually no value. The offset period defines the number of periods prior to an actual period for which a forecast will be measured against the given period’s actuals. For example, if our offset is 3 months, we can measure accuracy using actuals from August and the forecast for August that was captured in May. Recommendation: Set the offset period to most closely match the organization’s planning horizon.
5. Time buckets: Should we measure accuracy using weeks, months or quarters? Typically, you will want to measure accuracy in the same period buckets used to forecast. In some cases, where demand patterns follow a “hockey stick” high demand in the last month of a quarter, it may be more appropriate to use quarterly buckets. Recommendation: Measure accuracy using the same buckets you use to forecast unless there’s a compelling reason to move to a bigger bucket.
6. Which Forecast?: In a collaborative S&OP process, there may be several forecasts captured (Sales, Marketing, Demand Planning, Consensus, etc). Which should we use for accuracy measurement? If you’re only going to use one, then go with the forecast used by Operations to build or procure product. A typical example would be the Consensus Plan. Measuring accuracy against multiple forecasts will provide greater insights into potential areas for improvement. Recommendation: Measure accuracy using the forecast provided to Operations. Publish results throughout the organization. Also, measure accuracy across other forecasts to isolate areas for improvement.
Are there other aspects you’d add to this list? Please let us know.
S&OP Author Tom Wallace Responds to Your Questions
Note: On Tuesday, May 4, we were pleased to feature author and educator Tom Wallace in a webinar entitled, “Myths, Misunderstandings and Misinformation About S&OP.” Drawing from his decades of experience as a forecasting and sales planning leader, Tom revealed ten myths that can quickly derail an S&OP process and damage corporate performance and profitability.
Tom’s fascinating presentation is a must-watch for business people wanting to master the finer points of Executive S&OP. Click here to view the session on-demand.
If the number of questions that were submitted during the webinar are any indicator, Tom’s presentation certainly got the audience thinking! Tom was kind enough to respond to each of these questions following the live session and you can find his answers below.
(To learn more about Tom Wallace and Executive S&OP, we encourage you to visit www.tfwallace.com and consider picking up his book Sales and Operations Planning: The How-To Handbook, 3rd Edition.)
How to Launch Executive S&OP
Webinar Participant: Where do you start on creating an Executive S&OP?
Tom Wallace: With top management agreement to do a 90-day live pilot. (How-To Handbook, Third Edition, Pages 75-80.)
Webinar Participant: What is the best way to convince the team to attend the meeting and to express how important they are to the entire process?
Tom Wallace: Get top management to convince them. Seriously, if the leader of the business and his or her staff are truly committed to Executive S&OP, most of them will willingly go through the learning process and do their parts.
Webinar Participant: I work with small and midsized manufacturing companies. It is hard enough selling them on Manufacturing Resource Planning (MRP). Where do we start to get them to understand S&OP?
Tom Wallace: Conduct an executive briefing. Get a decision from top management to do a 90-day live pilot. Then, if that looks good to them, and it almost always does, proceed to cut over the rest of the families to Executive S&OP. (How-To Handbook, 3rd Edition, Pages 69-73)
Webinar Participant: Based on the myths of a company not willing to change for S&OP and education being the solution, what’s the best way to teach your executives and what material do you show them?
Tom Wallace: I’ve mentioned the Executive Briefing, and that’s by far the best way to get started. However, they’ll need more input than that and there are a substantial number of books and videos to help you with that at www.tfwallace.com.
Webinar Participant: How do you handle a pilot program when compromise may often include items or pieces (demand or resource constraints) outside of that pilot?
Tom Wallace: If possible, select as your pilot family one with little or no shared resources. If you can’t avoid that, then estimate the impact of the “outside the family” demand to show an approximation of the full picture on the resource.
Webinar Participant: Does Tom have a perspective on implementing S&OP in a services / distribution environment versus traditional manufacturing?
Tom Wallace: it’s more similar than different. The basics are the same: demand, supply and the related financials. (How-To Handbook, Third Edition, Page 166-167) › Continue reading
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.
Mix vs Volume Planning: What is your planning time fence telling you?
We’ve all been there. The speaker is providing way too much detail. “Just get to the point!”
What’s the right amount of information?
In forecasting demand and supply, there really is a point of TMI (too much information). Detailed forecasting can be counter-productive. It requires more effort to forecast at a detailed product mix level than at a volume level. Similarly, detailed capacity planning requires more effort than rough cut planning. So where should we draw the line?
The planning horizon dictates the appropriate timeframes for mix versus volume planning. The planning horizon is defined as the period of time needed to purchase and receive raw materials plus the manufacturing time needed to produce finished goods. Within the planning horizon, detailed forecasts and plans are needed by the Operations side of the business to produce the right products in the right quantities at the right times.
Beyond the planning horizon, who needs the details? Nobody. So why are so many companies forecasting in detail so far out? Because they can. Planning tools enable detailed forecasting and easy aggregation well into the future. Yet, this technological capability should not lead to the conclusion that more detail is better. If nobody needs the detail, it is wasteful to dedicate the additional effort to plan across a greater number of items.
The solution is to plan at mix detail inside the time fence and at volume level outside the fence. A good S&OP demand forecasting and planning system should make it easy to plan at appropriate levels across products, customers, geographies AND time periods.
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