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When ICT met S&OP

Eddie Chance | Thursday April 03, 2008



Eddie Chance is Regional Director and Country Leader Scotland for Oracle...

 

With economic soothsayers predicting leaner times ahead for the world economy, there has never been a more appropriate time for financial directors to use sales and operations planning (S&OP) to ensure demand driven business plans are delivering in terms of all-important profitability.

As enterprises batten down the hatches in the face of challenging market conditions, cutting edge software tools are helping financial directors to break their historic dependency on out-of-date business data. Next-generation sales and operations planning (S&OP) applications mean they can use real-time information in combination with ‘what if’ forecasts to ensure business plans deliver in terms of profitability.

There is some debate as to exactly what constitutes S&OP. On his website (http://www.tfwallace.com/pages/content/sop_101.html) Tom Wallace, author of “Sales & Operations Planning - The Executive's Guide”, has defined it as "a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations."

Whatever S&OP’s precise definition, until recently there has been a dearth of comprehensive applications to satisfy the requirements of financial directors looking for demand driven tools.

Part of the problem has been a focus on the supply side that lasted from the 1990s well into the new millennium. The last two decades of the 20th century witnessed the world’s leading manufacturers embracing material requirements planning (MRP) - a software-based production planning and inventory control system used to manage manufacturing processes. MRP was intended to simultaneously meet three objectives: ensure materials and products are available for production and delivery to customers; maintain the lowest possible level of inventory; and plan manufacturing activities, delivery schedules and purchasing activities. In short, everything was based around supply issues.

On the outside looking in
More recently, however, economists have argued that companies need to base their thinking on demand, in order that manufacturers only make what their customers want. Martin Christopher, author of the book “Logistics and Supply Chain Management: Creating Value-Adding Networks”, has called this “value chain management.” This evolution in thinking has also been dubbed 'outside in'. What happens on the outside of the company affects what goes on the inside, requiring systems to be agile, collaborative, real-time, and responsive.

‘Outside in’ is forcing organisations to use S&OP to transform their traditional supply chains into demand-driven value networks that coordinate customer demand (on the outside) back into the organisation (in) in a bid to maximize customer value.
As such, S&OP is well and truly on the boardroom agenda. Leading suppliers, whether service based or manufacturing, recognise the need for S&OP, but just because you’re doing it, doesn’t mean you’re doing it well. The essence of successful S&OP may be to align demand with supply against a business plan. But while you can track demand and create a plan for the manufacturing process, how can you guarantee the plan is going to be profitable? You need to know whether increasing the sales volume and putting the factory on over time to make the additional goods will turn in a profit.

For example, a ‘buy one, get one free’ campaign, may well result in a favourable report to the board from the marketing director. The same campaign may also generate positive noises from the senior sales staff, buoyed by having successfully achieved their sales targets. But with the manufacturer effectively selling its goods at half price, factories running at full capacity and staff on overtime, how can you be sure profitability will result? Such factors need to be included in the planning process.
In the midst of this potential turmoil, it is often the finance team that ends up bringing a much needed dose of reality to the formation and execution of the business plan. The detail and rigour of effective S&OP solutions combined with their potential for delivering an uncluttered mile-high view can help financial directors bring a realistic consensus to bear for all C-level executives.

Bloated spreadsheets and dated accounting solutions
One all too common response is to simply struggle on regardless, employing the standard combination of business intelligence tools and spreadsheets. There are multiple dangers in taking this approach. Reports in the form of bloated 50MB spreadsheets report information that is out of date the moment they are presented. The minute you read your monthly report, the information is redundant, which leaves employees running blind between meetings.

Other solutions include standard accounting tools. These, however, could lock you and your company into a long cycle of software upgrades from which it could prove very costly to escape, for which you will receive no thanks from the CEO five years down the line.

Bringing real time information and agility to the value chain
Today’s forward-thinking enterprises are looking to ditch their dependence on retro applications that manage information in batches as opposed to in real time. Financial directors are asking for tools that help them look into the future, dispensing with the traditional ‘rear view mirror’ approach and embracing tools that provide real time ‘headlights’ to help them make sense of the future.

Next generation S&OP solutions combine top down business planning with tools that validate such a plan from the bottom up using real time data, allowing enterprises to proactively respond to demand by sharing a single business map that aligns the entire organisation across departments and users.

Crucially, next-generation S&OP solutions provide ‘what if’ capabilities giving financial directors unparalleled accuracy and sophistication in volume forecasting, pre-event simulation, and post-event evaluation. A retailer, for example, could outline a business plan based on 20 percent growth over three years by opening a further 20 outlets. By carrying out ‘bottom up’ calculations it is now possible to ascertain whether these extra shops will end up cannibalising each other’s respective revenue, and thus prove counterproductive.

The benefits are double-fold. Account managers have real time information at their fingertips, allowing them to manage all routine sales forecasting and account planning activities from a single screen. Just as importantly, however, financial directors get the mile-high corroboration they need to successfully fight their corner in the boardroom.

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