s&op as a business issue business optimization & risk management
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S&OP As A Business Issue Business Optimization & Risk Management. Martin Jarvis Scott Vanlandingham GMA IS/LD Conference April 2006. Agenda. What is S&OP? S&OP and Risk Management Making It Work Case 1 Case 2 Indicators of Need Reasons for Failure. So what is S&OP?. - PowerPoint PPT PresentationTRANSCRIPT
S&OP As A Business Issue Business Optimization & Risk Management
Martin JarvisScott Vanlandingham
GMA IS/LD ConferenceApril 2006
Agenda
What is S&OP? S&OP and Risk Management Making It Work Case 1 Case 2 Indicators of Need Reasons for Failure
Do people still think of this as asupply chain issue?
It is a business initiative, not a supply chain imperative. S&OP is no longer just a supply chain process; instead, in the most successful organizations, it has become acritical business process, championed by a cross-functional team of senior executives.AMR Research Report July 2005
S&OP - Missing Link BetweenStrategy and Execution
Strategic Planning
Detailed Planning, Scheduling, and
Execution
SALES AND OPERATIONS PLANNING
Business PlanningStrategic Planning
Detailed Planning, Scheduling, and
ExecutionBusiness Planning DISCONNECT
What do we mean by S&OP
Definitions: What is Sales & Operations Planning?
S&OP takes a business’ sales & marketing ambitions, supply possibilities and financial goals and balances them to create a single, achievable plan
S&OP is a set of business processes and technologies that enable an organization to respond to demand and supply variations and risks with timely, data-driven decisions
S&OP is a means to translate demand data into an actionable and resourced operational plan; a collaborative process to align demand, supply and financial resources with a defined business strategy and priorities
S&OP is an effective means for senior management to practice and demonstrate leadership and teamwork
S&OP is senior management’s handle on the business and the means for management to orchestrate success
S&OP is the process by which a business makes its decisions
S&OP Develops
Sales and Sales and Ops PlanningOps Planning
MeetingMeetingReconcile with Reconcile with financial plansfinancial plans
SupplySupply
Reconcile Reconcile demand and supplydemand and supply
DemandDemand
From Forecasting to Demand Shaping and Sensing
From Rough Cut Capacity Planning to Supply Network Design
“What if?” Rather than “Yes/No”
From Cashed Up Turnover to P&L + Cash
Getting the right info to make decisions into the last 60 minutes of the process
How S&OP Relates to Risk
Key Findings Survey of 500 APICS members (largely MDT and CPG) designed to
understand 1) the major risks facing organizations and 2) the best solutions available to management to deal with supply-related risk
The top Supply Risk facing organizations is the lack of effective senior-executive led sales and operations planning (S&OP) process: 55 percent (#2 after “supply interruption”)
The top Supply Risk Solution available to organizations is a formal and effective enterprise-wide supply chain risk management process: 63 percent (#2 after “strategic planning”)
Source: “Understanding Supply Chain Risk Areas, Solutions and Plans” – Protiviti and APICS Study - 2004
S&OP and Risk Management
“Executives commonly undervalue and fail to act on the threat of predictable risk” 1.
1. From the authors of “Predictable Surprises: The disasters you should have seen coming and how to prevent them” - Bazerman and Watkins, 2004, Harvard Business School Press.
“An effective risk management program is a wide-ranging and continuous process that encompasses prevention, control and mitigation to protect a company’s value. Companies that have been successful at managing risks have brought multifunctional, multidiscipline people into the process together to look at all the risks in an organization”
FM Global Study – 600 Executives 2005 Companies > $500m Rev
Sounds like S&OP?
Making S&OP work
Flex the process to adapt to local market & business conditions, but insist on fundamental principles
Fact-based
Clear ownership
Formal assumptions
Rolling horizon
Relevant lead times
Trade-offs, clearly articulated, evaluated
The Aberdeen Group identified 6 common characteristics among S&OP leaders:
Profit focus (not just demand/supply balance)
Value Chain Focus (customers and suppliers)
Continuous Improvement Focus
Decision-Making – Teams Empowered
Technology Enablers – Integrated Systems
Risk Management – Multiple “What-If” Choices
•Symptoms as perceived by the “centre”;
•Under-delivery of growth
•Trade Margin erosion
•Poor customer service; high stocks
Case 1: Food Business, Volatile Economy
•Possible solutions as perceived by the “centre”;
•Change the Chairman
•Change the Chairman & the Supply Chain Director
•Change the Chairman & the SC & Sales Directors
•As we start our story the Chairman & Sales Director have been changed and the symptoms are still very prevalent
Identifying and tackling underlying business issue
Case 1: Food Business, Volatile Economy
Additional Symptom:
High forecast bias - circa 10% overforecasting of turnover
Little visibility of this - internally this felt like striving for a target and failing
Average last 5 days (NIV)
0%
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70%
Q4 03 Q1 04 Q2 04 Q304 Q404 Q105 Q205
W1 W2 W3 W4
Case 1: Food Business, Volatile Economy
A deeper symptom:
Month end peaking - 50% of monthly reported turnover occurring in last 5 days
Internally seen as a fact of life - “that’s the way the market is here”; “It’s what our customers want”. Not measured, not talked about. A dirty little secret
Average last 5 days (NIV)
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Q4 03 Q1 04 Q2 04 Q304 Q404 Q105 Q205
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Case 1: Food Business, Volatile Economy
S&OP made things visible; customers were talked to; decisions were taken on customer and sales force incentives...
Average last 5 days (NIV)
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Q1 03 Q2 03 Q3 03 Q4 03 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 050%
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Customer Contribution Total Sales Discounts
• From massively Biased forecast to unbiased
• From Sales Peak to flat phasing
• From uncontrolled spend to strategic investment
Case1: Food Business, Volatile Economy
•Symptoms as perceived by the “centre”;
•Some signs of growth slowing
•Poor turnover and profit forecasting
•Starting to miss targets
Case 2: Wide portfolio, Growing business
•Possible solutions as perceived by the “centre”;
•Stiffer targets!
•Change the Finance Director
•Promote the chairman!
•As we start our story the Chairman & Finance Director have been changed; trading is difficult - business is shrinking; financial forecast accuracy is poor
Tackling the internal issues first..
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7%
NPS
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MAT
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Chairmanappointed
Brief given to redesign
the business
Changesimplemented
Case 2: Wide Portfolio, Growing Business
Set out to tackle forecast bias; moved to “one set of numbers”; rolling forecasts; risk management; dynamic resource allocation = >S&OP in the fullest sense
Monthly - Volume & Value (P&L) Forecasting
Brand Teams held accountable for unbiased forecasting based on OSOF (One Set Of Figures)
NPS Bias (Act vs previous mth forecast)
-30%
-20%
-10%
0%
10%
20%
30%
Rama
Delma/Kasia
FloraLiptonSaga/BBHeartlandMeals Snacks Dressings
Always overestimated !NEGATIVE BIAS
Always underestimated !POSITIVE BIAS
Balanced forecastsNO BIAS
KEY LEARNINGS‘Honest’, integrated and up to date forecasts are the bedrock on which S&OP is built
Case 2: Wide Portfolio, Growing Business
Range Forecasting - Risks & OpportunitiesRisks & RemediesRisks & RemediesGrowth LB 5% rather than 10% (NPS -50m, TR -25m)
• Rama Margarine growth• RCB success• Einstein build-up• Bouillon's turnaround• Snacks• Familiada impact• Pizza innovat ion
Reduce MDC from 235m to 210m (st ill +10% vs 2004)
Forex to remain at current levels (TR +20m)
Oils drop 5% against current forecast (6m excl price issue)
• Apportion MDC spent depending on delivery (Q1…Q2…)
• PBO as primary target for BT’s on top of growth
Affordable innovations not developed (Einstein GP-6m)
Pricing (1% -12m)
Opportunities & their financingOpportunities & their financingInnovations (H2 NPS)
• Kylie/Corazon (2m)
• Wet soups (3m)
• Chilly (8m)
• Bertolli (?)
Forex to remain at current levels (TR +20m)
Range forecasts are key input to monthly Board Discussions
Downside Risks matched with potential ‘remedies’ (mitigating actions)
Upside ‘Risks’ matched with opportunities.
KEY LEARNINGS‘Active’ management of risks increases responsiveness.
Board focussed on strategic issues - no need for involvement in tactical matters.
Case 2: Wide Portfolio, Growing Business
Quarterly -Investment Management
Investment process triggered by review of range of possible forecast outcomes and stretching ambitions.
KEY LEARNINGS
Combination of ‘Going for Gold’ and ‘Your Earn You Spend’ creates positive energy (vs negative/defensive behaviour around fixed targets and budgets)
GrowthTarget
Where are we after Pułtusk?
FLT
Delma
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Meals
Heartland
SnacksLipton
Saga
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Rama
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
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Rama
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
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Dressings
Rama
-10%
-5%
0%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
-5%
0%
5%
10%
15%
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45%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
-5%
0%
5%
10%
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25%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
-5%
0%
5%
10%
15%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
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Dressings
Rama
-10%
-5%
0%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
-5%
0%
5%
10%
15%
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25%
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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
FLT
Delma
Flora
Meals
Heartland
SnacksLipton
Saga
Dressings
Rama
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%
Pułtusk
OSOF
10% -0.2% 120.7% 21.9% 7.6% 22.5% 8.5% 10.2% 6.9% 15.1%
8.7% -1.6% 103.6% 22.2% 6.2% 21.9% 8.3% 10.4% 5% 10.6%
How much can we spend?
Growth 7,0% 8,0% 9,0% 10,0%
A&P 196,0 202,1 208,1 212,6
A&P % TO 15,4% 15,7% 16,0% 16,2%
From TR perspective
original targetranges
current bestestimate and
stretch ambition
Case 2: Wide Portfolio, Growing Business
Key Elements of process change
Annual fixed financial planMultiple forecastsDe-coupled from operations
Continuously updated forecastWith rangesOne forecast linked to operations
PLANS
Annual fixed budgetsFunctionally ownedBudgets ‘an entitlement’
Owned by Brand TeamSubject to sanction (qtrly)Driven by Business Case
RESOURCEALLOCATION
Variance against planVariance against prior yearMoving Annual TotalsMEASUREMENT
Fixed by Annual ContractManaged by Board
Continuous alignment around‘projects’ and strategyDifferent bodies/ differing roles
COORDINATION
Annual fixed targetsNegotiatedPhased quarterly
Ranges (‘Threshold to Gold’)Set within context of strategyConstant ‘gap’ management
TARGETS
FROM TO
Case 2: Wide Portfolio, Growing business
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7%
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MAT
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Chairmanappointed
Brief given to redesign
the business
Changesimplemented
Case 2: Wide Portfolio, Growing business
Key Indicators of Need:
Absence of teamwork & shared risk management among internal functions -
Executive-level on down!
Poor collaboration among business partners - internal or external (finger-pointing)
Unacceptable levels of forecast bias and lack of ownership of sales forecasts
Ineffective bottleneck and constraints management on the supply side
Material/product shortages - increased expediting $
Supply Interruption – leading to production delays and on-time delivery issues
with customers and profits “hits” and/or customer loss
Unacceptable lead times
Excessive on-hand inventories and obsolescence
Lack of confidence in planning systems; Chaos!!!!
Ineffective utilization of resources, and lack of resources when needed.
High levels of customer service, satisfaction, and retention
Senior management leads and is actively involved in the process
Short, mid and long-term demand/supply/financial risks and plans are managed, re-evaluated, and integrated continuously across a rolling horizon
Clear demand planning accountability, and unbiased forecasts
Ability to reliably execute on supply commitments
Trade-offs articulated and commercially evaluated
Prioritization of Business Initiatives
Disciplined, consistent process in place
Key Indicators of a successful S&OP:
o S&OP delivers business results
o Risk Management thinking is at the heart of S&OP
o Finance should be fully integrated into the S&OP process
o S&OP needs to be a cross-functional process
o The consumer does not care about your financial calendar
o Decisions should be based on visibility of facts
Key Takeaways: