What’s at the end of the S&OP journey?

Posted by Kevin O'Marah

It is a truism among supply chain people that sales and operations planning (S&OP) is a “journey”. For those peddling solutions, this catchphrase is a get-out-of-jail-free card that buys a bit of time and forgiveness in conversations with practitioners looking for an edge.

Implicit in the notion of S&OP-as-journey is the promise of a reward once we get to the end. What does that reward look like and is it in tune with the supply chain reality we live with in 2014?

ANALYSIS PARALYSIS

I have had many candid conversations this summer about where S&OP is headed, and typically find it is the best thinkers that are least satisfied with existing definitions of “maturity” in S&OP. The reason has little to do with business leaders’ lack of appreciation or understanding.

In fact, when we collected data from almost 400 supply chain practitioners against our six-dimension S&OP maturity model, “internal alignment” – defined broadly as buy-in across the business – was clearly stronger than either “external alignment” or “information visibility”. General management no longer needs education on the benefits of S&OP.

Many companies are years into their S&OP development efforts and most have done a good job cleaning up information systems to get the right data to the meeting on time. One well-known technology company (whom I won’t name) reportedly spends over 400,000 man-hours per year preparing for, holding and reviewing their S&OP meetings. They are certainly religious about the process, but not necessarily getting a decent payback for the effort.

In another case, one executive whose organisation has put three years’ effort into S&OP finds that one-number forecasts, even with extensive quantitative analysis, end up constraining the business more than enabling it. Even among those with the best discipline and executive sponsorship, S&OP increasingly feels too much like process for the sake of process.

DEMAND DATA EXPLOSION

The problem seems to be an increasing disconnect in the clock speed of markets, which is accelerating, and that of the typical S&OP meeting cadence, which is still tied to calendars. Our latest CSCO survey found that among 14 separate supply chain risks, demand volatility was most concerning overall.

At the same time, we find that nearly half of practitioners are tapping social media for real-time customer feedback, but fewer than one in five are able to use this information to improve their forecasts. The top disruptive technology among eight that we looked at was big data analytics, suggesting a huge appetite for tools to parse the flood of demand data for foresight.

Looking ahead just a few years, this demand complexity problem looks set to get worse. Internet-of-things promises a tenfold increase in the volume of demand signals flowing into our planning processes. Whether this comes from smart shelves, self-provisioning capital equipment or RFID-equipped cartons, such new demand data could easily drown even the most mature S&OP process of today. S&OP as conceived back in the 1980s may be a journey leading to nowhere.

THE AMAZON EDGE

Most of what stresses S&OP comes directly from the mismatch of traditional forecasting processes and contemporary demand management realities – namely, digital demand and e-commerce. Amazon has been the prime mover in this revolution, and as such may be the place to look for ideas on how to deal with it.

We argued back in 2012 that Amazon’s endgame was all about mapping demand curves for the whole world. Strategically this means getting paid premium prices for premium products or services and still making a profit by trimming costs to make a deal where the customer must have a discount. If supply chains could consistently quote cost to serve at the transaction level and react to customers’ price elasticity instantaneously, how much more business might be closed at a profit?

To be fair, Amazon is not doing this. The cost side of the equation hasn’t really been its concern, and in any case cost to serve at this level of granularity is pretty well beyond any supply chain I’ve seen. S&OP should ultimately offer more than rhythmic efficiency in a 20th century factory-centric business.

This may sound utopian, but for such a long journey shouldn’t the destination be worthwhile?