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A rudder for course correction
In today's volatile business environment, supply chain managers cannot always be confident that their plans will play out as intended. Despite this uncertainty, few companies have a formalized method of responding when circumstances change unexpectedly. That's where "sales and operations management" (S&OM) comes in. S&OM provides a sense-and-respond mechanism that connects sales and operations planning (S&OP) with plan execution, thereby increasing plan achievement, improving supply chain resiliency, and providing a framework for monitoring performance.
S&OM adds to traditional supply chain management (SCM) processes a fast feedback loop as well as course-correction analysis and solutions to keep a company as close to plan as possible. Closed-loop S&OM has become critical to creating a responsive supply chain. In particular, its inherent feedback improves supply chain resiliency—or the ability after a disruption to return to a normal performance level in a timely fashion.1
[Figure A] Consumer electronics supply chain Enlarge this image
[Figure B] CEC example process playbook Enlarge this image
[Figure 1] Traditional SCM processes Enlarge this image
[Figure 2] Open-loop control Enlarge this image
[Figure 3] Closed-loop control Enlarge this image
[Figure 4] S&OP: Create and execute Enlarge this image
[Figure 5] S&OM: Closing the loop Enlarge this image
[Figure 6] Process playbook general format Enlarge this image
[Figure 7] S&OP process with additions Enlarge this image
[Figure 8] Web services architecture Enlarge this image
Think of S&OM this way: A sports team with a poor plan and great execution will likely not succeed. Conversely, a team with a great plan and poor execution will also not succeed. And because sports contests are dynamic in nature, a team that cannot react to events as they unfold on the field will lose. The best scenario is to establish a superior game plan and then execute to that plan, making adjustments as events unfold. S&OM is the mechanism that makes it possible for supply chain organizations to recognize what's happening out in the field and to continuously make adjustments while the game of business is in progress.
S&OP and S&OM: What's the difference?
Sales and operations planning is a formal supply chain management process that has been around for more than 20 years. It updates sales forecasts and creates demand and supply plans while attempting to meet company financial goals. The plans it creates— typically on a monthly cycle—are put into operation and executed by other supply chain management processes.
S&OM, on the other hand, is an integrated process that encompasses the S&OP process but focuses on plan achievement in addition to plan creation.
Figure 1 shows a high-level view of traditional supply chain management processes performed by most companies. The top of Figure 1 represents S&OP. At the bottom of Figure 1 are the weekly and daily operational and tactical processes that feed data to the S&OP process and receive plans from it.
In most companies today, this is a once-per-month cycle: Last month's performance data is gathered, new plans are created, and then these plans are executed. Next month the cycle starts over again. This is called an "open loop" process, as plan adjustments are not made until the next planning cycle, and continuous feedback is not systematically gathered and considered for corrective action between the publishing of one plan and the creation of the next one. This is only done at the beginning of each new cycle.
S&OM differs from the traditional open-loop structure shown in Figure 1 by adding new, closed-loop capabilities:
- Plan-do-check-act (PDCA)
- Sense and respond
- Process playbooks
It also adds new S&OP capabilities:
- Financial goal synchronization
- Scenario analysis and demand shaping
- Master data management
Of those six capabilities, the most important is plando- check-act (PDCA), a control construct developed by the quality expert Dr. W. Edwards Deming. In fact, the key difference between S&OM and S&OP is the addition of plan-do-check-act capabilities. These capabilities allow companies to rapidly assess their daily progress against their S&OP plans, understand the various courses of actions that can be taken, and then make rapid adjustments by choosing a course of action.
S&OM is considered to be closed-loop because it adds regular feedback to a company's plans and institutes mechanisms for minimizing deviations between plan and actual performance. While S&OP establishes the company's goal, it's S&OM that adds processes for achieving that goal. These processes both strengthen the existing S&OP process and add closed-loop capabilities for making adjustments within a cycle.
The closed-loop concept
The concept of a closed-loop system is rooted in control theory. Control theory is a branch of mathematics and engineering that deals with monitoring and managing the behavior of dynamical systems.2 In control theory, a controller attempts to keep a system or process output within a certain band or range. It achieves the desired output by managing process inputs.
To grasp this concept, think about an automobile. In this example, which is commonly used to explain control theory, the automobile is the system and its speed is the system's output. The speed of an automobile is controlled by regulating the engine's throttle position. If, for example, you wanted to maintain the speed at a constant level, you could do this by maintaining a constant pressure on the gas pedal (thus maintaining a constant throttle position). This approach will work when the external environment stays exactly the same as when the throttle position was established. It will not account for changes in terrain (such as hills), different surfaces, or wind conditions.
This steady foot on the gas pedal provides an example of open-loop control (Figure 2). There are no feedback mechanisms and accompanying changes to the input-control mechanism that accommodate external changes. Many companies still manage their supply chains under the open-loop approach; that is, they do not change in response to variations in external conditions. This may have worked well enough in the past. Today, however, economic uncertainty means that companies may have to re-evaluate their global operations on an almost daily basis.
A more sophisticated approach to controlling a vehicle's speed is cruise control, which is a form of closed-loop control. Cruise control continuously monitors the automobile's speed for deviation from the target and adjusts the input in order to keep the speed on target. Figure 3 shows closed-loop control. In this case, there is a sense-and-respond feedback loop.
Sales and operations management provides a closed-loop control mechanism for S&OP plan achievement. Current S&OP processes are not exactly open-loop, in that each new planning cycle takes into account what occurred in the execution of the previous cycle's plan. However, it is largely openloop during the month while that plan is being executed. In other words, it's like the constant pedal position in the automobile example. As Figure 4 illustrates, the S&OP process creates the plans and hands them off to the supply chain management processes, where they are implemented and then executed (the "P" and "D" of PDCA). Systematic feedback comes by way of the next S&OP cycle. This works well when there are not many changes in demand and supply during the month.
Adding the "C" and the "A"
Sales and operations management—a more closedloop process—monitors daily progress against the S&OP plan, and then acts on deviations. This adds the "C" (check) and "A" (act) of the PDCA control loop, as shown in Figure 5. Instead of waiting until the next S&OP cycle to gather feedback and then modify the next month's plan, feedback is continuously gathered and analyzed, and plans are adjusted in an effort to stay on course. The essential capabilities for making this happen are enabled through a "sense and respond" framework and "process playbooks."
Sense-and-respond capabilities are necessary for executing a closed loop within sales and operations management. "Sense" requires a method of event management that looks at various plan elements and can detect deviations at different aggregation and tolerance levels. This must be done on a relatively continuous basis, in most cases daily. When deviations are detected, they are routed to the appropriate person or organization for evaluation and resolution. This is the "respond" component, and it is essential for closing the loop. The "sense" component can be technology-based or a combination of technology and manual methods of analysis. Some companies identify and distribute plan deviations automatically using software. Others gather data on plan deviations, manually analyze them, and then transcribe them into reports that are distributed by e-mail.
Once a deviation or gap has been detected, the proper response is determined by running a "process playbook." Process playbooks provide prescriptive options for resolving gaps in the actual performance against plan. They lay out a series of steps, or formalized "decision trees," to follow in order to reduce or eliminate the deviation. Figure 6 shows the general format for a process playbook.
Each process playbook includes an event definition, root causes, and resolution levers that can be executed to address the root causes. An event definition describes a specific situation in which an actual result differs from the plan by a certain threshold. For example, a company might determine that sales for a particular stock-keeping unit (SKU) being 10 percent below the plan constitutes an event requiring action. Root causes are known reasons why this may have occurred, and resolution levers are known ways by which the deviations may be eliminated. Leading companies run simulations to perform impact analyses before choosing a specific lever. They save information about their resolution choices so they can leverage that knowledge when similar events and root causes arise in the future.
In other words, a process playbook provides the "control algorithm" that is used to close the loop. Most supply chain management business processes, however, cannot be written into mathematical formulas and then plugged into a controller. But deviations and events can be described, and their root causes and various resolution levers can be identified and established as part of a process. By doing so, supply chain personnel can immediately determine which of the various levers to pull and work together to resolve the problem, thereby closing the control loop.
Process playbooks may prescribe the resolution or response to either an event or a plan gap. Thus, they may be used for tactical plan deviations (for example, sales trending in a negative direction) or very strategic events (such as natural disasters).
In a world that each day becomes increasingly complex, companies can be blindsided by unexpected events. Nonetheless, it is possible to define, catalog, and institutionalize response mechanisms for most events. Cataloging these responses and having the ability to execute them improves supply chain resiliency. (For an example of a company that has successfully implemented PDCA and process playbooks, see the sidebar, "Point-of-sale data supports PDCA.")
Enhancements to S&OP processes
Along with having full PDCA capabilities, companies must also enhance existing sales and operations planning processes in order to fully realize the benefits of closed-loop S&OM. The necessary additions include scenario analysis and demand shaping, financial plan synchronization, and master data management. Figure 7 shows how scenario analysis, demand shaping, financial synchronization, and some of the check-act execution capabilities are integrated into the traditional S&OP process.
In the last several years, some companies have introduced scenario analysis and demand shaping into their S&OP processes. These companies create and evaluate scenarios for different demand and supply profiles as well as for various strategic, operational, and tactical events. These scenarios may include optimistic, pessimistic, and all-points-in-between demand plans. Each scenario has its own financials, and a single scenario is chosen through a consensus process as the plan for the company.
Demand shaping provides a mechanism for introducing actions that change demand to match available supply. Examples of such actions include price changes, promotions, and offering incentives to buy lower-grade products when certain parts are unavailable. These actions modify demand but may come at some cost to the financial plan, so they should be run as scenarios before they are selected for implementation.
Scenario analysis and demand shaping can be used within the context of process playbooks—this time as part of the S&OP process for deriving plans. Planners run scenarios with different demand and supply profiles, and they evaluate their impact on the company's financials. Deviations are noted, various demandshaping levers (part of a process playbook) are chosen, and then scenarios are run again. At the end of this process, various alternatives are evaluated, and a plan and its associated levers are chosen.
Fundamental to S&OM is the selection of a starting point based on a financial plan. Various plans created through the S&OP process must be dynamically integrated to the financial plan. It is critical that supply chain organizations see the immediate financial impact as changes are made, deviations are detected, scenarios are run, and levers are pulled. This is the principal "rudder" that steers the entire evaluation and decision-making process.
Another area ripe for improvement is data collation and management. Many S&OP processes today consume too much time in data gathering and management. Data collection at some companies takes so long that they end up sprinting just to finish that part of the project and get the plan published. This has become a big problem for companies that have moved to a global S&OP process. Differences in data formats, levels of aggregation, and levels of sophistication of information systems among regions can create serious integration problems.
Automated master data management can reduce the time it takes to collate the data needed for the S&OP process. It acts as a meta-data management layer that provides mappings and common definitions for various dimensions of data, including business unit, product, and geography. This allows different regions and organizations to map their data elements to one another and ensure proper aggregation and disaggregation. This is particularly useful for integrating data from emerging market regions with data from developed regions and for mapping data across multiple enterprise resource planning (ERP) systems.
Sales and operations management can be enabled by a supply chain management services-based architecture, which provides data integration and management across different systems. It also provides the ability to adapt solutions and workflows to changing business processes and to catalog workflows and process playbooks in a business-content library. A business-content library is an electronic library that contains workflow definitions and process playbooks that are based on extensible markup language (XML), which can be stored, retrieved, modified, and executed as needed. The architecture to support S&OM is shown in Figure 8. The Web services platform leverages capabilities from various functional systems and provides the ability to visually model the S&OM process and then execute it.
Flexibility is important for an effective sales and operations management system. For one thing, S&OM requires a lot of on-the-fly, interactive changes. For another, planners need to look at data across organizations and in different formats that are not always easy to envision when a process is designed. These are some of the reasons why Microsoft Excel, which provides very powerful flexibility, has become the universal planning tool for S&OP and S&OM processes. The downside of using spreadsheets is that their widespread use can result in an unmanageable system and data environment. Data elements embedded in spreadsheets cannot be effectively linked to each other in a scalable way for large companies. Furthermore, multiple spreadsheets can lead to multiple versions of a plan.
The service-oriented architecture (SOA) approach illustrated in Figure 8 provides a structured data environment along with the flexibility of Excel. User workflows are instantiated in Excel, while the data environment is managed using a master data management capability. The Excel user interface provides both structured and unstructured environments. This provides the best of both worlds—flexibility with structure.
Closing the circle
Sales and operations management helps companies improve their chances of actually achieving their plans by adding closed-loop capabilities to traditional S&OP processes. S&OM helps companies make sure that they are on target to meet their goals and schedules.
There's another potential benefit to sales and operations management, one that's particularly relevant right now. S&OM provides a process framework for companies that want to reduce their carbon footprint. Measuring carbon footprint is not much different from measuring, monitoring, and controlling material consumption or capacity consumption. The proper data elements have to be added to supply chain data models, and then logic must be added to manage these elements as constraints in the planning process.
Companies that add carbon-footprint data elements and logic to supply chain operational systems can pull that information into the S&OP process for monitoring and management. This data becomes another constraint to be considered in the S&OP consensus and decision process. More importantly, with S&OM, companies can continuously monitor and check carbon emissions against the plan and take corrective action where needed. This approach will be especially valuable when carbon emissions are subject to regulatory requirements in the future.
One of S&OM's greatest benefits is its ability to help supply chains bounce back quickly from disruptions. Companies with resilient supply chains can use S&OM to identify potential problems and establish process playbooks to deal with them. They can identify response levers before a hurricane hits and catalog in their process playbooks appropriate actions to take. In an uncertain world, companies that employ sales and operations management are better prepared to take quick, intelligent action when their plans go awry.
1. Yossi Sheffi, The Resilient Enterprise, (Cambridge, Massachusetts, USA: MIT Press, 2005).
2. Adapted from Webster's Revised Unabridged Dictionary, (Springfield, Massachusetts, USA: G & C Meriam & Co., 1913).
Despite a robust sales and operations planning process, "CEC," a consumer electronics company, still faced such chronic supply chain problems as excess inventory in the channel, shortages and excesses of some products, and sig- nificant demand volatility.
As a first step toward solving those problems, it imple- mented a closed-loop sales and operations management system that included a fast plan-do-check-act (PDCA) feed- back loop for point-of-sale (POS) data analysis as well as process playbooks (See Figure A). Now its retail customers provide POS data on a daily basis. Managers analyze this data for trends and out-of-tolerance situations against the plan. These deviations are flagged and distributed to process own- ers, who run process playbooks to determine what—if any— steps should be taken to minimize or eliminate the devia- tions. An example of a process playbook used by CEC is shown in Figure B.
The company's managers detected that revenue was below target. They invoked a corresponding process playbook and examined various root causes to determine which ones are in play. They executed levers—control actions—in order to close the gap between plan and reality. For example, the two rea- sons for revenue being below plan were: 1) sales volume was below plan; and 2) average selling prices (ASP) were below plan. In the case of low sales volume, CEC determined that one of the root causes was that it sometimes was short of supply for products it was promoting. Based on the responses laid out in its process playbook, the company responded by eliminating the promotion on the product that was in short supply and shifting the promotion to another item.
Thanks to its use of process playbooks, CEC has increased sales while reducing channel inventory, and it has greatly reduced the demand spikes that had occurred at the end of each quarter. Using sales and operations management, CEC has also elevated its expertise, standardized work, institu- tionalized knowledge, and provided a framework for continu- ous improvement.
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