From health care distribution and e-commerce fulfillment to food service, auto production, and beyond, the relentless onslaught of COVID-19 laid bare weaknesses across almost every industry—and the supply chain was spared no mercy.
The extreme environment, intensified by the emergence of the omicron coronavirus variant, has exposed existing faults across three core areas, requiring supply chain organizations to respond to supply and demand challenges most were unprepared for:
1. Supply chain tie-ups that delayed production and deliveries forced a staggering spike in allocation and trade-off decisions that needed to be made quickly. This overwhelmed many companies’ planning processes, especially those that assumed steady availability of supply.
2. At the same time, channel shifts—for example, the dramatic increase in business-to-consumer e-commerce—forced modifications to product mix and requirements, catching many companies by surprise and leaving them shocked by how poorly they were able to react and respond.
3. Lastly, the extended supply chains developed over the last several decades fell short when it came to agility, which prompted some companies to revisit the concept of reshoring.
As we (hopefully) begin to emerge from the worst of the pandemic, these and other pandemic-related challenges are leading supply chain executives to realize that some of their traditional sales and operations planning (S&OP) processes are no longer sufficient to keep pace with today’s dynamic changes in supply and demand. The clock speed has changed.
Sales and operations planning is one of the few structured, cross-functional processes at most companies. S&OP aligns strategy, finance, supply chain, operations, sales, marketing, and product development/engineering on longer-term operating decisions. Effective S&OP ties executive decisions with the activities of the dock. It creates a common view of future operations, and it holds people accountable for variances that impact the bottom line.
A mature S&OP process drives alignment and decision-making over a time horizon of three to 24+ months on strategic demand and supply plans, related policies, and significant investments. The executive S&OP meeting is the capstone of this structured process, which features a defined set of monthly meetings. The S&OP process typically includes:
Many of our clients, however, have found that the competencies and tools that typify S&OP placed them in a position of being unprepared to respond to disruptions that had no precedent, such as unpredictability of supply, supply hoarding, sudden labor shortages, immediate and dramatic demand and channel shifts, and cost swings. Instead, S&OP’s “what-if” planning discussions have been replaced with “What in the world will happen next”?
The experiences of the past two-plus years have many supply chain professionals questioning the value of planning. But we would argue that these processes and tools should not be abandoned. Effective planning creates a framework for addressing challenges when they occur; if the planning system is robust, then plans will align with company strategy. That’s why the planning process is still critically important: The ability to act when new challenges arise, quickly and in line with organizational goals, is separating companies that will be in a position of strength from those that will be struggling to pick up the financial pieces in these challenging times.
The pandemic continues to disrupt supply chains and crank up the uncertainty level. Today more than ever, organizations need capabilities that will allow them the flexibility to both improve their ability to forecast demand (improve accuracy) and reduce their reliance on that forecast (improve agility).
What’s an organization to do? Supplementing S&OP with a planning process known as sales and operations execution (S&OE) could help companies better meet the moment.
Understanding the pitfalls of S&OP
Effective S&OP requires a well-functioning set of “building blocks” that operate together. As shown in Figure 1, these building blocks fall into six interconnected dimensions that together form the framework of the S&OP process.
[Figure 1] Foundation of a well-functioning S&OP program
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Figure 1 shows that the elements of S&OP are well-defined. But S&OP is more than a process—it is a way of working. It must be as much a part of an organization’s culture and priorities as is sales. As illustrated by the top three blocks, securing executive buy-in for an S&OP program is critical for successful execution. When we’re introduced to a new company, we often ask if there is a supply chain professional on the executive team. Sometimes there is. Often there isn’t—and this can say a great deal about the company’s commitment to planning. Having a supply chain professional on the executive team suggests a level of maturity and an appreciation for their supply chain’s complexity and contribution to the company’s success. Supply chain executives help corporate leadership as well as sales and marketing understand the implications of alternatives and trade-offs. In short, failing to include a supply chain executive on the executive team does not set up the S&OP process for success.
Executives often express frustration and dissatisfaction that the S&OP process is “not working.” Often, that is not true; the process is working, just not in the way executives expected it would or as effectively as they think it should. There is no question that S&OP is a challenging process to implement and manage, and there are many reasons it may not be working as desired.
Figure 2 highlights some of the pitfalls that companies struggle with when they implement an S&OP process across their organization. For example, one that we frequently see occurs when a company’s S&OP process has become overburdened with short-term execution matters that it was never intended to handle. It’s not uncommon for high-level monthly meetings to get “hijacked” by participants focusing on short-term or tactical issues at a more fine-grained level. By design, S&OP facilitates cross-functional discussion, but this drift from its primary intent and charter makes it difficult for an S&OP meeting to achieve its objectives.
[Figure 2] Challenges that hamper S&OP
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Significant deficiencies in any of the operating dimensions listed in Figure 2 will undermine an organization’s commitment to a plan. For example, recently we were introduced to a large manufacturer that had a very capable planning team utilizing what is a truly best-in-class S&OP technology solution for their particular industry. The team worked hard to collaborate across operations, finance, and sales to create a signal that drove plant requirements—which was then largely ignored by manufacturing.
The company had not adopted the clearly defined organizational roles required to effectively drive and support an S&OP program. This lack of organizational alignment allowed competing agendas across functions to take hold, and there was no accountability for failing to execute according to the plan the staff had worked so hard to develop. The S&OP process essentially broke down, and the severe impact of the pandemic on supply and demand only made those poor outcomes worse.
The benefits of adding S&OE
We began this article with a provocative question: Is it time to “blow up” S&OP? Despite planners’ concerns that the impacts of the pandemic are too unpredictable for S&OP’s structured process to handle, we believe the answer is no. For all its shortcomings, S&OP is still very much necessary; good planning will position an organization to be effective and agile. Yes, the forecast is always going to be wrong, but it’s possible to be less wrong—and that distinction is valuable.
Rather than abandoning the practice, we believe S&OP should be augmented with a robust sales and operations execution (S&OE) process.
S&OE is a cross-functional process that helps organizations determine discrete, tactical steps that are necessary to meet the quarter’s requirements. Like S&OP, it enables cross-functional communication that an organization otherwise would not have. S&OE aligns finance, supply chain, operations, and sales on decisions made about exceptions that occur in the 0–13-week horizon. These decisions may involve allocations, substitutions, inventory, labor, and expediting. The S&OE process is typically supported by structured demand/supply analysis and a weekly cross-functional meeting. Importantly, it does not replace S&OP; rather, it supports that process by ensuring that S&OP remains focused on the longer-term horizon. (Figure 3 provides a simplified comparison of the two approaches.)
[Figure 3] S&OE vs. S&OP: A brief comparison
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S&OE can begin as simply as a weekly demand/supply meeting to tackle cross-functional decisions that need to be made to help ensure quarterly objectives are met. Or it can start as a weekly touchpoint among S&OP participants to discuss “in-flight” disruptions that were not known during the normal S&OP cadence. In either case, the objective is simple: answering the question, “What’s changed?”
While S&OP is quite difficult to get right, S&OE (a term and concept originally introduced by the analyst firm Gartner) is less complex. Its narrower focus complements S&OP by identifying sudden supply chain complications that are often specific to a region, a supplier, or a customer/market, and then generating a response—a capability that is especially valuable in light of pandemic-related supply chain disruptions. S&OE also supports S&OP by functioning as the “adjust” component of a “plan-execute-compare-adjust” strategy. When both processes are in place and are functioning well, S&OE escalations are fed into the S&OP process, and S&OP policy decisions are reflected in the S&OE process.
There are some common S&OE pitfalls that companies should avoid. For example, all too often, S&OE efforts don’t incorporate the process input and discipline that are built into S&OP. And some companies, disillusioned with S&OP, try to implement S&OE by itself. But an organization that relies solely on S&OE will only be “fighting fires”—reacting to one near-term problem after another—without making the long-term, strategic decisions in areas like procurement and manufacturing that could address the root causes of the short-term challenges.
Unfortunately, companies that could benefit from adopting S&OE often fail to do so, in some cases because of concerns about the time and effort involved in adding this additional planning layer. Yet it doesn’t have to be a heavy lift; since the decisions around S&OE are more limited in scope and often are more regionally focused, the harmonization and decision-support requirements may be less rigorous than those for S&OP. The process may even become more automated over time, making it even easier to manage.
The smart move in turbulent times
The turbulence and unexpected events of the past two years might have tempted companies to abandon their planning process, but that is not the right way to go. It is critical to understand that not having a plan does not mean you are being agile. It means you are being naïve and unprepared.
S&OP and S&OE are both important, and they reinforce each other. This is a case where the whole truly is greater than the sum of the parts—and companies need to implement and carry out both to maximize the effectiveness of either. (The quick self-assessment in the sidebar below will help you determine whether you have strong S&OP and S&OE processes.)
The unforeseen “black swan” effects in the past year have not all been about COVID-19 and emerging variants … and it’s likely they won’t be the last ones we’ll have to contend with. Adding agility to your S&OP process by incorporating S&OE will give you greater speed and confidence in your response, positioning you to be thinking ahead about the challenges—and opportunities—that will be presented in the coming months.
Do you have sound S&OP and S&OE processes?
How well prepared are you to tackle supply chain disruptions? Do you have sound S&OP and S&OE processes? How do you know? Here are some questions to ask yourself. If you’re on the right track, your answer should be “yes” to each.
1. Do you make decisions in your S&OE/S&OP meetings? Mature S&OE/S&OP processes are focused on making decisions, not simply reporting historical events. If you are making clear and sound decisions in your process, then you are on the right track. If not, then no matter how “correct” your process appears to be, you are missing opportunities for improvement.
2. Do you have a “single version of the truth” for these events? Often, companies have disparate information systems and weak data governance that make it difficult to achieve an accurate, shared view of business conditions. An effective decision-making process depends on having facts that are agreed upon by all participants.
3. Do you all speak the same supply chain “language”? When business units have different definitions and terminology for parameters and key performance indicators (KPIs), the trade-off decisions across segments may not be based on equivalent information. If you have aligned these details, then you will have a solid foundation for optimizing decisions across all segments.
4. Can you run a demand/supply scenario in a day? If you can do this quickly, then you have a solid decision-making tool for anticipating and managing change at your disposal. You may even be able to quickly run scenarios that include key suppliers, a benefit for both parties.
5. Do you have the right balance of central and local control? If your service delivery model incorporates the right balance of activities under local and central control, then you will be able to maximize the value of your process by optimizing across individual sites and common trading partners.
6. Do you have a balanced scorecard and aligned incentives across business segments? This alignment theme is reflected in several other questions—and no wonder: alignment is at the heart of a successful S&OP process. Without alignment of performance expectations and incentives, it is difficult to make cross-functional decisions that will “stick” and be quickly carried out.
Brian Higgins is U.S. customer & operations practice leader, commercial industries for KPMG LLP.
Mark Levy is managing director in KPMG LLP's advisory services practice where he serves as the global functional lead for supply chain planning.