Balancing supply and demand
Sales & operations planning can conquer challenges related to managing global supply chains
By Sidney Hill, Jr., executive editor -- Manufacturing Business Technology, 11/1/2005 7:00:00 AM
Enterasys Networks is known for its proficiency at designing networking equipment—routers, switches, bridges, etc.—that protects enterprises from constantly evolving security threats. Until recently, however, Enterasys wasn't quite as adept at responding to changes within its own supply chain.
"We were not doing a very good job of predicting demand," recalls Seema Phull, director of process and technology at Enterasys, Andover, Mass. "As a result, we had a problem with excess and obsolete inventory. That's the kiss of death for a high-tech company. It's not like we can off-load excess inventory at a discount outlet. We own it, and we have to write it off. That's the bottom line."
It took Enterasys less than a year to improve its bottom line—by applying a mixture of new techniques and information technology to what some consider an old business process. The process—known as sales & operations planning, or S&OP—has been around since the mid-1980s, but its true value is only recently being discovered, primarily by companies searching for ways to manage complex, global supply chains.
A recent survey of 212 manufacturers that practice S&OP, conducted by Boston-based AMR Research, shows the process to be especially useful in identifying the correct operational tradeoffs to make during corporate mergers, and for managing contract-manufacturing relationships.
Enterasys didn't use S&OP to help execute a merger, but the process has proved invaluable in helping Enterasys manage relationships with contract manufacturers.
The importance of planning
"We have a completely outsourced supply chain, with contract manufacturers building all of our products," Phull says. "That's why S&OP is so important for us. It allows us to align supply with demand, and to respond quickly to sudden shifts in demand."
Despite its seemingly obvious benefits, industry experts say companies like Enterasys—with a formal, enterprisewide S&OP process in place—are still a distinct minority.
"Almost everyone seems to know what S&OP can do in terms of solving problems, but companies still face a number of challenges when it comes to putting it in place," says Tim Campbell, CEO of Steelwedge Software, a supplier of applications that support the S&OP process.
The biggest challenge for most companies, Campbell contends, is breaking old habits. "If you think about the inner workings of most manufacturing companies, there are a lot of planning activities going on, but they tend to take place within the little silos of marketing, sales, or finance," Campbell says. "Each area is trying to solve its own problems."
As supply chains grow more complex, Campbell says, "Some visionary companies are realizing that a cross-functional S&OP process can solve a lot of these problems." Campbell counts Enterasys among those visionary companies.
Phull says Enterasys has not completely fulfilled its vision for how it wants to conduct S&OP, but it already has solved a number of critical problems. "The most important benefit so far has been demand predictability," Phull says. "That directly affects your ability to respond to change."
Fewer missed opportunities
Its S&OP process is working so well in this regard that Enterasys can determine, in near-real time, when a product is not selling as well as expected, and take immediate action to boost demand. Phull says these actions, known as demand shaping, can include kicking off a new marketing program or some other action to stimulate sales.
"If a product is selling faster than expected, we can look at incoming supply and see if we can meet that increasing demand," Phull explains. "We can see if our contract manufacturers can boost production. We also can ask sales to look at things to see if this is a trend that is expected to continue. If not, then we know we should use next quarter's supply now."
Enterasys has become so good at responding to sudden changes in demand that in a recent fiscal quarter in which the company reported $80 million in revenue, only $50,000 worth of missed revenue opportunities were attributed to misreading demand signals.
"Demand planning is no longer standing in the way of meeting our revenue goals," Phull says. "Also, when we hold our monthly S&OP meetings, we are having more discussions about things like improving gross margins. In the past, we would spend most of our time trying to find out if we had enough supply to fill a particular order."
The past to which Phull refers was not that long ago, but it was light-years away in terms of how Enterasys conducted S&OP. "The supply chain group was the only organization that really paid attention to S&OP," Phull recalls. "They got some participation from sales and product management, but it wasn't in a structured, disciplined manner."
Now Enterasys has a formal S&OP process with a number of required steps and a series of regularly scheduled meetings attended by people from different departments.
"We have a collaborative process that leads to making decisions like how much stock the company is going to invest in for a given [three-month to 12-month] period," Phull says. "Executives from the various functional areas—marketing, sales, operations, and the CEO—are all involved in that decision-making process."
A familiar look
Phull says IT also has become integral to the process, because "you can only do this type of collaboration if you have technology that brings all sorts of data elements together and allows you to do the analysis that's necessary to make good decisions."
Lora Cecere, a research director with AMR, says a lack of systems that adequately support S&OP has hindered wider adoption of the process. Currently, Cecere says, Microsoft Office applications—and Excel in particular—are the most popular tools for supporting S&OP.
Campbell says that fact heavily influenced the design of the Steelwedge software suite, which has adopted Microsoft Excel as its primary user interface.
Phull says that interface was one of several factors that caused Enterasys to make the Steelwedge system the primary tool for supporting S&OP.
"I had prior experience with sophisticated planning tools," says Phull. "I wanted something that we could get up and running in less than six months, and would be easy enough to use that it could drive collaboration across the enterprise. We did a formal vendor analysis, and Steelwedge came out on top. This tool has replaced 30-plus Excel spreadsheets, while also providing a very powerful planning engine in the background."
The Enterasys S&OP process starts with demand planners using a Steelwedge application to develop statistical forecasting models and create a baseline demand plan. The data used to create these models includes historical information on product shipments from Enterasys'SAP ERP system, as well as sales and customer data from its Salesforce.com CRM package.
All this information is funneled to a central operational data store, where it is validated and reconciled before being fed to the Steelwedge application. Phull says creating a mechanism for validating and reconciling data—also known as data cleansing—is an important step in implementing cross-functional S&OP, because the assumptions made in the planning process are only as good as the data from which they are made. "Most companies have not paid attention to the need for cleaning their data," Phull observes, "because you rarely see all of this data come together, unless you are implementing a formal S&OP process."
Achieving consensus
Once the Enterasys baseline demand plan is complete, it goes to the sales and product management departments, where it is supplemented by current market intelligence, such as new sales opportunities or customer feedback about existing products. The next step is a meeting of department directors and managers that produces what Phull refers to as a "one-consensus forecast." This forecast covers a 12-month period and serves as the starting point for discussions in monthly executive planning meetings.
The monthly executive meetings are where decisions about inventory investments are made. "You're looking at inventory investments in monthly buckets," Phull explains. "Those decisions feed our overall master production schedule and material requirement planning, which we use to do supply planning with our contract manufacturers."
Although the numbers related to missed revenue opportunities—and the elimination of the problem with excess and obsolete inventory—indicate Enterasys is doing much better at balancing the demand and supply sides of its business, Phull believes there still is room for improvement.
"Ultimately, we want to have S&OP working throughout our value chain—involving both our contract manufacturers and distribution partners," she says. "That would be world-class. Not many companies have been able to do this yet, but that's where we want to take it."
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