Plan with the big "S"

EMD Chemicals' Mark Wells is a "middle"man. As director of customer fulfillment, his challenge is to keep the company from being abused in the middle—i.e., pulled and pummeled alternately by supply and demand. Wells' goal: to see that EMD "makes a little money at the end of the day."

"Most people are reasonable most of the time," says Wells. "The trick is getting everyone looking at the same information at the same time."

For EMD, this is done using integrated sales & operations planning (S&OP), a process for building consensus among sales, marketing, financial, and operations to determine the best plan for meeting annual aggregate demand forecasts and achieving corporate business goals. Though the concept has been around for 20-plus years, it now has added cachet due to a convergence of factors—most significantly, globalization and the extension of supply networks, and the desire of those networks to become demand-driven.

"When you owned all your plants, you didn't have to care as much about it," says Lora Cecere, a director with Boston-based AMR Research. "Now, with global operations, it's a matter of needing to formalize what was once an ad hoc process."

Early on, S&OP got a bad rap as difficult and painful, likened to locking a contentious group in a room for several days while everyone disputed everyone else's numbers. The early difficulty and pain was aggravated by a dearth of software to adequately support the process.

"Software has long been a problem," says Richard C. Ling, president of Richard C. Ling Inc., and considered the father of S&OP. "It is sad to see companies using multimillion-dollar enterprise software packages and then having to use spreadsheets to do S&OP."

A new generation of Web-based collaborative software—such as the Zemeter suite from Supply Chain Consultants, which is used by EMD Chemicals—is changing that.

EMD Chemicals, a Merck business unit headquartered in Hawthorne, N.Y., produces reagents and specialty products for industrial, academic, and life-sciences research and analytical laboratories. The company was prompted to improve its demand forecasting process when it experienced what Wells describes as a major "supply shock" as demand outstripped a Savannah, Ga. plant's ability to satisfy it.

A major undertaking in establishing the foundation for the demand forecasting process was defining the complex product hierarchy to forecast appropriately at the aggregated parent or family level—rather than detailed SKU levels—to ensure greater last-minute production schedule flexibility geared to real orders.

"There is significant complexity in our production," Wells says. "These products are hard to make, with one of the most complex processes I've ever seen, involving by-product relationships. What we had to do was develop a product family structure that could show relevant constraints and data."

With regard to demand data, Wells identifies three major areas of demand information critical to the process. The first is historical sales information that provides the statistical base that drives the forecast. The second is routine collaborative information from customers.

"The third is a gray area: information that is hardest to get, but can have the most impact," he says. This is random market intelligence from salespeople—e.g., when a customer says he's anticipating increasing orders, or a competitor is introducing a new product.

Getting sales & marketing more engaged was key. "It's a significant culture change," maintains Wells. "The sales force had never been expected to be engaged before. Our CEO decided this was something we needed to change," maintains Wells. "It put more ownership on them in managing the forecast. But we're giving them better tools to do that."

The Zemeter suite provides a simple template for inputting random market intelligence to better drive demand forecasting. The system also automatically flags customer performance regarding forecasted high-volume demand that didn't materialize. "This gives the biggest bang for the buck," says Wells, as these are the areas that EMD needs to monitor more closely. "It has added tremendous value by identifying where we have issues so we can come up with actions plans to address them.

"We can go back to the customer now and ask them to help us understand why their demand was different from what they'd originally anticipated," Wells continues. "The system provides us with an objective means to improve the process that includes our people and relationships with our customers."

The shift to become more demand-driven means a transition from being "a little 's'&OP to a 'big S'&OP operation," says Karin Bursa, a VP for collaborative supply chain solutions provider Logility. "Finally, companies are truly understanding the importance of 'big S'&OP—where they are more demand-driven, producing what they expect to sell rather than attempting to sell what they produce," she says.

Properly executed S&OP provides three key benefits, Bursa says. First is visibility, for a better understanding of the business and the balance between supply and demand. Second is greater accountability, in having a consistent way to hold the operational team to a common set of objectives to execute daily.

"And third is better flexibility, in being able to assess how best to harness or respond to dynamic market conditions," she says. This comes in clearly understanding the costs and trade-offs of various options—e.g., whether to increase overtime, outsource capacity, or perhaps even raise prices in the event that demand surpasses supply; or conversely, discount the price when supply starts building into excess finished goods, creating inducement to move the product off its balance sheet.

Logility's supply chain solution takes input from various sources—including ERP, logistics packages, and spreadsheets—and translates numbers into meaningful formats for each group: dollars for finance, units for production, and margins for sales & marketing. It also provides analytics for comparisons and simulations on conditions to be monitored.

"This offers a higher level of confidence. You know that whatever decision you make is tied to all the relevant bits and pieces you have to execute," says Bursa. "The solution also has a template to factor in whatever threshold of variation to plan will warrant an alert to revisit the decision. The process doesn't have to be as difficult as it used to be, when you were locked in a conference room for three or four days."

"S&OP is not about generating a better forecast, but a better understanding of the full operational process of meeting the business plan," says Andrew Carlson, a VP for enterprise systems vendor PeopleSoft. PeopleSoft offers an integrated S&OP package through the EnterpriseOne solution gained from its J. D. Edwards acquisition.

"What lights up CFOs," says Carlson, "is knowing that, 'If I execute this plan, this is the balance sheet I'll report at the end of the quarter.' The solution provides real-time financial data while looking at the plan. There is a pro forma balance sheet available at any time to let you know how things look from a financial standpoint."

In October, PeopleSoft announced new capabilities to its EnterpriseOne S&OP solution, including range forecasting, a feature that establishes a forecast probability index designed to aid the S&OP team in better gauging confidence in likely scenarios and improving anticipatory responses.

Melbourne-based Berri Ltd., Australia's largest juice processor, crushes 130,000 tons of fresh fruit annually, producing more than 50 percent of its products to demand. Distribution is to more than 10,000 outlets, including McDonalds and Qantas Airlines, as well as a couple hundred "daily juice vans." Berri implemented EnterpriseOne primarily to improve communications to support special promotions and new product introductions—one of the thorniest issues compounding demand and supply cycle management.

"The PeopleSoft EnterpriseOne S&OP product was key to bringing together all the information necessary to run scenarios and see the impact of various actions," says Ross Bardley, Berri's CIO. "We can link all promotions into the demand plan. It's much easier for salespeople to have accurate plans, and for manufacturing to have visibility into what's needed.

"Profitability has increased dramatically," Bardley adds. On a total $8-million investment—including software, hardware, and services—Berri has identified $5 million in annualized benefits.

And so it seems the full potential of S&OP is being realized, given a new class of Web-enabled, fully featured software. "A lot of people have made the mistake over the years thinking that what you're doing with S&OP is adding up a bunch of numbers," maintains Ling. "What you're doing is deploying a business strategy."