Our Supply Chains are becoming more complex. It's no longer just about balancing service, cost and cash. We increasingly need to meet environmental objectives, like reducing C02, and social objectives, such as more responsible sourcing.
In this blog, I will try to explain how S&OP has evolved in recent years, and how I hope that a new vision on S&OP – S&OP 2.0, or Integrated Value Planning – can help to solve some of the common challenges I have seen over the last 15 years with S&OP and some of the same challenges I still see today.
So, why is a new vision on S&OP necessary? When I ask supply chain experts about their primary struggles, it usually boils down to three major issues:
When we then look at some insights from Lora Cecere – founder of the research firm Supply Chain Insights – who compared the effectiveness of S&OP in 2019 vs. 2016, it becomes clear that the amount of participants who rate their S&OP process as effective, decreased by 30% in only three years.
So, instead of advancing we seem to be going backwards. You could argue that the data from 2019 might be influenced by the upcoming Covid period, which resulted in less confidence in S&OP, but you can also turn that around and say that it seems our S&OP process has not been able to properly deal with the volatility and the uncertainty we had during and since Covid.
I’ve discussed previously that the mentioned market volatility is here to stay, so we might have an issue that our S&OP is simply not strong enough to deal with the volatility in our current supply chains. Additionally, the results from Lora Cecere’s survey also point out that in five years’ time (from 2015-2020), the same S&OP challenges persist, which means we’re not really making any headway here either.
Looking for answers
When I look at all of this, it seems we're really struggling with S&OP in the same way we’ve been doing for the last 10 to 15 years. So, how do we reimagine S&OP to tackle the supply chain challenges of the past, the present and the future?
It’s the central question I’ve been addressing since writing my first book in 2018. Then, my focus was on the Supply Chain Triangle, balancing service, cost and cash to improve S&OP. This technical topic was a good starting point, but it needed a strategic framework to link S&OP with an overarching business strategy: ‘how do you want to be successful in your market?’. The Strategy-driven Supply Chain was born, and was the main talking point of my second book in 2021.
Now, as it’s becoming clear to everyone how crucial S&OP is, we still find it hard to invest in it and take it seriously. In my latest book ‘Rethinking Supply Chain’, I try to get everyone invested in the health of their S&OP by linking it to other planning processes, improving adoption & data quality and eventually merging it with processes such as financial or sales planning.
If we want to improve S&OP, we will basically need to reorganize the house. Currently, companies often work in functional siloes, where Sales is drive by sales data, Operations is driven by efficiency and Finance is driven by cash flow. This creates tension in the Supply Chain Triangle and makes S&OP quite complicated, as it’s a cross-functional process that needs input from all these departments to bridge the gaps between them.
“So, how do we manage that white space in an organization and cross the divides between siloes in order to improve the health of our S&OP?”
As every silo is so thoroughly connected, the need to integrate them has become more apparent throughout the years – especially during and after the pandemic. The increased volatility in the global market, for instance, has made it a lot harder to forecast customer demand. That’s why I propose to stop guessing what your biggest A-customers will do and start a collaborative forecasting process in which you have visibility on their inventory levels, historical consumption and sales plan.
On the supplier side of the supply chain, you should do the same thing. Instead of placing orders 12 months in advance (to make sure you get your piece of the pie), reserve certain capacities with key suppliers and commit to buying certain raw materials on the long-term. This will ensure you can specify as late as possible which SKU you need them to produce for you, so you can cope with the increased market volatility.
On top of the intricate connections between siloes and external supply chain stakeholders, companies now also have to incorporate environmental and social standards into their S&OP ecosystem.
Regarding sustainability, companies not only have to keep track of their own emissions, for instance, but they also have to follow-up on the emissions at their suppliers and customers. And from a social point of view, we also want to put our supply chain in the right social context, and make sure our suppliers are behaving in a socially-responsible way – which might be a big concern in the fashion industry or in retail as a whole.
As the environmental ceiling is falling and the social foundation is rising the bandwidth we have to operate our S&OP ecosystem is getting smaller and smaller. Meanwhile, we still have to deal with competition fighting for the same customers and suppliers, trying to attract financing from the same markets, and competing in the same labour market. So, even if we can integrate our S&OP processes internally, and with our key customers and suppliers, how are we going to control this ecosystem that’s under stress from multiple sides?
The answer lies in the amount of planning processes we have in place in our S&OP. Below, you can see some of the common planning processes I regularly come across in companies, which is already quite a lot.
When I then ask my customers how many software tools or planning systems they have in place to control these processes, the general picture is equally spread-out. If you are lucky, you have only one variant of these systems, but you can easily end up with quite a landscape of different software tools.
And this brings me to my next point: to me it feels like we never really thought through how these different systems need to be integrated and that is an issue because disconnected planning tools and processes create the inverse of agility, with duplicate information, different assumptions and delays in the exchange of information between the different systems. Perhaps this way of working was good enough as a solution 20 years ago when markets were relatively stable. Now, unfortunately, the world has become more volatile and more demanding regarding sustainability goals, so what we have been doing in the past is simply not going to cut it anymore.
How can we then potentially solve some of these issues, and how does my new vision on integrated planningcome into play?
The starting point is a true and native integration of financial planning and supply chain planning, as I mention in my second book. Up to 80% of these planning processes already overlap, and – even though Finance and Supply Chain may not like it – it’s a necessary step with the current volatility on both the demand and supply side of the supply chain. It's basically irresponsible to not have proper financial information in supply chain planning, or have proper supply chain information in financial planning.
Additionally, I’m seeing that the two are growing towards each other anyway, supply chain planning is becoming more financial and financial planning is becoming more detailed, as we want to better understand where the variances in our supply chain are coming from. And I also believe that the current tools are powerful enough to combine the two processes.
The only reason we're not integrating the two is because Finance doesn't trust Supply Chain and Supply Chain doesn't understand Finance. That might have been a good enough reason 20 years ago, but today, it’s an essential hurdle we need to overcome.
Once we have integrated those two we need to think through how we will connect marketing planning, sales planning, product planning and resource planning. The key thing here will be to share long-term planning data, and keep everyone aligned.
Then we will need to connect with key customers and key suppliers to create a collaborative forecasting process. And when we have that connectedness, we need to think through how we include sustainability and social metrics in our core decision-making of our planning processes.
This vision for S&OP I’ve called ‘Integrated Value Planning’.
