Companies have been increasing investment in S&OP as they try to simultaneously reduce costs and improve customer satisfaction... and rightly so.
Benchmark data shows that those with a more mature process are rewarded with better margins and customer retention rates. Among the improvements that are often prescribed by consultants and experts is the creation of more accurate forecasts and a commitment to a monthly S&OP meeting.
Planning is important but it is also limited by the volatile reality of real-life. For example, one of our customers that makes smart phones is challenged to forecast demand given the fickle nature of its consumers and the constant introduction of competitive products.
Trevor Miles wrote recently on this issue in his blog post: I am adamant that an accurate forecast does not reduce demand volatility. Equally as often however, disruptions to plan will come from the supply side. These can be cataclysmic such as the 2008 Sichuan earthquake that temporarily shut down several high-tech manufacturers including a major Intel assembly plant.
More commonly, supply disruptions are small, widespread and difficult to identify in an increasingly distributed and outsourced supply chain. To address this reality, you have to accept the following truths about S&OP:
Planning is crucial but will yield diminishing returns Trying to build the perfect forecast is a futile exercise and will not result in a performance breakthrough. Rather, investing in a process of continuous sensing of the supply chain and the ability to respond quickly to disruptions is a better approach to reducing risk.
S&OP action cannot be governed by the calendar S&OP cycles should be flexible and reset when warranted by a plan deviation. An Executive S&OP review might not be feasible on an ad-hoc basis, but is necessary at the operational level in the face of increasing volatility.
The entire supply side should be continuously monitored in near real-time This monitoring should extend beyond the enterprise to outsourced manufacturing and even suppliers. As a brand owner that is making commitments to customers, every part of the supply chain should be visible to you.
The brand owner must play an active role in orchestrating their extended supply network to ensure the desired outcome. What is driving change with your S&OP process and what improvements have you made to address those changes?
Discussions
Dr Ross Wrigley
Why then do companies put much less effort into agility and especially, in these days of global supply chains, into lead time reduction, which not only makes for a more flexible and agile supply chain but reduces the impact of a poor S&OP process?
In a past business focus was put on lead time reduction - the added value steps of the 100+ day process being about 25% and the transport, queuing, & "safety" being the rest. 30 days was removed by attacking those areas with more to follow by deeper focus on all the planning elements. A powerful contribution.
I totally agree with your assesment of the nature of forecasts in the logistics industry.
Especially so because in the air cargo business (which I am part of ), we have that added factor of the so called "early indicators" like e.g. air cargo and the textile industry.
Ironically both rely unknowingly but nonetheless heavily on each other for making their respective forecasts.
That leads (as you might imagine) to the absurd situation that air cargo predicts a growing amount of cargo because of the textile industries prediction of a larger output (which in turn is based on the air cargo prediction of higher cargo volume…)
That certainly would be funny if we all were not relying so heavily on forecasts in the first place.
My personal conclusion in short (you can find the long version in the post "forecast" on my blog "Blogistics") is to rely on a wide range of very different sources for S&OP – which in fact turned out to be a quite useful approach for me so far.
Thank you for your inspiring thoughts!
Regards,
Oliver Evans, Swiss WorldCargo
I absolutely agree with you that supply chain planning and traditional S&OP monthly processes are not enough. I also agree that monitoring and response management are key to improve customer service and react to change.
However, I strongly believe that forecasting is as important as response management, mostly in the context of long lead time supply. In many sectors and situations, improving forecasting accuracy is key. It’s really a question of fit between the supply chain and operations model and the company’s context: goals, constraints, and culture.
From my point of view, planning, monitoring, reacting to change, reducing lead time, being leaner and flexible are all components of ONE global operations strategy and model, which I call “Global Operations Leadership" (for more details please see my blog: http://www.supplychainleader.org).
Imed Othmani, PhD
Thank you for your comment. I agree that in some environments, benefits from better forecasting will outweigh benefits from short term supply and demand balancing. That said, even sectors with long planning horizons are susceptible to disruptions as my colleague Monique Rupert pointed out in her recent post about an Eggo waffle shortage: https://blog.kinaxis.com/2010/03/leggo-my-eggo/. Does the ability to continuously monitor performance and quickly course correct belong in the S&OP process? Our opinion at Kinaxis is that yes, it does. Forecasting and response capabilities are complementary and best-in-class companies will have both. Our experience tells us that the greater gap is in the monitoring and response capabilities.
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