Evolving S&OP/IBP for the Real World
It is widely reported that only a small proportion (typically around 30%) of S&OP/IBP deployments deliver and sustain the full business benefits expected by organisations. This finding is also commonly recognised by the practitioners of these processes, who describe the various workarounds and firefighting required to create and execute optimal plans for the business. Whilst this is not a new phenomenon, some emerging trends have increased (and continue to increase) the barriers to effective S&OP/IBP in the real world.
This article summarises these factors and will be followed by a further post which outlines in more detail some key innovations in supply chain planning which enable organisations to build and deploy effective and meaningful S&OP/IBP.
Key factors which create significant challenges for effective S&OP/IBP deployment and operation include;
1. Increasing Volatility, Uncertainty, Complexity & Ambiguity (VUCA)
The concept of VUCA originated in military planning in the 1990s to describe the post-Cold War context. It has since become commonly used in leadership and business literature following the financial crisis of 2008. It describes the combination of factors which have increasingly impacted on business in recent years, in summary;
Volatility – market and environmental factors driving frequent, rapid and significant change
Uncertainty – events, cause and effect relationships and outcomes are unpredictable
Complexity – multiple and interconnected issues combine to create complex and sometimes chaotic outcomes
Ambiguity – a basic lack of clarity and there are many ‘unknown unknowns’ which lead to challenges in creating a fundamental understanding of an environment or situation
In the context of supply chain planning and forecasting, these factors create increasing challenge. Forecast accuracy has long been established as a key metric and significant efforts are often invested in tools and techniques for generating baseline forecasts and then agreeing consensus forecasts. Many organisations have goals for continuous improvement of forecast accuracy. However, the effects of the VUCA environment now mean that organisations will start to experience rapidly diminishing returns in this area with additional efforts on driving forecast accuracy confounded by the VUCA factors.
The effects of inadequate forecast accuracy are then amplified in traditional Material Requirements Planning (MRP) processes where the regular monthly planning cycle causes forecasts to be continuously revised. This causes constant changes to be rippled through manufacturing and purchasing and supply plans, leading to negative impact on service, costs and working capital.
A planning approach which provides tolerance for a lack of forecast accuracy in the VUCA environment is now required to address this.
2. Short-Term Transactional Focus
A common limitation in many S&OP/IBP deployments is an excessive focus on short-term planning. Root causes for this may lie for example in a lack of strategic commitment to the process, poor cross-functional collaboration or an underlying lack of control in basic planning and execution. However, these factors are also exacerbated by the frequent changes in planning and execution as outlined in (1) above. The workload, in the supply chain organisation in particular, to manage and address the ongoing amendments to the plan can prevent a focus being provided to the longer-term (potentially much more impactful) issues beyond the immediate horizon of the next few months.
The consequence of this short-term focus is also negative for commercial stakeholders involved in the process. Reworking and revisiting demand forecast inputs for the near-term takes commercial stakeholders away from the key tasks of evaluating and addressing fundamental external opportunities and risks. Being drawn back to reforecasting the immediate horizon offers little value-added for the commercial team when the business context requires them to be planning marketing and sales campaigns more strategically. This can create a fundamental tension with their engagement in the overall S&OP/IBP process and lead to the downward spiral of devoting even less time to the process of forecasting which further magnifies the inaccuracy of forecasts and the need for rework.
Ways of working which reduce short-term perturbation of planning and execution and therefore allow more focus beyond the immediate tactical horizon would add significant value in this context.
3. Supply Chain as Back-Office Service
In many industry sectors, the supply chain has traditionally been perceived as a back office service function with which other functions (especially commercial teams) engage ‘on-demand’ or reactively to ensure that business strategies can be realised and delivered to customers. This has started to improve in some sectors where the supply chain is increasingly seen as a key strategic resource but this is still not commonplace.
A key outcome of this arms-length/back office interaction is the lack of genuine integration between the overall business strategy and the capability and evolution of the supply chain. S&OP/IBP processes often tend to be primarily one-way discussions in which the overall corporate strategy is forced into the current supply chain model (ie asking the question ‘how will the supply chain deliver the plan that the commercial team has created?’). This drives a medium and long term strategy development approach without full consideration of the risks and opportunities inherent in supply chain capability.
This has a negative effect on the enterprise engagement with S&OP/IBP. As the process does not drive a genuinely integrated strategy which takes account of the broader enterprise capability, it reduces overall commitment to the process. In order to fill the perceived gaps, teams start to develop their own parallel planning processes and in turn, teams become attached to these local processes and reduce their engagement in the enterprise standard S&OP/IBP process.
An evolution of S&OP/IBP is now required to enable an efficient and informed integration of the wider corporate strategy and supply chain strategy as part of the regular enterprise planning effort.
4. Disruptive Technologies – Supply Chain Digitalisation
There has been increasing coverage and debate on the topic of Supply Chain Digitalisation (SCD) over the last year. SCD typically refers to the multi-dimensional opportunity presented by emerging digital technologies (such as AI, Internet of Things (IoT), ‘Big Data’, mobile and cloud computing and advanced analytics). A key expectation of these SCD technologies is increased market insight and information. As many businesses have discovered through deploying traditional planning processes such as S&OP/IBP, having access to more data does not automatically create more insight, clear actions or aligned enterprise decision-making.
There is a clear risk that, in adding new data generated from SCD approaches, a S&OP/IBP process already struggling to create the expected value from cross-functional insight and planning will not realise their potential value. There is a risk that real-time data feeds will create even more short-term planning and execution changes and that the process to create cross-functional alignment (that already is not being achieved with today’s limited datasets) will be overwhelmed by a volume of data for which the S&OP/IBP process is not designed.
A new approach to S&OP/IBP is therefore required that provides real business return by making the best use of the insights and information made possible by SCD.
In order to evolve SD&OP/IBP to be fit for purpose in meeting the various challenges outlined above, it is clear that a number of requirements need to be addressed;
A planning approach which provides tolerance for a lack of forecast accuracy in the VUCA environment
Ways of working which reduce short-term perturbation of planning and execution and therefore allow more focus beyond the immediate tactical horizon
Enabling an efficient and informed integration of the wider corporate strategy and supply chain strategy as part of a regular enterprise planning process
Leveraging the insights and information made possible by supply chain digitalisation
The next article in this series outline an innovative approach to S&OP based on demand-driven principles which is increasingly being deployed across a range of industry sectors to meet the challenges of impactful S&OP for the real world.
 Bennett & Lemoine, Harvard Business Review 2014