Demand Driven S&OP - The Commercial Perspective
In my previous post Evolving S&OP/IBP for the Real World, I outlined the key challenges in deploying S&OP/IBP and how these result from both traditional approaches to supply chain planning and from emerging environmental trends. In this article, I introduce an innovative and increasingly-adopted approach to S&OP and explain how this addresses these challenges.
The Demand Driven operating model (incorporating Demand Driven MRP and Demand Driven S&OP) has received increasing attention over the last few years. This model offers a number of elegant responses to the above challenges.
S&OP is an enterprise process with important outcomes and benefits for leading a resilient and adaptable business. For this reason, it should not be seen as a specialist supply chain process. My focus on Demand Driven S&OP in this article is therefore primarily concerned with the application of a process for its tangible benefits to the enterprise overall rather than for the detail of its technical or functional merits for their own sake.
Introduction to the Demand Driven S&OP Approach
In simple terms, the Demand Driven approach to planning is based on an overarching goal to increase flow. This incorporates both flow of materials (and ultimately finished products) through the organisation and positive cashflow into the organisation. The key foundation underpinning this is the principle that maximising this flow drives an increased rate of return on capital for the business and its shareholders.
The Demand Driven model improves flow by reducing the operational variability arising from traditional supply chain planning and execution methods. In simple terms, the demand driven model reduces operational variability through the use of strategically located and sized ‘buffers’ (typically inventory). The positioning of these buffers at the optimal points in the supply chain and the specific sizes of the buffers are determined by simple rules which take into account a number of parameters concerned with market demand (for example, typical variability in demand). This approach obviates the need for increasingly unattainable high levels of forecast accuracy as the buffering approach readily accommodates errors in forecasting.
These elements of the model are then combined with revised versions of the familiar S&OP meeting (sometimes also called the Integrated Reconciliation meeting). These meetings provide an enterprise focus to both refine and manage the short-medium term (eg out to 6-9 months) and also provide both the insight and the decision-making mechanisms to understand and shape the longer-term enterprise outlook.
The key challenges addressed by this innovative approach and the resulting benefits are outlined below;
1. Managing the response to an increasing Volatile, Uncertain, Complex & Ambiguous (VUCA) Environment
As described previously, the operating environment for all businesses has been strongly influenced by the above VUCA factors. As businesses expend more and more energy on attempting to increase forecast accuracy, these efforts are confounded by fundamental shifts in the environment. Organisations consequently now find themselves in a situation of rapidly diminishing returns for their investment in improved forecast capability.
The Demand Driven model is designed to address and reduce variability and, significantly, whilst forecasting still plays an important role in the process, it requires forecasts only to be accurate enough to design and manage buffers in the supply chain (and this level of forecast accuracy at SKU level is somewhat lower than that pursued in the traditional supply chain planning model). The emerging VUCA characteristics of demand, coupled with market intelligence and data on the demonstrated operational performance of the supply chain are then used to refine and continuously improve the strategic effectiveness of the buffers.
The Demand Driven approach is therefore well-adapted to operate effectively in this context. The key benefit of this approach for the commercial organisation is that it frees resource from an excessive ongoing rework of short-term forecast numbers and instead shifts the focus to monitoring and understanding the external environment and shaping strategies to accelerate growth in that environment. This provides a direct benefit in improving commercial strategy and execution but also more strongly aligns the commercial function with an S&OP process which is clearly more outward-looking than one primarily focused on forecasts.
2. Avoiding a short-term transactional focus in S&OP
The limitations of traditional supply chain planning, using forecasts to drive detailed manufacturing and supply operations cause frequent planning errors to be propagated through the supply chain. In turn, this often leads to the need for ‘firefighting’ to deliver supply commitments and this draws resource and attention from both the supply chain and commercial teams to the immediate short-term situation.
As described above, the Demand Driven approach avoids the need for this detailed attention to short-term forecasts and subsequent firefighting and recovery. Its use of buffers and their management to generate production and supply schedules places less emphasis on precise and accurate short-term forecasts. This means that the planning model manages baseline demand (and its variability) very effectively with minimal additional manual intervention.
This provides an overall enterprise benefit as it helps shift the balance of the whole S&OP process. This balance moves towards effective planning, beyond the immediate operational concerns of several days or weeks, and instead focuses on key tactical and strategic decisions.
For the commercial function, moving attention away from this short-term, transactional activity also allows more emphasis to be placed on developing excellence in commercial execution. This can include releasing resource to analyse and learn from previous promotional campaigns, build benchmarks on typical market impacts of different commercial models and gather and act on competitor intelligence – all of which also contribute to more informed participation in the S&OP process and a more robust capability to operate in the VUCA context outlined in (1) above. It also allows the commercial team to focus their S&OP preparation and discussions on longer-term/strategic forecasting, identifying and exploring possible outliers to baseline forecasts and investing more time on developing business responses and promotional plans to directly drive business value.
3. Building S&OP as an Enterprise Process
Many organisations experience difficulties with establishing S&OP as an enterprise (rather than supply chain planning) process. The issues outlined in (1) and (2) above, in which S&OP can become an inward-looking and short-term firefighting exercise clearly contribute to this challenge. However, S&OP processes also sometimes struggle to drive discussion and decision-making at the more strategic level as the information and insight to support a focused 2-way dialogue between senior executives and key S&OP participants is not readily available.
The nature of the Demand Driven S&OP model effectively addresses this challenge. The simplified approach to modelling and planning in the supply chain (using buffers, as described above) means that its capability and operating envelope can be readily and easily modelled. This allows various commercial scenarios (in terms of demand levels, product mix or new product introduction for example) to be envisaged in a scenario planning exercise with senior leaders and the key data modelled in the organisation’s chosen demand driven planning configuration. This readily highlights any shortfalls in capacity but also quickly provides insight on working capital and expenditure impacts, for example. This supports further iterations of the commercial scenarios and enables discussion on the need and attractiveness of investment in the supply chain to meet commercial ambition.
The ability to lift the discussion to broader strategic planning is, of course, a key benefit to the commercial function as a more integrated, enterprise view of the business outlook and potential facilitates more robust and realistic planning, with an increased probability of success. However, it is also interesting to note that this is an important development for the supply chain organisation as it places the significance of supply chain capability and investment at the centre of strategic planning and also drives value-adding dialogue between commercial and supply chain functions in a way which is often missing in traditional S&OP.
4. Focusing Investment and Application of Supply Chain Digitalisation
As outlined in my previous post, there is increasing coverage and debate on the topic of Supply Chain Digitalisation (SCD) over the last year. Emerging digital technologies (such as AI, Internet of Things (IoT), ‘Big Data’, mobile and cloud computing and advanced analytics) offer the potential for increased market insight and information, including in real-time. As many practitioners will have experienced, providing more data to the S&OP process does not automatically create more insight, clear actions or aligned enterprise decision-making.
However, the Demand Driven S&OP approach can help businesses to make more informed decisions on investment in SCD as it applies particularly to forecasting and planning. As described above, the Demand Driven model places less emphasis on precise short-term forecasts through its use of strategic buffers in the supply chain. The key focus for the organisation shifts from chasing forecast accuracy to refining and applying the planning parameters used to maintain buffer location and size.
With this in mind, the organisation can seek to obtain data that is fit for this purpose rather than, for example, attempting to source real-time consumption data which does not materially affect the robustness of the buffer configuration to market variability. This is important because it allows the business to focus its SCD investment in this area on data sources and insight which allow it to test and evolve its buffer configuration and this may allow it to avoid unnecessary investments which, in a more traditional forecasting and planning set-up, may seem (misleadingly) helpful in improving short-term forecast accuracy.
This provides a key benefit to the commercial organisation in that it allows a more focused investment in digitalisation technologies which fundamentally enable it to develop a better-informed and more agile market capability. This offers a competitive advantage and more direct impact in the market than an operating model which effectively attempts to enhance forecast accuracy or short-term planning inputs using SCD.
The Demand Driven operating model (incorporating Demand Driven MRP and Demand Driven S&OP) has received increasing attention over the last few years. Whilst, so far, this attention has largely been confined to the supply chain community, this model offers a number of important benefits over traditional planning methods at enterprise level and specifically for the commercial function.
The Demand Driven model enables commercial teams to leverage S&OP as it was originally intended, as an integrated enterprise approach in which they focus outwards on the customer and market and work cross-functionally to ensure the best medium and longer term outlook for the business.
Future articles in this series will further explore Demand Driven S&OP and how it enables profitable enterprise collaboration to drive growth.