Moving Beyond Demand-Supply Balancing in S&OP - Key Business Insights for the Supply Chain
Many organisations strive to increase levels of S&OP maturity in order to enhance the business value created by the process. These initiatives rely on developing the process beyond one which simply balances demand with supply to one in which cross-functional plans are created and executed to deliver the goals of the business. This enhanced maturity requires deeper collaboration between the supply chain function and commercial teams.
The foundation for this collaboration typically relies on building improved understanding of each function’s goals, constraints and pressures. For a variety of reasons, in many organisations the supply chain team have historically worked at ‘arms-length’ from the commercial team and this limits their insight on the needs and dynamics of the commercial operation which in turn limits their ability to add value through the S&OP process. Also, in my experience as a commercial leader working in S&OP/IBP, I have observed that many supply chain practitioners are highly motivated to grasp the commercial strategy and plans in more detail. However, they can find it challenging to develop this understanding, often because they are unclear how to start the discussion or frame the questions which will give them the insight they need.
In order to meet this challenge, I would suggest that, to build an improved awareness and understanding of the business, it is important for the supply chain and commercial teams to invest time in exploring the following three questions;
1. Where do we really need to win?
I have found that this is often a better question than ‘What are the commercial priorities?’ because the commercial reality is never one-dimensional and it is rarely straightforward to say one business area is more important than another. Different revenue streams are often complementary - for example, it might be equally important to maximise profit on mature products in the portfolio as it is to drive new product launches, because the return from the former enables the latter. A cohesive commercial strategy will have specific and differentiated commercial strategies for each business area (and the original ‘Boston Matrix’ is a simple and effective tool to help categorise and understand the dynamics involved).
In addition to this interplay of different business opportunities, the commercial strategy is also likely to have a various short, medium and long-term dimensions. Understanding how these play out is also a critical enabler for the supply chain to develop proactive, commercially-aligned proposals.
This fundamental understanding of the commercial strategy is a crucial enabler for a Supply Chain team wishing to work closely with the Commercial function as it enables a much more focused and proactive partnership to drive business value. Leveraging this understanding, however, requires two further questions to be discussed, as outlined below.
2. How do we win?
The text books might call this the ‘key drivers of competitive advantage’ – this is what it will take for the organisation to win in the markets it has targeted and focuses on the proposition that the business offers its customers.
Again, there are various tools which are used by marketing teams to develop their strategies in this area. One of the best known was developed by Professor Michael Porter at Harvard Business School in the 1980s to describe 3 generic strategies to achieve competitive advantage. In short these are based on Cost Leadership (minimising costs vs competitors), Differentiation (encompassing product/service characteristics, branding, distribution and promotion) and also Focus (concentrating the business in one or few market segments only).
Understanding how the Commercial team plan to win in each of its markets is essential as this strongly shapes the supply chain requirements of the business. For example, a premium product applying a Differentiation strategy will more often focus on product quality enhancements and service levels and would not unduly risk these in order to reduce costs. However, a more mature product in a commoditised market drives a greater requirement for continuously reducing costs.
3. How can we work together to ensure we win?
Having understood these key elements of the commercial strategy, the Supply Chain function is then able to drive targeted and relevant discussions with the Commercial team to create business value. The Supply Chain has many opportunities to influence the costs, working capital and product/service characteristics which ultimately shape the offerings made to customers. However, many commercial stakeholders have limited experience and understanding of the supply chain. This means that a discussion where the Supply Chain function lists possible initiatives it believes can support the business objectives often fails to achieve understanding, significant interest or traction with the marketing team.
However, being able to link supply chain initiatives and decision-making directly and specifically to the commercial strategy allows the team to anchor the discussion in the fundamental commercial requirements and this helps create the energy and engagement to support cross-functional partnership.
Examples of such initiatives and their associated commercial impact could include;
Supply chain segmentation
Adapts the supply chain configuration to align with the key business drivers (‘how do we win’) for each key business area and hence optimise costs, service and working capital for each commercial strategy element
This may be delivered by various routes including procurement, portfolio rationalisation or process reconfiguration but when carried out in collaboration with the commercial team and focused on the relevant marketing strategy these are supported and championed by the commercial team
Using the three questions above as the basis to build better understanding of the commercial strategy and its requirements is a very practical approach to building improved collaboration between the Commercial & Supply Chain teams. Reviewing some basic standard tools (such as the Boston Matrix or Porter’s Competitive Strategy model as outlined above) can help prepare the Supply Chain team for a productive engagement with the Commercial function and structure the discussions and questions which will create useful insights on the commercial outlook. These discussions are a critical enabler for driving mature S&OP discussions and decision-making which extends beyond demand and supply balancing and directly enhances the competitive advantage of the business in the external market.