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Balancing production efficiency and responsiveness to demand has never been more important or more challenging for companies with manufacturing-dominant cultures. Bayer Health Care shares their journey to S&OP excellence and how emphasizing the “S” in S&OP led to the successful redesign of its processes, overcoming ERP shortcomings to align market priorities with manufacturing capacity and extract the maximum competitive advantage from its supply chain.
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1
Putting The “S” Back Into The S&OP Process
Anthony Gabrielli, Bayer Healthcare
Kevin O’Mahoney, Meridian Consulting Group
Marcel Zondag, Western Michigan University
Bruce Ferrin, Western Michigan University
“You can’t do today’s job withyesterday’s methods and be in business tomorrow.”
- George W. Bush
Driven by market disruptions
Today’s Business Environment
Continued Uncertainty
With the rollout of the Affordable Healthcare Act in 2014, over half of American households now receive government assistance
U.S. HH Receiving Government AssistanceRising Subsidized Living
2011 U.S. Census 2014 AHA
+10MM
+151MM
52.4% HH49.2% HH
RisingAssistance
Median household income has declined 5.7%, to $53,043, since the beginning of the recession in December 2007
Today’s Business Environment
Median HH Income Index(January 2000-March 2014) Declining Household Income
Rising consumer prices on daily necessities such as food and energy are restraining consumer spending
Consumer Prices*Year-to-Year Inflation Rates
Slow Economic Growth
*Consumer prices are based on the price index for household consumption (PCE) as reported by the Bureau of Economic AnalysisSource: Kantar 2014
2014F 2014-2018F
1.6%2.2%
1.2%
4.0%
Consumer Prices* Food & Fuel
Source: Sentier Research, March 2014
$56,271
$53,043
-5.7% Declining HH Income
Rising Consumer
Prices
58.5% of consumers (18+) have little to no consumer confidence
Today’s Consumer
Consumer ConfidenceWeak Consumer Confidence
Over half (51.7%) of consumers focused on needs rather than wants. Almost half (44.6%) have become more practical and realistic in their purchases
Life ChangesFocus On Needs vs. Wants
Source: Prosper Insights & Analytics Monthly Consumer Survey, August 2014
No Confidence
Little Confidence
Confident
Very Confident
14.7%
43.8%
33.4%
7.9%41.5%
58.5%
51.7%
44.6%
Adults 18+
Source: Prosper Insights & Analytics Monthly Consumer Survey, August 2014
Weak Consumer Confidence
Focus on Needs vs.
Wants
All shoppers are shopping less retailers
Today’s Shopper
Average Number Of Retailers Shopped(Past 4 Weeks*) Consumers Shopping Less
Shoppers balanced budget constraints and challenges
Leading Reasons Behind Reduced Level of Consumption Consumers Spending Less
Spending more on gasoline
Trying to simplify my life by buying fewer things
Household income is not keeping up with rising prices
Not as much money left over after buying food & other necessities
31%
35%
38%
31%
2007 2008 2009 2010 2011 2012 2013
12.4 12.4
11.1 11.1 11.2 11.210.7
Source: Kantar Retail 2014
*Inclusive of visits to stores and websites; averages are for Q1-Q3 of each year.
Source: Kantar Retail 2014
Declining Stores
Shopped
Consumers Spending
Less
Customers Are Shifting Their Expectations Of Manufacturers Within This Economic Environment
S&OP Process Pressure 2009 - 2012
Series1
0% 10% 20% 30% 40% 50% 60%
56%
31%
45%
48%
2012 2009
Customer demand faster and improved service
Reduce supply chain costs
2012 Aberdeen Group
External customer
requirements driving pressure for supply chain speed, reliability,
and flexibility
+54%
Less emphasis on the “O” within the
S&OP Process
-24%
Manufacturers Are Seeing The Need To Restore The Balance Between The “S” And “O” To Effectively Compete Today
Benchmarking S&OP Process Importance KPIs
1 Topline volume growth
2 Orders shipped on-time and complete
3 Forecast accuracy
4 Inventory targets
5 Customer satisfaction
6 Profitability target
7 Case fill rate
8 Production flexibility
9 Line efficiency
10 Management of margins
Source: Meridian S&OP Benchmarking Survey
5 of Top 10 KPIs are “S”
KPIs
#1 KPI focuses on
the “S”
“In the business world, the rearview mirror is always clearer than the windshield.”
- Warren Buffet
S&OP Process Requirements Of Tomorrow
The industry is facing increased pressure from customers for improved responsiveness
Customer expectations for service and competitive pressures create a need for improved supply chain speed and flexibility
Slow industry growth and ongoing economic uncertainty has created an environment where the competition for Selling One More Unit is high – [Volume Growth]
Manufacturers have identified Topline Volume Growth as the #1 KPI from S&OP
S&OP needs to ensure that Marketing & Sales Opportunities are aligned with Supply Chain Capabilities to effective be able to Sell One More Thing
S&OP is a Core Commercial Process, not a Product Supply Process
S&OP is a Product Supply Process
Reality
Myth
Expected Benefits
Implications For S&OP
The S&OP Process Opportunity
The competition for Selling One More Unit is high
To compete in the future,restore the balance of the “S” and “O” within S&OP
The Business Challenge
The S&OP Opportunity
“Drive the business,
let not that drive thee.”
- Benjamin Franklin
Best Practices Application
DemandPossibilities
SupplyCapabilities
Putting The “S” Back In The S&OP Process
Putting The “S” Back Into The S&OP Process
This renewed focus on the “S” should not result in imbalance with the “O”
Renewed focus to be able to Sell One More Unit
Implication Is Not “Imbalance”
Marketplace Dynamics Creating A
Renewed Focus
Focus on S = Balancing Demand & Supply
However, one cannot consider sales without also considering a manufacturer’s ability to effectively, efficiently, and profitably create and meet demand
Objective is to balance Demand Management with Supply Capabilities– Balance demand & supply by efficiently utilizing
supply chain targeted flexibility to effectively respond to market priorities
Shopper Centric Demand Management
Demand Management:Sales - Marketing
Strategies & Tactics
ShoppersCustomers
Shopper Centric Demand Management
Demand Management:Sales - Marketing
Strategies & Tactics
ShoppersCustomers
First Choice Demand Signal
Market Priorities(Derived Demand Signal)
Objective
Demand Management:Sales - Marketing
Strategies & Tactics
Demand Signal Characteristics:
Magnitude & Timing
Control Levers
Theoretical Process Model
Demand Management:Sales - Marketing
Strategies & Tactics
Demand Signal Characteristics:
Magnitude & Timing
Voice of the Supply Chain
Voice of the Customer
Shopper Centric Supply Chain Management
Supply Chain Risk
Theoretical Process Model
Demand Management:Sales - Marketing
Strategies & Tactics
Demand Signal Characteristics:
Magnitude & Timing
Voice of the Supply Chain
Voice of the Customer
Supply Chain Risk
Shopper Centric Supply Chain Management
Theoretical Process Model
Demand Management:Sales - Marketing
Strategies & Tactics
Demand Signal Characteristics:
Magnitude & Timing
Voice of the Supply Chain
Voice of the Customer
Supply Chain Risk
Shopper Centric Supply Chain Management
Putting The “S” Back IntoThe S&OP Process
Bayer U.S. Consumer Care
Case Study
Food Animal Products
Companion Animals
General Medicine Specialty
Medicine
Diabetes Care Radiology &
Interventional
Analgesics Nutritionals GI Allergy/Cough
Cold Sun Care Foot Care
ConsumerCare
Bayer Is A $40 Billion+ Global Life Science Company
Medical Care
Pharma-ceuticals
Animal Health
Bayer U.S. Consumer Care Business Situation
Significant change has occurred over the last few years, including:– Bayer business growth– Merck Acquisition– Restructuring of the Sales and Marketing organizations– Organizational changes in Product Supply and Customer Logistics– Implementation of an ERP solution with SAP
This “journey of change” and accelerated business growth has created challenges within the Bayer U.S. Consumer Supply Chain resulting in:– Declining Customer Service Levels– Excess Inventory– Reduced Forecasting Accuracy– Product Cuts– Lost Sales
Bayer U.S. Consumer Care Business Challenge
Three perfect storms negatively impacted their S&OP Process
Marketplace volatility Competitive outages Category/segment/form shifts
The External Storm
Bayer business growth New roles, responsibilities, reporting relationships Process breakdowns System/information issues
The Internal Storm
Loss of trust cross-functionally Competing/non-aligned KPIs and STIs Lack of strategic alignment between U.S. CC Business
Plan and Bayer Product Supply Plan
The Political Storm
Key Underlying Issues Impacting S&OP Process
KeyIssues
Above Market Growth
Reduced Manufacturing Flexibility
Demand & Supply Process Challenges
Under Resourced Project Management Capacity
Declining Forecast Accuracy
Source: YTD Cuts Analysis w/Reasons (thru 10/31/12)
42%
14%
11%
11%
10%
8%
2%
Reason Why
Forecast Accuracy
Supply Center Delays
Production Problems - Bulk
Production Problems - Fin-ished Goods
Procurement/Third Party Products
Quality Issues
No Stock Out
Supply58%
Demand42%
Both Demand And Supply Challenges Drove Product Cuts
2012 Bayer US Consumer Care Product Cut Analysis ($)
Forecast Accuracy was reported as the leading cause
Bayer Forecast Accuracy In Aggregate Was Good; Issues Arose At The Item Level
Aggregate Forecast Accuracy
Forecast Accuracy In Aggregate Is Good
Consumer Care Aleve
74.7%78.3%
Source: Meridian Consulting Group
Goal 75%
-0.3% vs. Goal+3.3% vs. Goal
Series1
26%
-10%
28%
-36%
Acceptable Bias (Within +/- 5%)Unacceptable Bias (Outside +/- 5%)
Forecast Bias At Item Level (Aleve)
54% Of Items Over Forecast
46% Of Items Under Forecast
64% of Aleve Items Were Outside An Acceptable Level
of Forecast Bias
Source: Meridian Consulting Group
Causing Issues With Inventory Management
Average Monthly Inventory2011 vs. 2012
Monthly Inventory Impact $MM
Cost of Inventory2011 vs. 2012
Cost Of Inventory Impact $MM
2011 2012
Average Monthly Inventory
+20% vs. YAG+18% vs. Plan
2011 2012
Total Cost Of
Inventory+ 26% vs. 2011
Source: Meridian Consulting Group
2012 Plan
Carry Costs Wrong Inventory
Carry Costs Right Inventory
Write Offs
Source: Meridian Consulting Group
% Orders Complete
% Lines Complete
% Cases Complete
2010 2011 2012
And Negatively Impacting Customer Service
2010 2011 2012
# Of Compliance DeductionsTotal Compliance Fines ($M)
Customer Service Metrics Customer Compliance Fines
Orders Complete-9% vs. 2010
LinesComplete
-13% vs. 2010
Cases Complete
-13% vs. 2010
# Of Compliance Deductions
+71% vs. 2010
Compliance Fines Have Increased +359% vs. 2010
Declining customer service levels across all key measures
With increasing customer compliance deductions and fines
Source: Meridian Consulting Group Source: Meridian Consulting Group
Bayer U.S. Consumer Care S&OP Process Blueprint
Phase 1 Phase 2
S&OP Process Improvement Blueprint Development
S&OP Process Blueprint Implementation
Work StreamsQuantitative Assessment
Qualitative Assessment
Industry Best Practices &
Benchmarking DemandPlanning
SupplyPlanning
StrategicFramework
OrganizationalCapability
Four Work Streams Comprise The S&OP Blueprint
DemandPlanning
SupplyPlanning
StrategicFramework
OrganizationalCapability
The Bayer S&OP Process Consists Of Two Distinct Planning Cycles
S&OP is a Core Commercial Process for U.S. Consumer Care that aligns an Unconstrained Demand Plan with a Constrained Supply Plan
Rolling 6 to 9-Month Planning Horizons
MonthlyOperating
Cycle
Short-Term Horizon
Integration of the Commercial Strategic Planning Processes with the Long-Term Operational Planning Processes
Rolling 36-Month PlanningHorizon
3-YearPlanning
Cycle
Long-Term Horizon
S&OP 3-Year Planning Cycle
US CC Strategic Plan (5 Year)
US CC Portfolio Management Plan (3 Year)
Outputs
36-Month Demand Plan
Outputs
36-Month Supply Plan 36-Month Product Supply
Capacity Planning
Outputs
Processes that provide cross-functional Strategic Commercial Business Planning for US CC for a 3 and 5-year horizon
A process that provides Strategic Demand Planning for a rolling 36-month horizon to enable 3-Year Supply Planning
Processes that provide Strategic Product Supply OPEX and Capacity Planning
The S&OP Monthly Operating Cycle Is Comprised Of Two Core Processes With Two Key Outputs
Demand Planning Improvement
DemandPlanning
SupplyPlanning
StrategicFramework
OrganizationalCapability
Improved Short-Term Demand Planning Process
Three Core InputsThree Cross-
Functional Work Streams
Reaching Consensus
Output
“Bottom-Up” Customer Data
“Top-Down” Consumption-Based
Activities
“Best Pick” Model Forecast
Sales/Customer Logistics
Work Stream
MarketingWork Stream
Demand PlanningWork Stream
Demand Review Meeting
6 & 9* Month Rolling Unconstrained
Demand Forecast
*Note: 9 Months Rolling Forecast Cough Cold Brands
Sales View
Marketing View
Demand Planning View
Improved Demand Forecasting Sales View
Field Sales & Customer Logistics develops “bottom-up”collaborative demand forecasting by brand at the SKU level for
11 Leading Customers in these channels that represent over 80% of BHC volume
Mass Drug Grocery Club Value
Six Other Customers Will Have Direct Data Input By Customer Logistics
All Other Volume Will Be Forecasted By CBC
A/O Mass A/O Grocery A/O Diversified
Demand Planning Forecasting Is Supported By An Integrated Demand Planning System
APO
Integrated Demand
Planning System
Order Management Module
Demand PlanningModule
Data Inputs
Retail Inventory
Master Data
POS/Consumption
Promotions
Customer Orders (VMI/CPFR)
Supply Planning System
Supply Planning Improvement
DemandPlanning
SupplyPlanning
StrategicFramework
OrganizationalCapability
Bayer Commercial Success RequiredTargeted Flexibility To Achieve the Business Plan
Three Marketplace Dynamics Drive The Need For Targeted Flexibility
U.S. customers are large and growing… and becoming increasingly complex to serve
Seizing unplanned demand should be built and leveraged as a core competency
Changing Consumer
Requirements
Increasing Customer Demands
Unanticipated Marketplace
Events
Consumers are becoming more proactive about their health and wellness
Bayer Healthcare Targeted Flexibility
Targeted Flexibility Definition
Targeted Flexibility is the ability to support an unplanned increase in demand without significant cost increases
Targeted Flexibility Illustration
DescriptionStep
“A+” SKUs:Supply in 0-6 weeks
“A+” SKUs:Supply in 6-12 weeks
1 Establish SKU Segmentation Guidelines High volume SKUs that are important to the business
2 Determine Targeted Flexibility Capability
Volume required to reasonably guarantee no
stock-outs
Satisfy surge demand
20% increase over forecast
3 Quantify Supply Chain Requirements to Support
On-hand inventory increase by 20%
Capacity to handle increased demand exists today – main impact is on
intermediate and component inventory
increase
Targeted Flexibility Expected Benefits
Better alignment of product supply resources to support business requirements
Ensure continuity of supply when demand is high without significant cost increases
Increased supply flexibility may help gain additional volume
Improved customer service levels
“Perfection is not attainable. But if we chase perfection, we can catch
excellence.”
- Vince Lombardi
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