From S&OP to True Business Integration - Forecast Pro · Advancing From S&OP to True Business Integration Dr. Mark A. Moon Associate Professor and Flaskerud Faculty Fellow Haslam

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Advancing From

S&OP to True

Business Integration

Dr. Mark A. Moon

Associate Professor and Flaskerud Faculty Fellow

Haslam College of Business

University of Tennessee, Knoxville

ForecastPro Webinar

July 21, 2016

© 2016 Mark A. Moon Webinar July 21, 2016

So What’s Wrong with S&OP?

In theory, S&OP is great. In execution, S&OP is often:

Highly tactical in nature – time horizon is often limited to 1-2 quarters.

Supply chain driven – we’re the ones that are victimized by lack of

integration, so we need to do something!

Perceived as a way to run the supply chain, rather than a way to run

the business

Limited engagement from Sales and Marketing (some companies

refer to it as “&OP”)

Limited engagement from Senior Executives

A series of meetings that are limited to reporting on last months

results, rather than making decisions about how to balance demand

with supply in ways that best achieve organizational goals.


So the question, then, is:

Does S&OP lead to true

business integration?


Wait a second, what do we mean by

“integration?”

Here are some terms that often get tossed around:

Coordination, Collaboration, Integration

Coordination:

“to cause (two or more things) to be the same or to go together well; to

cause (two or more things) to not conflict with or contradict each other.”

Is that enough? For two or more entities to “not conflict with one another?”

Collaboration:

“to work jointly with others or together especially in an intellectual

endeavor.”

That sounds very discrete – “to collaborate on a project.”


Is Integration Fundamentally Different?

Integration:

“to combine (two or more things) to form or create something; to make (something) a part of another larger thing; to make (a person or group) part of a larger group or organization.”

Let me re-phrase:

Integration occurs when multiple entities behave as if they were a single entity in pursuit of a common goal

So then Business Integration occurs when people in multiple entities (Sales, Marketing, Supply Chain, Finance) behave in ways that promote the achievement of some set of common goals.


Demand Supply

Finance HR

Senior

Leadership

Business

Integration

Sales Procurement Logistics Operations

Marketing R & D

Business Integration


In particular, this is what S&OP (or

what I like to call Demand/Supply

Integration) is all about

7

SUPPLY

Production,

Logistics, etc., and

Upstream

Suppliers

DEMAND

Sales and

Marketing,

Downstream

Channel

Partners

Finance

Capacity Forecast

Demand Forecast

Financial Goal

Operational Plan

Demand Plan

Financial Plan

Senior

Leadership

Strategic Direction

Alignment To

Strategy

Demand/Supply

Integration

(or S&OP)


But too often, this fails to occur in

companies, in spite of S&OP

There are three drivers of Business Integration:

1. Processes

2. Organizational Structure

3. Culture

Let’s look at each, and see how they enhance (or impede)

Business Integration.


Process

Processes are formal, disciplined mechanisms that bring

together relevant pieces of information, from different points

of view, delivered by different people, in a regularly

scheduled forum, to help the organization make decisions

that will help it achieve its goals.

Companies spend a lot of time, and a lot of money on

consultants, to help them create these processes. The result:

S&OP, or SIOP, or IBP, or DSI.

Usually well crafted, elegant, comprehensive. But often fail to

achieve true integration.


Organizational Structure

By organizational structure, I mean the reporting

relationships.

To whom does demand planning report?

Does S&OP “live” in Supply Chain? In Sales? In Finance?

These reporting relationships greatly influence the presence (or

absence) of an integrative culture.

Companies often try to promote integration through matrix

organization structures, or “dotted line” reporting

relationships.

Matrix – “who do I really work for?”

Dotted line – often ineffective


Culture

Much has been written about culture. It’s clearly a complicated animal.

Webster defines it as “a way of thinking, behaving, or working that exists in a place or organization (such as a business).”

Cultures that inhibit integration are those where functions distrust other functions.

“I don’t believe any of the forecasts coming out of sales. They’re way too optimistic.”

“All the supply chain people care about is minimizing inventory. They don’t care about serving our customers.”

“Finance is living in dream-land. We’ll never make that AOP number.”

Which is the name on the front of the jersey?


Organizational

Structure

Integrative

Processes

A Culture That

Fosters Integration

In summary, then, business integration comes from three sources


So What Is a Company to Do?

Is S&OP (SIOP, IBP, DSI) really living up to its promise?

Critical to evaluate all three elements of integration

Process


Culture

Many good “maturity models” for S&OP processes.

These maturity models tend to focus on process design and conformance

What these are missing – assessment of organizational structure and culture that enables integration


Companies can benefit from a more

holistic assessment of business

integration

Business Integration Audit

Similar to the Demand Forecasting Audit approach developed by

Mentzer and Moon.


Companies that have participated in

the audit research since 1996


Companies can benefit from a more

holistic assessment of business

integration

Business Integration Audit

Similar to the Demand Forecasting Audit approach developed by Mentzer and Moon.

Objectives of a Business Integration Audit:

1. Document the current status of a firm’s business integration environment (the “as is” state)

2. Develop a roadmap for moving the firm from its current state to a more integrative environment.

Approach:

Three dimensions of Business Integration (Process, Organizational Structure, Culture)

Four Stages of Maturity in each dimension, ranging from Stage 1 (worst in class) to Stage 4 (best practice)


Integrative Processes

Stage 1 Stage 2 Stage 3 Stage 4

Portfolio Review process

Portfolio review not a part of the DSI process.

Portfolio review is part of the process, but it is included only sporadically.

New Product Introductions (NPI’s) are an integral part of the Demand Review process.

Both NPI and SKU management are regular, consistent elements of the DSI process.

Demand Review process

Demand forecasts are prepared, but no real “demand review” process in place.

Statistical analysis of historical demand is conducted, but participation in the demand review process by sales and marketing personnel is inconsistent.

Statistical analysis of historical demand is consistently supplemented with insight from sales and marketing personnel. Customer forecasts incorporated, where appropriate. Market intelligence gathered to arrive at top-down forecast.

Fully mature demand review process in place. Statistical forecasts are supplemented by qualitative judgments and customer forecasts. Gap analysis is performed to identify gaps between forecasts and goals. Consensus reached at formal demand review meetings.


Integrative Processes (continued)


Supply Review process

No formal supply review process in place.

Rough-cut capacity analysis done, but not done regularly each cycle. Limited engagement from supplier relations, logistics, or operations to document supply constraints.

Capacity forecast prepared each cycle. Consistent engagement from multiple supply chain functions.

Fully mature supply review process in place. Full engagement from logistics, operations, and supplier relations in preparation of capacity forecast. Demand / Supply balancing reviewed at formal supply review meetings each period.

Reconciliation (Financial Review) process

Financial reconciliation not a part of the DSI process.

Unit forecasts are “dollarized” and reviewed by financial personnel. Financial goals commonly influence either demand or capacity forecasts.

Financial review is a formal part of the DSI process. Finance is given adequate time to prepare financial forecasts based upon the outputs of the demand and supply review processes.

Fully mature financial reconciliation process in place. Headed by the Chief Financial Officer, demand / supply balancing results are dollarized and compared to financial goals. Gap closing strategies are analyzed and issues resolved.


Integrative Processes (continued)


Executive Review process

Executive Review not a part of the DSI process. Senior level executives not engaged in the process.

Senior executives engaged, but attendance at executive review meeting is sporadic. Non-attendance is tolerated without repercussions.

Executive review meeting is consistently attended by senior executives. Meetings occasionally deteriorate into “post-mortems” of why financial or strategic goals were not reached previously.

Fully mature executive review process in place. Headed by the senior business executive (CEO or division president), business results and critical KPI’s reviewed, and forward-looking plans discussed and approved.




Where does DSI report?

There is no DSI Leader.

DSI Leader reports to Supply Chain, Sales / Marketing, or Finance executive.

DSI Leader has solid line reporting responsibility to a functional unit executive, and dotted line responsibility to other, cross-functional unit executives.

DSI Leader reports to the General Manager of the business unit.

Organizational oversight

No process to evaluate DSI conformance.

DSI processes monitored, but no formal audit process in place to evaluate DSI conformance.

Resources dedicated to ongoing auditing of DSI conformance across multiple business units.

Business unit executives are accountable for DSI conformance in their units.


Culture that Fosters Integration

Stage 1 Stage 2 Stage 3 Stage 4 Incentive alignment

Functional areas pursue objectives that are relevant only to their functions, which can lead to sub-optimal outcomes in other functional areas.

Some cross-functional metrics in place, but they are not material, and do not drive integrative behaviors.

Some, but not all, functional areas have incentives in place that drive integrative behaviors.

All functional areas have highly relevant objectives that support integration, e.g., all functions measured on revenue, cost, and asset utilization

Training and education

No formal training or education available to any personnel on the benefits that accrue from, or the means to, integration.

Training provided to selective functional areas (typically supply chain) on the benefits from, and means to, integration.

Training provided to most functional areas (including sales and marketing) on the benefits from, and means to, integration.

Personnel in all functional areas receive education in the benefits of integration, as well as what they can individually do to encourage integration.



(continued) Stage 1 Stage 2 Stage 3 Stage 4

Functional area culture in support of integration: Sales Sales does not

actively participate in DSI process. Sales executives are skeptics.

Sales participates in the demand forecasting process, but the input is either cursory or highly biased in an effort to achieve sales-oriented objectives. Sales executives are neutral.

Sales provides valuable input to the DSI process, but the level of engagement is not consistent across all sales channels or customer groups. Sales executives are advocates.

Sales fully engaged in DSI process, consistently provides useful, unbiased input to the demand forecasting process. Sales personnel attend relevant DSI meetings regularly. Sales executives are zealots.

Marketing Marketing does not actively participate in DSI process. Marketing executives are skeptics.

Marketing participates in the demand forecasting process, but the input is either cursory or highly biased in an effort to achieve marketing-oriented objectives. Marketing executives are neutral.

Marketing provides valuable input to the DSI process, but the level of engagement is not consistent across all product lines. Marketing executives are advocates.

Marketing fully engaged in DSI process, providing timely and accurate information about promotional activity, NPI, and relevant market trends. Marketing executives are zealots.



(continued)


Functional area culture in support of integration: Finance Finance not

involved in DSI process. Finance executives are skeptics.

Finance is involved, but primarily to impose financial goals on the demand forecast, resulting in “plan-driven forecasting.” Finance executives are neutral.

Finance is engaged in both demand and capacity forecasting, and no pressure is imposed upon the process to “forecast the plan.” Finance executives are advocates.

Finance fully engaged in DSI process. Appropriately provides financial perspective on demand/supply balancing alternatives. Finance personnel attend relevant DSI meetings regularly. Finance executives are zealots.

Supply Chain Supply chain functions not involved in DSI process. Supply chain executives are skeptics.

Some, but not all, supply chain functions involved in DSI process. Supply chain primarily receives forecasts and executes, rather than participating in an integrative decision-making process. Supply chain executives are neutral.

All supply chain functions are active participants in DSI. Supply chain executives are advocates.

Supply chain fully engaged in DSI process. Supply chain owns Supply Review process, and is fully engaged in proactive demand/supply balancing. Supply Chain personnel attend relevant DSI meetings regularly. Supply chain executives are zealots.



(continued)


Functional area culture in support of integration:

Senior Executives DSI is a tactical process. No engagement from senior executives.

Senior executives participate in the DSI process, but are not active drivers of the organizational structure, processes, or culture needed to achieve true integration.

Senior executives are advocates of the DSI. They verbally encourage active participation from all within their sphere of influence. Although advocates, senior executives may be reluctant to invest significant resources into making DSI an organizational imperative.

Senior leaders unanimously committed to integration as a way of doing business. DSI is used as the framework for both tactical and strategic business planning. DSI is perceived as “the way we run the business.” Senior leaders attend relevant DSI meetings regularly, and ensure that others in their sphere of influence do also. Senior executives are zealots.


Benefits of this approach

It examines business integration in a holistic way

Expands the conversation beyond process conformance, and

examines the underlying barriers to true integration.

Focus here is placed on Organizational Structure, and most

importantly, on Culture.

It provides a roadmap for change

Experience from forecasting audits – final report serves as a

“blueprint” that identifies priorities and articulates specific

corrective actions


Once the situation is documented, what

tools do leaders have?

Top down change

All C-level executives (CEO, Chief Demand Officer, Chief Supply

Officer, and Chief Financial Officer) must become zealots.

This is how we will run the business.

Must be more than lip service – put your money where your

mouth is!

A senior level executive must be the champion of change.

That senior executive should not be the Chief Supply Chain Officer

It should be the Chief Demand Officer (i.e., Sales and/or

Marketing)

The best predictor of failure is lack of engagement from the

demand side of the business


Once the situation is documented, what

tools do leaders have?

Bottom-up Change

Must examine the measurement and reward structure.

The primary driver of behavior is how individuals get

measured and rewarded.

Does your reward structure encourage non-integrative

behaviors?

Education and Training.

Does everyone who participates in these integrative processes

understand why they’re so important? (That’s education)

Does everyone who participates in these integrative processes

understand how they should behave so that integration occurs?

(That’s training)


In Summary:

S&OP, as it’s currently executed in many companies, often fails to deliver true business integration.

Integration can be thought of as two or more entities behaving as if they were a single entity, in pursuit of a common set of goals.

The levers of integration are processes, organizational structure, and culture.

S&OP failure is most commonly a failure not of processes, but rather of organizational structure, and culture.

A business integration audit can be a useful tool for identifying gaps between current state and best practice.

Both top-down and bottom-up change must occur to transform a culture into one that promotes business integration.


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Part of CSCMP’s SCPro Supply

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From S&OP to True Business Integration - Forecast Pro · Advancing From S&OP to True Business Integration Dr. Mark A. Moon Associate Professor and Flaskerud Faculty Fellow Haslam