Whitepaper - Demand Driven S&OP – Maximizing Output To Match Demand Variation

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Demand Driven S&OP – Maximizing

Output To Match Demand Variation

21-JULY-2013. VERSION 2.0. RAHUL GOLLAMUDI

Demand Driven S&OP – Maximizing Output to Match Demand Variations

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CONTENTS EXECUTIVE SUMMARY .................................................................................................................................. 3

DEMAND-BASED APPROACH: DEPARTURE FROM TRADITION ..................................................................... 4

DEMAND-BASED S&OP ................................................................................................................................. 7

CUSTOMER CENTRICITY ............................................................................................................................ 7

PRODUCT GROUPS .................................................................................................................................... 8

VALUE SEGMENTATION ............................................................................................................................ 8

CAPACITY UTILIZATION ............................................................................................................................. 8

DEMAND RATE APPROACH ....................................................................................................................... 9

IMPLEMENTING DEMAND DRIVEN S&OP ................................................................................................... 10

Demand Driven S&OP APPROACH .......................................................................................................... 10

DATA MANAGEMENT .............................................................................................................................. 10

CAPACITY BALANCING ............................................................................................................................ 11

INVENTORY STANDARDS ......................................................................................................................... 11

DEPLOYMENT .......................................................................................................................................... 11

TECHNOLOGY .............................................................................................................................................. 12

INTEGRATION WITH SAP APO ............................................................................................................. 14

SUCCESS FACTORS AND KEY PARAMETERS ................................................................................................ 15

REACHING THE NEXT LEVEL – JOURNEY TOWARDS DDS&OP .................................................................... 16

1. Company Profile .............................................................................................................................. 16

2. Organizational Setup ....................................................................................................................... 17

3. Information ..................................................................................................................................... 17

4. Process ............................................................................................................................................ 17

CONCLUSION ............................................................................................................................................... 19

REFERENCES ................................................................................................................................................ 21


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EXECUTIVE SUMMARY

In today’s globalized world, where organizations are present in various geographies, insulation from market

fluctuations is essential. There is an urgent need for the executive management of such large organizations to

remodel their business model to accommodate demand and supply variations in the various markets they operate

in and implement a customer-oriented approach throughout their organization. Although the current supply chain

focus for the majority of companies is based on supply, this is rapidly changing, with customers driving a demand-

centric economy where specialized products are increasingly sought and product group complexity is veering

towards the vast.

This realignment from supply-driven to demand-driven is particularly important for large organizations because

without a change in their planning approach, they will remain supply-driven and Cost of Goods Sold-centric rather

than purchase cost-centric, meaning less profit-oriented. This will place them at a disadvantage compared to the

many organizations which have now shifted their production facilities to the ultra low-cost regions in Asia and

Africa.

The key components in Sales & Operations Planning (S&OP) – Demand, Customers, Products, Organization,

Finance and Operations are all considered from a different viewpoint, with focus on volatility, variety and value.

The focus shifts from internal to external, with emphasis on delivering customer value while managing the demand

complexities, maximizing capacity utilization and improving profitability.

This white paper aims to highlight the new focus that needs to be established for an organization’s S&OP to

become more demand-driven.

Sales and Operations Planning at higher levels of maturity is no longer

owned by the supply chain but by business leaders

-Gartner Research, Nov 2010

Why transition towards Demand-Driven S&OP?

Volatile market environments and Fluctuating Demand Specialized Products Complex product variety Competition from low-cost production facilities External Focus


4

DEMAND-BASED APPROACH: DEPARTURE FROM TRADITION

According to the Aberdeen Group 2010 study, the key S&OP challenges today include

improving data timeliness, quality and availability (31%), driving the use of the plan in

daily operations (30%), connecting strategic initiatives to the S&OP process (30%) and

moving from demand and supply matching to profitability as a goal (29%).

Traditional S&OP processes suffer from some inherent drawbacks:

Lack of a consensus forecast model – multiple forecasts

Lack of visibility and therefore, a collaborative network across the value chain

Lack of scenario simulation and modeling

These can be overcome by building what Gartner calls a ‘Demand Driven Value Network’ that helps sense and

orchestrate demand and maximizes value across processes and technologies. Figure 1 shows the thinking behind

this.

Fig 1. What makes a Demand driven value network


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Today’s industry leaders are increasingly looking to implement best practices in Demand-Driven (DD) S&OP. These

steps enable organizations to increase demand visibility, improve inferential decision making, and drive new

scalable and repeatable collaborative processes that help increase profitability.

DDS&OP eliminates the problems associated with traditional S&OP tools by adding the visibility, collaborative

demand planning and demand shaping, order predictions, logistics planning, production planning and material

planning into the equation.

A DDS&OP process/system takes the actual sales forecast from the retailer or sales channel and creates planned

orders instead of educated guesses. It then nets these orders against inventory and creates operational plans

(distribution, logistics, production schedules and raw material plans) to meet demand. The process is bi-directional

and matches demand to supply in a multiechelon, multi-party value network while taking into consideration all

capacity and material constraints. This approach delivers significant value to an organization in terms of inventory

reductions and service level improvement for all parties in the value network.

The following observations by AMR Research are worth paying attention to:

Companies with improved demand visibility and the ability to use this insight to produce better forecasts had

• 15 percent less inventory

• 17 percent stronger order fulfillment (with the associated revenue increase)

• 35 percent shorter cash-to-cash cycles

These companies achieved perfect-order performance in excess of 99 percent on a continual basis. These

improved KPIs had a significant impact on shareholder value. A recent AMR Research benchmark study found the

following correlations:

• Earnings per share (EPS)—10% improvement in perfect orders resulted in a gain in EPS of $0.50

• Return on assets (ROA)—10% improvement in perfect orders resulted in a 5 percent increase in ROA

• Profit margin—10% improvement in perfect orders yielded about a 2.5% gain in profits

The key factor behind these improvements—demand visibility—had a 2-to-1 impact on perfect orders. To measure

operational progress toward these types of gains, best practice companies typically use four key metrics:

• Forecast accuracy

• Perfect orders


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• Supply chain costs

• Cash-to-cash cycle time

Organizations today must have strong, effective software solutions for sales marketing planning, capacity planning,

sales forecasting, production scheduling and raw material planning. The technology must also work across all

trading partners to create a single plan.

Fig 2: Modern S&OP view and benefits

Source: Wallace, Tom. Stahl, Bob. “Sales & Operations Planning, The Next Generation.” 2005.

For most companies, the cost of implementing Demand based S&OP which lies in the investment required for new

technological systems and the time required for such a company-wide initiative act as a major roadblock towards

achieving this realignment. With new, cost-effective technology based on cloud platforms coming up however, this

roadblock will slowly be overcome in time.


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DEMAND-BASED S&OP

So what is different about this demand-driven approach? And how can organizations go about achieving this goal?

In the following sections, we try and answer these questions.

DDS&OP works in an entirely different way to traditional S&OP, with the supply-driven S&OP and DDS&OP

compared below. It is important however, to remember that although the central focus across the below factors is

very different in each case, demand-driven S&OP does not exclude supply constraints and factors. It merely looks

at the value network from a pull-creating viewpoint rather than a push-enforcing one.

Supply-Driven S&OP Demand Driven S&OP

Demand Predictable, Linear Volatile and unpredictable

Product Variety Limited Large and growing

Customers Demographic Considerations Value Considerations

Organization Silos Collaboration

Operations Reactive Proactive via Simulation

Finance Profit-Loss Focus Balance Sheet Focus

The key to achieving DDS&OP success is to convert to a customer-centric philosophy across the organization and

the value chain.

CUSTOMER CENTRICITY

Customer-centricity inside S&OP means setting the value derived performance metrics and the critical operational

imperatives which form an overall solution for the customers. It is the solution design which sets the proper

framework inside which S&OP will thrive and

accomplish value delivery to demand.

The focus on customer value must be supplemented by

processes that drive the same, supported by the

technological means to deliver this value while

maintaining high profitability and low costs.

This customer oriented approach helps in setting

concrete targets with equal focus therefore on

developing next generation solutions that increase customer value delivery.

Customer Value Groups

What values are needed?

Create Differentiation Deliver desired

value

Customer Value

Means

Focus

Processes


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PRODUCT GROUPS

Product Groups (PGs) can be formed based on Market, Material and Manufacture.

Goals, metrics, value definitions, patterns of demand, production resource constraints and all other key factors can

be defined in these homogeneous groupings and just as importantly can be readily managed.

PGs most importantly improve communication between tiers, functions and streams. They also help achieve

greater forecast accuracy as a result of aggregation.

VALUE SEGMENTATION

Contrary to the usual market segmentation process, On-Point Group suggests a value segmentation approach

which is more suited to a company pursuing Demand based S&OP.

The value segmentation approach helps design solutions that maximize customer value delivery.

The 4 values are given below:

Need States: Growth/Mature/Introduction

Behaviors: Business Practices and Cash-flow approach

Attitudes: What is the attitude towards the consumer?

Product/Price: What are the products/services the customer most relish? What are the metrics most

important to the company?

These value spaces significantly improve competitive edge by providing a new, essential perspective and helping

the company to achieve greater customer satisfaction.

CAPACITY UTILIZATION

Companies must strive to maximize the use of capacity to make exactly what the customer wants. In demand-

based S&OP, inventory is balanced across all SKUs in a product group once the group exits production. Inventory in

groups with low forecastability, that represent 20% or less of demand will be high in order to reduce production

frequency and conserve capacity towards the remaining 80%, of high volume and high forecastability.

Instead of taking the usual 80-20 rule, in demand-based S&OP it is important to break this classification down in

terms of constraint measures and predictability figures.


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DEMAND RATE APPROACH

Rather than focusing on forecasts and the volume of demand, the demand rate approach in S&OP looks at the

variance in demand volumes. Demand rate approach in demand-based S&OP helps to balance inventory among all

product group SKUs and enables operations to continue to produce groups with predictable demand according to

the demand rate, until a very palpable shift in demand occurs. DBS changes the production rate to match the

demand rate by using elements of simulation.


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IMPLEMENTING DEMAND DRIVEN S&OP

Demand Driven S&OP APPROACH

DDS&OP looks at some vital functions from a new perspective that helps achieve some key benefits. Some of these

are highlighted below:

Function DDS&OP Existing S&OP Benefit of DDS&OP

Demand Planning Product Groups Forecast only Demand-Supply relationship established during events

Production Demand Management Assumption of readily available capacity

Balancedwithin constraints, to demand

Trend Analysis Balancing Capacity Unrelated to Production Production is stabilized using demand rates

Inventory planning Simulation Safety Stock Planning (hard limit)

Floating inventory

Deployment Inventory standards To forecast at SKU level Simulation to deploy to demand rates

DDS&OP focuses on getting right the balance between supply and demand through planning and also seeks to

become a platform for marketing and operations to interact and strategize on how to maximize customer value

delivery as against the usual approach of maximizing metric goals.

DATA MANAGEMENT

Traditional S&OP also suffers on the front of data management – on many occasions, traditional S&OP fails due to

data conflicts amongst the various functional units. In DDS&OP, this is eliminated by way of a database built from

the active data of all the functional units. This data is mapped to the value segments and product groups. This way,

new and unassigned data can be mapped to value delivery.

By looking at this data set against the organization’s business plans related to costs, output, shipments, inventory

and KPIs, there are charts, plots and graphs generated as feedback.

Data from various

functional units

Business Plans and Metrics

Feedback (Charts,

Plots, Graphs)


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CAPACITY BALANCING

Since DDS&OP is run on the basis of demand rates, production plans need to be designed in accordance with this.

Once the rates of demand are available, production plans need to be corrected to reflect the actual demand. This

is accomplished by using charts to balance capacity. These activities are carried out at the product group level

since the forecastability and demand predictability are high at that high a level. Historical events such as

promotions, price revisions and NPIs are considered since they affect the demand curve.

INVENTORY STANDARDS

DBS&OP discards the concept of safety stock planning for inventory management. This is because, traditionally,

ERP systems have performed poorly due to safety stock planning since it goes against rational responses to

demand variations and are based on demand anticipation rather than actuals.

DBS&OP instead relies on inventory standards. Inventory standards help to move inventory in response to demand

variations in a logical manner. These standards are built on the basis of simulation, not just statistical anticipatory

calculations. Demand and Supply variables are used to test these standards and therefore, they prove to be a more

reliable measure of demand. The simulation using the demand and supply variables results in a range of

‘acceptable’ inventory which travels in the system in response to demand fluctuations.

DEPLOYMENT

Inventory standards preserve the integrity of earlier planning and help to balance the inventory to demand. These

standards generate a warning to the planners when demand is trending towards a deviation from the pre-planned

levels. This helps the planners to make accurate changes to production schedules without disrupting the existing

rhythm.

Deployment in DDS&OP happens after production and happens to demand rather than forecast. It functions to

balance all SKUs in a product group rather than at individual level. It is a planned process that starts at product

group level and moves down and is forward looking.


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TECHNOLOGY

At each level of S&OP implementation, technology plays the role of key enabler. Systems are essential to achieve

sustainability, consistency and standardization. Especially at higher levels (3 and 4), the S&OP objectives cannot be

met without the use of intelligent systems.

Some of the providers who give access to technological tools that aid S&OP are listed below:

Supply Chain Network Design Technologies: IBM, JDA, Llamasoft, OM Partners, SAP

Analytics: Chainalytics, Mu Sigma

Advanced Inventory Modeling: IBM, Logility, SAS, SmartOps, ToolsGroup, Terra Tech, JDA

Supply Chain Financial Modeling: Acorn Systems, Equazion, SAS, Tagetik, River Logic, Jonova, Oracle, SAP

Demand and Supply Modeling: SAP, Oracle, Adexa, Aspen Tech, Boardwalktech, Demand Solutions, DCRA,

Enterra, Infor, John Galt, Kinaxis, Oliver Wight, Teradata

Market Sensing: SignalDemand, Steelwedge

However, as overall S&OP solutions, the two major players are Steelwedge and SAP.

In the case of SAP, S&OP can be executed via a combination of SAP modules or as a single solution in the form of

S&OP with SAP HANA.

Let us examine the solutions that are provided by SAP that can be used during the various stages of the S&OP

Process, as described below.

Fig3: SAP Solutions for S&OP Stages

Strategic Planning

Demand Planning

Supply Planning

Supply/Demand Balancing

Management Evaluation

Strategic Planning: SAP SEM, SAP

BW-BPS, SAP CRM

Demand Planning: SAP APO-DP, SAP

SCEM

Supply Planning: SAP APO-SNP, SAP

SCEM, SAP ICH

Supply/Demand Balancing: SAP APO-

DP, SAP APO-SNP

Management Evaluation: SAP SCPM,

SAP APO-DP, SAP SCEM


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How does the system landscape look if we use this combination of SAP solutions for S&OP?

We shall now look at how each of these modules aid the

S&OP process and also how they interact with each other.

SAP SEM (Strategic Enterprise Management): It is typically

used for financially oriented planning. It provides for Business Planning and Simulation. It gives an overview of all

the controlling factors like internal processes, financial ratios, trends, markets, customers and competitors at a

single place called the Management Cockpit. It also helps in business information gathering.

SAP CRM (Customer Relationship Management): It helps with the Sales Planning and Promotion Planning phases.

For promotion planning, there is frequent interaction with APO-DP.

SAP APO-DP (Advanced Planner and Optimizer – Demand Planning): Performs quantitative forecasting with sales

and marketing inputs and also allows for What-If analysis and Consensus Planning. It provides flexible views for all

aspects of the S&OP process.

SAP APO-SNP (Advanced Planner and Optimizer – Supply Network Planning): Allows for capacity planning,

inventory planning, procurement planning and logistics. A separate version can be maintained for the S&OP

process.

SAP BW (Business Warehouse): Primarily used in S&OP for reporting and Supply chain analytics


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Despite the flexibility that SAP-APO provides for S&OP, for companies with complex business processes and large

yet growing volumes of data, SAP APO becomes highly cluttered since there have to be new KPIs defined and

accordingly, tracked.

SAP APO also does not provide for S&OP process modeling or documentation uploads – both of which are essential

for a higher management point of view and collaboration point of view.

In view of this, SAP has brought out a new solution that uses SAP HANA. The features and benefits are listed

below:

Unified model of demand, supply and financial plans

Instant simulation and results

Disaggregated results are easily available

Real-time scenario simulation

Embedded social collaboration platform

Delivered as a cloud solution, allowing for easy scalability and reducing total cost of ownership.

Optimized for in-memory technology so that mapping, synchronization and planning can be done in real-

time

INTEGRATION WITH SAP APO

The introduction of SAP S&OP on HANA does not mean that SAP APO can be abandoned for S&OP purposes. SAP

S&OP on HANA does not have the capability for preparing plans based on constraint analysis, determination of

inventory strategies or the ability to determine the best constrained forecast.


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SUCCESS FACTORS AND KEY PARAMETERS

A well-defined structure must be in place, backed by the leadership and with clear schedules.

Objectives must be matched to processes and vice versa. Any misalignment will only reduce the

effectiveness of S&OP and increase time to maturity.

Decision-making structure must be in place to clearly define roles, responsibilities and planning horizons.

o At the execution level, decisions are passed down and actions are taken in real-time and

o At the operational level, the factors of where and when come into the picture and daily or

weekly horizons are observed for planning

o At the tactical level, overall quantities etc are decided upon and monthly horizons are

implemented

o At the strategic level, business and functional strategies are determined and responsibilities

assigned. Horizons are usually annual or more.

Demand Planning must be stable and responsive before shaping the Supply Planning processes

Take advantage of technology and use various data sources, analytical tools and linkage networks.

Ensure availability of skilled resources to carry out the plan effectively

Standardize processes but flexibility is essential – while there is no need to reinvent the wheel, it is

important to be prepared for unexpected circumstances.

Identify KPIs and monitor them regularly to ensure there are no laggards in the value chain that can prove

to be bottlenecks for overall performance.

Strategic

Tactical

Operational

Executional


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REACHING THE NEXT LEVEL – JOURNEY TOWARDS DDS&OP

DDS&OP must be adopted and implemented with an attitude of continuous improvement. Since it is a high-level

process, there are no defined limits as to the potential that it presents. As such, it is important to have a reference

by which a company can measure its maturity and plan a future roadmap. The following provides a skeletal

framework. (Involvation/SCM Mindmap S&OP).

1. Company Profile

Type Complexity S&OP Maturity

Industry: No of Sales/Supply units Current

Driver: No of Sales Units: Level 1/2/3/4

No of Supply units: Ambition

No of SKUS Long term:

FG: Midterm:

Components: Short term:

No of Customers Assessment

Footprint Internal:

Converging External:

Diverging

Pipeline

Management Type

Centralized/Decentralized

Company Profile

Organizational Setup

Information

Processes

S&OP

Maturity

Metrics


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2. Organizational Setup

Ownership Commitment Meeting Structure Competency

Sponsor:

Apathetic/ Slight Acknowledgment/ Compliant/ Committed Participants Internal Training

Owner:

Calendar External Training

Coordinator:

Frequency Consultancy

Agenda

Documented? (Yes/No)

3. Information

Data Systems

Availability ERP

Definition: None/One/Multiple

Ease of Access: Demand Planning

Consistency Short term Tools:

One set of Number? (Yes/No) Long Term Tools:

Reliability Scenario Support:

Standard Reports: Supply Planning

Reproducibility Production Planning:

Hierarchy Scheduling:

Product: Executive Tools

Geography: Volume/Value Conversion:

Customers: Online Scenario Capabilities:

Time: Business Intelligence Tools:

4. Process

Data Gathering Demand Planning Supply Planning Pre-Meeting

Executive Meeting

Update/ Generate/ Analyze/

Disseminate Business

Assumptions: Business Assumptions: Demand-Supply Matching

Review pre-meeting decisions

Push/Pull Points Capacity 1. Identify Issues 1.Volume impact:

MTO Internal 2.Develop Scenarios

2.Value impact:

MTS Utilization: Set Agenda for Exec Meeting

3.GAP Analysis vs. Business


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Plans:

Hybrid Flexibility:

Continuous improvement

Components Skills/Competencies:

1.KPIS:

Internal Shift Schedules:

2.Accountability

Baseline: Performance

Decide on issues

Events: External

1.Summarize

External Other production facilities:

2.Disseminate

Customer Orders: Contract Manufacturing:

Customer Forecasts: Bottleneck Materials:

Forecasting Scenarios

Demand Sensing/ Shaping/ Shifting Variants

High

Middle

Low

Risks:

Complexity Level

Unconstrained

Constrained


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CONCLUSION

With the advent of demand-based systems, customers possess greater scope for negotiation. Producers are being

forced to change their cultures and operate more effectively. To build upon their customer base, producers have

to achieve greater supply complexity and narrower delivery windows while keeping prices stable.

However, DDS&OP requires mostly internal alignment rather than changes to organizational and operational

structures. It will make companies more streamlined and make decision making based on solid foundation of

information. The culture changes from cost-focused to value-focused. Capacity utilization is maximized by aligning

it to actual demand.

In hard benefits, the following can be achieved:

Enhanced market share

Better service

Lower costs and improved margins

Inventory reductions of 40-50 percent

Cuts in overhead expenses of 30-40 percent

Liberated cash flows of 20-30 percent

Understanding the value of DDS&OP and gaining insight into the processes involved and the method of

implementation that expedites journey to full S&OP maturity is important not only for companies who are yet to

implement DDS&OP but also for those companies who are using DDS&OP at an early stage.

It is essential to understand that DDS&OP helps identify the strengths and weaknesses of the current processes,

thereby aiding in moving towards improvement that help realize the full potential benefits of DDS&OP and

maximize the company’s profitability by making operations more efficient.

Each step in the advancement towards DDS&OP adds value and improves business results incrementally.

Improvements towards DDS&OP improve multiple metrics across business functions, rather than just one or two,

as is the norm when targeting purely supply chain improvements.

The most important factor for successful DDS&OP is to ensure that planning is linked to execution. The below

diagram from Gartner best captures this:


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REFERENCES

1. Sales and Operations Planning: Transformation from Tradition, AMR Research May 2009

2. Evolution of Sales & Operations Planning – From Production Planning to Integrated Decision Making,

Stratabridge September 2003

3. Sales and Operations Planning: Aligning Business Goals with Supply Chain Tactics, Aberdeen Group June

2008

4. Sales and Operations Planning: Key Enabler for the Chief Supply Chain Officer, Aberdeen Group August

2011

5. Demand Driven S&OP: A Sharp Departure from the Traditonal ERP Approach, On-Point Group

6. Market Driven S&OP, Lora Cecere of Supply Chain Insights LLC, July 2012

7. Putting Together the Pieces, Lora Cecere of Supply Chain Insights LLC, August 2012

8. Mindmap S&OP, Involvation and Supply Chain Movement 2012

9. A Fresh Look at S&OP, Booz and Company 2009

10. S&OP Maturity: What Does It Take To Get There, Gartner Research November 2010

11. Implementing S&OP Using Current Available SAP Applications, Tod Stenger, SAP Labs May 2006

12. SAP Sales & Operations Planning, www.sap.com

13. Evolution of Sales and Operations Planning, Oliver Wight

http://www.sap.com/


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Whitepaper - Demand Driven S&OP – Maximizing Output To Match Demand Variation