It is generally an agreed-upon idea that plans without execution are not worth a whole lot. The same is true for Sales and Operations Plans (S&OP). At the same time, converting S&OP to execution steps is not an easy task. In fact, in many companies, the S&OP process is somewhat disconnected from the business execution. It is important that companies have S&OP/IBP (Integrated Business Planning) driven execution but most of them do not know how to accomplish that. Often, the tactical or operational planning is done by a different group of people in the company who are disconnected from the S&OP output. This misaligned planning is detrimental to a firm’s financial performance, hence the need for strong alignment.
Once I worked at a large corporation where a group of people pulled together the demand and supply data from various systems and created an S&OP plan on a spreadsheet. This output was not institutionalized. The demand and supply organization worked independently and created their own plan and executed that supply/demand plan and production schedule to fill the orders. Even the supply and demand team did not interact much except for one or two hand-offs. It was a very chaotic environment with a lot of firefighting. There were a lot of ad-hoc and off-line communications among different functions with competing objectives. The business somehow survived because it had high-profit margins. Even then, the business realized that it was in an undesirable situation needing a change but could not figure out where to start or even what to do. This is very common for a typical business operating in a siloed model. The best practice in supply chain calls for an integrated operating model.
The S&OP process of this company was less than ideal. To be successful in S&OP, businesses need to start with People, Process, and Technology – in that order. However, there must be an orchestration process for all three to work in a coordinated manner. In addition, there must be organizational pull and leadership. This is where the sustainability of the process broke down.
According to industry surveys, most businesses achieve an S&OP maturity level where they do supply/demand balancing with a heavy supply chain/operation focus. It is typically led by mid-level managers in supply chain or operations organization. It generally does not consider or align with business or marketing or finance strategy. In many cases, they are also disconnected from tactical and operational planning. There are several reasons for this disconnect. Chief among them is:
- Lack of understanding of the concept of Hierarchical Planning
- Lack of subject matter expertise
- Lack of program sponsor
- Lack of hierarchy representation in the technology database
- Lack of role and process design to support Hierarchical Planning
We define hierarchical planning to be composed of three levels. The highest level is S&OP/IBP (Integrated Business Planning) spanning usually two to three years out. Below that is tactical planning, usually 6 to 12 months out. And finally, operational planning that runs from today up to 4 months out. In other words, hierarchical planning takes you from the tip of the supply chain pyramid to its base. The hierarchical plan deals with two kinds of hierarchy: One deals with the levels such as SKU (Product-package) to the product family. And the other deals with the time horizon (near-mid-long term).
To do the Hierarchical Planning, first one needs to define the product and planning hierarchy and define the relationship between the manufacturing view and the demand management view. The manufacturing view represents product/machine assignment whereas the demand management view represents the relationship between products and markets. One needs to define these relationships in a database, and this is where subject matter expertise in business and technology with coordinated solution design plays a central role. The ease of aggregation and disaggregation into different hierarchies and views are crucial to achieving success in hierarchical planning. Unfortunately, this is neither very well understood nor people take the time to do it right. Payback for doing it right is big.
Once the appropriate data structure is designed, it is time for the role and process design. At the very least, an organization should have, as roles, a demand planner, master planner, master production scheduler, and asset scheduler.
If there is only one demand planner, they should handle two demand plans:
- A demand plan at the aggregate product family level going out to 2-3 years in monthly buckets. This demand plan is typically generated to support the S&OP level. This aggregate demand plan is passed on to the master planner for running aggregate supply planning.
- A demand plan at the SKU level in a weekly bucket with a time horizon from 6 – 12 months. This demand plan will have to be disaggregated from the monthly aggregate S&OP demand plan. This demand plan is passed on to the master production scheduler to run the Master Production Schedule (MPS).
As mentioned above, the aggregate demand plan is passed on to the master planner for aggregate supply planning and resource requirement planning. Once the supply-demand reconciliation is performed at this level, the production plan is used as a guide for the MPS. This is a crucial step that is missed by many organizations. The disaggregation of aggregate demand and use of aggregate supply as a guide for MPS is what connects the dot between S&OP and Sales & Operations Execution (S&OE). As a last step, the output of MPS should guide the asset scheduling to complete the connection between S&OP and S&OE. This is what we call Hierarchical Planning.
When we had taken the above-described approach at the large corporation I was referring to, we saw great results. It improved revenue while lowering the operating costs, thereby impacting the bottom line. It also helped speed up the planning process and brought more discipline to it.
Here is a pictorial representation of how S&OP drives the weekly planning and daily execution which shows all planning hierarchy across different time horizon in play.
In my upcoming webinar, Hierarchical Supply Chain Planning – S&OP to Execution, I will discuss how to align between S&OP and execution through hierarchical planning approaches. Hope to see you there!