Supply Chain Frontiers Issue #26. Read all articles in this issue
The Sales & Operations Planning (S&OP) process has been around for more than two decades, but it could offer new opportunities for mitigating and removing supply chain risk. Research carried out at the MIT Center for Transportation & Logistics (MIT-CTL) as part of a Master of Engineering in Logistics (MLOG) program thesis looks at the application of risk management techniques such as scenario planning and range forecasting in an S&OP environment.
The research was presented at the MLOG Research Fest 2008 event, May 21-22, 2008, on the MIT campus. Over the course of two days and five sessions the results of 25 research projects were presented, ranging from work on supply chain security and inventory modeling, to network efficiency and carbon footprints.
In an S&OP process, the marketing & sales, operations, and finance sides of the organization come together to forecast demand and align it with supply. “You are really doing the business planning,” said Dr. Larry Lapide, MIT-CTL’s director of demand management and thesis adviser for this project.
However, in today’s highly uncertain commercial climate some long-standing S&OP planning approaches may no longer be adequate. For example, traditionally groups have put more emphasis on planning for demand rather than supply. “Now supply uncertainty has risen to a point where companies have to pay more attention to it,” Lapide pointed out.
The MIT-CTL research “focuses on how companies are encompassing uncertainty on the demand and supply side or both,” said MIT MLOG student researcher Yanika Daniels, who is a co-author of the thesis. The team interviewed S&OP practitioners and thought leaders, completed an on-line survey of companies and consultants, and visited a global manufacturer of semiconductors to determine how companies incorporate uncertainty into S&OP. “We are trying to find out whether there are similarities we can use in a risk management framework that can be incorporated in the S&OP process,” Daniels said.
In many ways this requires a redefinition of S&OP. “This is the next progression,” said fellow MLOG student researcher and thesis co-author Tim Kenny. “After getting your S&OP process going you can incorporate risk management into the process and make it much stronger.” Here are some steps that companies can take to make the S&OP process more risk resistant.
Target Your Efforts
An initial step in making S&OP more resilient is to identify the products that will benefit the most from the strategy through segmentation by profitability and business importance. Concentrating on the most profitable products, for example, is likely to yield the most cost savings and achieve the most dramatic reduction in risk levels. This is particularly important in an S&OP setting where managers are usually working with limited resources.
Three horizons
Traditionally S&OP groups have used single point forecasts to guide the demand planning process, but in highly changeable markets this approach can be too rigid. An alternative is to use scenario planning to generate three forecasts: a base-level projection much like the conventional one used as well as low- and high-demand level forecasts. The concept is not new but applying scenario planning methods to the S&OP process in this way is a departure from usual practice.
A further refinement is to consider the “forecastability” of each product. It is generally easier to anticipate the demand for a mature, top-ranked product than it is for an item that does not have an extensive market track record. “If you can forecast accurately then you don’t necessarily need scenario planning,” said Kenny.
Automated Solutions
Some demand planning software includes scenario planning functionality but often it is not utilized, said Daniels. Software that can automatically generate the three forecast scenarios described above is in the pipeline. A number of the companies interviewed by the researchers are particularly interested in functionality that can create different scenarios “so they can input financial and business risk factors against them and determine what the best options are going forward,” Daniels said.
The Wall Street Factor
The final piece of the research – but not necessarily the last one in terms of order of importance – is the “Wall Street” or financial piece. In many respects this is just as important as the operational and sales elements of the S&OP process, since meeting overall financial targets ties the process to corporate strategy. Prioritizing risk management actions, according to the business importance of products and the degree to which demand can be predicted, helps to align S&OP planning with the enterprise’s overarching financial goals. “If we talk about the business importance piece early on, everyone is on board with corporate strategy as well as supply chain strategy,” said Daniels.
A more detailed version of this article is published in the June 2008 issue of MIT-CTL Supply Chain Strategy. For more information on MIT-CTL’s demand management research please contact Larry Lapide.