Fresh produce supply chain planning, demand forecasting
Fresh produce supply chain planning, demand forecasting, pricing: fruit & vegetable packing
Demand Forecasting,
Inventory Optimization, and
Price Elasticity
Supply chain planning relies heavily on science and algorithms for better demand forecasting and inventory management. This includes forecasting independent customer demand, which changes with customer preferences. It also includes dependent demand that aggregates demand streams at a stocking point upstream to other echelons of the supply chain.
Let’s look at how science and machine learning in Sales & Operations Planning (S&OP) is streamlining demand forecasting, inventory optimization and price elasticity to improve long-/short-term planning for complex distribution supply chains.
Why is the Distribution Supply Chain So Complex?
Many factors are contributing to increasing complexity in these forecasts, including outbound customer demand volatility, managing multiple suppliers with long lead times (especially overseas), constrained transportation capacity, and increasing inbound supply line volatility.
Fresh produce supply chain planning, demand forecasting, pricing: fruit & vegetable packing
Fresh produce supply chain planning, demand forecasting, pricing: fruit & vegetable packing
Large Assortments
Distributors face even greater complexity in managing their supply chains. Large assortments to serve existing customers has become key to differentiation, but introduces an ever larger assortment with intermittent, lumpy and sparse demand in the “long tail.”
Fulfillment Standards
Multiple distribution centers serving a demanding customer base with increased expectations of rapid and reliable fulfillment introduces further complexity to the multiple echelons of inventory. Finally, increasing sales on mobile, ecommerce, and other direct channels is growing and competing with traditional channels for inventory and adds to inventory volatility across channels and echelons.
Sophisticated Science and Analytics
One solution to address this complexity is advanced analytics that can handle large data sets down to transaction-level details. Demand classification is key to identifying the type of demand for each product on each channel to apply the best forecasting techniques.
Advanced seasonality techniques are critical for identifying recurring seasonal trends, de-seasonalizing demand, and determining baseline demand. This supports flagging peaks in demand above baseline that can be associated with events like promotional activities, non-recurring natural incidents, and other factors driving demand forecast anomalies.
Machine Learning Tools for Inventory Optimization
Sophisticated science also improves inventory optimization. Machine learning is becoming a more significant addition to the demand forecasting toolkit, and is being widely used to optimize inventory forecasting accuracy.
Fresh produce supply chain planning, demand forecasting, pricing: fruit & vegetable packing
Fresh produce supply chain planning, demand forecasting, pricing: fruit & vegetable packing
Price Elasticity and Price Optimization
A crucial piece of the supply chain planning puzzle is price optimization. Since distributors face increasing transparency and competition, there is growing price sensitivity across channels and customer segments. Price elasticity must use similar techniques to demand forecasting in de-seasonalizing demand to determine baseline and measure response to price changes.
A proven practice for using elasticity of demand to measure willingness-to-pay is to measure price sensitivity for products sold on all channels and locations down to the customer level.
Another critical practice is using product attributes to infer price elasticity deeper into the assortment using Bayesian inference and other techniques. Remember analyzing large data sets down to the transaction level? Invoice-level data and analysis is part of this approach.
“INFORMATION IS THE OIL OF THE 21ST CENTURY, AND ANALYTICS IS THE COMBUSTION ENGINE.”
Long- and Short-Term Supply Chain Planning
Short Term: Sales & Operations Execution (S&OE)
Demand forecasting, Multi-Echelon Inventory Optimization (MEIO), and Price Optimization science certainly complement each other in tactical, shorter term (12-18 month) supply chain planning. I refer to the concept of short-term SCP + Pricing = Demand Shaping as “Sales & Operations Execution (S&OE)”. But what about using these advanced techniques in longer-term S&OP?
The benefits of effective S&OP are compelling - lower operating costs, reduced inventory requirements, and top-line growth, and top-performing S&OP companies are realizing these benefits and in the process gaining competitive advantage.
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Almost 70% of Respondents Have Adopted Formal S&OP View Slideshow
The Hackett Group Resources
The Hackett Group’s “The CPO Agenda: Procurement’s Key Issues in 2013” Research Report
Of all the Hackett Key Issues Studies conducted in the last five years, the 2013 edition shows the greatest year over- last change in priorities for both performance and capability-related issues.
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Pricing: Distributors’ most powerful value-creation lever
September 16, 2019 | Article
By Alex Abdelnour and Walter Baker
Pricing: Distributors’ most powerful value-creation lever
With new digital capabilities, distributors are finding that pricing can do more than traditional margin-expansion methods to create new value.
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Pricing is undergoing a revolution fueled by big data, advanced analytics tools, and powerful digital capabilities. Distribution businesses are well positioned to reap the benefits of this revolution, given the high volume of transactions they support and the breadth and complexity of both their product and customer portfolios. The pricing capability is critically important in a business where margins tend to be razor thin; no other lever can do more to raise earnings. But mind-sets haven’t caught up. Many industry leaders still relegate pricing to a “deal desk” rather than making it the centerpiece of commercial excellence.
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Distributors who embark on end-to-end pricing transformations can expand earnings by up to 50 percent with modest or negligible impact on volume. Their sales forces will be far more efficient and effective as they tailor pricing to each customer and situation, and they will provide accurate quotes more quickly, thereby improving the customer experience. Armed with additional capital, some companies will invest more in growth and differentiation. By offering new value-added services, these leaders can gain competitive advantage and build market share.
For many distributors, the traditional playbook of margin expansion has run its course
For years, distributors have pursued greater scale to expand margins by a few percentage points and return on sales in mergers that have significant overlap by up to 3 to 4 percent. Since the bottom of the Great Recession, nearly 30 percent of publicly traded distributors have acquired at least one other distributor (up from 20 percent in the decade before the recession), and revenue increases from the average acquisition today are roughly 35 percent larger.
In this industry-wide scramble for scale, attractive targets have become scarcer and thus more expensive, reducing returns on investment. Most industry leaders realize that once they have become the number-one or number-two player in a market, additional acquisitions can yield diminishing returns; indeed, many customers continue to use secondary suppliers to limit the risk of supply-chain disruption and sometimes to keep their primary suppliers honest. In addition, most acquirers face complex challenges as they try to merge far-flung sales organizations that make daily pricing decisions on hundreds of thousands of SKUs for thousands of customers and, at the same time, try to marry disparate IT systems, each with a patchwork of homegrown tools and expensive enterprise resource planning (ERP) solutions.
But even as building scale is delivering less value, raising margins through pricing is so complex that many big distributors have shied away from it. Instead, they allow sales teams to rely on their own knowledge and experience, assuming that each customer is unique and therefore no algorithm or dynamic pricing tool can offer useful insights. Mergers contribute to the problem when a focus on the challenges of integration causes managers to underinvest in data integration and analytical capabilities to optimize pricing across product catalogs, geographies, and organizational fiefdoms. Many focus on back-end margins—for example, maximizing supplier rebates and special pricing to expand margins—not realizing that gains in purchasing and procurement may be given away to customers due to a lack of pricing capabilities.
Pricing is distributors’ most powerful value-creation lever
In contrast to past reliance on growth through M&A, the outperformers in the years ahead will be the distributors that see price optimization as the foundation of commercial excellence—speeding pricing approvals and helping salespeople make not just more and bigger deals but more profitable deals. For a distributor, pricing is by far the most powerful lever for improving overall margins and increasing profits. A 1 percent price increase across the product portfolio has more impact on bottom-line margins (earnings before interest, taxes, depreciation, and amortization, or EBITDA) than a 1 percent uplift in volume or a 1 percent reduction in procurement cost or in selling, general, and administrative expense (SG&A).
Looking across our database of 130 global and publicly traded distributors, we estimate that a 1 percent price increase would yield 22 percent increase in EBITDA margins (Exhibit 1), and a 25 percent uplift in stock price. Moreover, pricing has a disproportionate impact on a distributor’s enterprise value, with an increase of 20 percent for a 1 percent increase in price.
Exhibit 1
Pricing is the most powerful lever for distributors.
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Achieving similar impact using other levers requires improvements of a larger order of magnitude. For example, an average distributor in 2018 would have to grow volume by 5.9 percent while holding operating expenses flat to achieve the same impact as a 1 percent price increase—no small feat, especially in mature markets where competition is fierce and growth often comes at the expense of profitability. That same distributor would have to reduce fixed costs by 7.5 percent or buy 22 percent of its own size (assuming similar P&L structure) to deliver an equivalent uplift in EBITDA. The only other lever with the same power as pricing is procurement, where similar results would require an aggregated cost reduction of nearly 1.2 percent across specialty and commodity products.
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Optimizing price requires overcoming misconceptions
Even experienced salespeople may believe that raising prices means losing deals, especially when competitors offer similar products. They may argue for aggressive price cuts to keep large customers happy (and reach their own volume targets). Our qualitative and quantitative research reveals that the truth is more nuanced. A lack of product availability, poor service, and damaged customer relationships can scuttle more deals than high prices, for example, and low prices rarely win deals.
Our survey of more than 200 distribution customers across sectors indicates that pricing ranks sixth overall in what customers look for in a distributor (Exhibit 2). Price is the most important factor in winning deals on the key value items (KVIs) that represent the top 20 percent of products, which represent roughly 80 percent of an individual customer’s purchases. But most customers are far less price sensitive on the many other items in their shopping baskets. This is where distributors have the biggest opportunities to raise margins.
Exhibit 2
Customers rank pricing sixth in importance.
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Sophisticated sales teams can increase their win rates with a deeper understanding of each customer’s willingness to pay for KVIs and the other value they provide, such as one-stop shopping across categories, convenient and prompt delivery, a breadth of brands and models, financial facilitation for small and medium-size businesses, flexible return policies, and, of course, product expertise.
Salespeople hungry to make deals may continually ask for price reductions, but cutting prices in a low-margin environment risks eroding margins without enough volume uplift to make up the difference. For a distributor with gross margins of 18 percent, for example, the volume uplift required to break even is roughly 6 percent for a 1 percent price cut. Continuously lowering prices is a race to zero margin. In the long run, it makes more sense to build pricing strategies on each customer’s willingness to pay and a keen understanding of the nonprice factors that the customer values most.
In distribution, of course, the number of customers and array of SKUs are too large for any human sales rep to know exactly how much to charge in each situation. Instead, most focus on a handful of high-turn products they know well, supplemented by a shorthand approach to the remaining thousands of items, such as using the same markup, margin, or discount percentages across all other products. This can mean overpricing some items (which can shake the trust of the customer) and underpricing other items (resulting in missed margin opportunities).
The distributors who outperform are those whose sales reps focus less on pricing thousands of items and more on selling, growing share of wallet, and delivering on the distributor’s unique value propositions. Many of these winners have a pricing organization, digital tools, and analytical benchmarks to give sales reps the market and customer intelligence they need to drive volume and margins.
These distributors don’t raise prices across the board. Instead, they look for pockets of strategic pricing opportunities and continuously improve their approaches and systems. For instance, in a business with a large transportation-cost component, sales reps have clear incentives to include the cost of freight at the transaction level to avoid underpricing items with a higher shipping cost. Leading distributors drive changes in measurement, incentives, and behaviors to improve price quality and achieve customer loyalty and other desired business outcomes.
Leaders also keep pace with their customers’ rising procurement capabilities. Large companies have doubled their investments in procurement in just the past six years, giving their procurement teams new price-comparison tools, clean-sheeting techniques, and best practices in category management. Most companies would rather cut their own costs or persuade suppliers to drop theirs than ask customers to pay higher prices.
What really matters in B2B dynamic pricing
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Best-in-class distributors use pricing to create value
A handful of distributors have been pioneers in adopting pricing as a discipline and have invested in building pricing organizations with a mandate to deliver year-over-year margin improvement. They have then embarked on journeys to build pricing discipline and exception routines in the sales organization and adopt analytics and other tools to capture value.
Based on our experience standing up pricing organizations and supporting several distributors on their pricing journeys, we have laid out five key elements of building a profit-generating pricing organization that creates substantial, steady uplifts in margins, even during challenging economic times:
Build a dedicated pricing organization with organizational clout. Distributors should consider standing up a pricing and margin-management organization to improve pricing processes and discipline. Using best practices, it can drive more consistent approaches to pricing routines and margin management across the organization, provide an end-to-end view of how pricing affects customers, and use new tools and technologies to help the sales organization capture value.
For example, the sales organization of a leading food-service distributor had autonomy over pricing but limited sophistication. The company took a multiyear journey to build a centralized pricing organization with local support in branches. Reporting to the chief operating officer, the pricing organization had a mandate to drive yearly margin expansion, develop long-term pricing strategy, and fend off digital threats. The pricing organization started small, launching quick-win initiatives across pilot locations and creating enough excitement to develop a pull from various branch managers rather than a push from the ivory tower. Several years in, the pricing organization is a profit generator with strong credibility in the sales organization, consistently delivering margin improvements of 50 to 100 basis points.
Embed best-in-class processes in the sales organization. Pricing in many sales teams is often an art rather than a science and lacks the structure, thoroughness, or oversight needed for consistent profit maximization. The winners clearly define pricing processes, including steps, owners, inputs, and outputs.
For example, an electrical distributor has implemented a rigorous performance-management routine with a layered escalation process to manage and control runaway exceptions more effectively. A pricing “war room” evaluates requests for exceptions, tracking their frequency and depth, analyzing deal economics, and providing sales reps with real-time guidance on prevailing prices. Adherence to pricing rules, policies, and targets is monitored and used for coaching at various levels of the organization, including sales reps, sales managers, branch managers, regional managers, and senior leadership.
Embrace advanced analytics and the digital revolution. As noted, it’s unrealistic to expect sales reps to get the best price in every transaction. Today, however, large distributors can run advanced analytics using their treasure troves of internal data enriched with readily available external data to identify pricing opportunities and arm sales reps with benchmarks and digital tools to make better pricing decisions.
A high-tech distributor with hundreds of thousands of SKUs and thousands of customers invested in a dynamic deal-scoring solution to group customers and products in segments. It provides sales reps with pricing recommendations for each order, tailored to the order’s size, location, customer characteristics, end market, and suppliers. This has minimized human error and pricing variability, improving margins significantly. The dynamic deal-scoring algorithm is part of an easy-to-use tool that sales reps employ to get product information, price each product, and obtain real-time benchmarks showing how their pricing compares with similar transactions by colleagues, which builds their confidence in their ability to tailor prices to deal characteristics.
Align sales incentives with margin expansion. Sales-rep compensation has traditionally been tied to volume rather than margins, which sometimes leads to revenue growth at the expense of profit. Indeed, since the Great Recession, distributors have grown revenue by about 7.5 percent per year, on average, while margins remained low and well below those before the recession (Exhibit 3). Best-in-class sales organizations are increasingly tying compensation to both revenue and margin growth.
Exhibit 3
Margins have sputtered despite revenue growth.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.comAn electronics distributor, facing significant margin erosion despite solid sales growth, realized that its thousands of sales reps, who were compensated solely on sales growth, were giving away free freight and expedited shipping and lowering prices to “win” deals. A shift in the compensation model and pricing policies, along with training and tools, has optimized both sales growth and margin expansion.
Invest in sales reps’ pricing capabilities. Sustained impact from pricing initiatives requires investment in sales reps’ capabilities to price based on value, negotiate, and manage contracts end to end—and success in wining sales reps’ hearts and minds. Pricing organizations can score quick wins across a distributed sales organization landscape by first piloting pricing initiatives in a few branches with willing general managers and pressure-testing them for impact. This builds credibility within the wider sales-and-marketing function, creating a pull from all other general managers.
A plumbing distributor launched a major pricing transformation with new policies, processes, and tools that sales reps had to master quickly. The pricing organization worked with the sales operations team to build a “train the trainer” curriculum followed by online training, leadership videos, an online chat forum, and a hotline for urgent questions. Sales reps understood the rationale for the changes, the long-term vision, and—most important—how and why previous pricing approaches had cost the company money. Moreover, sales managers and branch managers were integral parts of the solution: after gaining an understanding of pricing levers and the rationale for change, they became pricing champions within their teams.
Pricing optimizers hold the competitive advantage
When we talk with decision makers at distributors that have not invested in pricing optimization, we ask what’s holding them back. We caution them that if they maintain this stance, they will be at an increasing disadvantage as customers consolidate and invest in procurement capabilities and competitors arm their pricing organizations with highly effective new approaches and powerful digital tools.
Over the past ten years, the distribution marketplace has grown more competitive, with the average gross margin across a global index of distributors contracting by 100 basis points despite a stable and growing global economy. The contraction has not been universal, however: top performers have grown margins by an average of 400 basis points, widening the gap between distributors that excel in pricing and those that do not.
Distributors that understand the importance of pricing and have invested in a best-in-class pricing organization have seen margin uplifts of 200 to 500 basis points. Furthermore, they continue to drive margin improvement and expand their advantages over the laggards. For distributors, price optimization is an essential part of a winning strategy.
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July 23, 2013 · By Len Prokopets
Long advocated by expert observers of the supply chain scene, the Sales and Operations Planning process (S&OP) has reached a point of broad adoption.
A recent study performed by The Hackett Group indicates that almost 70 percent of study participants have implemented an S&OP process.1 However, the study also reveals a wide gulf between S&OP top performers and those that merely practice S&OP.
Not only do top performers apply S&OP best practices to a far greater extent, they also have begun to take the next step of integrating their S&OP and financial planning processes to drive true integrated business planning. As a result, top performing organizations find that S&OP is 68 percent more effective at driving benefits than it is for other organizations.
This article outlines study findings, provides key insights on challenges and opportunities, and offers a path forward for those seeking to join the ranks of S&OP top performers.
Let’s begin with a definition. We define Sales & Operations Planning as a collaborative decision-making process used to develop and align time-phased demand, supply, and financial plans in support of the overall business plan. S&OP is, by its nature, a cross-functional process that involves individuals from sales and marketing, supply chain, finance, procurement, logistics, and even R&D and capital projects.
S&OP Has Entered the Mainstream
First emerging well over 30 years ago, S&OP has moved from business buzzword status to mainstream adoption among the world’s large supply chain-focused organizations. A current Google search turns up over 860,000 entries and a search on professional networking site, LinkedIn, finds more than 16,000 individuals who list the term “S&OP” in their profiles.
Reflecting S&OP’s new mainstream status, The Hackett Group’s recent study finds that almost 70 percent of respondents have adopted an S&OP process with defined steps, milestones, and reviews that are executed on a defined monthly cadence (Exhibit 1). Only a small fraction of study respondents claimed “very limited or no adoption of S&OP.”
Almost 70% of Respondents Have Adopted Formal S&OP
Overall, these study findings are highly consistent with what we see on a day-to-day basis among our client base; the vast majority of our large clients with physical supply chains have implemented a formal S&OP process. And even among companies that have not deployed S&OP enterprise-wide, many apply S&OP to some degree in their business.
Benefits of a Mature S&OP Process
The appeal of S&OP lies in its ability to drive dramatic improvements in key business performance metrics. Our experience indicates that effective use of S&OP can help grow the top line of the business while reducing operating costs and reducing inventory required (see Exhibit 2). Few business improvement initiatives match the economic return that implementing an effective S&OP process can generate.
Business Benets of S&OP
Our study identified a group of S&OP top performers based on their ability to maximize benefits of S&OP and operate the process more effectively. Our findings show that these top performers have realized that to truly maximize benefits of S&OP they must go beyond simply implementing a basic S&OP process and conducting meetings on an ongoing basis.
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These companies develop highly mature S&OP processes that leverage key best practices and as a result, realize significant performance improvements and create an opportunity for competitive advantage. Our study findings indicate that top performer companies’ mature S&OP processes are 68 percent more effective at delivering benefits than are those of other organizations.
Organizations Outside Top-Performer Ranks Report 10 Key Capability Gaps
Case Study of an S&OP Top Performer
The following case study highlights many of the best practices associated with putting a successful S&OP into action. The company, a $1billion-plus manufacturer, faced a set of business and operational challenges. The external business environment was unfavorable, with weak customer demand and rising costs. At the same time, the organization experienced many of the typical capability gaps resulting from an immature S&OP process.
The supply chain was unstable, providing poor customer service levels while operating inefficiently. In particular:
Customer service levels were sub-par, with order fill rates averaging below 96 percent in an industry where customers expect 98.5 percent.
Protracted product outages resulted in major disruptions for key customers, endangering major account relationships.
Significant manufacturing variances arose, driven by frequent changes in the production schedule, at times made to satisfy unexpected demand and at others made in reaction to materials or packaging shortages.
Sales and marketing lacked the confidence to plan promotions and new sales due to concerns that supply chain would be unable to respond.
Furthermore, financial performance surprises were routine, frustrating senior leadership and precipitating a monthly game of “whack-a-mole” that included chasing and firefighting the latest set of issues.
Facing pressure to improve business performance, the organization’s senior leadership team initiated a project to put in place world-class Integrated Business Planning/S&OP capabilities. The effort consisted of three phases:
Phase 1: Preparation
The organization took action to rapidly stabilize its supply chain environment, identifying and addressing underlying gaps and disconnects in demand, supply, and financial processes and tackling major issues and risks for specific products to stabilize the business.
The organization designed and implemented S&OP capability improvements in each of the 12 best practice areas in process, organization, and tools/data. Examples include:
Established a formal monthly S&OP process including repeatable tools, templates, and approaches for gap modeling and resolution.
Shifted focus of the S&OP process from planning the current quarter to planning a rolling 18-month period.
Established visible C-level ownership of the process and hands-on involvement in monthly meetings.
Developed an integrated data model as a “single source of truth” for supply, demand, cost, and pricing data enabling the linking plans and metrics across business functions.
Developed operating and performance reports to support S&OP.
Built analytical tools to support what-if analysis and scenario modeling.
The organization integrated its S&OP and financial planning processes, creating a single monthly process for Integrated Business Planning:
S&OP plans and what-if analyses were translated into dollar terms focusing decision-making on business performance impacts.
A P&L, generated for each month in the planning horizon as part of the S&OP process, became the financial plan, eliminating the need for a separate financial planning process.
Established a framework for continuous improvement of S&OP with a balanced set of quarterly targets for business performance and for improvement in process execution.
Phase 2: Conduct Pilot Cycles
After a rapid effort to implement improvements in S&OP process, organization, and tools/data elements, the organization conducted three pilot cycles of the improved S&OP process.
The pilot cycles were used as an opportunity to train process participants and prepare them to operate in an Integrated Business Planning environment.
The S&OP design was refined with each successive cycle leading to a full launch after an executive leadership go/no-go review.
Phase 3: Implement Continuous Improvement
The organization monitored S&OP performance and process execution measures and defined necessary changes and actions to drive improvement.
Tools and templates were refined over time. The company transitioned tools that had been built in Microsoft Excel and Access to leverage more powerful enterprise toolsets such as the ERP system, financial planning system, and supply chain system.
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The project yielded exceptional results, providing senior leadership with the tools to better manage the business and driving substantial operational and economic improvements.
Customer service fill rates rose from 4th quartile to 1st quartile in four months, consistently achieving targeted 98.5 percent fill rates.
Simultaneously, finished goods inventory was reduced by 10 percent. Expediting was substantially reduced enabling reduction in raw material and packaging costs.
Finally, the improved stability of the supply chain enabled management to redesign and rationalize the manufacturing network, reducing overhead costs by 10 percent.
How to Become an S&OP Top Performer
Achieving S&OP top performer capabilities and performance requires a focused effort, dedicated, knowledgeable resources, and at least six months.
Such a project is typically comprised of three phases: Preparation, S&OP Pilot Cycles, and Continuous Improvement. Exhibit 8 provides a sample implementation approach.
Sample Implementation Approach for Achieving Top-Performer Capabilities
In many organizations, an initial S&OP assessment reveals gaps, breakdowns, and individual supply, demand, and financial and business plans that are ineffective and can complicate or prevent implementation of overall S&OP capabilities. In these organizations, an additional triage and stabilization step may be necessary to address gaps and disconnects and establish a starting point for developing an Integrated Business Planning process.
Once the current S&OP environment has been stabilized, the typical next step is to develop the future state design. This design should, among other changes, put in place the 12 key best practices across S&OP process, S&OP organization, and S&OP tools/data (see below).
12 Best Practices of S&OP
Processes
1. A formal, defined S&OP process.
2. A single consensus demand plan.
3. S&OP that looks out over a period of 18-plus months.
4. A supply plan that defines requirements to meet demand and highlights constraints.
Organization
5. Cross-functional participation in S&OP.
6. S&OP process is senior-leadership owned.
7. Formal targets with accountability are in place.
8. Discipline in the organization to adhere to S&OP decisions.
Tools/Data
9. S&OP reporting and performance dashboards.
10. S&OP plans fed directly into core WERP and EPM systems.
11. Ability to reconcile demand and supply plans and identify gaps and imbalances.
12. Ability to conduct what-if modeling supporting S&OP decisions.
Once a critical mass of process, organization, and tools/data capabilities are in place, the next step is often to execute a series of monthly pilot cycles, putting into action the new S&OP design. Pilot cycles allow for trial and error and course corrections. They also help build the organization’s comfort level and “muscle memory” to enable sustained execution of the process.
Once the pilot cycles are completed, organizations typically transition to a mode of continuous improvement that focuses on measuring performance, addressing issues and gaps, and executing further improvements in S&OP capabilities on an ongoing basis.
As top performers have experienced, a mature, best-practice-based S&OP process is a very powerful mechanism for managing the business and maximizing performance. Through a strong governance process and continuous progress, these improvements can be sustained over time, leading to a significant competitive advantage for the organization.
Longer-Term: Sales & Operations Planning (S&OP)
10 best practices you should be doing now
March 22, 2011Bob EngelNo Comments
In today's economic environment, doing what you've always done—even if you do it very well—is no longer acceptable. Under pressure to contain costs and produce results despite challenging circumstances, you (and many other supply chain managers) must transform rather than simply improve your operation. That means adopting the philosophies, methods, and processes that will make your organization "best in class."
What makes a supply chain organization best in class? The answer will vary for each company, but there are some practices that many leading companies are adopting now. This article will outline 10 of the key practices that I and my colleagues have observed through our work as supply chain consultants with clients in a variety of industries and locations.
3. Make technology work for you. Too many companies select software they hope will make them more efficient, and they structure their workflows and processes around that chosen technology. Instead, they should first review the processes that need improvement, and only then select the technology that best satisfies those process needs. That may seem self-evident, but I have seen more than a few companies buy first and figure things out later.
Rather than consider strategic sourcing as just a matter for the purchasing department, best-in-class organizations get internal "customers" actively involved in the decision-making process. More importantly, they solicit feedback and information regarding their objectives and strategies from those customers, which may include functional areas such as finance and accounting, engineering, operations, maintenance, safety/health/environment, and quality assurance—any internal business unit or function that will contribute to the initiative's success. This approach not only ensures availability of supplies but also results in lower total cost, streamlined processes, and increased responsiveness to customers' changing needs.
6. Focus on total cost of ownership (TCO), not price. One benefit of strategic sourcing is that it shifts the focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. For significant spend areas, procurement teams at best-in-class companies are abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price. Instead, they consider many other factors that affect the total cost of ownership. This makes good sense when you consider that acquisition costs account for only 25 to 40 percent of the total cost for most products and services. The balance (and majority) of the total comprises operating, training, maintenance, warehousing, environmental, quality, and transportation costs as well as the cost to salvage the product's value later on.
It's no surprise that best-in-class companies are paying attention to inventory at the highest levels. The "real" cost of holding inventory often is higher than the generally assumed 20 to 25 percent. In fact, recent research reveals that inventory holding costs could represent up to 60 percent of the cost of an item that is held in inventory for 12 months. Those findings included the holding cost of insurance, taxes, obsolescence, and warehousing.
Poor planning and forecasting are direct causes of inventories that are out of balance with a business's needs. Accordingly, best-in-class companies also are placing more emphasis on demand planning and forecasting as an additional means of ensuring optimal inventory levels.
9. Establish appropriate levels of control and minimize risk. Supply chain management policies and procedures should follow an appropriate sequence and structure, and it is important to review them frequently (if not constantly) and bring them up to date. Keeping them realistic and easy to understand and follow will help to ensure compliance.
It is certainly possible to go too far in establishing policies and procedures, however. That is why bestin- class companies periodically review their policies and controls to ensure that they are not creating bottlenecks. Their objective is to streamline them without sacrificing the ability of those controls to deter theft, fraud, and other problems.
Risk mitigation goes hand-in-hand with policies and controls, and best-in-class supply chain organizations integrate risk-mitigation methodologies into their sourcing decision process. This is a complicated subject that we can touch on only briefly here, but in short, these organizations are adopting sound methodologies that include: (1) identifying all of the risk elements, (2) determining the probability of the risk event occurring, (3) assessing the dollar impact on the sourcing decision if the risk event actually takes place, and (4) prioritizing risks for monitoring and prevention.
10. Take "green" initiatives and social responsibility seriously. Reducing a supply chain's carbon footprint is no longer a "nice but not necessary" practice. It's likely that a carbon- trading regime will be established in the United States at some point. But here's another reason why best-in-class companies "go green": buyers and consumers are taking environmental impact into consideration when they choose suppliers. That is why organizations such as Dun & Bradstreet now produce reports that evaluate "green" companies. We're also seeing more and more requests for proposal (RFPs) that ask suppliers and service providers to provide information about their green initiatives.
IBP: The Next-Gen S&OP Solution
Demand forecasting also plays a key role in long-term S&OP processes. Integrated Business Planning (IBP), the next generation of S&OP solutions, extends S&OP processes from within a company’s four walls to include downstream customers. These customer-level demand forecasts provide additional inputs to drive to a consensus forecast.
Effective IBP also includes upstream suppliers to provide better insight into planned demand changes to feed rough-cut capacity planning; production scheduling and other sourcing; assembly; and manufacturing processes. Once a consensus long-term forecast is chosen, direct integration with tactical demand forecasts is critical to ensure demand planning and purchase order recommendations are updated. This is especially critical for communications to suppliers with extremely long lead times to avoid inventory shortfalls.
Modern Tools Support Collaborative Planning and Forecasting
These three key scientific techniques combine to improve IBP process outcomes and supplement collaborative and effective sales operations planning across a company, downstream to customers, and upstream to suppliers. This is especially important in the face of increasing supply chain complexity. Distributors face an even greater challenge as they increase assortment sizes while combating the “Amazon effect” rapidly entering distribution.
Applying Price and Revenue Optimization for Demand Shaping
In our first post on optimizing supply and demand through demand shaping, we expanded upon the traditional definition of demand shaping to mean a process where the optimal demand and supply decisions are made by using all available supply and demand information.
What-if Analysis in Price and Revenue Optimization
As you may have noticed, the what-if analysis and price/revenue optimization methods are two different approaches to help organizations move beyond demand manipulation. However, both approaches use different models and answer different questions.
What-if analysis allows users to evaluate alternative strategies and policies to maximize their revenue and profit performance while considering risks and supply chain constraints. Typically, the demand options are developed by running an econometric model. Those demand options are then used in an optimization model to determine proper resource allocation.
This means that what-if analysis focuses on the ability of the supply organization to support the presented demand, which is a resource allocation problem. It answers questions such as, “Can we fill this order?”
Fresh produce supply chain planning, demand forecasting
And yet many distributors are not only surviving, they’re thriving in this new competitive landscape. What differentiates success from failure right now is not just the ability of an organization to understand how each disruptor will affect their business. Companies succeed when they’re able to incorporate a disruptor into their current commerce strategy, and use it to their advantage.
Five primary disruptors have emerged that distributors simply cannot ignore. From an increasing demand for pricing transparency, to customer experience expectations, the following areas within B2B e-commerce can create a massive competitive edge when handled effectively.
1—Pricing Complexity. Some experts say we’re currently facing a pricing war within distribution, while others argue it’s a “value” war. Actually, both of these statements are true, but let’s start by talking about pricing. B2B researchers and buyers prefer to complete low-value tasks online, in a self-service fashion. We also know that transparent pricing offered outside the portal can lure potential buyers looking for the best deal on commodity products.