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Lora Cecere's picture
What Is The Value of S&OP?

Many people ask me, "What is the value proposition for Sales and Operations Planning (S&OP)?" I have tried to answer this question many times and in different ways. One of the most interesting projects that we recently completed is a study where we asked companies to self-assess their S&OP processes on a scale of 1-7 based on perceived effectiveness. When we group the responses by Effective S&OP responses (scores of 6-7) versus those that Do Not Feel That They Have An Effective S&OP (1-5), we see distinct patterns in how they describe their organization. In Figure 1, we share these differences:

Figure 1. Characteristics of Effective S&OP

So, would you like to work on a program that could help and organization be more agile, strategic, and more in control? A program that could help companies be less reactive? The answer is an effective S&OP (with a 90% confidence level). However, what defines an effective S&OP process? Companies rating themselves with stronger capabilities are more likely to use supply chain planning systems, are more likely to be able to produce a feasible plan in supply planning, and use  "What-If Analysis." We find that it is not one, it is many elements. One thing is clear for me, it does not happen without the use of planning technologies.

Would you like for your organization to have these characteristics? I think so....

What do you see as the biggest advantage of an effective S&OP? I look forward to the discussion.

Jon kirkegaard's picture
Root cause NEED for S&OP

Lora:

As always find your views on what is needed refereshing and bold vs. others.. keep it up !

As you know DCRA Inc. our firm was very early to develop and deploy REAL S&OP 2001 or so, with weekly planning cycles and using S&OP to manage unplanned events.These S&OP centric solution were deployed not as some tool (never called S&OP)  but as an embedded enable behind pure business turn around effort.   This led us to develop essentially a real time capability we call Order Comit.  This solution uses S&OP relationships to find ability to commit the order, the incremental order.    

We have watched with great interest see firms try to make a "software" or cloud business focussed just on S&OP or some derivative of "planning".   Although admirable - and there are some custoemers who know they need to extend S&OP with a tool we do not think this is the right approach and all said a very very small market.  Very few business leaders will ever think they need S&OP and all your ERP vendor friends would be telling they already have it...but as you know they absolutely don't and ERP is in direct conflic to S&OP :)  

So cannot position S&OP as a thing ... you have to position for competitive advantge ...  the need to be better, have better results (like your chart above) but really focus on basics business finance measure of working capital, ROA, cashflow, cash to cash cycles and yes customer servce....  S&OP then is embedded in a process of culture change and analytical rigor of new culture. 

What we think is root need for S&OP is just plain and simple failed GAAP and IFRS accounting (accountant) focus is a disaster measurement system to run a busienss.   Managing EPS games,  and not accounting fo real upstream working capital comitments and definately not managing profit in volatility.  Additioanlly, ANY backwards looking traditional accounting measures averages over time... and the average can be ok but in today world of short product life cycles and volatile demand you could look good on the "average" over the time but be loosing boat loads of cash due to volatility.  Imagine managing demand and supply in a  continual sign wave of demand... that is much of business today !  It is not 1950 with a steady flow from lower left to upper right over time.

Another way to look at it is ERP has given power to the accountants who only know precision not accuracy.  They burden the business and SEC / GAAP accounting with precision of control but in most case is totally "in accurate" or real flows of money, inventory, customer satisfaction.  Only is only accurate when measured backwards over 5 or 10 years.   Ever run a manaufacutring business (we do) and that is not how it works... you are looking 6 months to 6 years ahead not backwards !!

So the answer is simple but is quite different the what is in market today.   Outside of your analyst coverage have to say rest of analysts just either have not idea of real solution or just write around what some software firm pushes on them.   

1.  So we all need an all out full court press on business schools, finance schools, real business consulting, Wall Street analysts a simple package of real uncorruptable measurements grounded in real physical flow of inventory, inventory commited to be produced MPS, and cashflow.    Measurments that screen out the manipulation plain and simple

2. Tools to simulate this measurement approach (S&OP used as an analysis tool) change management tool to simply show firms HOW GOOD they could be and how they can control the pace, projects, programs, impact but that there is a HUGE need in order to stay in busines or prosper.   By the way same tool can then be deployed to scale and operate in this manner 

- this process should be supported a analysis of the competitive advantage of top players in everyy SIC code and what you will find is top 5% of firms today in almost every SIC code do have programs, management tools, measurements that do this and have real business competitive advantage from it.  They may not call it S&OP, or they may but have a strong culture to manage first then report GAAP second.  They by no means have it all figured out but are just a bit better then their GAAP / ERP accounting oriented competitors and can turn up the screws at anytime based on competitive pressures

- the tools that do this simulation should be darn near free so every MBA student, every engineering first principles focused supply chain student, every clear thinking renagade in a corporation can grap one and show analytically without a shadow of doubt the need / opportunity.   Today, tools are priced through the roof or convoluted with some ERP package in violent conflict of interest with this apporach.   We have done this to a small extents at sopbook.com making these available almost free and architected ansynchrounsly using a spreadsheet at user interface (not a spreadsheet) !  It is our small token of effort but needs much more mind share and funds around theme

3. Lastly if technology is really going to help it is going to have to be a breakthrough that makes the concept "easy" like Google to use.   Imagine if you could type in any part number or planning bill or assembly and get public private availability, lead time, coordination of need.    It amazes me how in past 10 years there has been a flood of consumer tools for finding the right music, using our phone, searching for consumerism but almost zero of this effort applied to flows of inventory and production which is maybe lifeblook of 60 to 70 percent of global GNP.    When we patented our view of this tool a few years back we thought there would be a flood of this thinking...   Still amazed mindset still controlled by silos of technology stacks now silos of clouds that don't really talk.    

 Money made by the traditional software approach that radically conflicts with solving this problem is embarrasing.  Almost all technology executives and their VC Wall Street backers ONLY think about controlling a synchronous world they make money on (a cloud, a software stack, etc.).    They don't understand and most of all don't  like the loosely coupled flow of information between companies and customers... this needs to change in the supply chain solution world.   These IT centric leaders constantly try to get the people to conform to IT or amazing blather on how some algorithm is smarter then people (nuts).  I would make the case there has NEVER been a real supply chain solution that works unless it is focuse on saving people time in making decision not replacing people with algorithms.   

So tecnology leaders who think multi-enterprise, non intrusive compatible with any tech, rapid deployment, map the flow of inventory across boundies need to be put in leadership rolls but it will take business leaders know what to look for to make this happen.  

To summarize the reason S&OP is so hard is 95% of firms, business executive DON"T know what they don't know.   They think because Fred purchased inventory software in 1972 and updated with some GAAP accounting driven ERP tool in 92 they solved this problem long ago.    What they have done is sealed in their future like Radio Shack. 

This is compounded that even though there are now a few S&OP solutions vs. in 2001 when we launched our 99% of these are controlled by some IT centric management trying to create a business model for S&OP technology in same way "Farmville" or how Microsoft Office makes money.  This is a looser from the beginning.   S&OP technology needs to be able to be deployed, publicly, privately, in a could out of a cloud, customer to a user decision but most of all needs to be fed by millions of loose connected links of relationships and data... not the ellusion it all is going in one CLOUD :)

Our experience with dozens of clients is once we go throught this education / simulation process we call Total Order Fulfillment (tm) the light always come on with top brass and it is a completely changed culture.    It is truly a top down bottom up WIN across the board and creates enourmous good for all levels both financially and in terms of job satisfaction and customer satisfaction.   However, this process take an amazing amount of effort, energy and the ability to speak dozens of business languages (role based, fiancial, or operational, IT or real IT etc.)

So there you go... that is why S&OP is so hard !     

 

Jon kirkegaard's picture
Root cause NEED for S&OP

Lora:

As always find your views on what is needed refereshing and bold vs. others.. keep it up !

As you know DCRA Inc. our firm was very early to develop and deploy REAL S&OP 2001 or so, with weekly planning cycles and using S&OP to manage unplanned events.These S&OP centric solution were deployed not as some tool (never called S&OP)  but as an embedded enable behind pure business turn around effort.   This led us to develop essentially a real time capability we call Order Comit.  This solution uses S&OP relationships to find ability to commit the order, the incremental order.    

We have watched with great interest see firms try to make a "software" or cloud business focussed just on S&OP or some derivative of "planning".   Although admirable - and there are some custoemers who know they need to extend S&OP with a tool we do not think this is the right approach and all said a very very small market.  Very few business leaders will ever think they need S&OP and all your ERP vendor friends would be telling they already have it...but as you know they absolutely don't and ERP is in direct conflic to S&OP :)  

So cannot position S&OP as a thing ... you have to position for competitive advantge ...  the need to be better, have better results (like your chart above) but really focus on basics business finance measure of working capital, ROA, cashflow, cash to cash cycles and yes customer servce....  S&OP then is embedded in a process of culture change and analytical rigor of new culture. 

What we think is root need for S&OP is just plain and simple failed GAAP and IFRS accounting (accountant) focus is a disaster measurement system to run a busienss.   Managing EPS games,  and not accounting fo real upstream working capital comitments and definately not managing profit in volatility.  Additioanlly, ANY backwards looking traditional accounting measures averages over time... and the average can be ok but in today world of short product life cycles and volatile demand you could look good on the "average" over the time but be loosing boat loads of cash due to volatility.  Imagine managing demand and supply in a  continual sign wave of demand... that is much of business today !  It is not 1950 with a steady flow from lower left to upper right over time.

Another way to look at it is ERP has given power to the accountants who only know precision not accuracy.  They burden the business and SEC / GAAP accounting with precision of control but in most case is totally "in accurate" or real flows of money, inventory, customer satisfaction.  Only is only accurate when measured backwards over 5 or 10 years.   Ever run a manaufacutring business (we do) and that is not how it works... you are looking 6 months to 6 years ahead not backwards !!

So the answer is simple but is quite different the what is in market today.   Outside of your analyst coverage have to say rest of analysts just either have not idea of real solution or just write around what some software firm pushes on them.   

1.  So we all need an all out full court press on business schools, finance schools, real business consulting, Wall Street analysts a simple package of real uncorruptable measurements grounded in real physical flow of inventory, inventory commited to be produced MPS, and cashflow.    Measurments that screen out the manipulation plain and simple

2. Tools to simulate this measurement approach (S&OP used as an analysis tool) change management tool to simply show firms HOW GOOD they could be and how they can control the pace, projects, programs, impact but that there is a HUGE need in order to stay in busines or prosper.   By the way same tool can then be deployed to scale and operate in this manner 

- this process should be supported a analysis of the competitive advantage of top players in everyy SIC code and what you will find is top 5% of firms today in almost every SIC code do have programs, management tools, measurements that do this and have real business competitive advantage from it.  They may not call it S&OP, or they may but have a strong culture to manage first then report GAAP second.  They by no means have it all figured out but are just a bit better then their GAAP / ERP accounting oriented competitors and can turn up the screws at anytime based on competitive pressures

- the tools that do this simulation should be darn near free so every MBA student, every engineering first principles focused supply chain student, every clear thinking renagade in a corporation can grap one and show analytically without a shadow of doubt the need / opportunity.   Today, tools are priced through the roof or convoluted with some ERP package in violent conflict of interest with this apporach.   We have done this to a small extents at sopbook.com making these available almost free and architected ansynchrounsly using a spreadsheet at user interface (not a spreadsheet) !  It is our small token of effort but needs much more mind share and funds around theme

3. Lastly if technology is really going to help it is going to have to be a breakthrough that makes the concept "easy" like Google to use.   Imagine if you could type in any part number or planning bill or assembly and get public private availability, lead time, coordination of need.    It amazes me how in past 10 years there has been a flood of consumer tools for finding the right music, using our phone, searching for consumerism but almost zero of this effort applied to flows of inventory and production which is maybe lifeblook of 60 to 70 percent of global GNP.    When we patented our view of this tool a few years back we thought there would be a flood of this thinking...   Still amazed mindset still controlled by silos of technology stacks now silos of clouds that don't really talk.    

 Money made by the traditional software approach that radically conflicts with solving this problem is embarrasing.  Almost all technology executives and their VC Wall Street backers ONLY think about controlling a synchronous world they make money on (a cloud, a software stack, etc.).    They don't understand and most of all don't  like the loosely coupled flow of information between companies and customers... this needs to change in the supply chain solution world.   These IT centric leaders constantly try to get the people to conform to IT or amazing blather on how some algorithm is smarter then people (nuts).  I would make the case there has NEVER been a real supply chain solution that works unless it is focuse on saving people time in making decision not replacing people with algorithms.   

So tecnology leaders who think multi-enterprise, non intrusive compatible with any tech, rapid deployment, map the flow of inventory across boundies need to be put in leadership rolls but it will take business leaders know what to look for to make this happen.  

To summarize the reason S&OP is so hard is 95% of firms, business executive DON"T know what they don't know.   They think because Fred purchased inventory software in 1972 and updated with some GAAP accounting driven ERP tool in 92 they solved this problem long ago.    What they have done is sealed in their future like Radio Shack. 

This is compounded that even though there are now a few S&OP solutions vs. in 2001 when we launched our 99% of these are controlled by some IT centric management trying to create a business model for S&OP technology in same way "Farmville" or how Microsoft Office makes money.  This is a looser from the beginning.   S&OP technology needs to be able to be deployed, publicly, privately, in a could out of a cloud, customer to a user decision but most of all needs to be fed by millions of loose connected links of relationships and data... not the ellusion it all is going in one CLOUD :)

Our experience with dozens of clients is once we go throught this education / simulation process we call Total Order Fulfillment (tm) the light always come on with top brass and it is a completely changed culture.    It is truly a top down bottom up WIN across the board and creates enourmous good for all levels both financially and in terms of job satisfaction and customer satisfaction.   However, this process take an amazing amount of effort, energy and the ability to speak dozens of business languages (role based, fiancial, or operational, IT or real IT etc.)

So there you go... that is why S&OP is so hard !     

 

Richard Cushing's picture
Agreeing with Jon Kirkegaard...

I would heartily recommend two outstanding books:

  1. The Measurement Nightmare - this book focuses on the failure of GAAP / IFRS / ERP-base systems to provide "accurate" (not "precise") and relevant data for managers and executives in S&OP
     
  2. Demand Drivenn Planning Using Smart Metrics - which provides and unlying conceptual framework and examples of the kinds of metrics that really can help S&OP participants improve their performance and the company's bottom-line

I think Jon Kirkegaard would be in full agreement with what is found in these two valuable books, if I read and understand what he is saying correctly.

Kind regards,

Richard D. Cushing
Certified Demand Driven Planner (CDDP)

Jon kirkegaard's picture
Agree with Cushing !

Richard

Yes, in my masters degree in finance many moons ago we spoke constantly about "Agency Cost" (the differgence of shareholde interest vs. what management decides to do)  Sort of how Carl Ican makes his living busing up on Wal Street.   

As a cashflow, operating, finance supply chain guy I asked one of the heads of the accounting department informally why GAAP accounting even exists as it create so much operating distortion.  His answer was consistency in evaluating companies over time in history !   Sort like a librarian measures how much dust is on a book !  I guess there is some value in this but it pales in comparison to tools to really project forward how to manage, what risks to take, how to maneuver, understand lead time propogtion.   So my cut is the whole accounting worlds prioirities are out of wack thus ERP systems that really are sold to CFO's for compliance not business management have server to lock in this constricting fatal approach to measurement ?

I already like the books as subtitle says based on "Theory of Constraints".   Properly positioned S&OP really is the TOC for total supply chain measurement...  thus real extended enterprise measurement

Thanks for the heads up ont he books !    We have been penciling two books for several years based on "real world" experience, projects with companion free S&OP tools to break the cycle.  Have held off publishing as really don't think the world needs more "business books" that no one reads - but maybe just the right voice could help :)

thanks 

Cheers

 

Jon

 

Richard Cushing's picture
Publish your books...

Jon,

Your comment about using GAAP to standardize the evaluation of companies over time being like "a librarian measures how much dust is on a book" is great!

At least, if the systems being sold were called "accounting" or "bookkeeping" or "financial" systems it would be nearer the truth and folks might look at them as such. However, to label them Enterprise Resource Planning system is a real fraud, because without adaptation much of the data provided by the system is just plain wrong when used for "planning" purposes.

I hope you get one (or both) of the books I suggested into your hands.

Kind regards,

Richard D. Cushing
Certified Demand Driven Planner (CDDP)

Jon kirkegaard's picture
Yes ERP is a fraud... has been for decades

Back in my days at Booz Allen we had a model for IT Strategy that really made sense and I think it still does

It used a pyramid as a metaphor and the base of the pyramid were utility systems you had to have but really just needed to run the most cost effective way. As you reach the top of the pyramid are the strategy based systems that generate competitive advantage, differentiate your business.   Accounting is essentially a "utility" have to have but by no means creates advantage.

S&OP linked to your demand generation systems to me are in essence the most sustainable forms of competitive advantage.   Unfortunatly, since deploying in 90% of business is taking on the establishment holding on to accounting / ERP dug in IT'ers, accountants and ERP salesmen it is hard work and delicate to reach breakthrough.   Have done it many times so speak with a bit of experience and could list all sorts of interesting ways and events that have to happen to break through.

Better, we educate and / or use unique technologies the break the "fraud" of ERP.    If you start to reach even a small percentage of the 90% who don't know what they don't know you do alot of good, create alot of value and help many business create competitive advantage

This is why we have taken on several indirect initiatives over past few years to help make this break through

1. invented and patented a real time S&OP (Order Comitment) that is easy for average employee an any firm to use to commit the incremental order.. thus improve ROA.  

2.  We also make our S&OP solutions completely non invasive, can work with any systems of any type,  Do not have "new" expensive BS user interfaces we let planners and all in an enterprise use Exel as user interface.  Even use asynchonousl so can still do their own offline analysis... even send analysis to S&OP team to cleanup and include in repository as a template that can be checked out by others and sync'ed with supply chain repository and S&OP cleansed data etc.

3. We have done a considerable amount of philinthropic efforts with State of Texas Governors office, US manufacturing assistance center and US Department of Commerce on using these supply chain strategies and enablers to create jobs... One example we like very much is leverage of postponed manfufacturing.    Our efforts probably generate over a half billion in governemt funding ... but once politicians got the money they diverted it to other efforts.  Very very disapointing but is reality

4. We even built a re-manufacturing business using these concepts from the ground up to have a show case to show how it can be done very profitably and thus "eat our own dogfood" :)

We have done all this as we believe stongly that an S&OP culture, mindset and enabler are so powerful and is a real cure for much of the micro and macro economic malaise we have in the US !  We have case studies of breakthrough success in multi Billion dollar firms like Siemens and small startups using offshore production doing final assembly in US and many in between.

We know the only element needed for success is an executive in a firm who really cares about results and has the tenacity to sort through and drive through the distractions.   

None of this did we  do  to be just different like most IT shiny object selling.   We did as a real efforts to use technology to assist in breaking through the nonsense the noise the disinformation of ERP.    In essence rather then using tech to sell tech and trap users these are the types of human factor leverage of tech to help solve the real root cause problem.

One of my inspirations years ago doing a deal with heads of Microsoft to license at technology for data integration a company I was helping run had I was struck by what the original CFO of Microsoft said about Microsoft products in the early days.   His quote was back in the 90's corporate IT groups were trying to keep the PC out, trying to block usage of Office and other tools.   Microsoft conciouslly made everything cheap and easy to the consumer to buy on an expense account and go around the IT "chieftans" !    This is part of our insparation for our Beta site www.SOPBook.com  !   We could use some help promoting as we litterally can give a user or compelete organziation real scalable, complete S&OP for hundreds of dollars not hundres of thousands.  Even if they scale it to run billion dollar business (which it easily scales to and beyond).  It might be thousands and they have access to source code to tweek and embed and integrate to existing culture and process.

So this all leads to a conclusion that the real NEED is education, experential education.   We have a methodlogy that involved a cost simulation of current vs. best dialed in based on culture and leadership that seems to work everytime.   The trick is you cannot push on a string !  Have to have a "Marine" inside an organization that sees the opportunity for himself and others.   

Cheers

 

Jon

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