The more global the supply chain, the greater the need for smart planning tools. Has this breathed new life into S&OP asks John Dwyer?
Sales & Operations Planning (S&OP) is coming of age. Devised in the 1980s, largely by US consultant Dick Ling, the S&OP idea is to match supply and demand to each other and to the company’s grand plan, if it exists.
Sales and marketing produce the most well-founded predictions they’re capable of – based on actual orders and customer intentions. These forecasts are made by product category and, eventually, by stock keeping unit (SKU). Production managers contribute to a realistic supply plan to meet that demand plan over the next 18 to 24 months. The supply plan identifies the equipment, people and raw materials that will be needed to deliver the forecast. Top management reviews the forecasts monthly against the overall strategic business plan and approves the necessary resources.
S&OP’s practitioners say that, properly applied, it produces accurate forecasts, allowing production to match demand with minimum waste. But, as reported here a couple of years ago, S&OP lost its way.
Several reasons suggest themselves. One is that a fight broke out among its advocates. Until 2000 S&OP’s champion had been the Oliver Wight consultancy, with whom Ling had long been associated. Then Ling co-founded Wight breakaway Stratabridge. Wight didn’t help itself when, in 2005’s sixth edition of its Class A Checklist for Business Excellence, it changed S&OP’s name to ‘integrated business management’ – why change it?
It’s just as likely, however, that S&OP lost its gloss because the manufacturers who stood to gain from it also lost the plot. When it seemed you could double or treble your profits by moving production to China, why bother with the hearts-and-minds heartache needed to gain a few per cent from S&OP back home?
They’re learning. The return from China isn’t exactly on the scale of Napoleon’s retreat from Moscow, but let’s just say Krakow is the new Zhangzhou. Meanwhile, companies intent on long-term survival are taking S&OP seriously, especially now that money market uncertainty has lent ever greater interest to S&OP’s claim to identify the best ways to deploy precious investment funds.
The key is S&OP’s identification of ‘necessary resources’. If S&OP hasn’t always delivered that’s because its adopters have sometimes taken too constrained a view of what ‘resources’ means.
According to Trijntje Cornelissens of supply-chain management and S&OP consultancy Möbius, S&OP is meant to link all the business planning processes: sales, marketing, product development, manufacturing, sourcing and finance. Too often, however, manufacturers have linked sales and marketing with manufacturing and left it at that. That gives them an internal forecasting tool to identify likely peaks and troughs in demand and allocate production lines and people accordingly.
But it’s nowhere near as powerful as taking S&OP’s benefits out to the supply chain.
The step after that is to take S&OP one step further and use it to plan investment. Wooden flooring, roofing and insulation company Unilin sells through distributors, not DIY sheds. Since 2005 Unilin, whose headquarters are in Wielsbeke, Belgium, has been run as an autonomous subsidiary of carpet maker Mohawk of Calhoun, Georgia, US. Its Wielsbeke and Moeskroen, Belgium, factories supply laminated parquet flooring, and the Bazeilles, France, factory produces MDF. Unilin Europe accounted for two thirds of turnover in 2006.
The US business unit provided the other third. Until last summer it comprised two factories in Thomasville, North Carolina, making laminate parquet flooring; another North Carolina factory making MDF; and distribution centres in Thomasville, Seattle and Los Angeles.
Unilin’s problem was how best to deploy its resources. In the more mature European market Unilin could achieve forecast accuracies of up to 95 per cent, says Unilin supply chain manager Rik Blanchaert. But serving the highly volatile US market was proving altogether different, says Cornelissens, who worked with Unilin on its S&OP deployment.
Unilin had entered the US market with a few big wholesale customers who sold by marketing campaigns. Unilin didn’t always know which campaigns were coming up and would suddenly be hit with large orders it hadn’t bargained for.
Later the market grew even more difficult as the US housing market hit the skids. New home construction fell 14 per cent in January 2006 alone, says Blanchaert, and the number of vacant homes grew one third through that year. And we all know what’s happened since. Nevertheless, demand outstripped the capacity of the US factories to meet it, and the shortfall had to be made up in Europe.
When one business unit supplies the other, says Cornelissens, “you have to work out which site is producing which product and where the raw material is coming from.” The company had recently decided to serve the US market from the US, but Canada would be served from Europe. “If you have limited resources,” says Cornelissens, “you have to decide which products to make in Europe and which investments to make in Europe.”
Unilin’s dilemma, says Blanchaert, was that overseas transport is expensive and attracts duty on goods imported into the US, not to mention currency penalties. “Which product [should we] transfer, when, to where?” How could Unilin strike a balance between the cost of sourcing in Europe and that in the US, against the need to deliver on time and in full? To make things worse, it takes a month to move the goods from the Belgian production site to the US distribution centres. All those decisions were made more complex by Unilin’s aim to expand into eastern Europe, particularly Poland and Russia.
For volume lines the balancing act is less stressful, says Blanchaert. Unilin has been investing to make sure it has the manufacturing capacity in the US. It’s adding a new line to make the US market self-sufficient by the end of the year.
But, “for certain product families you need specific machines, which means you have to make specific investments,” says Cornelissens. So while Henkel is building up US capacity for volume products, it can’t afford to put plants in both the US and Europe to supply niche, lower-volume products, says Blanchaert. The supply chain has to be smart enough to deliver what’s wanted where it’s wanted.
Raw material supply presents yet further complexity. In niche laminate flooring, for example, Unilin’s unique selling proposition is the quality of the look of the flooring. The secret of that, says Blanchaert, is the quality of the paper on which the flooring image is imprinted – it accounts for 40 per cent of the value of Unilin’s total stock value. Unilin uses 10 different printers, one for each SKU. “To get a good price we need to buy in big quantities, so lead times are two to three months. There’s a supplier of the base paper involved, which will be the big paper mills. That makes it quite difficult.”
Overall, Blanchaert summarises, Henkel is involved in a constant recalculation about capacity and sourcing to make sure there are “neither unsold stocks or missed opportunities. S&OP is the only way you can control it, and that’s why it’s strategically so important.” With S&OP in place, Henkel has a firm handle not just on its supply chain, but on the investments it needs to make to ensure it makes the goods as cheaply as it can, with the certainty that it will deliver to the customer on time every time, wherever that customer happens to be.
Niche products are the high-value lifeblood of the company. “We will always have niche products we can only produce on one site. We need to change these every year or half year,” says Blanchaert. If he has a reservation about the way Unilin has introduced S&OP it’s that the company didn’t take enough account of new product introductions (NPIs), “but you need to be able to make sure you have the foundations right before you can move on to more difficult topics. That was a learning process we went through.”
For now he’s more than content that the work Unilin has done so far has established a base for SAP’s advanced planner and optimiser (APO) supply chain management tool in the fourth quarter of this year. “That will allow us to make big advances on stock levels. For me that’s a very concrete and very specific benefit.”
Another is the amount of money Unilin can save on tooling. Tooling can now be planned globally so that the tooling available is visible to the whole organisation. If tooling is needed each plant can see whether tooling newly available elsewhere can be reused or adapted for a different product. Blanchaert puts the savings from that alone as £200,000 a year.
Blanchaert’s advice to the S&OP adopter who wants a quick implementation is simple, and familiar – make sure the top management are behind you, so that you have the authority to do what you need to do; and “make sure you have a few resources available to make it happen.” With full-time implementers you can be up and running in a few months.