Academic journal article The Journal of Business Forecasting

How the S&op Process Creates Value in the Supply Chain

Academic journal article The Journal of Business Forecasting

How the S&op Process Creates Value in the Supply Chain

Article excerpt

In today's competitive environment, it is easier and much less expensive to keep a customer with awesome service than to acquire a new customer ... S&OP reduces inventory levels by improving forecast accuracy ... both Sales Planners and Supply Planners have a tendency to hedge up the forecast.

The supporters of S&OP implementation projects often face a tough question from senior management: How will the implementation of an S&OP process benefit the organization? This is not an unusual question, as most business process redesign efforts face similar justification issues. This article describes five typical value creation opportunities enabled by S&OP and is based on our experiences with a diverse cross industry mix of clients.

Before we start, it is important to define the word "value." In this article, value is defined as an improvement in revenue, profit, efficiency, reduction of waste, obsolescence, or working capital. Organizational value can be measured with any number of return-on-assets calculations - we employ a simple return on shareholder value approach.

With the recent increase in the use of S&OP processes, a number of research groups have attempted to assign various value propositions to the S&OP process. As an example, the Aberdeen Research Group in a recent article claims the following benefits associated with a typical best in class S&OP implementation:

* 14% increase in operating margin

* 4% increase in gross margin dollars

* 55% reduction in inventory write-off

* 17% increase in new product revenues

These results are not surprising to us. Of course, with any reference to a benchmarkoriented benefits statement, there are always some additional questions. The first one is simple: "Can my company expect to get the same results?" We can answer this question with a definitive maybe! The second question is normally, "What do I have to do to get all these benefits?" Hopefully, this article will attempt to illustrate how the benefit stream is realized.

THE BENEFIT STREAM

At a recent Institute of Business Forecasting (IBF) conference, a speaker offered his personal experience of a benefit stream derived from an S&OP implementation. As a way to set the stage, he offered the information as shown in Table 1, which exhibits a "live" calculation of cost of inventory at his company. Inventory was a real concern at his company, as they were carrying twice as much inventory as their nearest competitor. The company conducted a thorough review of inventory cost as a way to assess the value leakage associated with carrying this excess inventory. The presenter used Table 1 to demonstrate how the company used actual transactional inventory costs - as well as a fairly low cost of capital-to calculate a surprising 20% annualized cost of inventory.

With an average summed finished good value of $35,000 per SKU, each item in the company's product portfolio was costing the business almost $7,000 per year. If you multiply this by the total number of SKUs in the product portfolio (1,500), the cost of carrying the inventory was over $10 million per year, and the amount of cash tied up in inventory was over $52 million. When his company calculated the number of turns, they found they were only six per year, while the industry benchmark standard was twelve. Using the competitive benchmark as a guide, the presenter determined his company was carrying $26 million in excess inventory, and was incurring about $5 million in additional costs each year to hold and manage the inventory. The conclusion was obvious: a reduction in inventory would have a dramatic impact on cash flow, profitability and competitiveness.

This particular company recognized the value leakage associated with its excess inventory, and then focused the S&OP process on metrics that increased the visibility of the excess. The company also sought to use measurements to modify some of the planning behaviors that it determined were contributing to the excess inventory carry. …

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