Ignoring S&OE Is Increasing Your Risk
Brian Hoey - August 23, 2018
Think about some of the biggest supply chain risks for a moment: unexpected weather events or natural disasters; price fluctuation for oil or other transport factors; inaccurate forecasts—all things that require an immediate response in order to prevent complete supply chain shutdowns. Now, think about most sales & operations planning (S&OP) workflows: focused on mid-term, quarterly or yearly cycles; designed to support longer-term goals like new product launches—quite simply, the opposite of immediate. Of course, S&OP is crucial to shaping a business’ mid-term strategy, but when disruptions hit there’s rarely time to wait for the next quarterly planning meeting in order to respond. As a result, without a secondary workflow to cover the weekly or monthly planning timeframe, the inherent risks in longer-term planning processes are significantly amplified.
The Promise of S&OE
Luckily, there is just such a workflow: sales & operations execution (S&OE). As Gartner defines it, S&OE is tasked with making small daily and weekly adjustments to inventory restocking, transport logistics, and other matters that require real-time monitoring. At this point you may be wondering why it’s necessary or even desirable to have a separate, defined process for this stage of the planning cycle. “Why,” you might be asking, “can’t we let crises be sorted out by the relevant teams that they affect?” Simply put, confining this sort of daily or weekly monitoring to a specific business function, you not only prevent inadequate responses, you also prevent overreactions of the sort that might occur when problems are being addressed by those who lacked a complete, real-time picture of the supply chain. Essentially, supply chain operations across all touchpoints are smoothed out by having a separate execution function.
Just as crucially for reducing risk, S&OE also provides a real-time, up-to-the-minute snapshot of your company’s operations. This has the benefit not only of forcing your planning workflows to incorporate real-time information, but also injecting a level of intra-operational visibility into day-to-day tasks like transport routing that can help planners in longer-term cycles make more informed decisions. Without this added level of visibility, it can be difficult to even assess risk, let alone adequately respond to disruptions.
In the explanation of S&OE above we suggested some of the ways in which a supply chain that lacks this function might leave itself open to increased risk, but let’s think through a pair of hypotheticals in order to more thoroughly elucidate the ways in which ignoring S&OE might prevent adequate responses to disruption:
First, imagine you have robust execution workflow based on real-time supply chain information. During your busiest season of the year, an execution planner notices a slight downturn in the daily demand for a particular item or part, and a simultaneous increase in shipping costs due a fuel price hike. Because she has some buffer stock, she decides not to replenish inventory levels for this particular part until demand goes back up, while keeping restocking orders for other parts at the same level. When fuel prices and demand level out, she restocks the part in question to its original levels at a much lower cost than might have been expected during the period of increased fuel prices. Meanwhile, she is able to convey all of this information to S&OP planners and other stakeholders within her company through an intuitive digital interface. Thus, longer-term planners know that their goals remain on track, just as they know to take the potential volatility of demand for this specific product into account in setting their expectations.
Now, let’s imagine the same scenario playing out at a company that lacks a distinct S&OE process: while demand levels and fuel prices are still prone to fluctuation, there is no real-time monitoring to let planners know about any daily divergences from expectations. As a result, restock orders remain unchanged even when transport costs spike and demand for a particular product dips. The business, in turn, spends more on transport logistics than they intended, all without gaining any value on their end (because the products that were moved to the warehouse weren’t in demand). This lack of alignment between cost and value has budget ramifications, which might be noticed by longer-term planners. Unfortunately, questions about costing would probably only serve to obscure the demand volatility that created the inefficiency in the first place. Because there was no real-time snapshot of the supply chain that could be shared among decision makers, S&OP planners would continue to make decisions without critical information. If the volatility arose again, the occasional losses of value would continue to compound until the company’s mid-term plans were utterly derailed.
In this way, we can see the power of S&OE to prevent small, immediate disruptions from compounding into large-scale supply chain snafus—businesses ignore it at their own risk.