A Revolutionary Model for Sales and Operations Planning in the New On-Demand Economy
Excerpt
INTRODUCTION
WE ARE IN THE MIDST of a profound shift in the ways of commerce:
The economic engines of supply and demand have traded places. The
business of buying is shifting from a centuries-old supply-driven model
and moving rapidly to a market-driven, customer-centric one. Customers
are dictating what they purchase, insisting upon specialized
products for unique situations and tastes. Product-line complexity is
getting broader, and demand variability per product is growing higher
by orders of magnitude. Seemingly excessive service levels and
response times are becoming the norm.
While sales and operations planning (S&OP) traditionally has
been an important operations management process, its design has
remained essentially unchanged for more than 40 years. It customarily
has been internally focused, with a one-size-fits-all-customers
mindset. Today, however, S&OP is being whipped by strong, unrecognized
market forces that are increasing inventory and lowering
manufacturing and distribution productivity. The forces that drive our
economic engines are rapidly changing in the United States and
Europe and will spread to all other markets as those markets mature. In
today's on-demand economy, demand has come to dominate supply as
the driving force. This new circumstance is why the traditional, 40-
year-old approach is failing.
We have implemented the new market-driven supply chain
processes using advanced S&OP in many good companies. In most
cases, the share price increases by three to nine times over the course
of the few years required for full implementation and realization of
benefits. The company's value increases because of the process and
increased cash flow, not because of some information technology (IT)
system. The market-driven supply chain delivers customer value,
defines and delivers competitive advantage, and generates free cash
flow. All three of these deliverables are not even considered in
operations-driven S&OP or demand-driven supply chains.
Studies done by AMR Research, now part of Gartner Group, have
found that more than 70 percent of companies are stuck in entry-level
S&OP processes, reacting or responding to the winds of change in the
market. Traditional approaches are operating two or more steps
removed from the market. In order to not only survive but thrive in
the new on-demand economy, you must learn how to implement an
S&OP process built on market savvy and operating "at the market.?
The Market-Driven Supply Chain will show you how your business can
accomplish this.
A revolutionary transformation in business management processes
is required to deal with the profound changes emerging and expanding
in the world economies. Today, the economy of business has a whole
new set of dimensions, as shown in Figure I-1. The figure outlines how
an enterprise views the overall planning process, given a supply versus a
demand view of the economy.
The supply chains of the future must become market-driven rather
than operations-driven or even demand-driven. As we describe in
Chapter 1, the market-driven supply chain uses a Level IV, or
advanced, S&OP. In the market-driven supply chain, the customer's
definition of value is the paramount concern. In contrast, in demand-
driven or operations-driven supply chains, internal economics and
inventory are the drivers.
From a supply view, markets are seen as homogeneous; we manufacture
a hammer, and everything looks like a nail. Conversely, from a
demand perspective, markets are specialized by consumer/customer
groups, with different solutions and products required for each group.
Prior to the 1970s, in a supply economy, the rate of change was very
slow; a product's life cycle was measured in decades. Today, in a
demand economy, a product life cycle of even a few years is considered
long. In the 1990s, product rationalization was the mantra. Now, an
S&OP process tuned to the demand economy enables complexity
when it is necessary to address specific customer needs in specialized
markets. Segmentation now needs to be done on customer values. In
the old supply view, decision making was driven by customers rather
than sales or marketing efficiency. In the old economy, with vastly less
product complexity and high concentration in distribution, planning
models were developed using the assumption that the underlying
demand patterns were normally distributed. Today, demand at the
product stock-keeping unit (SKU) level is significantly more volatile.
Analysis finds most SKUs have random demand patterns. This factor
alone necessitates a very profound change in approach.
A significantly more dynamic, customer-focused, and forwardthinking
S&OP model is needed to achieve success. The market-driven
supply chain needs to be managed by an S&OP process with lots of
market savvy. To distinguish between the market-driven supply chain
and the process managed by it, we refer in this book to market-savvy
S&OP as the most advanced and Level IV S&OP process. In the
market-driven supply chain, the market—not the manufacturer—
leads, and even dictates, the ways of commerce. A new "market-in?
approach to business planning and product production and deployment
is essential if a company is to be successful in today's challenging business
environment.
To win, the enterprise must manage to "at market? demand and
manage the customer's demand for valuable services. If your present
S&OP has an uncommitted top management, is mired in detail, or
lacks strong marketing and sales leadership, you must change the culture
starting here and now. If your process does not have strategic
vision or consists of interdepartmental rifts and disconnects, your
move to a new S&OP process is critical.
This book will help you create a market-savvy S&OP that is
built on strong cross-functional collaboration and market insights. A
market-savvy S&OP becomes a competitive weapon, designed to
achieve market share growth and positive cash flow. The robust
process empowers and multiplies the strengths of individual executives
in a collegial culture.
In this book, you will learn how to make a successful transformation,
both in management process to operate "at market? and in the
company's culture, to move to a customer-centric approach that generates
remarkable business results. You will not only see how your business
can compete but how it can dominate in its markets. The major
benefits your company accrues from implementing market-savvy
S&OP will be free cash-flow generation and market share gains.
These are the serious objectives most boards of directors require of senior
management. Achieving these benefits will have direct impact on
the company's stock price and will create value for shareholders.
You will also learn about a powerful new management process that
will bring about full organizational collaboration and be highly effective
in implementing your company's strategy. The need for full crossfunctional
collaboration in planning and execution has never been
greater, and the need is growing. The issues are far more complex than
can be effectively handled by individual functional areas operating
independently.
You will learn as well how being market-driven is practical and mirrors
reality, despite initially seeming to be counterintuitive. Becoming
market-driven may appear to be a daunting task, but in the end, it is
not difficult to achieve with the tools described in this book—tools for
the transformation of the culture, tools for the design of new processes,
and tools for the accomplishment of the transition to the new S&OP.
Many in business have long desired and even attempted to have
cross-functional collaborative management, to develop processes
that drive market-share growth, and to generate free cash flow.
Only a few have succeeded. This is often because of two factors: the
lack of a compelling reason for change, particularly when people are
operating inside individual functional areas, and a less-than-rigorous
change management process.
Individuals who have studied, labored, and stressed over achieving
change in enterprise culture in many different arenas—from public to
private, in both social and industrial organizations—know that change
comes only when the whole organization desires it. Change cannot be
forced or dictated, nor can it be accomplished by IT installations. The
CEO must be a role model for change, envisioning increased cash flow
and market share, then cultivating the desire to change through communication
and education. The CEO must recognize change has three
distinct aspects: vision, behavior, and process. A transition to the new
vision, with new behavior and new processes, is required. A change in
culture is implemented through a disciplined change management
process articulating the vision, accentuating the behavior, and adopting
the process.
This book is structured to demonstrate how to apply these three
aspects of change to create a winning market-savvy S&OP process.
We will show you, step by step, how to make the supply chain a strong
and successful competitive weapon. The overarching framework for
the book is shown in Figure I-2, with the associated relevant chapters.
Part I, "Creating Vision,? focuses on the first management change
required to implement a market-savvy S&OP process. Vision in this
context means to correctly define customer values and needs and to
determine what strategies you will use to satisfy these needs.
Part I has two chapters. Chapter 1, "Seeing Anew from a Market-
Savvy Perspective,? establishes what it means to be market-driven and
market-savvy. It describes market-savvy S&OP and explains how to
conduct this type of planning in a way that is fundamentally different
from what you are now doing. The chapter also examines value segmentation
and describes in detail how to perform it, leading to the
development of a go-to-market strategy, which is the statement of how
each functional area within the organization will accomplish the goal
or strategy of the business.
Chapter 2, "Competing on Time and Customer Connectivity,?
describes the time advantage and customer connectivity strategies that
hold the potential for desirable performance improvement when a
market-savvy S&OP is implemented.
Part II, "Changing Behavior,? looks at the second aspect of change
management. The two chapters in this part explore the driving aspects
of changed behavior in an S&OP context: robust analytics and a
customer-centric culture.
Chapter 3, "Managing by Analytics,? discusses the critical requirement
of replacing conventional wisdom based on past behavior with
facts and market-savvy, which look into the future.
Chapter 4, "Establishing a Customer-Centric Culture, " covers the
drivers of collegiality and a foundation for open and productive collaboration
across, up, and down the organization, all of which are vital
for achieving a customer-centric culture. Chapters 1 through 4 set the
stage by creating and communicating the need for change and outlining
the behavior needed to accomplish the change to a market-savvy
S&OP.
Part III, "Designing New Processes,? is the third and final phase of
the change management process. The processes fall into three major
areas: (1) the monthly collaborative planning processes, (2) the ratebased
planning processes in operations, and (3) the sustaining culture
processes of audits and continuous improvement. Each area is discussed
in its own chapter. Together, they reach the overarching goals
of gaining and sustaining competitive advantage and free cash flow.
Chapter 5, "Designing and Implementing Collaborative Planning
(Segment-Level S&OP),? describes the monthly planning
processes for managing demand and becoming customer-centric that
are led by senior management, with ownership and significant participation
by the organization's business units.
Chapter 6, "Designing a Rate-Based Planning Process,? covers
weekly execution of the rate-based planning processes for demand
fulfillment at the operational level. These processes enable the organization
to become market-driven in inventory replenishment, procure-
ment, and production. You will learn that rate-based processes replace
MRP (material requirements planning) and work hand in glove with
lean manufacturing initiatives.
And, finally, Chapter 7, "Transitioning to a New Culture of
Market-Driven Supply Chain,? discusses sustaining processes for continuing
and increasing competitive advantage, including the establishment
of process clubs.
Using the principles you will learn in this book, you will be able
to successfully implement a new and highly productive S&OP in
your company. The new processes will have a profound impact on the
business and on your career. The companies that have implemented
market-savvy S&OP now dominate their industries, some by further
strengthening and most by revolutionizing their impact on the industry.
Seven Guiding Principles of the Design of
Market-Savvy S&OP
Seven guiding principles or design principles are described in the book,
one for each chapter. The seven principles provide a useful overview
of what you will be learning:
1. Market In
2. Segment Level
3. Management by Analytics
4. Organize Around Customers
5. Process Heavy, People Light
6. Rate-Based
7. Change Culture
The journey begins with creating a vision. You will learn about this
exciting new approach in Chapter 1.
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