For companies up and down the consumer packaged goods (CPG) value chain, now is the time to take a fresh look at sales and operations planning (S&OP) processes. Although S&OP is a well-established, proven tool in the CPG industry, nearly a quarter of companies still do not use it, and many others could be realizing greater benefits than they do today from their S&OP efforts. Increased complexity in the value chain is putting pressure even on well-run S&OP processes, making accurate forecasting and planning more difficult. Strategy& advises CPG industry participants to keep in mind seven key parameters when refreshing their S&OP approach: Match objectives to processes; adopt an integrated value chain perspective; reflect tailored business streams in policies; leverage technology; get closer to demand; account for unpredictable elements in new product and promotion cycles; and align to harmonized key performance indicators.
A fresh look at S&OP can be of equal benefit to companies that are implementing it for the first time and companies that have had it in place long enough for it to get stale. S&OP is more than a series of policies that support a highly functional tool. Rather, it allows companies to define and implement their own strategies and then to take those strategies beyond the company walls to share them with strategic partners. S&OP therefore needs to be frequently refreshed based on the changing realities of customer demand and value chain structure. With complexity increasing, companies need to build advanced capabilities to ensure that ongoing critical trade-offs can be made to efficiently and optimally drive growth and profit across the value chain (“S&OP Success Stories”).
S&OP success stories
A major U.S. food products company had a strong stable of brands and low production costs overall. However, it had higher inventory levels than competitors and lower service levels, marked by poor fill rates, late deliveries, and a frequent need for expedited shipping. A recent restructuring had created a longer and more complex supply chain. A new S&OP process standardized the service and supply policies, used consumption data t o drive forecasting rather than react to historical data, introduced regular cross-functional management meetings for key decisions, and drove home the importance of the initiative by linking supply chain KPIs directly to management incentives. As a result, the company cut inventory levels by US$40 million (25 percent), improved customer service levels from the mid-90s to more than 98 percent, and reduced overall manufacturing and distribution costs by more than 20 percent.
A global fashion apparel manufacturer had myriad supply chain issues: Lead times were too long; inventories were in chaos, with products not in the right place at the right time; and demand forecasts were often in error. As a result, the company spent too much time fixing what was wrong instead of delivering properly. Using S&OP, it developed a cross-functional collaborative approach to forecasting, made better decisions on production sourcing and inventory by taking service and lead time trade-offs into account, and recast the warehousing of products with better use of SKU data. Additionally, it began shifting the entire supply chain from a forecast, or “push,” model. Seasonal goods remained on a forecast basis while core products used a demand-driven “pull” model. As the program gained traction, revenues and profits increased as inventory costs plummeted.
A major housewares company, after two years of multiple acquisitions, was near crisis in its cash flow and customer service because of excess inventory at all stages of production, from raw materials to the finished product. It was having severe difficulty managing an increasingly complex U.S. and Asian supply chain. It implemented an S&OP system; developed a demand-driven operating framework for its supply chain; trained its sales force to look at the total cost to serve, rather than focusing only on making the largest sale; and improved sourcing efforts to achieve cost reductions. The result was an initial inventory reduction of about 20 percent, better lead times for vendors and customers, price reductions of up to 15 percent for sourced products, and a fully coordinated planning process.
A multibrand durable goods manufacturer with a presence in all major markets was incurring significant costs because it carried extreme excess inventory due to a lack of organizational structure and analytic tools to inform its inventory decisions. The introduction of S&OP brought about regular cross-functional meetings to coordinate sales forecasts with production plans at the tactical level, and encouraged a strategic approach to aggregate volume planning. The company also developed inventory management tools, including forecasting, inventory targets, and production planning. Within five months, the company reduced inventories by 30 percent, cutting operating expenses by $25 million.