S&OP As A Business Issue Business Optimization & Risk Management

Martin JarvisScott Vanlandingham

GMA IS/LD ConferenceApril 2006

Agenda

What is S&OP? S&OP and Risk Management Making It Work Case 1 Case 2 Indicators of Need Reasons for Failure

So what is S&OP?

Do people still think of this as asupply chain issue?

It is a business initiative, not a supply chain imperative. S&OP is no longer just a supply chain process; instead, in the most successful organizations, it has become acritical business process, championed by a cross-functional team of senior executives.AMR Research Report July 2005

S&OP - Missing Link BetweenStrategy and Execution

Strategic Planning

Detailed Planning, Scheduling, and

Execution

SALES AND OPERATIONS PLANNING

Business PlanningStrategic Planning

Detailed Planning, Scheduling, and

ExecutionBusiness Planning DISCONNECT

What do we mean by S&OP

Definitions: What is Sales & Operations Planning?

S&OP takes a business’ sales & marketing ambitions, supply possibilities and financial goals and balances them to create a single, achievable plan

S&OP is a set of business processes and technologies that enable an organization to respond to demand and supply variations and risks with timely, data-driven decisions

S&OP is a means to translate demand data into an actionable and resourced operational plan; a collaborative process to align demand, supply and financial resources with a defined business strategy and priorities

S&OP is an effective means for senior management to practice and demonstrate leadership and teamwork

S&OP is senior management’s handle on the business and the means for management to orchestrate success

S&OP is the process by which a business makes its decisions

S&OP Develops

Sales and Sales and Ops PlanningOps Planning

MeetingMeetingReconcile with Reconcile with financial plansfinancial plans

SupplySupply

Reconcile Reconcile demand and supplydemand and supply

DemandDemand

From Forecasting to Demand Shaping and Sensing

From Rough Cut Capacity Planning to Supply Network Design

“What if?” Rather than “Yes/No”

From Cashed Up Turnover to P&L + Cash

Getting the right info to make decisions into the last 60 minutes of the process

How S&OP Relates to Risk

Key Findings Survey of 500 APICS members (largely MDT and CPG) designed to

understand 1) the major risks facing organizations and 2) the best solutions available to management to deal with supply-related risk

The top Supply Risk facing organizations is the lack of effective senior-executive led sales and operations planning (S&OP) process: 55 percent (#2 after “supply interruption”)

The top Supply Risk Solution available to organizations is a formal and effective enterprise-wide supply chain risk management process: 63 percent (#2 after “strategic planning”)

Source: “Understanding Supply Chain Risk Areas, Solutions and Plans” – Protiviti and APICS Study - 2004

S&OP and Risk Management

“Executives commonly undervalue and fail to act on the threat of predictable risk” 1.

1. From the authors of “Predictable Surprises: The disasters you should have seen coming and how to prevent them” - Bazerman and Watkins, 2004, Harvard Business School Press.

“An effective risk management program is a wide-ranging and continuous process that encompasses prevention, control and mitigation to protect a company’s value. Companies that have been successful at managing risks have brought multifunctional, multidiscipline people into the process together to look at all the risks in an organization”

FM Global Study – 600 Executives 2005 Companies > $500m Rev

Sounds like S&OP?

Making S&OP work

Flex the process to adapt to local market & business conditions, but insist on fundamental principles

Fact-based

Clear ownership

Formal assumptions

Rolling horizon

Relevant lead times

Trade-offs, clearly articulated, evaluated

The Aberdeen Group identified 6 common characteristics among S&OP leaders:

Profit focus (not just demand/supply balance)

Value Chain Focus (customers and suppliers)

Continuous Improvement Focus

Decision-Making – Teams Empowered

Technology Enablers – Integrated Systems

Risk Management – Multiple “What-If” Choices

Simple, but not too simple..

…..and honest

•Symptoms as perceived by the “centre”;

•Under-delivery of growth

•Trade Margin erosion

•Poor customer service; high stocks

Case 1: Food Business, Volatile Economy

•Possible solutions as perceived by the “centre”;

•Change the Chairman

•Change the Chairman & the Supply Chain Director

•Change the Chairman & the SC & Sales Directors

•As we start our story the Chairman & Sales Director have been changed and the symptoms are still very prevalent

Identifying and tackling underlying business issue

Case 1: Food Business, Volatile Economy

Additional Symptom:

High forecast bias - circa 10% overforecasting of turnover

Little visibility of this - internally this felt like striving for a target and failing

Average last 5 days (NIV)

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Case 1: Food Business, Volatile Economy

A deeper symptom:

Month end peaking - 50% of monthly reported turnover occurring in last 5 days

Internally seen as a fact of life - “that’s the way the market is here”; “It’s what our customers want”. Not measured, not talked about. A dirty little secret

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Case 1: Food Business, Volatile Economy

S&OP made things visible; customers were talked to; decisions were taken on customer and sales force incentives...

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Customer Contribution Total Sales Discounts

• From massively Biased forecast to unbiased

• From Sales Peak to flat phasing

• From uncontrolled spend to strategic investment

Case1: Food Business, Volatile Economy

•Symptoms as perceived by the “centre”;

•Some signs of growth slowing

•Poor turnover and profit forecasting

•Starting to miss targets

Case 2: Wide portfolio, Growing business

•Possible solutions as perceived by the “centre”;

•Stiffer targets!

•Change the Finance Director

•Promote the chairman!

•As we start our story the Chairman & Finance Director have been changed; trading is difficult - business is shrinking; financial forecast accuracy is poor

Tackling the internal issues first..

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7%

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Chairmanappointed

Brief given to redesign

the business

Changesimplemented

Case 2: Wide Portfolio, Growing Business

Set out to tackle forecast bias; moved to “one set of numbers”; rolling forecasts; risk management; dynamic resource allocation = >S&OP in the fullest sense

Monthly - Volume & Value (P&L) Forecasting

Brand Teams held accountable for unbiased forecasting based on OSOF (One Set Of Figures)

NPS Bias (Act vs previous mth forecast)

-30%

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Rama

Delma/Kasia

FloraLiptonSaga/BBHeartlandMeals Snacks Dressings

Always overestimated !NEGATIVE BIAS

Always underestimated !POSITIVE BIAS

Balanced forecastsNO BIAS

KEY LEARNINGS‘Honest’, integrated and up to date forecasts are the bedrock on which S&OP is built

Case 2: Wide Portfolio, Growing Business

Range Forecasting - Risks & OpportunitiesRisks & RemediesRisks & RemediesGrowth LB 5% rather than 10% (NPS -50m, TR -25m)

• Rama Margarine growth• RCB success• Einstein build-up• Bouillon's turnaround• Snacks• Familiada impact• Pizza innovat ion

Reduce MDC from 235m to 210m (st ill +10% vs 2004)

Forex to remain at current levels (TR +20m)

Oils drop 5% against current forecast (6m excl price issue)

• Apportion MDC spent depending on delivery (Q1…Q2…)

• PBO as primary target for BT’s on top of growth

Affordable innovations not developed (Einstein GP-6m)

Pricing (1% -12m)

Opportunities & their financingOpportunities & their financingInnovations (H2 NPS)

• Kylie/Corazon (2m)

• Wet soups (3m)

• Chilly (8m)

• Bertolli (?)

Forex to remain at current levels (TR +20m)

Range forecasts are key input to monthly Board Discussions

Downside Risks matched with potential ‘remedies’ (mitigating actions)

Upside ‘Risks’ matched with opportunities.

KEY LEARNINGS‘Active’ management of risks increases responsiveness.

Board focussed on strategic issues - no need for involvement in tactical matters.

Case 2: Wide Portfolio, Growing Business

Quarterly -Investment Management

Investment process triggered by review of range of possible forecast outcomes and stretching ambitions.

KEY LEARNINGS

Combination of ‘Going for Gold’ and ‘Your Earn You Spend’ creates positive energy (vs negative/defensive behaviour around fixed targets and budgets)

GrowthTarget

Where are we after Pułtusk?

FLT

Delma

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

FLT

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

FLT

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

FLT

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

FLT

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

FLT

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Heartland

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Rama

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FLT Delma Meals Snacks Saga Rama 7% - 12% -8% - 3% 38% - 72% 17% - 35% 0% - 7% 6% - 21% 3% - 9% 6% - 13% 1% - 9% 6% - 27%

Pułtusk

OSOF

10% -0.2% 120.7% 21.9% 7.6% 22.5% 8.5% 10.2% 6.9% 15.1%

8.7% -1.6% 103.6% 22.2% 6.2% 21.9% 8.3% 10.4% 5% 10.6%

How much can we spend?

Growth 7,0% 8,0% 9,0% 10,0%

A&P 196,0 202,1 208,1 212,6

A&P % TO 15,4% 15,7% 16,0% 16,2%

From TR perspective

original targetranges

current bestestimate and

stretch ambition

Case 2: Wide Portfolio, Growing Business

Key Elements of process change

Annual fixed financial planMultiple forecastsDe-coupled from operations

Continuously updated forecastWith rangesOne forecast linked to operations

PLANS

Annual fixed budgetsFunctionally ownedBudgets ‘an entitlement’

Owned by Brand TeamSubject to sanction (qtrly)Driven by Business Case

RESOURCEALLOCATION

Variance against planVariance against prior yearMoving Annual TotalsMEASUREMENT

Fixed by Annual ContractManaged by Board

Continuous alignment around‘projects’ and strategyDifferent bodies/ differing roles

COORDINATION

Annual fixed targetsNegotiatedPhased quarterly

Ranges (‘Threshold to Gold’)Set within context of strategyConstant ‘gap’ management

TARGETS

FROM TO

Case 2: Wide Portfolio, Growing business

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7%

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Chairmanappointed

Brief given to redesign

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Changesimplemented

Case 2: Wide Portfolio, Growing business

Key Indicators of Need:

Absence of teamwork & shared risk management among internal functions -

Executive-level on down!

Poor collaboration among business partners - internal or external (finger-pointing)

Unacceptable levels of forecast bias and lack of ownership of sales forecasts

Ineffective bottleneck and constraints management on the supply side

Material/product shortages - increased expediting $

Supply Interruption – leading to production delays and on-time delivery issues

with customers and profits “hits” and/or customer loss

Unacceptable lead times

Excessive on-hand inventories and obsolescence

Lack of confidence in planning systems; Chaos!!!!

Ineffective utilization of resources, and lack of resources when needed.

High levels of customer service, satisfaction, and retention

Senior management leads and is actively involved in the process

Short, mid and long-term demand/supply/financial risks and plans are managed, re-evaluated, and integrated continuously across a rolling horizon

Clear demand planning accountability, and unbiased forecasts

Ability to reliably execute on supply commitments

Trade-offs articulated and commercially evaluated

Prioritization of Business Initiatives

Disciplined, consistent process in place

Key Indicators of a successful S&OP:

o S&OP delivers business results

o Risk Management thinking is at the heart of S&OP

o Finance should be fully integrated into the S&OP process

o S&OP needs to be a cross-functional process

o The consumer does not care about your financial calendar

o Decisions should be based on visibility of facts

Key Takeaways:

Questions and Answers