S&OP: A new frontier for supply chain resilience?
The Sales & Operations Planning process has evolved over the past 20 years, but it is not designed to cope effectively with the impacts of large-scale disruptions such as the COVID-19 pandemic. However, with some changes, S&OP could be a potent defense against the effects of extreme fluctuations in supply and demand.
by James B. Rice Jr., Kai Trepte, and Walid Klibi
The Sales & Operations Planning process (S&OP) has evolved over the past 20 years as a mechanism for synchronizing operations when demand and supply change. It is not designed to cope effectively with the impacts of large-scale disruptions such as the COVID-19 pandemic. However, with some changes, S&OP could be a potent defense against the effects of extreme fluctuations in supply and demand.
S&OP’s Achilles heel
A key characteristic of S&OP processes is that they bring visibility to operational functions within organizations, thereby exposing hidden buffers (be they excess inventory or capacity) that supposedly protect the enterprise against what is often viewed as departmental “bad behavior.” An example of this kind of behavior is when sales representatives inflate their forecasts to ensure adequate supply.
When an organization implements S&OP, the hidden buffers become visible because each stage of the S&OP process seeks to remove unplanned slack, causing inflated forecasts to shrink and inventory caches to disappear.
While such benefits are laudable, they do present a significant downside: The efficiency-building measures promoted by S&OP produce business plans that can be quite rigid, especially when the organization is hit by an unexpected disruption. Consequently, when a resilience-based approach is not integrated into S&OP, the strengths that distinguish the process can become liabilities.
Turning weaknesses into strengths in sales and operations planning
We have identified a number of benefits that become pitfalls in the S&OP process — and ways to remedy this problem and create a resilient form of the process. One example is forecast bias reduction.
S&OP helps to reduce the forecast bias that creates systematic over- or under-forecasting in organizations, improving supply chain efficiency. When over-forecasting diminishes, there is a one-time inventory reduction as the buffers mentioned above are eliminated because there is no longer a need to support non-existent demand. When systematic under-forecasting is reduced, capacity buffers are eliminated because this obviates the need to maintain capacity to support unplanned demand. However, the removal of buffers reduces the organization’s resilience when it experiences an unforeseen disruption.
This pitfall can be avoided — and the S&OP process made more resilient — by enabling the organization to predict the potential impact of unexpected events.
While few stakeholders classify forecast bias as desirable, from a supply chain resilience perspective, under-forecasting is likely to have a larger impact on supply chain resilience than over-forecasting. A sensitivity analysis could be presented during the S&OP process to show stakeholders the potential impact of unexpected demand surges or supply shortages. The analysis would show the percentage of the potential “upside demand” that can be covered by current supply. This analysis is based on the organization’s current supply capabilities and the percentage of expected demand if “downside supply” conditions materialize. The analysis also shows by how much forecasted demand can increase or supply can decrease before the organization faces significant customer service issues.
Using this information, S&OP stakeholders can develop a proxy for the resilience of their supply chain and understand how much buffer they have should an unexpected disruption occur. Once the implications are understood, the organization can assess the costs and benefits associated with adding capabilities, proactively, to increase supply chain resilience.
The S&OP Process at a crossroads
As the speed and intensity of disruptions continue to increase, organizations are faced with a choice: accept the weaknesses of an efficient but narrowly focused S&OP process or make the process resilient by collectively and thoughtfully designing the business to respond with resilience.
Companies can choose the latter route by introducing changes to S&OP practices that enhance the process and help them navigate an increasingly volatile competitive environment.
Kai Trepte is a Research Affiliate at MIT CTL (trepte@mit.edu), Walid Klibi is a Professor at Kedge Business School (France) and Visiting Scholar at MIT CTL (wklibi@mit.edu), James B. Rice Jr. is Deputy Director of MIT CTL (jrice@mit.edu).
This post is based on a more comprehensive article published on Supply Chain Quarterly.
