S&OP process redesign: why half of implementations struggle, and how Bram Desmet would fix demand, supply and the executive meeting

About Bram Desmet

CEO of Solventure and professor of operations and supply chain at Vlerick Business School in Belgium. A mathematician by training, he started in IT, moved into supply chain consulting after an MBA, and has written three books on supply chain and its link to strategy, finance and sales, the latest on integrated value planning. Listen to the episode.

Half of S&OP implementations run into trouble

When Bram Desmet sent a friend the draft of his latest thinking, the reply was: "I don't agree that S&OP is a broken process, there's a lot of companies that drive value from it." Bram agrees and disagrees. "My feeling is that at least half of the implementations of S&OP run into some kind of issues."

The symptoms are familiar: no buy-in from sales, forecasts that sales over-states in the plan and under-states in the budget, executives who don't engage. The technical causes, mostly data quality, are hard but solvable. "The more subtle thing is cross-functional alignment."

His conclusion, after 30 years of textbook S&OP and IBP, is that the process itself needs redesigning: demand planning, supply planning and the executive meeting. Here is how he would change each, and what it means for the systems underneath.

Whose job is it to fix?

Ben asked whether it is even supply chain's job to solve a cross-functional problem. "I believe it is our duty to solve it. Because supply chain has that connecting function. If supply chain is not solving it, there's nobody else who's going to solve it."

The only other connecting function is finance, and when Bram asks organisations who should balance his triangle of service, cost and cash, they choose supply chain. "If we ask it to finance, the cost will be under control and the inventory will be under control, but we will be left without customers."

Consensus demand is arm wrestling

Bram's starting point is the textbook demand process: the tool generates a statistical forecast, sales validates it, and the two sides agree a consensus. In practice: "Sales says we're going to sell 150. Supply chain says no way, at maximum 100. Consensus demand is arm wrestling between sales and supply chain, and depending on the power of the two functions, we settle for 120."

Both sides are rational. Sales, especially in long supply chains, knows that "if I don't put 150 in the plan, I'm never going to produce 150, and I'm never going to be able to sell 150." Supply chain knows that if it plans 150 and sells 100, "50 ends up in inventory, and who has the target on inventory? Me, the poor supply chain guy."

What consensus ignores is that functions have different attitudes to risk. "Sales is always going to be optimistic. Supply chain has the incentive to be exactly right: too much is an inventory problem, too little is a service problem. Finance is typically conservative, because in finance it's better to under-promise and over-deliver. Over-promise and under-deliver is the shortest way to the exit."

Redesign demand planning: base demand and opportunities

His proposal is to separate the two things being fought over. "Base demand, or recurring demand, should be statistically forecasted, by a data analytics team. The opportunities should be forecasted by sales, and managed in the CRM system."

The reason is adoption. "If we expect salespeople to go into a planning system to validate forecasts, into a CRM to manage opportunities, and then submit a separate financial forecast to finance, managing information in three systems is not going to work. One is already a challenge." Sales should focus on opportunities, which go both ways: new business, and contracts at risk.

Promotions are a third category with their own tool. "There's a supply chain aspect, what is the uplift and the cannibalisation, but there's also a promo efficiency aspect: what did the promotion deliver as a benefit to the company? That's not something you want to do in a supply chain planning system. That's something you do in a TPO system."

Stop stretching the planning system

Bram distributes planning software, and he warns his own consultants against scope creep. "If a customer calls tomorrow and asks, with your tool, can we mop the floor? The reflex is: let me think about it. No. Our answer needs to be time out. An advanced planning system is not used to mop the floor."

The deeper problem is that nobody designs the landscape. "The VP supply chain wants an APS, does a selection, starts implementing. The marketing director wants a trade promotion system, does an RFP, starts implementing. Finance wants an FP&A system. And three, six, 12, 18 months down the road, people realise: how are these systems going to interact?" An FMCG company, he says, has to decide upfront which planning processes it runs and which system supports each, and how they connect.

Supply planning: growth, comfort, economy, super saver

"Supply planning should by default be scenario-driven, and should by default put options on the executive table." The real discussion, balancing sales opportunity against inventory risk, "is not on the table, it's under the table, in the arm wrestling."

His analogy is the driving modes of a car. Growth mode puts every opportunity in the plan: good for sales, a large inventory risk. Comfort mode puts in selected opportunities, for instance generic products that will sell the following quarter but not customer-specific ones. Economy mode leaves opportunities out: good for inventory and cash, but if they materialise they eat the safety stock. And super saver mode is what happens when finance says "take 30% out of the inventory" because a loan repayment is due. "Supply chain people diligently execute the executive order, without showing the organisation what the sales risk is going to be."

The job of supply planning is to put the modes side by side, with their service, inventory and cash consequences.

The executive meeting: a business decision, in euros

"Whether we put 100 in the plan or 150, it's not a sales decision, not a supply chain decision, not a finance decision. It's a business decision." Consensus belongs at the end of the process, in the executive S&OP meeting, not assumed at the start. "What is relatively certain? What is uncertain? Use that as the basis for scenarios."

Today's executive meetings, in his experience, don't do that. "It's kill by PowerPoint. Ten slides with service levels, ten with forecast accuracy, ten with inventory. I'm disconnected after slide three. It's a reporting meeting, not a decision-making meeting."

Two things have to change. Scenarios need to be standardised, so the executive can mix them in the room: growth mode in Latin America, comfort mode in the US, what does that do to sales risk and inventory risk? And the plan has to be natively financial. "If you want to drive executive decision-making, it has to be in euros."

Integrate supply chain and financial planning

Both processes start from a sales forecast and both use bills of material and routings, one in volume and one in money. "What we are doing today is not efficient. We are duplicating the two processes and then try to connect them. That's what S&OP and IBP propose."

His minimum: any APS with a volume forecast should add prices to get gross sales, discounts to get net sales, standard costs to get a margin forecast, and feed the working capital forecast. "For finance people, when I pitch it, they increasingly think it's logical." SG&A can stay in the FP&A tool for now, but he expects the two to merge. The FP&A vendors already claim they can do supply planning, "I don't believe they really can," while no APS vendor claims financial planning. "One part of the ecosystem is already claiming it. The other part is a bit slower."

What AI is for: a joystick for the business

Bram's hope for AI is specific. "Planning systems have been built for planning experts. If you want the executive team to use the planning process to drive decisions, we need to make it intuitive." Like the driving modes: "I don't need to be a mechanic to handle them." His image is a joystick on the service-cost-cash triangle: more service, more margin, more cash, and see what happens. "Planning engines need to become more complex. They are too simplistic today. But we should not expose that complexity to the user."

Your next steps

• Split your demand plan into base demand and opportunities. Forecast the base statistically, and let sales own the opportunities, in the CRM, both upside and at-risk.
• Write down which planning processes you run (demand, promotions, supply, financial) and which system owns each, before the next RFP.
• Define three or four standard supply scenarios with names your executives will use, and show the service, inventory and cash of each.
• Add prices, discounts and standard costs to your volume plan so the executive meeting reads it in euros.
• Rebuild the executive S&OP agenda around one question: which scenario do we choose, and what risk are we accepting?

Bram's reading advice applies to the whole redesign: "We stick too much to the supply chain box. If we want to solve our core issues in the supply chain box, we will need to position a bit broader. Read into different domains and make the link yourself."