cscmp 2014: bayer: putting the s back in s&op

1

Putting The “S” Back Into The S&OP Process

Anthony Gabrielli, Bayer Healthcare

Kevin O’Mahoney, Meridian Consulting Group

Marcel Zondag, Western Michigan University

Bruce Ferrin, Western Michigan University

“You can’t do today’s job withyesterday’s methods and be in business tomorrow.”

- George W. Bush

Driven by market disruptions

Today’s Business Environment

Continued Uncertainty

With the rollout of the Affordable Healthcare Act in 2014, over half of American households now receive government assistance

U.S. HH Receiving Government AssistanceRising Subsidized Living

2011 U.S. Census 2014 AHA

+10MM

+151MM

52.4% HH49.2% HH

RisingAssistance

Median household income has declined 5.7%, to $53,043, since the beginning of the recession in December 2007

Today’s Business Environment

Median HH Income Index(January 2000-March 2014) Declining Household Income

Rising consumer prices on daily necessities such as food and energy are restraining consumer spending

Consumer Prices*Year-to-Year Inflation Rates

Slow Economic Growth

*Consumer prices are based on the price index for household consumption (PCE) as reported by the Bureau of Economic AnalysisSource: Kantar 2014

2014F 2014-2018F

1.6%2.2%

1.2%

4.0%

Consumer Prices* Food & Fuel

Source: Sentier Research, March 2014

$56,271

$53,043

-5.7% Declining HH Income

Rising Consumer

Prices

58.5% of consumers (18+) have little to no consumer confidence

Today’s Consumer

Consumer ConfidenceWeak Consumer Confidence

Over half (51.7%) of consumers focused on needs rather than wants. Almost half (44.6%) have become more practical and realistic in their purchases

Life ChangesFocus On Needs vs. Wants

Source: Prosper Insights & Analytics Monthly Consumer Survey, August 2014

No Confidence

Little Confidence

Confident

Very Confident

14.7%

43.8%

33.4%

7.9%41.5%

58.5%

51.7%

44.6%

Adults 18+

Source: Prosper Insights & Analytics Monthly Consumer Survey, August 2014

Weak Consumer Confidence

Focus on Needs vs.

Wants

All shoppers are shopping less retailers

Today’s Shopper

Average Number Of Retailers Shopped(Past 4 Weeks*) Consumers Shopping Less

Shoppers balanced budget constraints and challenges

Leading Reasons Behind Reduced Level of Consumption Consumers Spending Less

Spending more on gasoline

Trying to simplify my life by buying fewer things

Household income is not keeping up with rising prices

Not as much money left over after buying food & other necessities

31%

35%

38%

31%

2007 2008 2009 2010 2011 2012 2013

12.4 12.4

11.1 11.1 11.2 11.210.7

Source: Kantar Retail 2014

*Inclusive of visits to stores and websites; averages are for Q1-Q3 of each year.

Source: Kantar Retail 2014

Declining Stores

Shopped

Consumers Spending

Less

Customers Are Shifting Their Expectations Of Manufacturers Within This Economic Environment

S&OP Process Pressure 2009 - 2012

Series1

0% 10% 20% 30% 40% 50% 60%

56%

31%

45%

48%

2012 2009

Customer demand faster and improved service

Reduce supply chain costs

2012 Aberdeen Group

External customer

requirements driving pressure for supply chain speed, reliability,

and flexibility

+54%

Less emphasis on the “O” within the

S&OP Process

-24%

Manufacturers Are Seeing The Need To Restore The Balance Between The “S” And “O” To Effectively Compete Today

Benchmarking S&OP Process Importance KPIs

1 Topline volume growth

2 Orders shipped on-time and complete

3 Forecast accuracy

4 Inventory targets

5 Customer satisfaction

6 Profitability target

7 Case fill rate

8 Production flexibility

9 Line efficiency

10 Management of margins

Source: Meridian S&OP Benchmarking Survey

5 of Top 10 KPIs are “S”

KPIs

#1 KPI focuses on

the “S”

“In the business world, the rearview mirror is always clearer than the windshield.”

- Warren Buffet

S&OP Process Requirements Of Tomorrow

The industry is facing increased pressure from customers for improved responsiveness

Customer expectations for service and competitive pressures create a need for improved supply chain speed and flexibility

Slow industry growth and ongoing economic uncertainty has created an environment where the competition for Selling One More Unit is high – [Volume Growth]

Manufacturers have identified Topline Volume Growth as the #1 KPI from S&OP

S&OP needs to ensure that Marketing & Sales Opportunities are aligned with Supply Chain Capabilities to effective be able to Sell One More Thing

S&OP is a Core Commercial Process, not a Product Supply Process

S&OP is a Product Supply Process

Reality

Myth

Expected Benefits

Implications For S&OP

The S&OP Process Opportunity

The competition for Selling One More Unit is high

To compete in the future,restore the balance of the “S” and “O” within S&OP

The Business Challenge

The S&OP Opportunity

“Drive the business,

let not that drive thee.”

- Benjamin Franklin

Best Practices Application

DemandPossibilities

SupplyCapabilities

Putting The “S” Back In The S&OP Process

Putting The “S” Back Into The S&OP Process

This renewed focus on the “S” should not result in imbalance with the “O”

Renewed focus to be able to Sell One More Unit

Implication Is Not “Imbalance”

Marketplace Dynamics Creating A

Renewed Focus

Focus on S = Balancing Demand & Supply

However, one cannot consider sales without also considering a manufacturer’s ability to effectively, efficiently, and profitably create and meet demand

Objective is to balance Demand Management with Supply Capabilities– Balance demand & supply by efficiently utilizing

supply chain targeted flexibility to effectively respond to market priorities

Shopper Centric Demand Management

Demand Management:Sales - Marketing

Strategies & Tactics

ShoppersCustomers

Shopper Centric Demand Management



ShoppersCustomers

First Choice Demand Signal

Market Priorities(Derived Demand Signal)

Objective



Demand Signal Characteristics:

Magnitude & Timing

Control Levers

Theoretical Process Model




Magnitude & Timing

Voice of the Supply Chain

Voice of the Customer

Shopper Centric Supply Chain Management

Supply Chain Risk

Theoretical Process Model




Magnitude & Timing

Voice of the Supply Chain

Voice of the Customer

Supply Chain Risk

Shopper Centric Supply Chain Management

Putting The “S” Back IntoThe S&OP Process

Bayer U.S. Consumer Care

Case Study

Food Animal Products

Companion Animals

General Medicine Specialty

Medicine

Diabetes Care Radiology &

Interventional

Analgesics Nutritionals GI Allergy/Cough

Cold Sun Care Foot Care

ConsumerCare

Bayer Is A $40 Billion+ Global Life Science Company

Medical Care

Pharma-ceuticals

Animal Health

Bayer U.S. Consumer Care Business Situation

Significant change has occurred over the last few years, including:– Bayer business growth– Merck Acquisition– Restructuring of the Sales and Marketing organizations– Organizational changes in Product Supply and Customer Logistics– Implementation of an ERP solution with SAP

This “journey of change” and accelerated business growth has created challenges within the Bayer U.S. Consumer Supply Chain resulting in:– Declining Customer Service Levels– Excess Inventory– Reduced Forecasting Accuracy– Product Cuts– Lost Sales

Bayer U.S. Consumer Care Business Challenge

Three perfect storms negatively impacted their S&OP Process

Marketplace volatility Competitive outages Category/segment/form shifts

The External Storm

Bayer business growth New roles, responsibilities, reporting relationships Process breakdowns System/information issues

The Internal Storm

Loss of trust cross-functionally Competing/non-aligned KPIs and STIs Lack of strategic alignment between U.S. CC Business

Plan and Bayer Product Supply Plan

The Political Storm

Key Underlying Issues Impacting S&OP Process

KeyIssues

Above Market Growth

Reduced Manufacturing Flexibility

Demand & Supply Process Challenges

Under Resourced Project Management Capacity

Declining Forecast Accuracy

Source: YTD Cuts Analysis w/Reasons (thru 10/31/12)

42%

14%

11%

11%

10%

8%

2%

Reason Why

Forecast Accuracy

Supply Center Delays

Production Problems - Bulk

Production Problems - Fin-ished Goods

Procurement/Third Party Products

Quality Issues

No Stock Out

Supply58%

Demand42%

Both Demand And Supply Challenges Drove Product Cuts

2012 Bayer US Consumer Care Product Cut Analysis ($)

Forecast Accuracy was reported as the leading cause

Bayer Forecast Accuracy In Aggregate Was Good; Issues Arose At The Item Level

Aggregate Forecast Accuracy

Forecast Accuracy In Aggregate Is Good

Consumer Care Aleve

74.7%78.3%

Source: Meridian Consulting Group

Goal 75%

-0.3% vs. Goal+3.3% vs. Goal

Series1

26%

-10%

28%

-36%

Acceptable Bias (Within +/- 5%)Unacceptable Bias (Outside +/- 5%)

Forecast Bias At Item Level (Aleve)

54% Of Items Over Forecast

46% Of Items Under Forecast

64% of Aleve Items Were Outside An Acceptable Level

of Forecast Bias


Causing Issues With Inventory Management

Average Monthly Inventory2011 vs. 2012

Monthly Inventory Impact $MM

Cost of Inventory2011 vs. 2012

Cost Of Inventory Impact $MM

2011 2012

Average Monthly Inventory

+20% vs. YAG+18% vs. Plan

2011 2012

Total Cost Of

Inventory+ 26% vs. 2011


2012 Plan

Carry Costs Wrong Inventory

Carry Costs Right Inventory

Write Offs


% Orders Complete

% Lines Complete

% Cases Complete

2010 2011 2012

And Negatively Impacting Customer Service

2010 2011 2012

# Of Compliance DeductionsTotal Compliance Fines ($M)

Customer Service Metrics Customer Compliance Fines

Orders Complete-9% vs. 2010

LinesComplete

-13% vs. 2010

Cases Complete

-13% vs. 2010

# Of Compliance Deductions

+71% vs. 2010

Compliance Fines Have Increased +359% vs. 2010

Declining customer service levels across all key measures

With increasing customer compliance deductions and fines

Source: Meridian Consulting Group Source: Meridian Consulting Group

Bayer U.S. Consumer Care S&OP Process Blueprint

Phase 1 Phase 2

S&OP Process Improvement Blueprint Development

S&OP Process Blueprint Implementation

Work StreamsQuantitative Assessment

Qualitative Assessment

Industry Best Practices &

Benchmarking DemandPlanning

SupplyPlanning

StrategicFramework

OrganizationalCapability

Four Work Streams Comprise The S&OP Blueprint

DemandPlanning

SupplyPlanning

StrategicFramework


The Bayer S&OP Process Consists Of Two Distinct Planning Cycles

S&OP is a Core Commercial Process for U.S. Consumer Care that aligns an Unconstrained Demand Plan with a Constrained Supply Plan

Rolling 6 to 9-Month Planning Horizons

MonthlyOperating

Cycle

Short-Term Horizon

Integration of the Commercial Strategic Planning Processes with the Long-Term Operational Planning Processes

Rolling 36-Month PlanningHorizon

3-YearPlanning

Cycle

Long-Term Horizon

S&OP 3-Year Planning Cycle

US CC Strategic Plan (5 Year)

US CC Portfolio Management Plan (3 Year)

Outputs

36-Month Demand Plan

Outputs

36-Month Supply Plan 36-Month Product Supply

Capacity Planning

Outputs

Processes that provide cross-functional Strategic Commercial Business Planning for US CC for a 3 and 5-year horizon

A process that provides Strategic Demand Planning for a rolling 36-month horizon to enable 3-Year Supply Planning

Processes that provide Strategic Product Supply OPEX and Capacity Planning

The S&OP Monthly Operating Cycle Is Comprised Of Two Core Processes With Two Key Outputs

Demand Planning Improvement

DemandPlanning

SupplyPlanning

StrategicFramework


Improved Short-Term Demand Planning Process

Three Core InputsThree Cross-

Functional Work Streams

Reaching Consensus

Output

“Bottom-Up” Customer Data

“Top-Down” Consumption-Based

Activities

“Best Pick” Model Forecast

Sales/Customer Logistics

Work Stream

MarketingWork Stream

Demand PlanningWork Stream

Demand Review Meeting

6 & 9* Month Rolling Unconstrained

Demand Forecast

*Note: 9 Months Rolling Forecast Cough Cold Brands

Sales View

Marketing View

Demand Planning View

Improved Demand Forecasting Sales View

Field Sales & Customer Logistics develops “bottom-up”collaborative demand forecasting by brand at the SKU level for

11 Leading Customers in these channels that represent over 80% of BHC volume

Mass Drug Grocery Club Value

Six Other Customers Will Have Direct Data Input By Customer Logistics

All Other Volume Will Be Forecasted By CBC

A/O Mass A/O Grocery A/O Diversified

Demand Planning Forecasting Is Supported By An Integrated Demand Planning System

APO

Integrated Demand

Planning System

Order Management Module

Demand PlanningModule

Data Inputs

Retail Inventory

Master Data

POS/Consumption

Promotions

Customer Orders (VMI/CPFR)

Supply Planning System

Supply Planning Improvement

DemandPlanning

SupplyPlanning

StrategicFramework


Bayer Commercial Success RequiredTargeted Flexibility To Achieve the Business Plan

Three Marketplace Dynamics Drive The Need For Targeted Flexibility

U.S. customers are large and growing… and becoming increasingly complex to serve

Seizing unplanned demand should be built and leveraged as a core competency

Changing Consumer

Requirements

Increasing Customer Demands

Unanticipated Marketplace

Events

Consumers are becoming more proactive about their health and wellness

Bayer Healthcare Targeted Flexibility

Targeted Flexibility Definition

Targeted Flexibility is the ability to support an unplanned increase in demand without significant cost increases

Targeted Flexibility Illustration

DescriptionStep

“A+” SKUs:Supply in 0-6 weeks

“A+” SKUs:Supply in 6-12 weeks

1 Establish SKU Segmentation Guidelines High volume SKUs that are important to the business

2 Determine Targeted Flexibility Capability

Volume required to reasonably guarantee no

stock-outs

Satisfy surge demand

20% increase over forecast

3 Quantify Supply Chain Requirements to Support

On-hand inventory increase by 20%

Capacity to handle increased demand exists today – main impact is on

intermediate and component inventory

increase

Targeted Flexibility Expected Benefits

Better alignment of product supply resources to support business requirements

Ensure continuity of supply when demand is high without significant cost increases

Increased supply flexibility may help gain additional volume

Improved customer service levels

“Perfection is not attainable. But if we chase perfection, we can catch

excellence.”

- Vince Lombardi

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cscmp 2014: bayer: putting the s back in s&op

Business

balancingdemand supply

business tomorrow

hh incomerisingconsumerprices

business world

kpifocuses onthe s

improved supply chain

kantar retail

fconsumer prices