© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

The Three Stages of Harnessing Inventory in the S&OP Journey

Executive SummaryGlobalisation has delivered some expected and unexpected benefits and challenges: Supply chains are more dynamic, more complex and carry more risk. Leading companies are scrutinising the performance of each node in their supply chain to ensure internal and external targets are met.

Sales and operations planning (S&OP) is part of that goal. As a functional and collaborative integrated planning process, S&OP aims to align marketing, sales and supply chain initiatives and plans with the company’s goals.

A successful S&OP process creates a common set of plans and metrics for a more cost effective balance between supply and demand. Teams will evaluate a range of options and scenarios to achieve this based on a set of constraints capacity or otherwise. A holistic inventory plan plays a critical role in the success of S&OP. Depending on the sophistication of the organisation’s inventory strategies, tools needed to deliver evolving capabilities and new approaches must be layered on as the processes become more established and complexity grows.

S&OP means different things to different companies based on their size, maturity, current challenges and longer term goals, but the common thread to all is inventory.

WHITE PAPER

Highlights the degree to which inventory is at the centre of the S&OP initiative

“Sales and Operations Planning is a cross functional process to align and develop a conscientious plan between sales, marketing and operations”

– APICS

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

IntroductionSome industries have greater inventory fluctuation than others; be-it raw materials, finished goods, parts, semi-finished goods and so on, but generally globalisation of the supply chain has brought a new focus on inventory and connected processes such as supplier collaboration, risk mitigation and demand visibility.

Whilst S&OP has been part of many organisations progression for some years, the burning platform behind this endeavour is highly driven by economic climate, market dynamics and the organisation’s own performance. In turn, these have a considerable impact on visibility of demand and inventory.

The primary objective for many is therefore to develop a synchronised and sustainable supply plan that balances service, costs and inventory and delivers a competitive advantage.

This paper will explore the three stages of harnessing inventory as part of the S&OP journey:

Three Stages of S&OP MaturityInventory plays a critical role in the S&OP process, but how central it is to processes, strategies and/or technology depends on the company’s maturity in S&OP. Complexity grows over time, and processes, skills and tools need to be ready to support this evolution.

1. Building a Feasible Plan: In Stage 1 companies often focus on shorter time windows—weeks to one year. Processes are relatively basic; inventory is managed as part of daily supply chain processes without dedicated resources and the technology used to deliver a feasible plan is not particularly complex.

2. Matching Supply and Demand: In Stage 2 the concept of inventory-specific resources and processes as well as KPIs are being rolled out. The company has invested time and money in becoming more effective and is ready for more advanced approaches such as multi-echlon inventory optimization (MEIO). Inventory strategies have become a core consideration in the S&OP process and outcomes.

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

3. Delivering the Most Profitable Plan: In Stage 3 it becomes clear that building flexibility and elasticity in inventory performance requires a closer look at the overall supply network. This includes the location of facilities, the function and form of inventory and the impact on financial drivers such as tax, compliance etc.

Planning for Progress: Defining the Journey As companies are defining or redefining their S&OP strategy, requirements for success will depend immensely on how clearly the gap between current-state and to-be state has been mapped. Using a maturity model is a good way to start.

However, before hurrying into the next board meeting to lobby for executive support, cross-functional teams should benchmark existing performance and identify potential operational improvements and financial benefits over time. Only at this point should the board consider the initiative. A holistic benchmarking exercise should cover five areas:

1. Vision: This should be reflective not only of the supply chain objective but also on how this will positively impact the overall performance of the business. Statements about improvements should be tangible and quantified at a strategic and tactical level.

2. Organisation: Organisational changes can be disruptive and should be evaluated carefully. Prioritize based on potential benefit and chance for success first, rather than ‘big bang’ initiatives.

3. Processes: In order to be concise, focus on the aspects of the process that need to evolve and why. It is also good to add an element of weighting to those changes to highlight the need for all to buy in in order to be successful.

4. Tools and Technology: Be clear as to what is needed for today, and what is required to support ongoing maturity; this is not a project, it’s a journey.

5. Metrics: Think of a supply chain metric as a multi-dimensional cube: These cannot be static and set in stone. Define the axes and thresholds. Agree on KPIs that demonstrate progress versus the longer-term objective, as well as those that show performance on a daily basis.

Finally and most importantly, consider the organization’s readiness for transformation. The lower that readiness is, the higher the effort in change management will be.

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

Stage 1 Objective: Building a Feasible Plan Characteristics:

• Planning horizon is short--weeks to one year

• Processes and tools to deliver a feasible plan are basic and manageable

• Supply and demand are matched on a volume level in line with constraints

• Inventory is simulated into the future

• Basic inventory policies are adhered to and often set, and for many companies this is as much as they can manage

Constraints applied at the Volume level, Simulated Inventory over 1 year period

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

Stage 2 Objective: Matching Supply and Demand Characteristics:

• Planning horizon increases - 12 months up to two years

• More complex processes such as inventory optimisation and tools to support MEIO are introduced

• Inventory becomes a core part of the S&OP process and decision making and a business performance indicator

• Inventory is segmented into groups based on its volatility, cost and LTs to determine push/pull boundaries.

• Emphasis how inventory flows through the network. This means that where inventory is stored (pre-build stock) as well as how it delivered to the customer may change

• Decisions driven by constraints or seasonality propose changes such as the location of the inventory and/or how it is delivered to the customer

Volume / Mix Optimisation, Postponement, and Multi-Tier Inventory Optimisation

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

Stage 3 - Delivering the Most Profitable Plan Characteristics:

• Planning horizon significantly longer - often up to five years

• Deeper dive into the make-up of the network itself

• Inventory facilities and their function and form are determined based on financial drivers like tax and compliance

• With implications on both supply chain costs and the P&L, this stage will guide capital investments in supply chain and decisions on how to achieve the best possible inventory flow

Keeping the Journey in MindProgression through the stages will create greater complexity as the planning horizon extends and the connection between the strategic elements and tactical responses requires connected decision making. This will call for deeper cross-functional collaboration and end-to-end data and metrics to match.

Variables should be compared, taking into account service, costs, new product launches and so on; and will require more sophisticated optimisation capabilities. Being able to evaluate multiple scenarios and iterations will be an essential component of finding the best answer. The ability to simulate changes in demand and supply will become a fundamental input into the S&OP process and of the testing of the robustness of the proposed optimised network. A well compiled business case will highlight both the benefits longer term, the changes required and the investment that can support success by pointing to flexible and scalable solutions.

Figure 4: Network Design, Volume / Mix, Production and Flow Optimisation

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

Harnessing Dynamic and Integrated Supply Network Planning and Optimisation for Predictable Inventory PerformanceThe objective of S&OP is to balance demand and supply by aligning strategic planning with tactical and operational execution to ensure connected decision making and maximise service. The challenge is to excel both at the strategic and the tactical, however, businesses tend to fall into one of two categories:

• Heavily focused on the tactical to get short-term gain but failing to realise long-term business benefit

• Highly strategic in their approach, but missing the translation into tactical planning, resulting in slow value realisation

What is required is the ability to achieve an accelerated value curve to align and optimise demand, supply and inventory processes and measure and control performance from strategic planning to execution over time.

This dual focus is no easy goal: teams must positively affect the longer-term cost effectiveness and performance of the supply network in meeting demand and create effective and profitable tactical plans regardless of promotions and seasonality. They must do this in the present and in the future across demand, supply, logistics, manufacturing data and processes.

The Key to Long-Term Performance Improvement: Connected Design, Optimisation and Execution As teams start to collaborate more effectively and connect end-to-end supply chain processes, it will become more apparent that inventory comes in many guises at the various stages of the supply and manufacturing processes. This realisation brings to the surface the unseen or unaccounted for associated costs, storage requirements and accuracy of data. The key objective is inventory visibility for cross-functional decision support.

Much harder to control are how outside factors influence demand patterns, and the impact this has on inventory. As well as focusing on improving forecast accuracy, leaders are investing time and efforts into creating greater elasticity in their supply network. This requires a significant improvement in how processes associated with design, optimisation and execution are connected and measured.

Capability and improvement priorities in each area can be summarised as follows:

Strategic Supply Chain Design: Evaluation & Validation

• Validating a current configuration without compromising on costs or service.

• Identifying the optimal footprint set up to business goals.

Tactical Supply Chain Optimisation : Balancing Service and Financial Performance

• Evaluating product flow end to end in the context of complexity and risks and costs.

The underpinning of long term end to end performance: connected Design, Optimisation and Execution.

© 2013, 2015 LLamasoft, Inc. All rights reserved. v.20/01/16

LLamasoft, Inc. 201 South Main Street, Suite 400 Ann Arbor, Michigan 48104, USA Phone: +1 866.598.9831 LLamasoft.com | Info@LLamasoft.com

• Build in-house capabilities in ‘right sizing’ networks nationally, regionally or globally.

Supply chain execution

• Connecting short and medium term demand and inventory requirements while balancing the associated trade-offs

• Buffer variability that leads stock build up through controlled replenishment.

Conclusion: Supply Chain is a People Process Supply chain talent development is often limited to a functional level rather than aligned with a holistic end-to-end view of the supply chain. As such, individuals become experts in their own processes but fail to connect all the dots. Leaders are creating supply chain academies to better educate their teams on both the processes and drivers affecting the entire supply chain. This step becomes a valuable input into continuous improvement: as knowledge increases, teams are better equipped to collaborate and evolve processes to increase performance and mitigate risks.

Because metrics tend to drive behaviour, a cross-functional metrics framework will play a key role in creating alignment. Functional heads must spearhead a culture change and incentivise their teams to work proactively; sponsorships from senior executives is the foundation of this evolution for teams to feel empowered and accountable. The ability to demonstrate benefits are fundamental to achieving broader organisational buy-in.

Globalisation will continue to challenge organisations and S&OP, driven by strong cross-functional teams, will support the effort to synchronise supply, service and costs and harness inventory in the end-to-end supply chain.