Chapter 6: Sales and operations planning for the food supply chain: case study – Delivering Performance in Food Supply Chains

6

Sales and operations planning for the food supply chain: case study

Ö. Yurt,     Izmir University of Economics, Turkey

C. Mena and G. Stevens,     Cranfield University, UK

Abstract:

The aim of this chapter is to examine sales and operations planning (S&OP) in the food and drink industry. The chapter highlights the impact on performance of the planning process and specifically S&OP, for food and drink companies. First an overview of S&OP and its historical evolution is presented. Then aims, trends, best practices and implementation processes of S&OP, together with its challenges are examined. The section that follows provides a roadmap for implementing S&OP in the food and drinks industry and discusses the critical aspects that should be evaluated during implementation. Finally, different aspects of S&OP in the food industry are discussed, based on the distinctive characteristics of the sector. The case study of a global leading company in the beverage sector is used throughout the chapter to exemplify key points.

Key words

sales and operations planning

food and drink supply chains

planning process

6.1 What is sales and operations planning (S&OP)?

The aim of sales and operations planning (S&OP) is simply to maintain a balance between supply and demand. However, defining the entire S&OP process is more complicated since its use has evolved and a number of new tools and techniques have been included in this decision making process.

First of all, S&OP is not a discrete activity and it is not an ultimate destination. It is mainly the management of an ongoing process. The Aberdeen Group defined S&OP (2005, p.i) as: ‘a set of business processes and technologies that enable an enterprise to effectively respond to demand and supply variability with timely determinations of the right market and supply chain mix, all through the S&OP horizon’. The S&OP process is affected by a number of factors as illustrated in Fig. 6.1. These factors are the elements of a dynamic marketplace which are orchestrated by the S&OP process.

Fig. 6.1 S&OP: orchestrating the dynamic marketplace (adapted from Aberdeen Group, 2005, p 3).

S&OP is an ongoing and dynamic process (Aberdeen Group, 2005; Wallace and Stahl 2008) which gives companies the ability to make changes very quickly and to determine the potential changes that may arise from new market conditions. It provides a logic and structure for managing change (Wallace and Stahl, 2008) and requires effective harmonisation and synchronisation of different functions of the business. Accordingly, coordination of a number of different plans is needed. Ling and Goddard (1988) refer to S&OP as the process for ‘orchestrating the success’ since such a decision making process aims to provide congruence of several operations and sub-processes. Most significantly, S&OP should be coordinated and aligned with financial planning activity to provide a continuum.

S&OP requires continuous updates and both operating plans and strategic plans need to be checked and revised regularly. Therefore, periodic meetings and management of the required changes are critical in S&OP. The responsibilities of the key players in each department are to compare the actual results of the plan, assess their performance and prepare an updated plan for the current period. This process enables companies to develop realistic goals for the following period which are the basis for business success (Ling and Goddard 1988). In this context, S&OP is a valuable strategic management tool for executives.

Although the processes for managing demand and supply have the common goal of providing business success and increasing business performance, lack of coordination between these processes is common. To solve this problem, S&OP aligns demand and supply processes by adjusting and harmonising demand and supply plans.

Businesses usually face performance problems owing to their misaligned operations. Although they have totally integrated their supply chain and utilised supply chain management practices, they may still have considerable problems with the integration and alignment of functions and departments in their organisation. One of the most significant misalignments is between sales and marketing which deals with demand management and production, and logistics and purchasing which deals with supply management (Mentzer and Moon, 2004; Crum and Palmatier, 2004). Again S&OP is the potential solution to this problem.

Before discussing the evolution of S&OP, it should be noted that some confusion about its definition and boundaries still exists. Balancing demand and supply at the aggregate level is the basis of S&OP and this activity does not deal with specific details about products, customers and orders. However, the boundaries of the approach have broadened to include some of these details (Wallace and Stahl, 2008). This evolution has created much confusion about the definition and scope of S&OP. Wallace and Stahl (2008, p. xvii) proposed two different terms to reduce the confusion: ‘… Executive S&OP to refer the executive activity’ and S&OP ‘… refer to the larger set of processes, which include forecasting and planning at the detail level as well as Executive S&OP’. In this chapter we adopt the executive S&OP concept which has also been called dynamic S&OP (e.g. Aberdeen Group, 2005).

6.1.1 Evolution of sales and operations planning

Through its evolution, S&OP has been given different names including Integrated Business Planning, Integrated Business Management, Integrated Performance Management, Rolling Business Planning and Regional Business Management (Coldrick et al., 2003). The term S&OP process was first introduced in the late 1980s when it mainly focused on the operations function, the main variable was product volume and there was no link between the metrics used for S&OP and financial plans. In the 1990s, the benefits of S&OP started to gain visibility. The majority of companies that implemented S&OP in the 1990s have successfully reduced inventory levels, increased customer service levels and boosted profits as a result (Coldrick et al., 2003). In recent years the focus has expanded to provide an operational ability to evaluate demand and ensure that the required resources were in place. It turned into an ongoing process which aligns demand and supply processes and harmonises different functions of the organisation. It has become an executive tool which works in coordination with financial plans and is operated in coordination with master production scheduling (MPS) and the operational plans of the company (Coldrick et al., 2003; Wallace and Stahl, 2008).

S&OP has become a consolidation process of the multiple functions in a company as well as the synchronisation of that company with other supply chain members. Figure 6.2 depicts the evolution of sales and operations planning. In the 1980s, companies were managing their demand and supply processes by focusing on inventory. At that time, inventory management efforts aimed to determine the optimum inventory level, replenishment times and volumes, all of which are the basic elements of demand and supply management processes. In that period, the main focus was on materials and operations and these were being managed at a tactical level. Over time, inventory planning and management efforts, as well as supply and demand processes, have been embedded into business process management (BPM) and materials requirements planning (MRP). However, these tools were only partially fulfilling the roles of S&OP. Through these approaches, the focus started to turn onto the whole resources from the particular materials while the business impact was becoming more operational than tactical.

Fig. 6.2 Historical evolution of S&OP. More information on the concepts detailed here is provided in Russell and Taylor (2005).

In the 1990s, manufacturing resources planning (MRP II) and MPS processes started to be accepted as effective tools for planning production and inventory processes by the vast majority of companies. The business impact of those tools was approaching the strategic level. In the late 1990s, S&OP became an approach which is not far from our current understanding. It became an approach, a tool and an activity which affects the entire business and even other members of the supply chain. Accordingly, its focus has become mostly financial and covers the entire company. Today the scope of S&OP is still broadening.

6.1.2 Aims and objectives

Although the ‘official’ aim of S&OP is to balance supply and demand, companies embarking on S&OP usually have a number of specific objectives in mind. According to Wallace and Stahl (2008) the role of S&OP is to eliminate the disconnect between the strategic and business planning processes and the detailed plans. The linkage role of S&OP is illustrated in Fig. 6.3.

Fig. 6.3 Linkage role of S&OP (adapted from Wallace and Stahl, 2008, p 12).

Managers engage in planning processes like S&OP with the aim of gaining benefits for their organisations. Ling and Goddard (1988) suggest that the following benefits can be obtained from a successful S&OP implementation:

• It helps departments work better together and it links company functions.

• It provides a connection between the business plan with the operations of each department.

• It produces realistic plans.

• It reduces surprises and hidden decisions.

In order to exemplify the objectives of S&OP, we will use the case of the large multi-national food and drink company: The company, operating in over 25 countries with a turnover in excess of €6 billion in 2007, performs in a very dynamic market and over the past five years has been growing annually at double-digit rates. This has partly been achieved through geographical expansion, particularly in countries with high business growth rates such as Russia, but also through an increasingly complex product range with over 75 brands and several hundred stock keeping units (SKUs). The company has used S&OP over a number of years and when asked about the reasons for using the system, they provided a summary of the aims of their S&OP. Their views are summarised below:

• To have one set of numbers: ‘We used to have multiple forecasts and plans and this was a recipe for disaster, creating conflicts and undermining performance’ said one of the executives. The implementation of S&OP helped to ensure that everybody plans and organises activities based on the same set of numbers and that these numbers are agreed by everybody.

• To increase forecast accuracy: Forecasts are the centre of the planning process as they influence many decisions such as inventory levels, lot sizes and target service levels. It is acknowledged that some products are more difficult to forecast than others, but it is important to know where the problems lie and act on them as soon as possible. The S&OP process provides a framework for reviewing forecasts on a regular basis and taking targeted action.

• To work around constraints: One of the executives stated: ‘Our facilities and infrastructure have constraints, and S&OP help us to consider all constraints before rolling out plans. This essentially produces more realistic plans’.

• To manage promotions effectively: Promotions are commonplace in the food and drinks industry, and achieving effective management of promotions is one of the central reasons for engaging in S&OP. The S&OP process ensures promotional activities are planned holistically, taking into consideration capacity and other constraints.

• To manage customer service: ‘We aim for perfection in customer service, but we accept this is not always possible when you have a wide range of products like we do’ said one of the managers. There is a perception that S&OP has helped to improve delivery and availability measures, but it also helped when making difficult decisions to manage service levels in accordance with the reliability of forecasts and the impact on the business.

• To improve life cycle management: product introductions and with-drawals present some of the biggest challenges for supply chain managers. On the one hand, demand for new products is notoriously difficult to predict, since there is no history on which to base the initial forecast and this is coupled with other sources of uncertainty in production and supply. Withdrawals, on the other hand, can also leave the company with obsolete goods and raw materials if they are not properly managed and communicated. One of the managers said: ‘S&OP has provided a forum to make life cycle decisions, making sure they are properly agreed and communicated and helping us to keep check on the complexity of our portfolio’.

• To manage cash: ‘Managing cash is an important issue and we need to consider it when making supply and demand decisions. That is why our finance team is also involved in the S&OP process’, stated an executive of the company. This helps to resolve cost/benefit trade-offs such as cost versus the benefit of certain fixed assets.

• To manage profitability and margin growth: ‘In the end it all goes down to money. The ultimate goal of S&OP is to improve the profitability and market growth of the company’, explained a manager of the company.

6.2 Trends in sales and operations planning and best practices

In today’s marketplace, S&OP implementations and business practices are aimed at more effective demand and supply balancing, which is the fundamental goal of traditional S&OP. Thus, the characteristics of contemporary S&OP and traditional S&OP are not the same. Many of the characteristics of traditional S&OP have been replaced with new ones in today’s dynamic S&OP. Table 6.1 illustrates these changes based on S&OP best practices.

Table 6.1

Changing characteristics of traditional and executive S&OP

Characteristics Traditional Executive S&OP
Timing Quarterly ‘Right time’: weekly/daily
Total time: approximately 18 months
Change Discrete and incremental Continuous (change management philosophy)
Objective Volumetric Balance Profitability
Approach Single iterations Multiple ‘what-ifs’
Ideal capability Responsiveness Shaping
Organisational scope Sales and operations Enterprise + network partners (entire supply chain)
Predominant activity Data gathering and cleaning Dynamic decision making

Source: Adapted from Aberdeen Group, June 2005, p ii

Lessons learned from the best practices of S&OP have enabled other companies to benchmark their businesses and to manage their processes proactively. Aberdeen Group (2005, p. ii) determines the critical elements of best practices as:

‘− Explicitly linking supply and inventories to demand dynamics,

− Contingency planning to shape demand and harmonize supply,

− Tightly managing the demand process and not just the numbers.’

Moreover, the following recommendations, which are based on the results mentioned in the studies of Aberdeen Group (2004 and 2005) and Muzumdar and Fontanella (2006), provide a roadmap for S&OP implementers based on best practice:

• Focus on your target market and positioning strategies. Do not try to dominate all segments.

• Focus on demand management processes first. Effective demand management provides a better management of other processes like supply management.

• Involve your supply chain members who play the role of business partner in the design of the S&OP processes.

• What-if analysis and contingency planning are two critical tools for a more effective S&OP.

• Responsiveness will be provided by the alignment of supply and demand processes.

• S&OP requires more than just ‘planning’. Companies should test the validity of their planned assumptions and ask ‘why’ questions rather than ‘what’.

• Generally, companies need less data than managers think they do during the S&OP process. Research results have shown that less than 10–15% of available data is vital to achieve the required results.

• Developing an ‘outside-in’ sequence of S&OP initiatives is necessary because uncontrollable factors have negative effects on the sales and operations planning processes.

• Managers need to focus on critical information, not just more data, since it has been indicated that less than 10–15% of all available data has a significant influence on business results.

6.3 Implementing sales and operations planning

Although the benefits of S&OP might be clear for many companies, effective implementation is a major challenge. Proper implementation of S&OP provides a linkage between tactical and strategic planning processes and helps to orchestrate all departments through horizontal and vertical communication. Accordingly, companies are able to formulate realistic plans, thus achieving their objectives. Furthermore, S&OP enables companies to coordinate their operations and financial processes.

There are still some companies which assume that implementing S&OP is only a series of meetings with the aim of balancing supply and demand. Actually the managers of such companies are implementing traditional S&OP, which offers an organised process which is not a revolutionary development since it only focuses on customer service and inventory levels. This can bring some benefits to organisations, but falls short of a full implementation of executive S&OP and could lead to poor overall performance of the process. Some symptoms of poor planning processes, such as S&OP, include lost sales, over-optimistic sales forecasts and low forecast accuracy, mismatch of available production and actual demand, limited flexibility to respond to changing market segment priorities, lack of collaboration with trading partners, poor on-time delivery owing to low level of inventory, and a lack of sustained focus on best market segment and supply partners (Aberdeen Group, 2005; IGD, 2007).

Companies which use S&OP usually have an adaptation process when they first start to implement it. Companies need to protect themselves from the above-mentioned symptoms by adapting and continuously improving S&OP practices. The evolution of S&OP is critical at a single company level as well, since it is an ongoing change management process. The vast majority of companies are not at the mature stage of S&OP implementation and they usually have a long way to go before they reach it. Insights and learning at the different stages of the maturity model of S&OP may provide sustainable benefits for the managers of these companies. A roadmap for S&OP implementation is depicted in Table 6.2 based on Lapide’s (Lapide, 2005, p 14) ‘S&OP maturity model’, which presents the development of S&OP at the single business level. In this model, moving gradually from one stage to another is recommended for a successful S&OP process.

Table 6.2

S&OP maturity model

Source: Adapted from Lapide, 2005, p 14

Different stages of the model are evaluated according to a number of key elements including people, technology, process and scope of focus which are critical to business success. A similar evolution process is also defined by Oliver Wight (2000) which provides a checklist for operational excellence. In this approach, companies are classified from A to D. Stage 4, a mature process of the model, is illustrated in Table 6.2 and represents a company which fits into group A of Oliver Wight’s (2000) classification in terms of the S&OP process. To benefit completely from S&OP, companies should make an effort to reach group A of Oliver Wight’s (2000) classification and/or stage 4 of Lapide’s model (2005).

This is not a particularly easy process owing to the numerous challenges which are discussed in the following section. The basic requirement is having the insight of change management during S&OP implementation. However, many fundamental factors and infrastructure affect the success of change management including appropriate organisational culture, alignment of agenda, political environment, industrial environment, clarity of objectives, clarity of duties and responsibilities of each department during S&OP, and implementation and integrity of data.

The critical question for companies is ‘How do you equip the organisation to implement S&OP?’ The answer to this question is more important than the implementation process but the above-mentioned factors help companies to answer it. Actually Oliver Wight (2000) proposed a proven path, an ABCD checklist for companies, to help them to be aware of the requirements of being competitive and achieving world-class levels of performance. Regular use of the checklist can help companies evaluate their progress and their journey from D to A.

Ling and Goddard (1988, p 18–19) highlight five critical factors in deciding how to equip organisations before implementing S&OP:

‘1. Each department must gain an understanding of the S&OP process

2. The company must commit the time and resources to the process

3. The company must define product groupings or families

4. The company must establish an adequate planning horizon

5. The company must establish and manage time fences’

One of the confusions about S&OP implementation is whether it should be implemented in individual products or at an aggregate level. By aggregate we mean product groupings or families. S&OP generally focuses on the entire business and it usually does not aim to achieve results at an individual product level. Actually it aims to maximise business profitability. Although it may change according to the industry, S&OP should be carried out at the aggregate level if forecasts based on product families provide sufficient information for S&OP (Lapide, 2002). Since planning at the SKU level would cause problems by the increasing volume and complexity of data as well as decreasing data accuracy, implementation of S&OP at an aggregate level is more practical and it provides more control by managers. However, grouping products into appropriate families is a critical task in the S&OP process and managers of different departments should achieve a consensus on the product families in terms of size and meaningfulness (Ling and Goddard, 1988).

The entire planning process includes different planning stages including operational planning, materials planning and S&OP, as illustrated in Fig. 6.4. These planning processes, which are significant for businesses, are interdependent and should be managed in a coordinated manner. It should be noted that the timescales of different stages in the planning process vary in different industries.

Fig. 6.4 Typical planning process.

The best time for the implementation of the process is another source of confusion in S&OP implementation. The S&OP process generally takes 18–24 months or even longer, although longer and shorter planning periods are common (Lapide, 2002). Ultimately this period will depend on the size and complexity of the organisation.

Once implemented, the S&OP process repeats itself on a monthly basis as depicted in Fig. 6.5. The process starts by gathering the necessary sales and operations data and finishes with the executive meeting. Attendees of the meeting should include the president (general manager), directors of sales, marketing, supply chain, operations, product development, finance, logistics and human resources (Wallace and Stahl, 2008).

Fig. 6.5 Monthly S&OP process (adapted from Wallace and Stahl, 2005, p 54).

Many issues can affect the S&OP monthly process. Thus, coordinating and adjusting the different plans holistically will ensure the proper implementation of the S&OP process. To this extent, Lapide (2004) proposes to accept marketing and sales plans as rough-cut plans and to adjust them to the supply plans. The S&OP process does not recognise demand plans as fixed. Supply and demand management should be aligned along the entire process. Therefore demand planners and supply planners should first accept that they must work as a team with a common purpose. They must also accept that their plans can be changed and/or adjusted according to the other party for the purpose of a more effective S&OP process. Hence developing a basis for the consensus after eliminating the discrepancies between demand and supply plans is the main aim of S&OP meetings.

Accurate forecasting is the main input of S&OP. Although past data is a great source of forecasting, Wallace and Stahl (2008) proposed some factors that show how history is not the best predictor:

field input regarding large customers, potential new customers, new products, promotion plans, open bids, price changes, level of inventory in distribution, point of sales volume, competitive activity, industry and market dynamics, economic conditions, intra-company demand (from other business units within the company), and … a review of the forecast errors from the prior month.

Therefore, many factors including those mentioned above should be evaluated in an integrated manner during the forecasting process.

Another confusion within S&OP implementation is whether to use spreadsheets or sophisticated software to implement it. Accurate and timely information is essential for the S&OP process. Although a number of software packages support the S&OP process, many companies rely heavily on spreadsheets in their planning decisions. This is a great advantage for companies since S&OP does not require sophisticated, complex and expensive software. Also, in some cases, graphs are used to make spreadsheet data easier to understand. Using graphs is a good way to highlight the critical issues along the process and/or significant results of the process. On the other hand, relying on spreadsheets has some disadvantages such as the difficulty of integration and synchronisation of various spreadsheets (Supply Chain Digest, 2004).

When we focussed on the S&OP implementation process of our case study company, we were faced with a similar definition of S&OP implementation:

A continuous process that follows a monthly cycle. The starting point is the collection of all the necessary data to create an initial demand plan. This includes forecasts, orders, market information, inventory, and some production information. This plan, prepared by the demand planning team, is circulated to all the attendees of the S&OP monthly meeting which includes the regional director as well as managers from sales, supply chain, finance and demand planning. The main outputs of the meeting are an agreed forecast and a financial plan and most of the discussion will focus on managing exceptions such as promotions, new product introductions and interruptions in demand, as well as assessing their financial implications. Once a forecast has been agreed, it is used to produce more specific plans for production, raw materials and distribution.

Figure 6.6 depicts the main flows of S&OP.

Fig. 6.6 The S&OP process in context.

Managers of the company also stated: ‘In addition to the monthly meeting, which is dedicated to tactical and strategic issues such as profitability and long-term investment, the company has weekly meetings involving smaller groups of people and are targeted at resolving day-to-day issues and addressing short-term changes in the plan’. Together with the managers of the company, we developed Fig. 6.7 which illustrates the sequence of events and the main milestones over a four-week cycle.

Fig. 6.7 S&OP milestones.

6.4 Challenges of sales and operations planning

Although there are many companies implementing or trying to implement S&OP, it is difficult to say that it is being done correctly. There are several challenges to implementation which are discussed below:

• Implementers’ misunderstanding of S&OP: This is the most important challenge of S&OP. The manager who can understand the aims, processes, benefits and challenges of S&OP will be able to implement it and to gain the most from it. On the other hand, the S&OP process will not succeed if the implementers do not understand the process.

    As depicted in Fig. 6.4, planning processes should be managed in a coordinated manner. If a specific problem about a particular product or a supplier cannot be resolved in the first stages of the planning process, i.e. the operational planning and materials planning stages, then extra effort is needed during the S&OP stages to solve these problems, but such an implementation will obviously slow down the S&OP process.

• S&OP should be embedded in the entire business processes: If it is not, then it will be difficult to gain benefits from it. Most frequently, managers complain about not achieving positive results although they have had S&OP training.

    People need to have S&OP insight during implementation. Although it is possible to manage the S&OP process in a particular department, this is not sufficient. S&OP requires effective change management skills. However, if S&OP is not adopted by all parts of the company and if the process is not embedded into other business processes, then implementing will be more challenging.

• Mentally non-aligned staff: In many cases it is difficult to align the views of the marketing and operations functions since they are responsible for different parts of S&OP (i.e. supply management and demand management) and they tend to have different measures of performance. If their different perspectives cannot be aligned before starting to implement S&OP, it would obviously be difficult to benefit from S&OP.

• Management’s bias toward a certain department: As mentioned before, S&OP deals with several functions in the company and the involvement of key members of these functions is essential. Accordingly, general management’s balanced view toward each function is critical but providing that view is not an easy task (Ling and Goddard, 1988).

• Fear of detail (Ling and Goddard, 1988): Although S&OP requires aggregate data, in some cases the planning process needs some degree of back-up detail. Therefore, finding the balance between the volume of product family level data and individual SKU level data is necessary and sometimes a challenge to make the planning process work.

• Failure to involve all stakeholders (Lee, 2005): If management does not involve all stakeholders, including first line manufacturing supervisors, schedulers, salespeople, sales and marketing managers, engineers, plant managers and new product coordinators in the process, it will be difficult to achieve the expected results at the end of the process.

• The perception of S&OP as simply a software implementation project (Lee, 2005): Although it utilises software as well as spreadsheets, S&OP is an executive management and capability improvement tool.

• Recognition of S&OP only as a tool to improve planning and scheduling: S&OP plays a role as a significant decision support tool which provides critical insights for the future.

• Recognition of S&OP as a very costly implementation: It actually is not as expensive as managers may think. The main cost items regarding S&OP are training costs and consulting costs – if indeed a consultancy is required. So, although it is not free, it does not require a high investment. All it actually requires is people’s time (Wallace and Stahl, 2008).

• Poor training: Another challenge proposed by Wallace and Stahl (2008) is insufficient education of users, insufficient discipline and conflict aversion in the company.

• The need for change in organisational culture: The S&OP process brings a new approach into the decision making process of companies. It needs a transformation and change process within the corporate culture (Lee, 2005). Systems approach and change management philosophy are the main prerequisites of S&OP implementation. Therefore, any lack of these prerequisites is a great challenge to S&OP.

During interviews in the case study a manager stated: ‘Implementing and sustaining S&OP presents substantial challenges because it requires cross-functional collaboration and involves the continuous evaluation of trade-offs which can generate disagreement and possibly conflict’. Based on interview results we present some additional challenges for successful implementation of S&OP:

• Achieving cultural change: The effective use of S&OP requires a cultural change that can break the silo mentality in the organisation and allow people to work together for a common cause. The main problem of a silo mentality is that it leads to local optimisation; however, S&OP provides clarity about the global optimum and helps to resolve trade-offs. This requires a cultural change which involves a robust process, with structured regular meetings (such as monthly and weekly), a common set of key performance indicators (KPIs) as part of a balanced scorecard and, finally, appropriate training and information dissemination.

• Developing corporate capability: In many organisations, S&OP does not operate at a corporate level but only at a regional level, with each unit managing the process independently. Inevitably, practices vary from one country to the next and, while some countries exhibit very sophisticated practices, others are still developing. However, the case study company has used the recent implementation of an ERP system to homogenise practices and disseminate leading practices. This will also lead to more consistent reporting across all countries, based on common KPIs.

• Effective use of tools: S&OP requires the filtering and analysing of vast amounts of data and for this we need the appropriate analytical and information tools and trained users. The most important set of tools relates to forecasting, particularly for a company with a wide diversity of SKUs and very different characteristics, which require different approaches to forecasting. To decide the most appropriate approach to forecasting, products are classified according to their financial impact and demand variability. This classification framework is presented in Table 6.3.

Table 6.3

Forecasting approaches for different products

6.5 Sales and operations planning in the food and drink industry

The food and drink supply chain has certain characteristics that make it different from any other industry. These characteristics need to be taken into consideration throughout the planning process and particularly in S&OP. In this section we will review the key characteristics of the industry and discuss their implications for S&OP.

• Volatility of demand: In the food and drink industry, companies face a major problem in consolidating and normalising demand. This is difficult since demand tends to be volatile in this sector caused by a variety of factors including promotions, weather fluctuations and rapidly changing customer preferences. This also makes forecasting difficult. Any problem in demand management affects customer service negatively. To solve this problem companies increase the number of their backorders. Usually, the cost of purchasing and transportation increases because of backorders. Companies tend to solve these problems through improved financial planning but a better solution is implementing an effective sales and operations plan (Wallace and Stahl, 2008).

• Supply volatility: Equally, supply volatility also affects planning processes in the food and drink industry. Unlike other industries, supply cycles change in short periods. This mostly affects product mix rather than volume and requires a more careful S&OP. In classical S&OP examples, demand is the driver and it is independent, whereas supply is dependent (Wallace and Stahl, 2008). However, in the vast majority of cases in the food and drink industry, supply is the key driver. In highly variable supply cases, supply determines what is going to be sold.

In one example of a food processing company, the size and amount of the crop to be harvested determines the sales volume of the processed food product. In such cases, the five steps of the S&OP process should be adopted (Fig. 6.5). In the new version of executive S&OP, the process begins with the initial supply planning phase (Fig. 6.8). Initial supply planning is usually the responsibility of the purchasing function. Predicted supply is passed to the sales and marketing department for the demand planning process. Then the new forecast, determined in the demand planning stage, is given to the second supply process. Following this, premeeting and executive meeting stages take place (Wallace and Stahl, 2008).

Fig. 6.8 Six-step process for highly variable supply (adapted from Wallace and Stahl, 2008, p 209).

• Seasonality: This is a barrier in the balance of supply and demand and plays a critical role in the food and drink industry from both a demand and supply management aspect. Seasonal demand requires careful inventory management whereas seasonal supply necessitates multiple sourcing locations – generally in different regions. For products which are subject to seasonal supply such as olives or products that are subject to seasonal demands, such as ice cream, annual planning is required to have a perspective of the whole year. However, annual S&OP should be updated according to the periodically held cross-sectional meetings. It should be noted here that seasonality will not be a big risk if an effective S&OP process is implemented. In such cases, accurate forecasting will enable companies to manage seasonal fluctuations.

• Natural cycles: Although S&OP is a great tool for making fundamental changes and improvements in business processes, it is not easy to realise in the food and drink industry. For instance, in the poultry industry it is inevitable that short-term based supply and demand alignments will be made. Producers must manage their processes according to predetermined rules. However, after the first stages of the production, adjustment of volumes of different types of end products such as fresh, frozen and chilled can be possible. This implementation is basically related to product mix rather than product volume.

• Short lead times: Companies need to react quickly to changes in demand in the food and drink industry. Therefore, lead time tends to be short, usually between 24 and 48 hours, which is a critical input of S&OP.

• Large number of SKUs: In the food and drink industry, there are high numbers of SKUs and, accordingly, product families. This characteristic of the sector requires different approaches to forecasting. The appropriate classification of SKUs according to their financial impact and demand variability is essential for effective forecasting and S&OP.

• Products with short shelf life: Food and drink products tend to have short shelf life. Although there are different types of products in this industry, a large proportion of food and drink products are perishable. This characteristic of the sector increases the importance of the balance between demand and supply which can only be realised by successful S&OP.

• Promotion intensive: Food and drink companies frequently face customer service challenges and high levels of forecast errors. This is partly caused by the promotion intensive nature of the industry. Therefore S&OP processes are even more significant for these companies. Companies need a more accurate demand forecasting system, especially during promotion periods. In such cases, S&OP terms should be reduced to weekly periods although the longer term S&OP period continues. For this reason, horizons for planning updates have to be shorter in this sector. Therefore, S&OP should be managed in at tactical as well as at a strategic level.

In the light of these characteristics, if the food and drink industry is compared to other industries such as automotive, electronics and chemicals, a number of differences in S&OP are visible. The planning process is more stable in sectors such as chemicals and pharmaceuticals which require long horizon stability. Therefore, companies in these industries will not require the same levels of agility that food and drink companies need. As a result, in the food and drink industry the planning horizon tends to be shorter when compared to other industries and MPS tends to be even more critical than S&OP. It should be noted that MPS is more important for short shelf life products, although S&OP is more critical for long shelf life products.

One of the best practice examples was identified by the Aberdeen Group (2005) as Campbell Soups – a global manufacturer and marketer in the food and drink industry. Their main products of Campbell Soups include soups, sauces, beverages, biscuits, confectionery and prepared foods. Campbells operates in an environment in which promotion activities are usual. During these promotion periods, managing customer service and optimising inventory levels have been the great challenges for Campbells. Promotions aim to decrease prices and to increase sales. This environment requires a higher level of inventory turnover and immediate replenishment. The target forecast accuracy level was 75%+; however, it was found to be impossible for the company to achieve such a target. Campbells solved this problem by using a new technology solution which allowed them to reduce weekly forecast error to less than 25%. The Aberdeen Group (2005) reported the Campbells case as follows:

...Campbell learned that the technologies necessary to enable real-time forecasting for immediate replenishment as necessarily those that are effective for medium term planning purposes and that it is critical not to take a ‘one forecasting technology does all’ approach. They also determined that it was possible and very important to accomplish this while seamlessly integrating with their existing powerful suite of planning applications. Finally, the company proved that individual best intuitive ‘guesses’ were no match for a formal decision making process, enabled by planning and forecasting models capable of generating multiple ‘what-if’ scenarios and simulated outcomes.

6.6 Summary and conclusions

In this chapter we have highlighted the significance of S&OP in the food and drink industry. Better planning processes, as well as balancing supply and demand with the coordination and integration of all related functions in a company, can lead to favourable outputs such as lower costs, lower stock, better service, increased sales and improved forecast accuracy. We propose a roadmap for good practice of S&OP implementation in the food and drink industry by placing emphasis on the main characteristics, challenges and trends in S&OP in this sector. We aim to capture the attention of current and future implementers of S&OP in this industry and to provide them with a framework to facilitate the difficult process of adopting S&OP.

6.7 References

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