Sony Electronics' S&OP journey

The past decade has been a time of upheaval in the consumer electronics market. New technologies, new competitors, the recent global financial crisis, and the bankruptcy of the major U.S. retailer Circuit City are just some of the developments that continue to reshape the market. To survive and succeed in this new environment, manufacturers need to focus on supply chain excellence and more effective collaboration with key retailer partners.

That's the strategy Sony Electronics (SEL), the U.S. sales and distribution subsidiary of Japan's Sony Corporation, adopted in 2009. As part of its response to changing market conditions, the electronics group has strengthened its planning and forecasting by implementing a sales and operations planning (S&OP) process. S&OP involves sharing a "one number" plan among sales, finance, and supply chain organizations; holding regular meetings to align operations and strategy; and tracking agreed-upon key performance indicators. (For a more detailed definition, see the sidebar, "What is sales and operations planning (S&OP)?")

Implementing these principles, however, can be surprisingly difficult in the real world. It requires making cultural and organizational changes that cannot be accomplished overnight. Instead, successfully implementing S&OP is a "transformation" or "journey" that may easily span months or even years.

For Sony Electronics, the journey involved grafting S&OP principles onto its existing collaborative planning, forecasting, and replenishment (CPFR) process. CPFR is a business practice developed by the Voluntary Interindustry Commerce Solutions (VICS) organization to help trading partners share market intelligence for planning and fulfillment of customer demand. By marrying the two, Sony hoped to achieve results that go beyond the traditional, short-term benefits typically realized from each process on its own.

Here's how Sony accomplished this integration and improved its supply chain planning process to meet the new realities of the consumer electronics marketplace.

Shifts in the competitive landscape
Sony Corporation, with its history of innovation, has long held a leading position in the consumer electronics market worldwide (see the sidebar, "About Sony"). In mid-2009, however, the company had to address shifts in the competitive landscape in order to maintain its market position.

In the previous five years, the television industry had been revolutionized by flat-panel LCD (liquid crystal display) technology, a development that opened the way for new competitors that specialized in execution, speed, and cost control rather than product innovation and quality. Next, the "Lehman shock" in late 2008 caused a worldwide contraction of trade and credit that led manufacturers and retailers alike to intensively focus on cash flow and inventory. Then, the second-largest consumer electronics retailer in the United States, Circuit City, ceased its retail operations—an event that not only demanded Sony's immediate, tactical attention but also mandated a significant adjustment to its channel strategy. In this challenging environment, it was becoming clear to Sony executives that better supply chain management would be critical for maintaining the company's competitive edge in the future.

Sony reacted quickly to its most pressing supply chain issues at the global level. Executive Deputy President Yutaka Nakagawa reduced the number of parts and materials suppliers by more than 50 percent and targeted purchasing cost reductions of 20 percent in fiscal year 2010 through process improvements and rationalization of payment terms. Sony also divested manufacturing assets through alliances with contract manufacturers. However, these cost-reduction initiatives were just the first step; the company also needed to find ways to collaborate more effectively with its key retail partners. It was at this point that Sony Electronics stepped to the forefront to lead the company on its journey to optimized supply chain performance.

Clarified roles and responsibilities
Sony Electronics was well-suited to the initiative because it already had certain characteristics and capabilities in place. For one thing, SEL had a good working relationship with its retailers, built on years of doing business together. For another, the division had established electronic data interchange (EDI) relationships with many of its retail partners and was even receiving store-level point-of-sale (POS) information from several of them. But SEL also had some problems to solve. For example, the division was not taking advantage of all of the data it was collecting. It seemed that no one had the time to sift through the massive files to identify useful information, let alone pass it on to people who might be able to act on that intelligence. Moreover, the supply chain planning and forecasting process, while thorough, tended to be tactical and reactive.

At the time, Sony Electronics was already engaged in CPFR with its major retail customers, but there were significant variations in how different groups executed the CPFR processes. For instance, the headquarters channel management team, a key voice in decisions about allocation of product and quantities for each retailer, did not consistently participate in the CPFR conference calls. Plus, there were no clearly defined rules for what data would be prepared and discussed during the calls. Without a preset agenda, participants might spend more time discussing the previous week's results than looking forward to the next quarter's forecast. Complicating matters was the fact that a large amount of manual work was required for Sony to consolidate the demand signal across all accounts in time to provide an accurate forecast to overseas suppliers. As a result, suppliers were working from a monthly plan instead of adjusting to week-byweek changes, a situation that sometimes created disconnects between supply and demand.

In order to bring consistency to these critical processes, Yuka Yu, vice president of supply chain operations at Sony Electronics, created a dedicated team to look at how to improve planning and forecasting. This cross-functional team included representatives from Sony's sales, business planning, channel management, and supply chain groups. Working together, the team redefined the existing CPFR review as a tightly managed weekly call with standardized metrics, such as weeks of inventory supply by channel and "order-tocommitment" achievement. (The latter compares the quantity Sony commits against customers' demand forecasts to those customers' actual orders.)

Additionally, the team clearly defined and assigned roles and responsibilities for the call, including designating some roles as "speaking" and some as "nonspeaking." This distinction kept the calls on track: The speaking roles were designated for those closest to the data (account sales team, demand planners, and channel managers), while the distraction of wellmeaning requests for explanation or investigation from less informed listeners was eliminated. (Their questions could be answered outside the meeting as needed.) The team even created and disseminated a standard operating procedure for the call to ensure that the process, roles, and rules of engagement were crystal-clear. Now, the right people were always in the room to hear the information firsthand and to make decisions appropriately—there was no waiting for news to filter back to headquarters.

This initial step formalized the CPFR partnership and gave added focus to Sony's discussions with its retailers. Where previously some categories focused primarily on "sell-in" quantities (the units sold by Sony to the retailer), now the emphasis shifted to "sell-through" quantities (the units sold by the retailer, a better measure of end-customer demand) and channel inventory as measured by weeks of supply based on the sales forecast. These rules of engagement set clear expectations that both Sony and its customers would meet their respective commitments.

One plan, one number
With collaboration firmly established, the foundation for true sales and operations planning was in place. The next step was to extend the CPFR discussions to a deeper level of analysis and partnership. Accordingly, Sony asked its retailer partners to communicate sell-in and sell-through forecasts for a longer planning horizon; in return, Sony shared future product and promotional plans more openly.

In addition, the information exchanged during the CPFR call could now be fed into a new, common information platform. Stakeholders across multiple functional areas were now able to view and update the latest sales and forecast information. This consolidated planning platform allowed Sony and its partners to create a consensus demand plan, which in turn could feed the consolidated business-unit forecast— ultimately enabling SEL to generate the "one number" plan required for S&OP. SEL then shared this plan each week with the factory suppliers, who used it to develop production and shipment schedules.

Now that Sony had a consolidated business forecast that incorporated the latest customer demand and retail sales trends, the product groups could use it to make more strategic decisions about supply planning and allocation of products to sales channels. For example, if a particular series of television sets was selling well in the club store channel but not as well in the regional stores channel, the product group could request that the factory manufacture more of the club-specific models.

Providing a validated, consensus demand plan was also an important cornerstone of Sony's global efforts to manage worldwide supply and demand in the highly competitive LCD panel market. LCD panels, which are used in flat-panel televisions and laptop computers, typically are constrained and price-sensitive components and therefore must be closely managed. Establishing better demand plans across all regions allowed Sony's main sourcing factories in Asia to effectively plan their component procurement and production.

The shared database also helped Sony to establish key performance indicators that could be used both to track execution and to drive collaboration. Previously, compiling and reporting the data was a largely manual, labor-intensive task requiring data to be pulled from several disconnected systems. With a common database, it was now possible to automatically calculate metrics and report back to the business on a much more timely basis. These metrics included sell-in and sell-through forecast accuracy, channel weeks of supply, order-to-commitment achievement, and customer in-stock percentage.

To ensure that the system had good data, Sony worked with its retail partners to improve the data coverage and quality of the point-of-sale information received via EDI. For example, SEL installed dataquality management (DQM) software that could identify and correct common mapping errors, such as an almost but not-quite-correct model name.

Retailers benefit from data analysis
Sony Electronics next approached its key retail partners with a low-risk offer: Would they be willing, on a trial basis, to expand the CPFR agenda to include a store-level data analysis in addition to the aggregate sell-through quantity information they were already providing? The new level of detail would include feedback on such concerns as whether inventory at the retailer's distribution center was aligned to store-level demand and whether certain stores were consistently over-or underperforming compared to average sellthrough levels. The proposed pilot program, which encompassed the television product category, would have a fixed duration of four to six weeks; after that the retailer could opt out if it saw no benefit to having the additional information, or it could continue.

To process this information, Sony teamed up with JDA Software to set up an offshore team in India that would analyze the store-level data during U.S. evening hours. This meant that fresh insights would be available in time for the morning CPFR calls. The Indian team parsed the sell-through and inventoryquantity data by product model and store to identify actionable trends for the CPFR team back in the States. For example, if the analysis showed that the sell-in order quantities for a retailer's distribution center were not in line with the associated store-level sell-through quantities, then the Indian team would identify this mismatch. That information would then be highlighted during the CPFR call, giving the retailer's buyer or planner time to adjust future order splits accordingly. Another example: If sell-through of a particular model-store combination showed an anomalous drop, Sony would alert the retailer, which could then check whether the model was correctly displayed, priced, and available for sale at that store.

Having this type of analysis available in a timely fashion quickly produced results. In-stock levels at stores increased by up to 18 percent with the same or lower aggregate channel inventory levels. Forecast accuracy improved by up to 40 percent. The retailers, of course, were delighted. During the review sessions held at the end of the pilot program in late 2009, their demand planning managers expressed excitement that Sony had been able to focus the CPFR discussions and make useful suggestions for improving storelevel execution. There was universal agreement to continue the program beyond the pilot phase, and the retailers asked when and how the program could be extended to include more categories, more recommendations, and more information sharing.

Capping off this success story, Wal-Mart Stores Inc. recognized Sony Electronics as its 2009 Supplier of the Year. The award criteria included financial growth versus the prior year, market-share gains, ability to provide new technology and innovative design, marketing collaborations, and support of Walmart's online business. As these criteria suggest, the award served to validate the very point that had been used to initially justify the S&OP program: that supply chain improvements and better collaboration with retailers can provide competitive advantage and benefits to the bottom line.

The future of the "trusted chain"
As Sony's journey along the road to S&OP continues, collaboration with its key retail partners has expanded. In addition to the weekly CPFR calls with the customer's buyer or demand planner, Sony Electronics now also conducts quarterly reviews at the manager/director level and holds biannual executivelevel summits. This focus on collaboration is why Vice President of Supply Chain Operations Yuka Yu advocates using the term "trusted chain" instead of simply "supply chain." According to Yu, this term emphasizes that the strong relationships between Sony and its partners depends on mutual trust and communication.

What's next for Sony's trusted chain? According to Yu, the next level of S&OP sophistication is "profitability- aware decision making." In other words, decisions about sales and operations should support Sony's overall objective of maximizing gross margin return on investment for retailers as well as revenue and profitability for Sony.

Rather than merely discussing tactical, executionoriented metrics (such as the number of units ordered, shipped, and sold) the conversation will extend to such topics as which assortments are most profitable and strategic for the retailers based on customer demographics, or what pricing actions make the most sense from a mix and margin perspective. In this way—collaborating with retailers not just on order flow but also on business plans, customer-segmentation strategies, and long-term vision—Sony will ensure a continued strong presence in the consumer electronics space for the foreseeable future.

Note: For more about integrating S&OP and CPFR, see the Voluntary Interindustry Commerce Solutions (VICS) paper, "Linking CPFR and S&OP: A Roadmap to Integrated Business Planning".