The impact of COVID-19 showed that traditional sales and operations planning (S&OP) may not be able to keep pace with today’s dynamic changes. Should we abandon S&OP altogether—or could adding a robust sales and operations execution (S&OE) process save the day?
From health care distribution and e-commerce fulfillment to food service, auto production, and beyond, the relentless onslaught of COVID-19 laid bare weaknesses across almost every industry—and the supply chain was spared no mercy.
The extreme environment, intensified by the emergence of the omicron coronavirus variant, has exposed existing faults across three core areas, requiring supply chain organizations to respond to supply and demand challenges most were unprepared for:
1. Supply chain tie-ups that delayed production and deliveries forced a staggering spike in allocation and trade-off decisions that needed to be made quickly. This overwhelmed many companies’ planning processes, especially those that assumed steady availability of supply.
2. At the same time, channel shifts—for example, the dramatic increase in business-to-consumer e-commerce—forced modifications to product mix and requirements, catching many companies by surprise and leaving them shocked by how poorly they were able to react and respond.
3. Lastly, the extended supply chainsdeveloped over the last several decades fell short when it came to agility, which prompted some companies to revisit the concept of reshoring.
As we (hopefully) begin to emerge from the worst of the pandemic, these and other pandemic-related challenges are leading supply chain executives to realize that some of their traditional sales and operations planning (S&OP) processes are no longer sufficient to keep pace with today’s dynamic changes in supply and demand. The clock speed has changed.
Sales and operations planning is one of the few structured, cross-functional processes at most companies. S&OP aligns strategy, finance, supply chain, operations, sales, marketing, and product development/engineering on longer-term operating decisions. Effective S&OP ties executive decisions with the activities of the dock. It creates a common view of future operations, and it holds people accountable for variances that impact the bottom line.
A mature S&OP process drives alignment and decision-making over a time horizon of three to 24+ months on strategic demand and supply plans, related policies, and significant investments. The executive S&OP meeting is the capstone of this structured process, which features a defined set of monthly meetings. The S&OP process typically includes:
sequential processes,
calendared demand (tied to specified time horizons),
inventory and supply meetings,
limited number of segment or margin scenarios to review, and
relatively predictable inputs.
Many of our clients, however, have found that the competencies and tools that typify S&OP placed them in a position of being unprepared to respond to disruptions that had no precedent, such as unpredictability of supply, supply hoarding, sudden labor shortages, immediate and dramatic demand and channel shifts, and cost swings. Instead, S&OP’s “what-if” planning discussions have been replaced with “What in the world will happen next”?
The experiences of the past two-plus years have many supply chain professionals questioning the value of planning. But we would argue that these processes and tools should not be abandoned. Effective planning creates a framework for addressing challenges when they occur; if the planning system is robust, then plans will align with company strategy. That’s why the planning process is still critically important: The ability to act when new challenges arise, quickly and in line with organizational goals, is separating companies that will be in a position of strength from those that will be struggling to pick up the financial pieces in these challenging times.
The pandemic continues to disrupt supply chains and crank up the uncertainty level. Today more than ever, organizations need capabilities that will allow them the flexibility to both improve their ability to forecast demand (improve accuracy) and reduce their reliance on that forecast (improve agility).
What’s an organization to do? Supplementing S&OP with a planning process known as sales and operations execution (S&OE) could help companies better meet the moment.
Understanding the pitfalls of S&OP
Effective S&OP requires a well-functioning set of “building blocks” that operate together. As shown in Figure 1, these building blocks fall into six interconnected dimensions that together form the framework of the S&OP process.
[Figure 1] Foundation of a well-functioning S&OP program Enlarge this image
Figure 1 shows that the elements of S&OP are well-defined. But S&OP is more than a process—it is a way of working. It must be as much a part of an organization’s culture and priorities as is sales. As illustrated by the top three blocks, securing executive buy-in for an S&OP program is critical for successful execution. When we’re introduced to a new company, we often ask if there is a supply chain professional on the executive team. Sometimes there is. Often there isn’t—and this can say a great deal about the company’s commitment to planning. Having a supply chain professional on the executive team suggests a level of maturity and an appreciation for their supply chain’s complexity and contribution to the company’s success. Supply chain executives help corporate leadership as well as sales and marketing understand the implications of alternatives and trade-offs. In short, failing to include a supply chain executive on the executive team does not set up the S&OP process for success.
Executives often express frustration and dissatisfaction that the S&OP process is “not working.” Often, that is not true; the process is working, just not in the way executives expected it would or as effectively as they think it should. There is no question that S&OP is a challenging process to implement and manage, and there are many reasons it may not be working as desired.
Figure 2 highlights some of the pitfalls that companies struggle with when they implement an S&OP process across their organization. For example, one that we frequently see occurs when a company’s S&OP process has become overburdened with short-term execution matters that it was never intended to handle. It’s not uncommon for high-level monthly meetings to get “hijacked” by participants focusing on short-term or tactical issues at a more fine-grained level. By design, S&OP facilitates cross-functional discussion, but this drift from its primary intent and charter makes it difficult for an S&OP meeting to achieve its objectives.
Significant deficiencies in any of the operating dimensions listed in Figure 2 will undermine an organization’s commitment to a plan. For example, recently we were introduced to a large manufacturer that had a very capable planning team utilizing what is a truly best-in-class S&OP technology solution for their particular industry. The team worked hard to collaborate across operations, finance, and sales to create a signal that drove plant requirements—which was then largely ignored by manufacturing.
The company had not adopted the clearly defined organizational roles required to effectively drive and support an S&OP program. This lack of organizational alignment allowed competing agendas across functions to take hold, and there was no accountability for failing to execute according to the plan the staff had worked so hard to develop. The S&OP process essentially broke down, and the severe impact of the pandemic on supply and demand only made those poor outcomes worse.
The benefits of adding S&OE
We began this article with a provocative question: Is it time to “blow up” S&OP? Despite planners’ concerns that the impacts of the pandemic are too unpredictable for S&OP’s structured process to handle, we believe the answer is no. For all its shortcomings, S&OP is still very much necessary; good planning will position an organization to be effective and agile. Yes, the forecast is always going to be wrong, but it’s possible to be less wrong—and that distinction is valuable.
Rather than abandoning the practice, we believe S&OP should be augmented with a robust sales and operations execution (S&OE) process.
S&OE is a cross-functional process that helps organizations determine discrete, tactical steps that are necessary to meet the quarter’s requirements. Like S&OP, it enables cross-functional communication that an organization otherwise would not have. S&OE aligns finance, supply chain, operations, and sales on decisions made about exceptions that occur in the 0–13-week horizon. These decisions may involve allocations, substitutions, inventory, labor, and expediting. The S&OE process is typically supported by structured demand/supply analysis and a weekly cross-functional meeting. Importantly, it does not replace S&OP rather, it supports that process by ensuring that S&OP remains focused on the longer-term horizon. (Figure 3 provides a simplified comparison of the two approaches.)
S&OE can begin as simply as a weekly demand/supply meeting to tackle cross-functional decisions that need to be made to help ensure quarterly objectives are met. Or it can start as a weekly touchpoint among S&OP participants to discuss “in-flight” disruptions that were not known during the normal S&OP cadence. In either case, the objective is simple: answering the question, “What’s changed?”
While S&OP is quite difficult to get right, S&OE (a term and concept originally introduced by the analyst firm Gartner) is less complex. Its narrower focus complements S&OP by identifying sudden supply chain complications that are often specific to a region, a supplier, or a customer/market, and then generating a response—a capability that is especially valuable in light of pandemic-related supply chain disruptions. S&OE also supports S&OP by functioning as the “adjust” component of a “plan-execute-compare-adjust” strategy. When both processes are in place and are functioning well, S&OE escalations are fed into the S&OP process, and S&OP policy decisions are reflected in the S&OE process.
There are some common S&OE pitfalls that companies should avoid. For example, all too often, S&OE efforts don’t incorporate the process input and discipline that are built into S&OP. And some companies, disillusioned with S&OP, try to implement S&OE by itself. But an organization that relies solely on S&OE will only be “fighting fires”—reacting to one near-term problem after another—without making the long-term, strategic decisions in areas like procurement and manufacturing that could address the root causes of the short-term challenges.
Unfortunately, companies that could benefit from adopting S&OE often fail to do so, in some cases because of concerns about the time and effort involved in adding this additional planning layer. Yet it doesn’t have to be a heavy lift; since the decisions around S&OE are more limited in scope and often are more regionally focused, the harmonization and decision-support requirements may be less rigorous than those for S&OP. The process may even become more automated over time, making it even easier to manage.
The smart move in turbulent times
The turbulence and unexpected events of the past two years might have tempted companies to abandon their planning process, but that is not the right way to go. It is critical to understand that not having a plan does not mean you are being agile. It means you are being naïve and unprepared.
S&OP and S&OE are both important, and they reinforce each other. This is a case where the whole truly is greater than the sum of the parts—and companies need to implement and carry out both to maximize the effectiveness of either. (The quick self-assessment in the sidebar below will help you determine whether you have strong S&OP and S&OE processes.)
The unforeseen “black swan” effects in the past year have not all been about COVID-19 and emerging variants … and it’s likely they won’t be the last ones we’ll have to contend with. Adding agility to your S&OP process by incorporating S&OE will give you greater speed and confidence in your response, positioning you to be thinking ahead about the challenges—and opportunities—that will be presented in the coming months.
Do you have sound S&OP and S&OE processes? A self-assessment
How well prepared are you to tackle supply chain disruptions? Do you have sound S&OP and S&OE processes? How do you know? Here are some questions to ask yourself. If you’re on the right track, your answer should be “yes” to each.
1. Do you make decisions in your S&OE/S&OP meetings? Mature S&OE/S&OP processes are focused on making decisions, not simply reporting historical events. If you are making clear and sound decisions in your process, then you are on the right track. If not, then no matter how “correct” your process appears to be, you are missing opportunities for improvement.
2. Do you have a “single version of the truth” for these events? Often, companies have disparate information systems and weak data governance that make it difficult to achieve an accurate, shared view of business conditions. An effective decision-making process depends on having facts that are agreed upon by all participants.
3. Do you all speak the same supply chain “language”? When business units have different definitions and terminology for parameters and key performance indicators (KPIs), the trade-off decisions across segments may not be based on equivalent information. If you have aligned these details, then you will have a solid foundation for optimizing decisions across all segments.
4. Can you run a demand/supply scenario in a day? If you can do this quickly, then you have a solid decision-making tool for anticipating and managing change at your disposal. You may even be able to quickly run scenarios that include key suppliers, a benefit for both parties.
5. Do you have the right balance of central and local control? If your service delivery model incorporates the right balance of activities under local and central control, then you will be able to maximize the value of your process by optimizing across individual sites and common trading partners.
6. Do you have a balanced scorecard and aligned incentives across business segments? This alignment theme is reflected in several other questions—and no wonder: alignment is at the heart of a successful S&OP process. Without alignment of performance expectations and incentives, it is difficult to make cross-functional decisions that will “stick” and be quickly carried out.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”