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S&OP

Non-Negotiable as a Process




December 2013
Bryan Ball






This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and
represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc.
and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.




December 2013
S&OP: Non-Negotiable as a Process
With all the handwringing over ecommerce, Black Friday, Cyber Monday,
omni-channel fulfillment, and the newly empowered customer, somebody
still needs to make the call on what is the demand for the business and what
(how much) is it going to supply. That is where Sales and Operations
Planning (S&OP), often referred to as Integrated Business Planning (IBT),
comes into play. As simple as it sounds, the challenge is to make those two
critical decisions and align the organization to one plan from which to
operate. In a nutshell thats it!
But the devil is in the detail as one might suspect. The components of all the
aforementioned critical elements that make up the demand statement are
highly variable and seldom 100% known. There may also be several value
chains within the supply chain that need special consideration, such as
market channels, specific customers, individual brands, new products, or
some form of segmented combination that requires its own evaluation.
Whats critical to a business is what that demand statement is for the
organization so the supply planning and scenario planning can take place.
In this Analyst Insight, we will examine S&OP from the Best-in-Class
perspective why their performance is superior and what capabilities and
technologies enable that performance. We will also highlight any particular
trends or changes in closing the capabilities gap between the Best-in-Class
and other maturity levels, plus review Cloud adoption for S&OP solutions.
Business Pressures
As Figure 1 indicates (next page), reducing supply chain operating costs was
the highest pressure felt by all companies, and at approximately the same
percentage compared to our 2012 report.
Demand volatility (45%) escalated for the Best-in-Class to a close second in
priority, much more so than All Others (25%), although still in the top five.
This supplants the increasing demand for better, faster customer service,
which dropped to fifth place (not shown). It also highlights the increasing
pressure and anecdotal information we hear from our end users regarding
the increasingly independent customer and their changing buying behavior.
This may signal the increasing impact of ecommerce demands, which are
based on availability and price only, and the shift away from more traditional
shopping channels.
Improving top line growth is a pressure felt by all companies and is a typical
response in a slow growth economy. With costs going up in that kind of
market, margins are squeezed and most companies feel the pressure to
Analyst Insight
Aberdeens Insights provide the
analyst's perspective on the
research as drawn from an
aggregated view of research
surveys, interviews, and
data analysis.
S&OP: Non-Negotiable as a Process
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2013 Aberdeen Group. Telephone: 617 854 5200
www.aberdeen.com Fax: 617 723 7897
"make something happen" to grow the top line in order to maintain those
margins,
Tighter integration between planning and execution indicates the secondary
impact of demand volatility. As volatility increases, the need to respond
quickly to increases to capture new business and react quickly to decreases
to minimize changes becomes increasingly important. Regardless of the type
of change, increasing the speed and reducing the latency in the supply chain
is top of mind.
Figure 1: Business Pressures Felt by all Companies
Source: Aberdeen Group, November 2013
Best-in-Class Metrics and Maturity Class Index
Table 1 provides the metrics used to define the Best-in-Class, Industry
Average, and Laggards.
The Best-in-Class continue to hold a substantial edge in customer service at
95%. In spite of demand volatility noted in the business pressures, they have
been able to maintain a high level. It might be costing them more to
maintain their edge, but it has remained intact at the same level compared
to last year.
The Cash-to-Cash cycle continues to show a substantial edge for the Best-
in-Class (46 days versus 73 days and 85 days for the Industry Average and
Laggards, respectively). This does show an increase for all, year-over-year,
but the relative comparison between groups is basically unchanged. As it
relates to the business pressures, this may well reflect the impact of
increased demand volatility resulting in more stranded orders compared to
previous years.
We looked at the improvement in gross-margin (GM) change over last two
years to see if there was any substantial change. The Best-in-Class are
slightly better at a 3% improvement compared to the other maturity levels
Aberdeen Methodology
The Aberdeen maturity class
is comprised of three groups
of survey respondents.
Classified by their self-
reported performance
across several key metrics,
each respondent falls into
one of three categories:
Best-in-Class: Top 20% of
respondents based on
performance
Industry Average: Middle
50% of respondents based
on performance
Laggard: Bottom 30% of
respondents based on
performance
All Others: Industry
Average and Laggard
Combined
S&OP: Non-Negotiable as a Process
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of 1% and 0%, but there is not a dramatic improvement at any level. This
tends to support the pressure felt to grow the top line. Reducing costs is
always at the top of the list, but to continue growing margins now requires
an increase in business. The leaders recognize that to increase margins it is
more than just cost reduction and the top line will have to increase to get
there.
Table 1: Best-in-Class Maturity Matrix

Best-in-
Class
Industry
Average
Laggards
Average Customer Service Level 95% 89% 79%
Average Cash Conversion Cycle
(days)
46 73 85
Gross margin change over last 2
years.
3% 1% 0%
Average Forecast Accuracy at
Family Level
86% 68% 25%
Source: Aberdeen Group, November 2013
Forecast accuracy also continues to show a wide margin between the Best-
in-Class and the other groups at 86%. Thats 18 points higher than the
Industry Average and at 25%, the laggards barely have a process in place.
Strategic Actions
Establishing a formalized S&OP process is the number one strategy for the
Best-in-Class, and has increased in priority since last year (Figure 2). Their
capabilities indicate that they have many of the pieces in place and there is a
renewed interest in solidifying this process relative to last year. Considering
the pressure coming from demand volatility and the risk management
related to supply continuity, it is no surprise that establishing or
reestablishing S&OP as a key formal process is the top strategic action.
Note that it is the number one priority by a significant margin, 61%
compared to 39% for the second priority.
Integrating the S&OP Process to the financials has moved up in priority.
Given the concern for reducing costs and growing the top line, it is no
surprise that understanding the impact of the S&OP plan changes in on the
financial plan in "real time" is high on the list.
Establishing a formal demand planning process within S&OP is still a top
priority, and considering the pressure of demand volatility, it is no surprise
that is third on the list (34%). It is clear from the metrics on forecast
accuracy that the Best-in-Class are much more advanced and vis--vis other
companies. However, this has not stopped them in their quest to better
understand their customer in order to address the pressure of increased
S&OP: Non-Negotiable as a Process
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2013 Aberdeen Group. Telephone: 617 854 5200
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demand volatility. Their capabilities around customer collaboration reflect
that direction.
Establishing an Inventory Optimization (IO) initiative is not surprising
considering the pressure coming from demand volatility (see Inventory
Optimization: Balancing the Equation for Enough but not too Much,
August 2013). As our research has indicated, it is a good place to start for
understanding tradeoffs on service level versus inventory. As the concern
over omni-channel fulfillment grows out of the increasing ecommerce
demand, reviewing inventory and stocking policies has become a very active
process as traditional channels evolve and volatility increases. Being able to
segment and understand stocking levels by location are becoming
increasingly important. Implementing an IO solution can be considered a
direct response to address the pressure coming from increased demand
volatility.
Figure 2: Actions

Source: Aberdeen Group, November 2013
Capabilities: Best-in-Class Compared to Others
We now look at Best-in-Class capabilities to better understand the
advantages they may have over the Industry Average and the Laggards from
the process, measurement, and organizational standpoint. This is where the
differentiation normally appears between maturity levels and explains their
ability to perform at a higher level.
Process Capabilities
We have listed six key capabilities, all of which are core to making the
S&OP process a robust process. The main outcome of the S&OP process is
the execution plan. Fundamentally, the two questions to answer are what
is required?, which refers to unconstrained planning, and then what can
S&OP: Non-Negotiable as a Process
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2013 Aberdeen Group. Telephone: 617 854 5200
www.aberdeen.com Fax: 617 723 7897
we do?, which is the constrained planning. Basically, this effort addresses
what the boss wants to know, which is what will it take to satisfy demand
compared to what can realistically be done. Most companies can define
where they are but often the unconstrained, or what it will take may get
into facility, equipment manpower, and possibly location issues, which are
much tougher to answer. This is where the Best-in-Class show their
strength at 59% compared to 49% and 44% respectively for the Industry
Average and Laggards.
The ability to plan at multiple levels allows a company to take advantage of
its segmentation and value chain insight. Being able to identify and group
products by any means is helpful, if that improves the forecasting capability.
Based on the 18 point advantage held by the Best-in-Class in forecast
accuracy, the Best-in-Class are much more effective with this capability
(43%).
Responding to unplanned events does not show great differences by
maturity class in capabilities. But the customer service level gaps indicate
that the effectiveness at the execution level certainly does (six points less
for Industry Average and 19 points less for Laggards).
The ability to understand the impact of the S&OP Plan compared to the
financial plan suggests that the Best-in-Class are slightly behind in this area,
which may account for why it is higher on the strategic action list. There is
work to be done at all maturity levels on this particular capability, which
suggests that only about one third really have this in place.
Figure 3: S&OP Specific Process Capabilities
Source: Aberdeen Group, November 2013
S&OP: Non-Negotiable as a Process
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Creating possible upside scenarios in advance will prepare the organization
for how to think and respond when the unplanned event does occur.
Testing the upside is often the most challenging because it is often difficult
to model the unknown. But testing the capacity of existing products is an
exercise that at least identifies the upside constraints as volume increases.
The Best-in-Class show a distinct advantage in this area.
The gap has narrowed some in process capabilities compared to the prior
year, but there is still a gap. With many capabilities identified in the 30
percentile or less, it indicates that even for the Best-in-Class there is much
work to be done to have a formal robust S&OP process.
Measurement Capabilities
Reviewing the measurement capabilities in Figure 4 does show significant
gaps by maturity that may reflect that even though some capabilities are in
place, leveraging them at the execution level is still challenging.
Being able to consider prior period KPIs in the forecasting process and
capacity planning is a must have to be able to make comparisons and
generate recommendations going forward. At 87%, the Best-in-Class are
much more likely to be in a position to make that happen compared to the
Industry Average at 66% and Laggards at 53%.
Figure 4: Measurement Capabilities
Source: Aberdeen Group, November 2013
A key point here is the commitment to track and measure performance,
which will lead to course correction and improvement.
Having the dashboard reporting for the executive team available in a form
that helps them to evaluate and know where they stand is important so that
S&OP: Non-Negotiable as a Process
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the need for support requirements or need to take corrective action will be
well understood and can minimize delays.
The last measurement still shows a gap between maturity levels. Although
some business may be looking at a make-to-order model, where the lead
times will vary by order, for the balance it is difficult to understand why
there would be any gap. Knowing the lead time and being able to commit to
customers on delivery is pretty fundamental to a business. So at a minimum
this is one of the first things to get a handle on if it is not already in place.
Organizational Capabilities
Figure 5 shows the organizational capabilities; there are a couple of basic
issues that stand out related to talent and possibly training.
The first one is understanding the tools required to perform the necessary
functions within the planning environment and the basics of an ERP business
system. Certainly there is always some uniqueness in each businesss
systems, but 53% for the Industry Average and 38% for the Laggards
indicates some talent and training deficiencies at a minimum. In our
Aberdeen Summits, one underlying concern we constantly hear is the need
for talent.
The second is understanding the business itself not as great of a gap, but
still a 10-point gap between the Best-in-Class and the Industry Average. This
area would be about the basic understanding of the organization and its
products. Again, there is at a minimum a training deficiency or a possible
general business acumen talent deficiency, as well.
Figure 5: Organizational Capabilities
Source: Aberdeen Group, November 2013
Specifically related to the S&OP Process itself is the scenario planning skills
to use the tools effectively and address the what if questions regarding
S&OP: Non-Negotiable as a Process
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alternatives and tradeoffs. Recognizing and providing the alternatives are at
the heart of defining the tradeoffs and achieving the right supply / demand
match, which is what the S&OP process is all about. Seldom is there a clear
path and the ability to arrive at a consensus plan. To arrive at the consensus
plan there is continuous process of vetting the alternatives, negotiating the
tradeoffs, and testing the limits so that everyone involved has confidence in
the plan at the outset and can align behind it
The overall organizational capabilities appear to deter the Industry Average
and Laggards from achieving a Best-in-Class status. Whether it is the basic
talent or the need for training, this area definitely needs to be addressed as
an enabler to move forward.
Technology Support for Core S&OP Processes.
Figure 6 illustrates that there is strong technology support for the key
S&OP processes that are fundamental to make S&OP work. Without basic
demand and supply planning, the S&OP process really is not functional other
than as a communication vehicle. However, we specifically considered those
with strong support to see if it would highlight any technology enabler
deficiencies that might provide more clues to the challenges faced by
companies that have not achieved Best-in-Class status. The results?
Figure 6: Strong Technology Support for Core S&OP Processes

Source: Aberdeen Group, November 2013
There are clearly visible gaps at the basic support level, particularly for
supply planning, demand planning, and executive dashboards. If the support
level is the reason that capabilities at the organizational level fall short or
that basic training is not provided, this would certainly be a place to start.
[S&OP] is fundamental for any
business or organization.
~ David Wilson, Partner /
Principal, Small Asian / Pacific
Educational Institution
S&OP: Non-Negotiable as a Process
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2013 Aberdeen Group. Telephone: 617 854 5200
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Evaluation of S&OP Specialist Solutions
When asked the question, 46% of the companies surveyed have chosen to
use a specialist S&OP solution. From a technology perspective, 56.5% of
those have a home grown version, while 43.5% have chosen a Best-of-Breed
solution. Table 2 reflects this breakdown.
Table 2: Specialist S&OP Solutions

Specialist S&OP solution

% of Total Specialist Solutions
Best-in-Class All Others
Internally developed 35.8% 63.4%
Best of Breed non Cloud based 44.8% 24.4%
Cloud based SaaS S&OP solution 19.4% 12.2%
Source: Aberdeen Group, Month 2013
The percentage of installed Best-of-Breed Cloud based solutions for S&OP
has not changed in the past year in terms of a percentage (7%), but of the
percentage of those planning to implement a Best-of-Breed S&OP Specialist
solution, 39% indicated that would be looking at a Cloud based option.
As the demands and requirements keep going up for the S&OP process, the
ability to internally support a home grown system will become a tougher
task. The S&OP plan has become the system of record for many companies
against which alerts are sent as exceptions to the plan and dashboards
reflect those exceptions. Ties to the budgeting and financial processes have
become the expected. Risk management and scenario planning have been
incorporated to address the what if questions. The speed with which
planning and re-planning must occur has accelerated. Just moving the data
for scenarios, aggregating, and disaggregating in the review process puts
tremendous stress on the tools originally developed and on IT support
groups that struggle to support basic supply and demand planning.
All of these factors suggest that as the speed and complexity continue to
rise, the demand for S&OP Specialist solutions that have been designed with
all of those above mentioned requirements in mind will continue to
increase. Based on the percentages that are now reflected in our research, a
significant percentage of those will be Cloud based.
Key Takeaways
The S&OP process is non-negotiable to those that have ever used it to drive
their business. They would not consider running a business without it and
the metrics clearly show superior results for the Best-in-Class compared to
other companies. To assist those that have not started the journey, plus
those that are moving forward or possibly plateaued in the process, we
Our S&OP Process has been
driven from the Operations side
of our business unit for the
majority of the 8 years. We've
been using this construct to
effectively use our resources to
meet customer demand and
shareholder need. We've done
better at engaging our senior
leadership as we've more fully
globalized the effort. We've
recently added a component of
budget analysis and execution
within the process and this has
been very successful.
~ Manager, Large North American
Financial Services Company
S&OP: Non-Negotiable as a Process
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2013 Aberdeen Group. Telephone: 617 854 5200
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highlight our insights as suggestions by maturity class to consider in order
institutionalize your S&OP process:
Laggards
o Address training and possible talent adjustments
immediately.
o Evaluate the IT support in terms of being strong enough on
core processes. Under the assumption of S&OP being non-
negotiable, address those shortcomings.
o Recommend using a third party Best-of-Breed approach,
assuming there is not a solution in place.
o Concentrate on the demand side first and begin measuring
forecast accuracy immediately.
o Start measuring performance on other key metrics,
regardless of where they are. Improvement becomes
contagious and can be celebrated as success.
o Start holding the meeting (monthly, quarterly at a minimum,
or more frequent if business demands it).
Industry Average
o Address training and talent issues perhaps not as much
work to do as the Laggards but still issues to address.
o Same as for Laggards on IT.
o Education on scenario planning and overall system
understanding. Consider external resources for help on the
training side.
o Establish the measurements where they do not exist and
implement a root cause corrective action approach to
improve them.
o Forecasting go beyond the basics and formalize the
demand planning process. Include sales in the forecasting
process.
o Use or implement segmentation to better refine the
demand statement in the S&OP process.
o Present a recommended plan and at least one upside and
one downside scenario at the S&OP meeting along with the
assumptions.
o Incorporate supply risk into the process for review.
o Incorporate new planning introduction into the process.
Best-in-Class
o Address the basics for Laggards and Industry Average that
might not be in place particularly in the talent, training,
and systems area.
S&OP: Non-Negotiable as a Process
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o Concentrate on customer collaboration and work to
expand it to all levels and to as many customers as possible.
o Refine the segmentation model and consider consolidation
at some lower levels for unbranded or common material
level to simplify planning.
o Consider the refinements that may come from an IO tool in
terms of forecast adjustments.
o Align metrics and executive scorecards.
o Concentrate on consensus and address any alignment issues
immediately.
As indicated in the title, S&OP is non-negotiable as a process. The metrics
tell the story through the Best-in-Class perspective. The process works. If
you havent started, do so now. If you have started and could use some
ideas, review our takeaways as a catalyst for your thought process. If you
have it in place and its working well, congratulations! But never stop
working at it because the demands continue to increase and remember
its Non-Negotiable.
For more information on this or other research topics, please visit
www.aberdeen.com


Related Research
Inventory Optimization: Balancing the
Equation for Enough but not too Much;
August 2013
S&OP Process Demands Put Pressure on
System Support and Big Data; March
2013
Sales and Operations Planning: A Global
Comparison; January 2013
Demand Planning: Renewed Focus for
Companies to Drive S&OP and
Operational Improvements; November
2012
S&OP: A Critical Process for Superior
Performance; September 2012
Supply Chain Control Tower: Concept and
Impact; August 2012
Author: Bryan Ball, Vice President and Principal Analyst, Supply Chain
Management (Bryan.Ball@aberdeen.com)
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This document is the result of primary research performed by Aberdeen Group. Aberdeen Groups methodologies
provide for objective fact-based research and represent the best analysis available at the time of publication. Unless
otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be
reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by
Aberdeen Group, Inc. (2013a)
S&OP: Non-Negotiable as a Process
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S&OP: Non-Negotiable as a Process
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