Predicting the future is never an easy task. Once I read an article on the future of supply chain expecting to read about trends, but it was actually a survey amongst professionals where half of the people who answered it said to have S&OP (Sales and Operations Planning) integrated, working perfectly. However, in the survey there was no definition of S&OP. So, was the outcome of the assessment really useful?
We recognize two levels of S&OP. The first level works with an annual budget meeting where production, commercial and logistics areas talk to each other and there is a second level where commercial and production areas are all integrated into forecasting algorithms, which can take both tactical six month decisions and real time operational ones. So, which of these two levels of S&OP do half of the people who responded have?
Let’s start from the beginning. What is S&OP? Sales and Operation Planning is the concept of aligning Production and Logistics with expected Sales, instead of having Production and Sales working individually and Logistics sorting out the inconsistency between the two of them at really high costs.
Those three areas must be aligned. If production is going to produce lots of one product, because it’s cheaper to do so at the moment, then the promotions on the sales side to push this product need to be in place, and logistics processes have to be aligned in order to get this to the market in time at normal cost levels. And similarly, if you are going to sell in a certain area that you didn`t sell before, this will increase your cost per ton, so it should be a strategic opportunity.
So what about the future of S&OP? Let’s think beyond that!
Currently, the industry of Consumer Package Goods is very orders based, which means that we’re surprised every day by these orders and they are not very flexible. In the future, this will be more and more like a Vendor Managed Inventory process. This means that, based on historical consumption at a certain customer and the macro trends at all customers, you know when and how that customer is selling and how he will continue selling. The question really is: why should the retailer have to worry about his stock? You want them to sell your products so it is in your interest to make sure they have them in stock. He needs to worry about getting people into the store and in order to do this he needs a nice store and products. If he provides real time sales data, it is possible to forecast his needs, but if he doesn’t, forecasting can be based on historical sales.
As the algorithms get more sophisticated they will slowly replace Sales. This concept has been common practice for Oil and Gas distribution for about 15 years, because in a lot of places the customers only pay for the Fuel once they take it out of the tank, so the stock in the tank still belongs to the distributor. This saves a lot of money in Logistics and commercial contact becomes less and less necessary.
For retailers, this would be a very easy trend to implement, because they also ‘own’ the stock in both the DC and the store (because they own the stores). However most still rely on waiting for their shelf to be empty to send an order to the central warehouse, when it would be a lot more efficient if the central warehouse knew the shelves were starting to get empty and sent a truck with the order they need.
The other trend is to produce in line with customer orders. In the CPG industry, for example, you can build full pallets, but only about 20% of your customers ever order them, they are 50% of your volume. For the other 50% it seems like a waste of time and energy to do that. How it works now: first you produce it up to six layers and then the pickers need to reduce it again to three because you don’t have a single customer that orders more than three layers of this product. This, off course, would mean that eventually you will be producing your customers orders not in the picking in front of the dock, but in the factory where most of this is already automated. And then you’ll move this into your automated storage to reduce your stock and labor costs and increase your service levels.
For Oil and Gas production it’s much simpler, because there are fewer products and there is hardly any manual labor involved in moving them around. For Retailers this is actually more complex and similar to the previous trend. CPG deals have 100 to 1.000 SKU’s, while Retail’s have 2.000 to 100.000, so producing perfect pallets and perfect forecasting is much more difficult, but with current Operations Research and Big Data trends this will rapidly be a reality.
These trends bring us to the question, if you can forecast and optimize everything and if most ‘peripheral actions’ like invoicing, taxes, accounting are a logical result of this, why would you need an ERP?
Further reading: Is your logistics still congested?