Saturday, May 14, 2005

Anecdotes to Support Need for S&OP

Large companies have to, essentially, split themselves up into silos for manageability. The usual silos include production, product design, product lines / marketing and regional sales. Each of the silos depend on the other to be successful; But each silo is driven by sub-goals which are not at the superficial level completely aligned. Frequent collaboration across silos is necessary to make sure each of the silos' plans are supported by the other silos' plans. So collaboration on plans across silos is common sense though in the world of limited time, commonly overlooked.

Here are some high profile examples which show how lack of internal collaborations resulted in serious financial consequences in some large companies.

  • In the first example: In the mid-90’s, Volvo was faced with exactly such a problem when the company found itself with an excessive inventory of green cars in the middle of the year. Eager to get rid of this inventory, the sales and marketing group started aggressively offering special deals, discounts, and rebates on green cars to the distributors. The good news was that the scheme worked, and green cars started to sell. The bad news was that the supply chain planning group, not recognizing that such deals were in place, erroneously thought that customers finally liked green cars. As sales of green cars increased rapidly, they decided to produce even more green cars to meet the seemingly increased demand. The end result was that Volvo was left with a huge inventory of green cars at the end of the year.
  • Another Example: A few years ago, when Hewlett-Packard (HP) first introduced its home personal computer, the Pavilion, it also learned a hard lesson from supply chain management that did not capture the impact of demand management. When demand for the Pavilion started to fall due to aggressive price cuts by Compaq and Packard Bell, the HP supply chain planning group decided to curb production of the product, only to discover later that their sales and marketing group had decided to match the competition’s price cuts. The result was a painful Christmas season when HP faced crippling stock-outs of the Pavilion.
  • Third Example (subscription required): In 1999, an earthquake in Taiwan shutdown shipment of computer components by weeks. Most PC manufacturers had stock outs because of the supply disruption. Dell, which practices active management, through strong S&OP processes, used its demand levers to adjust the demand away from computers that use those components. Though the other computer manufacturers had the same capabilities to shape demand, they did not have the speed and the processes in place to quickly implement the corrective actions to get back to plan.
The process of internal collaboration, across silos in an organization, of plans is Sales & Operations Planning. Lot of companies have started initiatives to implement Sales & Operations Planning. Few are good at doing this on a consistent basis at a high enough level in the organization to make it effective. This is an area companies will focus a lot more on in the next few years. What do you think? Karthik Mani

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