No pain, no gain

Every ops director already knows that firefighting is usually the result of bad or absent planning. But what to plan? How to plan? And who should be doing it? Planning's dream is to match supply and demand. Production chases its own tail when it isn't working to a production plan that means anything. Either demand isn't what was expected or planned for, or the demand was predicted, but production doesn't have the resources to meet it - even if the capacity is there, bad planning may have given it to something else. All this was recognised in the mid-1980s by Dick Ling, then a consultant for Oliver Wight - deviser of materials-requirements then manufacturing-resources planning (MRP and MRPII). Ling, now associated with Oliver Wight breakaway Stratabridge, took MRP farther. He devised a business process that would attempt, first, to identify likely customer demand more accurately. Better forecasts meant much more effective MRP calculations. Secondly, it would align the equipment, premises, people and other resources needed to match that supply forecast. He called the process sales and operations planning (S&OP). S&OP aligns separate sales, production and finance plans to ensure future business predictions are integrated with operational plans. In exemplar companies, the monthly S&OP meetings are points in the calendar as immutable as the phases of the moon. Not everyone buys into the S&OP idea. Richard Williams of consultancy Procertis says: "The end goal of S&OP is to accurately predict what the market is going to demand from us. That's not possible. You are never going to reach that goal. You can get closer and closer, but you have to put in more and more effort for less and less improvement." In his view, S&OP doesn't pay close enough attention to day-by-day fine-tuning of the product offering. However good you are at forecasting, he argues, something will intervene to make your forecast wrong and you end up paying the sales force to foist unattractive products on an unwilling public. Andrew Purton of Oliver Wight says this misrepresents current S&OP thinking. For him, S&OP is about matching demand with resources of all kinds. That includes knowing which products to introduce, which to keep and which to retire. Duncan Alexander of Stratabridge says new product development (NPD) is a continual process that isn't necessarily a series of mould-breaking breakthroughs. "It may just be changing labelling or packaging, rather than a new product as such... but it still needs to be executed properly." It's a tough proposition. The first step is to manage the product portfolio: "You would want to be reviewing the size of the portfolio and how it breaks down into A, B, C and D," says Alexander. Unit numbers Having too many stock keeping units (SKUs) in the range is a killer, Alexander says. But the temptation is always there to increase them: "If you're a sales person, you are driven and rewarded on revenue growth. So [if] a customer wants a tailored version to suit them, you say 'yes' to all these requests [because] they all mean more volume. "You don't see the cost of the extra complexity. More frequent changeovers in the factory, more packaging stocks. If you have more products to forecast, it makes forecasting more complicated and, in the field, it's more items to maintain and get wrong." Any product line change has implications across the business. For Purton, the problem is managing the expectations of a project manager who might be doing a good job on his own project but doesn't see the twenty others going on, for which resources also have to be found and managed: "Who's looking at the big picture? Have we got the resources for the whole programme or do we have to prioritise, limiting the total programme to the resources available? Or do we go and find some more resource?" Three years ago, Smith & Nephew Medical Wound Management (SWM) faced such a crisis. Having too many customers for its dressings and wound-care products wasn't the worst of burning platforms. But its long tail of single-item orders was diluting SWM's margins from rising sales. Orders cost between Û50 and Û120 to receive, process and deliver. But in 2005, SWM took 40,000 orders worth less than that Û50 minimum cost, says SWM's senior global supply chain vice-president, Paul Adams: "If your business objective is to push revenue growth, and you release sales people into the market, you will probably get a whole set of new accounts, all generating small orders. It's spray and pray. "Our demand forecast was not aligned with our financial forecast or operational forecast, and we were over-optimistic as a business about what could be achieved." Not surprisingly, "we had a number of manufacturing capacity issues," says Adams. Looking forward three years from 2003, SWM was short of about £100m of manufacturing capacity. Service levels hovered around 72% on time and in full (OTIF): "The service offering is critically important, especially in a healthcare environment - if they don't get our products we're letting people down and that could be tragic - and we did not have the infrastructure to support all the propositions that we were offering our customers." One cost of poor service, Adams points out, is that of dealing with customers' questions and complaints. "We had a high number of supplementary transactions [with] customers, apart from normal order taking. It was not an effective business process." SWM was over-extended in other ways. "In new product development, we were taking too long to launch products and then often missing the launch dates. We found ourselves asking, 'why can't we do what we say we are going to do?'." NPD was among 150 live projects going on in the business, from extending lines to rolling out SAP and other IT projects. SWM managed projects well, but each needed money or people behind it. "Getting those down was really difficult," says Adams. His task was to find efficiencies. "How could we create more capacity through our organisation to deliver better performance and faster execution around new product development and the manufacturing and supply cycle at a more acceptable cost?" Inromation gathering Adams worked with Purton on a series of information-gathering exercises: "We found a pile of profound things and the SKU issue was one of them." If one SKU only sells in one market, "why do we need it?" By moving to common packet sizes and multiple-language labelling across geographical markets, "we were able to eliminate a lot of that complexity". SWM halved its SKU count from 2,200 in 2002 to 1,100 in 2006. Adams says SWM's integrated business planning (IBP) version of S&OP "enabled us to align our sales strategy with our operational capability and supply chain design". The number of projects has been cut to five global and 28 local initiatives. And SWM appointed intermediaries to handle the frequent, small deliveries to low-volume local customers. Overall, the IBP programme delivered a 20% increase in manufacturing capacity, Adams estimates. Inventory dropped and now Smith & Nephew offices supply fewer delivery locations, with larger orders. Average order size in some markets has increased by up to 60%. OTIF measures are now running at 95% or better all the time, he says, and one area recorded a fall in monthly complaints from 100 to five. Forecast accuracy rose from no better than 60% to higher than 80% for three-quarters of the product range. And profit margin rose three points in one Euro market alone. Highly charged Easy? "It was hell" is Adams's succinct summary. Some conversations, especially about cutting back projects and SKUs "were highly emotional... It was a dog fight." Knowing that you have to rationalise the product offering is one thing. Doing it is another. Pruning apparently well-selling old products, or killing promising new ones at birth, can be an emotional business. SAP's Simon Pollard says global competition is now such that "it's very difficult to take the tough calls with favourite products or favourite customers. The argument is that some business is better than no business." It's not enough just to axe a product, says Alexander. You have to manage sales people who say, 'but this product is strategic for my account. If it goes I have to give up £50,000 of revenue.' Similarly, an organisation must develop the ability to call a project off before it gets to marketing and sales but, in too many cases, new product development is a tunnel, not a funnel, says Alexander. "You need to take a portfolio view, too, and see how all the NPD projects balance each other. The organisation needs to judge whether this or that project fits its strategy. If your strategy is high-end innovation, why are most of your projects merely packaging tweaks?" But there are many culture issues involved, Alexander acknowledges. "The product manager in charge of a new range may be emotionally tied up in that project and won't want to stop it, even if it's sensible to." Pollard says each stage of an S&OP programme has a different group of stakeholders and requires a separate set of metrics to establish that the products, and the actors who influence them at each stage, are doing what they should be doing. And balanced score card (BSC) and other tools are the way to establish that. In an ideal world, says Pollard, each product should have revenue targets, a contribution profile - which relates the cost of developing and launching the product with how quickly its sales recoup that investment - and a threshold for market share. Any manager can make decisions based on objective criteria, says Adams. What singles out the leader is the ability to take subjective decisions - those based on good judgement or gut feel. Whatever SKU you want to cut, there's always someone who says it's essential. A country manager will say that this or that SKU is 10% of his or her volume. You have to drive the decision through, says Adams, and that's tough. "Marketing departments never want to deal with it and then it becomes an event-driven process, rather than a continuous upgrading activity. "You need strong leadership and sponsorship, and that doesn't have to be the CEO. What you need is a strong, high-profile individual who is not going to move away from taking a stand when it needs to be made. "Those are easy words to say," he adds, "but it has a large cultural impact... What we did, really," he summarises, "was cause an epidemic, forcing things through to the top of people's pile." One person with a commitment, he reasons, is worth several with an interest.