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Improved coordination between sales and operations becomes a competitive advantage in industry segments where availability and reliability are critical success factors. The better the effectiveness of the supply chain the better the perspectives of gaining market share. A fundamental step toward effectiveness is bringing together sales and operations stakeholders, removing cultural and organizational barriers, increasing accountability, building trust and aligning management objectives.
1. An industry segment highly dependent on Supply Chain
The implementation of sales and operations planning processes is a very demanding challenge. Research from APICS has shown that lack of strategic coordination among departments and insufficient interaction and involvement among groups are the most common barriers. Recently, we faced these challenges in the implementation of new S&OP processes for a multinational company in Brazil.
The company has ambitious sales targets and it was shown that without improving its supply chain capabilities it would be impossible to reach them. The company provides a broad range of automation equipment for various industry segments. Growth always imposes a number of coordination and operational hurdles but in this specific case, supply chain challenges were even more critical.
The automation equipment sector is well developed in Brazil but is highly dependent on imports. Major players are multinational companies that bring from overseas a significant amount of equipment or parts that are sold in Brazil. Even players (local or multinationals) with local manufacturing depend to some extent on materials and parts from abroad.
For this company, a significant part of its sales in Brazil comes from imports and the other part comes from engineered products that require a joint effort of supply chain and production. There are two Critical Success Factors (CSF): availability and reliability. As an important source of businesses comes from serving maintenance needs of industrial clients (End Users), availability of products is mission critical for clients. As this is well known in the market, a source of competitive advantage is having a local stock to serve the client’s demands quickly. Reliability is critical for two reasons. First, serving maintenance, corrective or predictive, demands perfect order fulfillment as clients operations are at risk. Second, original equipment manufacturers (OEM) are also a significant source of businesses, and they depend on reliable schedules for their production planning. Missing deadlines compromises their production schedule and businesses.
In this case, a number of issues affect availability and reliability:
- Complexity: the company sells more than 600,000 different SKU´s. Significant parts of SKU´s are variations on a limited number of product categories and lines, normally being the variants of dimensional specifications. This is a critical problem for the demand forecasting of each SKU and its required inventories;
- Import Procedures in Brazil: deviations of time delays of import procedures are frequent and significant. Each SKU must comply with a substantial number of import regulations. Depending on the origin and product classification, taxes are different and eventually import procedures vary;
- Transportation cost: the most cost efficient modal is sea freight. However, its transit time is significant as most products come from Asia. When a client has an urgency, equipment must be imported by airfreight increasing significantly its transportation cost. Anticipating the demand allows imports by sea freight, reducing the transportation cost and in consequence facilitating its price competitiveness.
The problem to address is how to competitively serve the market. The answer is simple: having an inventory aligned with the market demand at competitive prices. Easy to be said, difficult to implement.
2. The key challenge: Organizational Transformation
The organization passed through several changes that compromised the available competences for planning and execution. This situation affected all related areas: sales, logistics and engineering. The processes maturity level did not allow also sufficient transparency. The organization lacked a proper set of key performance indicators to support effective decision-making. IT support was also limited, compromising the credibility of the available information. Additionally, planning and coordination activities were distributed in different areas making the proper allocation of responsibilities difficult.
The lack of reliable information motivated each organizational area to address the perceived problems from their own perspective without proper coordination. Sales increased inventory requirements to anticipate potential problems in supply chain and engineering. This was a first step toward a bullwhip effect. Expected deadlines were also changed and influencing operations. On the other side, Operations perceived the distortions on the sales requirements acting without an accurate concern on them. IT adjustments were not properly addressed, as the information that should be used as a reference for decision-making was not consistent. Consequently, a business dynamic of low reliability of information was installed in the company, creating friction and misunderstanding between areas.
To implement a coordination process within a fragmented organization with limited competences and capabilities was the big challenge to overcome
3. The Solution: the Implementation of a new S&OP Process
A framework addressing simultaneously the key drivers of a management process was used:
- Strategic Imperatives: From our experience, any transformation initiative must have clear priorities and must be aligned with the company strategy. The first step is defining clearly the initiative priorities. The company selected service level, a fundamental dimension of client satisfaction, as the main operational goal in order to be aligned with the overall objectives of sales and market share growth. A key decision was to focus on the organizational dimension of the problem. Although there is a fundamental IT component in any S&OP initiative, it was considered that the organizational dimension was more critical at the beginning. Improvements in IT systems and decision support tools were also proposed and implemented, even a Business Intelligence initiative was launched to better support management decisions, but the company did not entered any sophisticated IT implementation process in the first phase;
- Organizational Structure: The Demand and Supply Chain Planning Department was significantly reshuffled. All logistics planning and control activities, including order management, were centralized in a single area. Processes and activities of the contact center were redefined incorporating people dedicated to capture all clients’ requirements and complaints. A project management structure was implemented to take care of the whole process implementation;
- Planning Processes: Different processes were redesigned and new ones were implemented. A coordination weekly meeting between sales and all operational areas (logistics, engineering and manufacturing) was established. Templates were used to drive the decision process. A methodology for regular analysis of the performance indicators was implemented. At the beginning, the focus of the meeting was process improvement but it gradually changed to a focused planning and control meeting. Sales requirements were taken from a weekly sales management meeting using a predefined template. The initial priority was assuring the accurate delivery of client orders. A monitoring process for delivery quality was implemented generating a daily report of On-Time delivered orders. All operational departments were driven to implement better management processes. Each department established its own management processes including monitoring an improved set of performance indicators;
- Key Performance Indicators: The company had a tradition of monitoring a very extensive set of indicators without a supply chain perspective. Their relevance was limited and the quality of data was poor. In consequence, the credibility of the service level of supply chain was very limited. To change this, we started implementing a very simple indicator of On-Time delivery, monitored daily. Focusing on a simple but meaningful indicator gave credibility to the initiative. Gradually other Key Performance Indicators were incorporated and different perspectives (level of detail) of the same indicators were implemented allowing the identification of problems´ root causes. A driver of improvement was a straightforward process where the responsible for reporting was also accountable for proposing solutions for the identified gaps;
- People: A significant number of changes were made on the staff. No professionals were dismissed, as opportunities in other areas were found for them. However, new competences were brought to the logistics department as well as to the contact center. A new approach for skills management was implemented identifying the true talent of the professionals redirecting them to positions where they could better perform. A strong emphasis was given to the development of the people related to the planning process. The chosen approach was on-the-job training instead of formal courses. Spending enough time with the team sharing experiences and coaching all professional levels demonstrated to be the more adequate approach for the organization.
4. Initiatives Benefits
Although the initiative did not follow the traditional S&OP implementation path, its essence was absolutely anchored on the principles of bringing together demand management and operations planning. The next step would be the implementation of better automated decision support tools bringing more sophisticated analytical approaches.
The experience was extremely rich and brought important contributions for the company:
- Quantitative results: the service level was expressively improved. The On-Time orders indicators significantly improved, reducing in more than 50% the daily volume of orders with delays. Returns and other operational indicators, deteriorated at the beginning. However, it was proved that the current performance was not correctly measured nor captured. Once the real performance of the operation was captured and became transparent for all stakeholders, it was possible the identification of root causes of problems. Effective actions were implemented and improvement was achieved. The integration of the new coordination processes into the organization were fundamental to achieve the desired improvements;
- Qualitative results: the organizational dynamics expressively changed. First, the increase in transparency brought an increase in accountability, as the responsible for any problem in the delivery chain was easily identified. Secondly, it was clear for each stakeholder his or her contribution to the process. Objectives became aligned, increasing the effectiveness of each stakeholder’s efforts. The coordination meeting brought awareness for all stakeholders regarding the hurdles of their counterparts. A renewed team spirit was established as it became clear that each department was making its best effort to fulfill their responsibilities. The initiative also sent a clear message for the whole organization that service level was a priority and that the whole organization was committing its best efforts to it. The use of templates and a stable analysis methodology elevated the objectivity of the discussions moving from a culture of blaming to a solutions oriented organization.
An important outcome of the initiative was the increase in sales and market share. There was no formal client survey but preliminary client contacts pointed to the market recognition of the improvements. Most important was the renewed trust of the sales force on the company capacity to fulfil its sales offers increasing the motivation of the salesmen to offer the full portfolio including products that are more complex. A number of additional measures were taken to improve sales but we could objectively assume that a critical factor on the increase of sales was due to the improvements in the overall S&OP process.
5. Lessons Learned
S&OP is deeply dependent on people, processes and technology. Analytical tools and decision support systems are fundamental to gain effectiveness in planning processes but without confronting the human dimension, any result is at risk. The process dimension is also very important. Structured processes understood by stakeholders and implemented with the required resources are crucial for S&OP.
Indeed, in the specific case of the study, the human dimension was key for the success of the initiative. Working on the human dimension set the basis for any improvements. Although some management practices may be linked to the Brazilian market, the key issues of the initiative could be found at any company in the world.
A key challenge was moving away from what we called the “Heroes Culture” to a “Process Culture”. Some professionals in the company mastered key information and know-how making them essential to achieve successfully complex orders. Instead of following the formal processes, some sales people preferred to ask for “help” from the “Heroes”. The problem is that as individuals they had limited capacity to “help” everyone making the results irregular. Designing new and simpler processes and strongly enforcing compliance with standard procedures reduced the orders delivery variance giving consistency to the service level. Although it might seem counterintuitive, the company faced strong resistance from the “Heroes” and users. These practices gave power and recognition to the “Heroes.” They were strongly praised across the organization as people who solved key problems. Moving to more standardized processes reduced their power, influence and importance. The “Heroes” were not openly against them but tried to keep the old practices. On the other hand, some salesmen were also against the changes as they were closer to the “Heroes” and were used to get the best out of the old practices being less affected by the processes variances. Changing to more uniform practices would put them into the same service level as the rest of the salesmen. The “Privileged Users” were also against, not openly but also tried to keep the old practices.
Weekly S&OP and Sales Management Meetings were key to change this vicious circle. The use of templates with few and simple indicators created awareness on everyone’s needs, sharing the status of key client’s orders and the overall operation. Frequently, the “Heroes” were called upon deviation from standard procedures. Salesmen were forbidden to contact “Heroes” directly and all requirements were channeled through standardized processes with a dedicated team. Soon the organization realized that it was better to have a team of several professionals serving everyone’s needs instead of few “Heroes”. Once the procedures began gaining momentum, the results started to show the service level improvement to all stakeholders.
Other benefits are the regularity and efficiency gained at the warehouse. The planning process is now able to anticipate needs avoiding last day-last minute rushes to deliver critical orders. As most sales organization, there are monthly sales targets and a significant number of orders are concentrated on the last days of the months. As a result from the improvements, client’s requirement (demand and sales orders) are adequately estimated and anticipated allowing a smoother operation in the warehouse.
A fundamental driver used to change the organizational dynamics was a constant and steady coaching process. Either in in the management meetings (S&OP and Sales Management) and through individual sessions with key stakeholders, coaching was used to develop new competences in the organization. A lot of effort was devoted in one-to-one meetings explaining the approach and the importance of the standardized processes. Also important was to give concrete and rapid answers to the needs of the different agents. Improving the sales support function made it unnecessary to call for the “Heroes” as there was a more efficient channel to address sales force needs.
Although significant results have been achieved, there are still big challenges to overcome. Processes are being assimilated by the organization but relaxing on the enforcement of the standardized processes and without continuous improvement the current achievements can be lost. Old organizational bad practices could return.
The implementation of S&OP practices bring tangible results: efficiency, effectiveness and a better strategic alignment in the organization. Better alignment between demand management and operations (delivery) creates a favorable environment that fosters sales force motivation. The real aim is transforming the sales and operations planning into a strategic dialogue bringing a virtuous cycle of better service level that increases client satisfaction and translate in more sales. An additional virtuous cycle was also started as better service level and strategic alignment foster sales motivation and drives more sales efforts that certainly translates in higher sales.
Once a satisfying level of reliability is reached, the focus should be moving to sales force effectiveness on one hand and to agility in operations on the other hand. Similar to lean manufacturing initiatives the first step was to reduce the processes variance. Next, better results on Key Performance Indicators should be pursued. The implementation of better analytical sales support tools would increase sales effectiveness, requiring also a continuous improvement initiative for Sales Management and S&OP processes.
Although implementation issues due to the specific organization´s dynamics and the conditions of the country are unique, some universal principles can be drawn from this business case. Addressing the organizational issues first built the base ground to a sustainable sales enhancement process that will bring significant competitive advantage and is the cornerstone of any S&OP transformation initiative.