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How can demand-driven S&OP improve materials planning?

Demand-driven S&OP is meant to close the gap between a company's long-term forecasts and its short-term responsiveness. Here are the fundamentals of this new approach.

The traditional materials planning approach that uses sales and operations planning to determine the materials...

required by using a material requirements planning tool is no longer effective for today's volatile and complex logistics and supply chains. Instead, some believe that an approach called demand-driven S&OP can help.

The traditional approach goes like this: In many companies, sales and operations planning (S&OP), a forecast-based sales planning approach, is conducted by the sales team once a year to set sales targets. The operations team then uses material requirements planning, or MRP, for materials planning processes to ensure all daily, weekly or monthly production and procurement takes place on time to meet the sales forecast.

The problem with that traditional approach is that forecasts from S&OP are typically inaccurate due to factors such as changing customer demands and supply disruptions. Since the materials planning process is based on those original forecasts -- that is, inaccurate forecasts -- too much or too little stock is produced.

In contrast to that top-down, one-way approach, demand-driven S&OP links S&OP with MRP in an ongoing, two-way approach to information and material flows, where changes and real-world happenings inform the materials planning process.

Demand-driven S&OP, an initiative of the Demand Driven Institute, combines the business objectives of S&OP with MRP by being adaptive to the changes in materials' actual supply and demand situations at both the strategic and tactical levels. S&OP closely aligns with the strategic nature of materials planning on longer horizons, such as annual, quarterly or monthly; the tactical nature of MRP aligns with its shorter planning horizons, such as weekly, daily or even hourly.

SAP is developing its own demand-driven S&OP application, but there's no firm release date yet. For now, third-party vendors are offering demand-driven S&OP as an add-on to SAP S/4HANA, SAP Supply Chain Management (SCM) and SAP Integrated Business Planning (IBP).

Demand-driven S&OP follows a closed-loop approach and focuses on the stability, reliability and velocity of material and information flows. Demand-driven S&OP achieves all three of these materials planning key performance indicators by recommending that senior management and other stakeholders adopt the following five sequential and integrated steps:

1. Get buy-in from senior leadership

Proactive engagement with a company's senior management is a key success factor of demand-driven S&OP, and it is achieved when a constant and consistent flow of data and information helps users make important strategic decisions.

Coupled with demand-driven MRP, demand-driven S&OP provides capabilities for a company to put its working capital and resources to effective use.

Here, demand-driven MRP, another new approach to materials planning, provides the valuable information on the demand and supply positions of materials. Demand-driven MRP shortens the lead times, lowers inventory and increases customer services for a company, and thus enables a company to take advantage of newfound capabilities to increase its market share, enter new markets or introduce new products.

Demand-driven S&OP and demand-driven MRP connect with each other for a bidirectional information flow. Like demand-driven S&OP, demand-driven MRP is available as a third-party add-on until SAP makes it available in S/4HANA, SAP SCM and SAP IBP. (SAP has not yet announced a firm release date for the product.)

2. Engage the finance team and other important stakeholders

In this step, the finance team needs to get proactively involved in ensuring that strategic decisions, such as an increase in the product portfolio, have positive financial implications. Demand-driven S&OP achieves a far higher success rate when the finance team is involved in all five steps of demand-driven S&OP planning and execution.

Similarly, involving key stakeholders, such as customers, sales, marketing, product development, manufacturing and sourcing, provides much better insight into what it takes to succeed and where everyone is part of the decision-making processes -- and, consequently, can make stakeholders feel more invested.

3. Managing product portfolio

Demand-driven S&OP is not only able to manage the demand and supply situation of the current product portfolio, but can also manage other portfolios that may be in various lifecycles. For example, a product portfolio can include new products that do not have any historical data, and another portfolio can include products that will eventually be phased out, with their waning demand ensuring reduced supply.

It isn't uncommon for a company to have multiple strategies to manage multiple product portfolios based on their lifecycles.

4. Managing demand

Traditionally, the sales team has been the driver to predict or forecast what the customers may buy. But forecasting has generally been quite inaccurate, often leading companies to operate in a firefighting mode or in a situation where in-demand products are unavailable, while slow-moving stock piles up.

Therefore, it makes sense to have aggregated plans for products that can absorb demand variability while ensuring an uninterrupted supply rather than predicting products at individual SKU levels. Demand-driven MRP plays a central role in managing demand in demand-driven S&OP.

5. Managing supply

Demand-driven MRP is an integral part of demand-driven S&OP and, as already mentioned, they complement one another through a bidirectional and timely flow of information.

Demand-driven MRP relies on actual demand to position where inventory is and how much to hold to minimize lead times and reduce variability in the supply chain. It does so by dynamically adjusting strategic stock positions to promote flow and to reduce inventory capital. 

Materials planning using demand-driven S&OP does not result in a fixed or rigid master production schedule, which has traditionally been the norm. Coupled with demand-driven MRP, demand-driven S&OP provides capabilities for a company to put its working capital and resources (machines and manpower) to effective use. 

Next Steps

What materials planners need for inventory management

Tips on forecasting customer demand correctly

What you need to know about today's supply chains

This was last published in July 2017

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