The first step is to improve the existing S&OP process to best-in-class. Whether starting from scratch or making a few minor tweaks, the establishment of a strong S&OP process is the foundation for SI&OP. The aspects of a best-in-class S&OP are also characteristics that make up a successful SI&OP. Data integrity, managing by exception, financial integration, executive involvement and meeting discipline all serve to create a strong, successful SI&OP platform.
The second step is to install an inventory optimization capability. Getting inventory optimization up and running can be done one of two ways. A company can choose to implement software in-house or use a service provider in an outsourced arrangement. An outsourced provider hosting the software can help get an inventory optimization capability up and running much more quickly than selecting and implementing software in-house. An in-house implementation could take up to a year to go live, while an outsourced provider can have the system up and running in as little as three months.
Once S&OP and inventory optimization are up and running well, it is much easier to integrate the two processes than it would be to implement SI&OP from scratch without a solid S&OP process in place. The final step in the journey to SI&OP is to combine the two processes. Incorporating inventory optimization as Step two requires integration both upstream with demand planning as well as downstream with supply planning. Since forecasting is already an input to inventory optimization, the work to integrate upstream consists of expanding the forecast horizon to equal that used in S&OP.
Now, to splice the output of inventory optimization downstream into supply planning, the recommended inventory levels and replenishment orders must feed the supply plan. A key difference between S&OP and SI&OP is the replenishment orders that feed supply planning. The replenishment orders in SI&OP are now calculated from inventory parameters that are optimized based on service-level targets. Supply planning benefits from a more precise derivation of replenishment order to create both production requests for internally manufactured items and purchase orders for purchased items. The more precise replenishment orders allow for overall inventory reduction and increased service levels.
Special care should be given to organizational change. The change in roles and responsibilities must be clearly defined. Of special consideration will be ownership of the final forecast as most inventory optimization software has demand planning capability that is duplicative if the organization already uses a system for forecasting. A rationalization of IT systems will have implications for the forecast ownership. Attention should also be given to align metrics and incentives to drive the desired behavior. Overall, the migration to an SI&OP process is a complicated initiative that requires not only process and system expertise but also focus on the soft issues of people management to ensure a successful launch.
The sum of it all
Like all business practices, S&OP has evolved over the years. While many companies may be following all of the prescribed steps of a best-in-class S&OP process, there may be capabilities not being utilized. Most notably, the optimization of inventory planning based on service-level targets is often overlooked in a traditional S&OP process. The next evolution of S&OP is the integration of inventory optimization capabilities. Inventory optimization provides companies with a scientific approach to dynamically plan inventory to meet desired service levels. It is the inclusion of this service-level planning that makes SI&OP a more effective planning process than traditional S&OP.
A robust S&OP process is the building block upon which to add inventory optimization and create an integrated SI&OP process. The company that extends its capability beyond S&OP to SI&OP will reap the benefits of lowered working capital investment, improved service levels and increased sales.
About the Author: Mike Valentine is Director, Supply Chain Design & Innovation at UTi Worldwide, Long Beach, Calif., a global logistics provider of inventory optimization services. Reach him at firstname.lastname@example.org.