By James H. Hughes
Enterprise resource planning-based advanced supply chain planning tools have become increasingly powerful, and today they allow companies to set inventory targets more effectively, accurately model future networks, and make well-informed distribution decisions based on sales forecasts, customer segmentation, sales orders and actual production. And the list goes on.
Such capabilities are especially important today, because improvements in planning are the key to a variety of supply chain activities and to excellence in overall supply chain management, which can be an important driver of business performance. Indeed, in 2003 a team of researchers from Accenture, Stanford and INSEAD found that the average market capitalization of companies that employ supply chain best practices increased by up to 26 percent more than the industry average over a three-year period.
The potential value of today's ERP-based planning tools is clear, but in practice many companies find that they fall short. For example, in spite of significant industry investments in planning systems, the majority of chemical companies are not satisfied with their supply chain management technology, regardless of which technology they implemented, according to an Accenture industry study. When asked to rate their impressions of their current use of demand planning, 57 percent of respondents graded their internal results as less than favorable, and only 7 percent rated it as excellent.
The problem typically does not lie with the technology, however — it lies with the way that companies approach the technology. Too often, supply chain planning implementations are regarded as technical projects, when in fact they are business transformation initiatives and should be managed as such.
Transformation Rules of the Road
Business transformation does not just happen, of course. It requires a conscious effort and a methodical approach. Over the years, Accenture has been involved in numerous ERP implementations, supply chain planning initiatives and business transformation efforts across industries, and we have conducted ongoing research into the nature of high-performance businesses. Based on that experience and insight, Accenture has identified several practices that are key to a successful, business-oriented implementation of advanced planning tools.
These practices encompass the full lifecycle of an implementation. For example, companies need to work upfront to ensure business readiness — that is, to assess whether they have the right people with the right capabilities in place, and to consider training and recruitment to fill in any gaps. They also need to look beyond the launch of the system, and establish post-go live governance processes to ensure that the new tools are adopted by the organization and that employees don't gradually revert to the old approaches. And they need to set up ongoing "value realization" processes for managing against key performance indicators to keep the focus on achieving the desired business benefits.
For supply chain executives who want to take advantage of today's advanced planning tools, three practices stand out — in part because of their importance, and in part because companies often fail to address them. These practices are:
- Begin with a value-led business vision and a business case.
Today's supply chain planning tools offer a wide range of functionality. That depth and sophistication is important, but it can also be a double-edged sword. Facing a wide array of possible new capabilities, companies can get sidetracked and wind up going through the effort of implementing solutions that, in reality, will provide them with little business value. The effort needs to be targeted and focused right from the beginning.
Thus, an effective supply chain planning transformation starts with a vision of how the new approach will help the company achieve higher levels of business performance. This vision must then be translated into a roadmap for moving forward and ultimately quantified with a business case. Companies need to document their current performance and evaluate the costs and benefits of moving to a new planning technology. They should identify their specific supply chain pain points and the specific capabilities that will address those points. For example, an inability to easily generate optimized inventory targets based on demand, service levels, orders and production yield might be addressed through better supply planning capabilities. Or, having insufficient data available for quick "what-if" supply chain analyses might indicate the need for better demand planning capabilities.
Through this exercise, companies develop an understanding of the business value and cost of implementing each capability, the changes needed to capture the expected benefits, and the performance metrics that will be used to track the progress of the implementation effort. This provides a business-oriented platform for planning and focusing the initiative on solid results. For example, using this kind of approach, a major chemical company expects to achieve a 5.8 percent reduction in inventory and 1.2 percent reduction in operating expenses.
- Keep it simple — for now.
Companies often look at the tremendous range of possibilities presented by today's ERP supply chain planning tools and simply decide to "do it all," that is, to move ahead immediately into the most sophisticated and complex aspects of the software. However, it can be better to employ a gradual "crawl, walk, run" approach.
When companies become overly ambitious and try to create highly complex planning processes, they often find that it is too great a leap to take all at once. Typically, they have been working with very rudimentary planning tools. Demand planning, for example, is frequently performed using little more than spreadsheets. To move ahead, then, companies can start with simple planning models using integrated information. As people become more comfortable with the tools, additional functionality can be introduced, creating a step-by-step journey to the desired end state and avoiding the confusion and disruption of quickly introducing more complex approaches.
The good news is that for many companies, the introduction of even relatively simple, integrated new tools will usually bring significant improvements, given the low level of sophistication of traditional planning approaches in the industry. People can quickly access better information, and the organization can use "one set of numbers" to support aligned and better decision-making. Then people and the process can grow and improve over time.
- Consider sales and operations planning management.
Accenture research points to a powerful, but often overlooked, correlation: The benefit derived from supply chain management technology is directly related to the health and efficiency of the organization's sales and operations planning (S&OP) process.
S&OP is a management process that cuts across functional borders to ensure that the longer-term business plans of the company are achieved. Accenture research has identified several S&OP leading practices used by high-performance companies: These include:
- S&OP operates under a "one set of numbers" principle.
- The S&OP process is a common companywide standard process with common calendar, terminology and tools.
- The S&OP process is a holistic business process that includes all business activities, from customer and market interface to idea generation, innovation, product stewardship, manufacturing, supply chain management, finance, marketing and sales.
- The S&OP process drives a high performance culture by identifying gaps between existing and target performance, and by implementing corrective actions for P&L/balance sheet-relevant items.
Effective S&OP relies on supply chain management's demand and supply balancing capabilities. S&OP's primary focus is to maximize profit by balancing sales, asset utilization, inventory and customer service. Supply chain planning technology plays a key role in this process because it enables companies to create future projections of each of these four key profit drivers.
Too often companies implement planning tools to be used at the front-line level but fail to integrate them with the S&OP process. However by linking the two, companies can give business management a clear sense of plans while enabling planners to make day-to-day decisions that reflect overall strategic goals.
Planning for Performance
ERP-based advanced supply chain planning tools offer the promise of significant business benefits, but the achievement of those benefits relies on the way the technology is implemented and managed. These tools often require new ways of working, and that in turn requires a business-oriented approach to implementation — one that takes into account the people, processes and strategies involved, as well as the technology itself.
This kind of business transformation is not easy; it clearly requires hard work. But it can be worthwhile. By understanding and using the key practices described above, companies can put themselves in position to take full advantage of today's sophisticated planning technologies and use them to support higher levels of business performance.
About the Author: James Hughes (firstname.lastname@example.org) is an executive in Accenture's Chemicals industry group. He specializes in large scale global supply chain transformations and is based out of Basel, Switzerland.