Sales and Operations Planning in Food and Beverage Companies

A Knowledge-Driven Consulting White Paper

2004 Hitachi Consulting Corporation

Contents
What Is Sales and Operations Planning and Why Is It Important for a Food and Beverage Manufacturer? ....................................3 Assessing the Opportunity for Sales and Operations Planning ..3 Where Sales and Operations Planning Fits With Traditional Planning Processes ....................................................................4 Sales and Operations Planning Process Cycle ..........................5 Successful Implementation Lessons...........................................6 Summary ....................................................................................7 About Hitachi Consulting ............................................................7 About Hitachi, Ltd .......................................................................7

What Is Sales and Operations Planning and Why Is It Important for a Food and Beverage Manufacturer?
Every year, the imbalance between supply and demand costs food and beverage manufacturers billions of dollars in out of stocks, excess inventory and excessive discounting. Managing through things such as regional promotions, product introductions and discontinuations, packaging/graphics changes, seasonal capacity constraints and weather related demand patterns can wreak havoc with the Demand and Supply planning processes for a Food and Beverage manufacturer. Combined with trends such as low carb diets, the next cool product, and unpredictable consumer behavior, food and beverage companies are finding agility and access to information to be the necessary recipe for success. The Sales and Operations Planning (S&OP) process helps to maintain a well coordinated and valid, current operating plan in support of customer demand, a business plan and a strategy. The operating plan provides management with a complete picture of forecasted demand, supply capacity, corresponding financial information and allows them to make informed, critical decisions. This process includes a formal meeting each month (or more frequent, if required due to business needs) run by the senior management and covers a planning horizon adequate to plan resources effectively. This approach helps the company move in one direction for the overall good of the company instead of each function pulling for its own silo goals. Companies that utilize Sales and Operations Planning have greater visibility across the company, gain the agility necessary to improve the Product Lifecycle Management (PLM) process, improve promotional planning, minimize unnecessary buildups of inventory and increase revenue predictability and budget forecasting.

Assessing the Opportunity for Sales and Operations Planning

Benefits of the S&OP Process 1. 2. Visibility of demand and supply across the company Improvement of the Product Lifecycle Management process Improvement of promotional planning Improvement of inventory management Revenue predictability Budget forecasting Implementing a Sales and Operations Planning process enables companies to identify problems and make better decisions faster and easier. Some typical problems that are addressed in the S&OP process include: Silo organizational structure where each department or business unit operates and plans for inputs independently of one another, often resulting in misalignment with the corporate strategy. Master plans, production plans and production schedules change continuously, promoting instability throughout operations. Sales and operations blame each other for problems. Financial plans are inaccurate, resulting in high variances between budget and actual results. Revenue goals are consistently not met. Low service levels or high cost of servicing customers along with low inventory turns are prevalent. Capacity utilization, forecast accuracy, obsolete inventory, product-tomarket time and transportation costs are not understood and/or measured. In addition, corrective action plans are not made. New product introduction process is broken and generally results in missed launch dates, significant issues with inventory management and poor service levels. Product phase-outs are costly and generally involve inventory excess or shortage issues. Poorly performing product lines are not reviewed and discussed. Product codes that have been phased out are not deleted or consolidated, promoting SKU proliferation. Promotional campaigns and activities cause major swings in inventory and service levels resulting in higher operational costs than budgeted.

3. 4. 5. 6.

Where Sales and Operational Planning Fits With Traditional Planning Processes
The Sales and Operations Planning process is a vehicle for communication among all functions within a business. It enables the deployment of company strategy and helps to better coordinate the allocation of critical resources (people, capacity, materials, time and money) so the company can profitably and effectively meet customer demand. As such, it serves as a mechanism to coordinate the vision, strategy, financial and tactical plans of a business into one unified operating plan. Furthermore, the Sales and Operations Planning process reviews high level planning activities at the monthly and yearly levels. Therefore, the review process does not get bogged down into tactical planning at the weekly or daily level. This is critical as it allows an organization the opportunity to proactively identify and manage around up coming issues like overstock situations, fixed capacity constraints, regional velocity of demand and financial reserve accruals. The following illustration provides a high level view of the integrated planning process.

Sales and Operations Planning Process Cycle

Sales and Operations Planning is a monthly process that is heavily participated in by senior management to achieve cross functional consensus on a single operating plan. Although actual processes vary depending upon complexity and size of an organization, a typical model of the Sales and Operations Planning process is pictured below:

Key Elements to Demand Review 1. Define process 2. Have business-appointed process owner 3. Involve participation from every division within the organization 4. Produce unbiased forecast 5. Document assumptions 6. Utilize aggregate and detailed demand plan 7. Continuously improve forecast inaccuracy

The S&OP process begins with the development of the demand plan for a rolling time period of 12-24 months (dependent upon business needs of the company) followed by the creation of the corresponding supply plan over the same time period. The demand and supply plans are then used to create the operating plan. The process is continually refined where focus is geared toward resolving conflicts and assigning priorities in supply and demand in the short term, and aligning more closely to corporate strategy and setting direction, in the long run.

Demand Review Process

As discussed above, the S&OP process begins with a Demand Review meeting at which the ultimate goal is to gain consensus on what will be sold each month for each product line or category and the resulting revenue. The driver of the Demand Review process is continuous improvement of forecast accuracy. The purpose of the meeting is to have all stakeholders, including sales, marketing, finance, product development and supply chain agree upon a consensus Demand Plan. At the meeting, participants will discuss factors affecting customer demand patterns (such as new or deleted products, competitors or market conditions), the aggregate demand plans and associated revenue plans. Once all demand for products and services has been recognized, the information is consolidated into one Demand Plan. When the Demand Plan has been approved by the meeting participants, it is then passed to the Supply team.

Supply Review Process

After the Demand Plan is received by the Supply team (which includes buyers, inventory management, production, warehousing and logistics), a Supply Plan, including a rough-cut Capacity Plan and a procurement plan, is created to fulfill the Demand Plan. The goals of the Supply Review are to: Develop a proactive approach to resolving imbalances in capacity and resources Identify capacity constraints and alternatives Develop a procurement plan Improve plan adherence Evaluate capacity utilization (forecasted and past performance) Maximize resource utilization (capacity, storage, transportation, people, materials)

Key Elements to Supply Review 1. Define process 2. Participation from supply chain, operations and finance 3. Document assumptions 4. Determine planned capacity 5. Capacity constraints 6. Create rough-cut capacity plan 7. Determine gaps between supply and demand 8. Continuously improve capacity utilization and planned and schedule adherence

At the Supply Review meeting, participants review and approve the Supply Plan and accompanying costs. This information is used as the primary input to the Sales and Operations Planning Meeting. If there are any imbalances between the demand and supply plans they are documented and brought to the Sales and Operations Planning meeting.

Sales and Operations Planning Meeting

The purpose of the Sales and Operations Planning meeting is to discuss and resolve any imbalances between supply and demand. Participants in this meeting include senior leadership representing functional areas such as finance, sales, marketing, purchasing, operations, planning, logistics and other operational and sales management as needed. In the meeting, the Demand and Supply Plans, financial plans, strategic business goals and unresolved issues from previous meetings are all reviewed and resolved. Where imbalances exist, participants are prepared to discuss alternative plans since new options must be developed and approved in this meeting. The group sets strategic direction on capacity, raw material availability and new business opportunities, and comes to a consensus on the Sales and Operations Plan. All decisions resulting from the meeting are published as a single authorized plan which becomes the operating plan for each function within the company. Sample of Information Examined in Sales and Operations Planning Meeting 1. Forecasted demand and corresponding revenue 2. Production Plan and cost of sale projections 3. Inventory positions/levels 4. Financial budget versus actual comparison (P&L, balance sheet and cash flow) 5. Raw material purchase projections 6. Forecasted capacity utilization compared to past performance 7. Forecasted labor utilization compared to past performance

Successful Implementation Lessons

The following attributes are key to successful Sales and Operations Planning implementations: 1. 2. An organization is in place to support Sales and Operations Planning functions. Enterprise Executives are both key supporters and leaders of the Sales and Operations Planning process. At the beginning of the implementation of S&OP, an individual project team can be utilized to develop and deploy the process. However, the team should utilize the Executive sponsor to derive direction and leadership. Key Performance Indicators (KPIs) are determined and defined prior to the beginning of the project. These KPIs are monitored on a monthly basis to measure the success of the implementation and identify areas of opportunity to continuously improve and refine the Sales and Operations Planning process. Continuous improvement is part of the process. You are not going to define everything with 100 percent accuracy at the beginning of the project. The Sales and Operations Planning process is a process that continuously changes and improves to suit the needs of the business.

3.

4.

5.

6. 7.

Deploy and stabilize the Demand Planning process prior to the Supply Planning process. This is dependent upon the processes that are already in place and data availability. Hold regular meetings with Executive Sponsorship Board to discuss process improvements and direction. Recognize the difference between productive and non-productive meetings. The Sales and Operations Planning process is decision making tool if decisions are not being made, enhancements to the process will need to be made.

Summary
Enterprises that utilize the Sales and Operations Planning process to manage their business stand a greater chance to increase their customer service levels and attain improved, more balanced inventory, supply and demand plans. The Sales and Operations Planning process seeks to improve sales forecast, inventory turns, production plan and schedule adherence, capacity utilization rates, and decrease the gap between the budget and actual performance. Additionally, it is a vehicle for communication between all planning functions within a business. Sales and Operations Planning translates the vision, strategy, financial and tactical plans of a business into one operating plan. Given the changing landscape of the food and beverage industry, it is more important than ever to streamline all processes to gain competitive advantage. Companies that are effective in utilizing the Sales and Operations Planning process stand to improve their visibility across the company and realize opportunities to increase their revenue predictability and budgeting.

About Hitachi Consulting

Hitachi Consulting is Hitachi, Ltd.s (NYSE: HIT) global business and IT consulting company. We serve Fortune 2000 companies across many industries across the United States. We work with you to understand your needs and to enable and implement key business strategies. We deliver practical solutions to generate demand, ensure supply and help you manage your enterprise effectively. Our commitment to delivering measurable results is unparalleled, as is our dedication to transferring knowledge. Our experience translates to your results. To find out more about how Hitachi Consulting can inspire your next success, please call 1.877.664.0010 or visit us at www.hitachiconsulting.com

About Hitachi
Hitachi, Ltd. (NYSE: HIT), headquartered in Tokyo, Japan, is a leading global electronics company, with approximately 326,000 employees worldwide. Fiscal 2003 (ended March 31, 2004) consolidated sales totaled 8,632.4 billion yen ($81.4 billion). The company offers a wide range of systems, products and services in market sectors, including information systems, electronic devices, power and industrial systems, consumer products, materials and financial services. For more information on Hitachi, please visit the company's Web site at http://www.hitachi.com. ###
2004 Hitachi Consulting Corporation. All rights reserved. "Information Velocity" is a service mark, and "Knowledge-Driven Consulting" is a registered service mark of Hitachi Consulting Corporation. Printed in USA..