DEMAND DRIVEN S&OP: A SHARP
DEPARTURE FROM THE TRADITIONAL
ERP APPROACH
By Robert P. Burrows III
Enterprise resource planning
(ERP) systems, currently used, do
not work well in a customer-centric
economy … what is needed is a
demand-based supply system that
focuses not on minimizing costs
and inventory, but on optimizing
customer value … currently
deployed ERP systems churn out
thousands of schedule changes at
the individual SKU level to deal
with the volatile nature of the
demand economy.
W
ith the rapid emergence of the
demand economy, appeals for
better planning and forecasting
are intensifying as customers require 100%
on-time performance. Enterprise resource
planning (ERP) systems universally have
scheduling and inventory replenishment
logic dating back to the 1960s. These push
systems fail miserably in the emerging
demand economy. New rate-based
demand planning tools are the solution
because they replace traditional sales and
operations planning (S&OP) logic and
deliver competitive advantage. Continued
reliance on the traditional ERP systems
will substantially erode service levels
and make total cost quite prohibitive.
This article delves into the fundamentals
of rate-based demand planning and
accompanying supporting processes. In
addition, it focuses on customer centricity
throughout the organization and designing
customer-value spaces that help streamline
demand planning.
4 THE JOURNAL OF BUSINESS FORECASTING, FALL 2007
FATAL FLAWS IN ERP
SYSTEMS
Over the past quarter century, the ERP
ROBERT P. BURROWS III
Mr. Burrows is the founder and
managing principal of The On-
Point Group, a firm that applies the
quantitative science of operations
research to supply-chain management
problems. He spent 15 years as a
strategic business unit head of Figgie
International Corporation. Prior to that,
he worked for Booz Allen Hamilton Inc.,
where he consulted to dozens of Fortune
100 international manufacturing com-
panies. Additionally, he has been on
the General Management Council for
Growth Enterprises of the American
Management Association. He holds a
Bachelor of Science in Engineering from
Iowa State University and a Master’s
degree in Business Administration from
Case Western Reserve University.
system has become the operational nerve
center—if not the virtual brain—of most
companies. And as the marketplace
becomes more competitive, the number of
products expands and customer demands
escalate, suppliers are resorting to more
and more sophisticated add-on software
tools to manage production, logistics, and
payment schedules.
Although billions of dollars have been
invested in ERP systems, they have not
stood the test of time and, in fact, often fail
to meet suppliers’ needs. It is not unusual to
hear of companies, having spent millions of
dollars on ERP systems, dismantling them
before long. This often occurs because
ERP systems are supply-centric, set up to
minimize costs and inventory. However,
to succeed in the today’s demand-centric
world, companies need demand-based
supply systems that are specifically
designed to optimize customer value.
ERP and its associated customer-
relationship, supply-chain, and product-
life cycle management systems were
built upon the supply-driven logic of the
1960s. This logic, known as time-phased
requirements planning, has never worked
well due to the overwhelming amount of
exceedingly detailed data, rigid inventory
safety-stock floors, and high levels of
change orders. With such logic, supply-
programming rules are neither flexible
nor sufficiently collaborative. Supply-
chain systems are hierarchical and supply-
focused; they are not tied to customer
value. Such data are arranged into regions,
states, customers, or products, without
well-defined supply relationships. Further,
the detail required to run the “system” is
so overwhelming that, once specified, it
becomes a major barrier to change.
ERP systems, as currently deployed,
tend to focus primarily on the make-supply
equation or on managing inventories.
These systems assume that good forecasts
are available, which generally is not the
case. Rapid changes in market dynamics
generate endless forecast updates, and
ERP systems are not equipped to cope.
The ERP system’s standard answer
to the “make” question is “stock it and
allow a long lead time for delivery.” But
to meet the demands of today’s customer
who says, “I want something different and
I want it now,” the ERP system complies
via change orders—lots of them. Further,
ERP systems are highly insensitive to
capacity constraints—so insensitive that
they force schedule changes at the speed
of the computer’s processor, rendering
plans and timetables instantly out of
date. However, ERP’s biggest flaw is the
frequent loss of perspective and control,
as managers dive into oceans of ever-
changing data. With technology changing,
ERP systems have tripled in size from
megabytes to gigabytes and now terabytes.
With that, high-priced, well-educated, and
talented management professionals have
become just data minders as their ERP
systems churn out thousands of schedule
changes at the individual SKU level in an
attempt to deal with the volatile nature of
the demand economy.
Managers want data that can be easily
converted into usable information. When
combined with a strong understanding
of customer values, data become a real
source of any organization’s ability to
sustain competitive advantage. This is the
way a company can transform itself into a
value-delivery enterprise.
A NEW DEMAND-BASED
APPROACH
A more customer-centric form of
“networked planning” is required.
Such networked planning decreases
purchased cost, which amounts to half
6 THE JOURNAL OF BUSINESS FORECASTING, FALL 2007
the cost of goods sold, by stabilizing the
master schedule and making purchased
materials predictable. In this article,
we will discuss the critical first steps
towards accomplishing the demand-based
transformation of S&OP.
The needs of a demand-based economy are
vastly different from the traditional supply-
based views embedded in ERP systems.
(See Table 1) Here a company’s customers
are sorted out by using a value approach, that
is, by how the customer makes a profit from
utilizing the supplying company’s products.
This is in lieu of categorizing customers by
the cost of serving them, which is basically
a self-serving and largely demographic
approach.
In addition, demand in the new economy
is vastly more volatile because customers
demand a larger variety of items, in many
cases 10 times more variety than before.
A supplier’s product lines will continue to
expand, while overall volume stagnates.
For example, beverage companies have
seen carbonated drinks increase from 10
flavors/types to more than 100 in five years,
while the carbonated drink market share
has not increased at all. Operations must
be simulated using advanced operations
research techniques that model all sorts of
demand using “what-if” analyses. Finance
must become less focused on traditional
profit and loss (P&L) and concentrate
instead more on understanding cash flows
and cash performance, which requires
a much more sophisticated analysis.
The traditional P&L focus ignores the
equilibrium among capacity utilization,
inventory investment, and cash velocity.
Finally, companies must change their
organizational structure from functional
silos to collaborative cross-functional
teams that are focused on customers in
specific value groups. Likewise, companies
must measure their success holistically
from the customer perspective, rather
than continue to rely on narrow silo-based
operational or marketing measures.
Becoming demand-based requires
embracing forecast variability, new
operations management logic, and planning
systems built on actual transactional data
that have been generated through the ERP,
thereby shedding light on demand. This
demand-based supply (DBS) approach
is a customer-value delivery system that
enables complexity, conserves capacity, and
maximizes throughput. It uses simulation
rather than simple linear programming to
set policies for inventory, supply network,
and deployment. DBS changes operations
from a chain that is yanked by customers
to a network that is orchestrated to manage
demand. (See Figure 1) Furthermore,
under DBS, the focus is customer-centric,
with supply functions tailored to customer
needs, rather than to a “one-size-fits-all”
approach.
To achieve customer centricity,
companies need a flexible and well-
orchestrated supply network that is in
very close proximity to customers. Far
Eastern supply chains are much too
long and inflexible to be of value to
most customers. Operations should be
organized around customer value. Most
companies group customers into three to
five value-described segments. Each value
segment is then subdivided into families
that have a commonality of raw materials
and production resources, as well as
markets. The point of this whole change
in approach is to deliver value and find
profitable ways to grow revenues.
The demand-based approach starts with
defining demand in customer-value terms.
DBS uses value segments and operating
strategies with a time advantage over Far
Eastern producers to achieve customer
centricity and deliver value. The forecast
of demand is just one element of the demand
plan at the beginning of the S&OP process.
Companies need a demand-based process
because the new consumer-driven economy
requires it. Companies have not been doing
everything wrong; rather, the economy
has changed. So, the methods used to
forecast, plan, and operate have to change
too. The new reality is higher product
complexity, more exacting customer
demands, and many suppliers chasing
fewer retailers. To be competitive and
survive in this new environment requires
a major shift in an organization’s thinking
and culture. Key elements of this change TABLE 1
are described in the following sections. SUPPLY VS. DEMAND VIEW OF THE ECONOMY
The implementation of a DBS system is
Supply View Demand View
more counter-intuitive than difficult to
achieve. To manage demand, forecasts Customers Demographics Value factors
will reflect much greater flexibility than Demand Linear, simple Volatile
has previously been assumed feasible. Products Few, commodities Exploding variety
Because implementation will take one or Operations Reactive Simulated
two years to complete, companies should Finance P&L focused Balance sheet focused
start the transition promptly, or someone Organization Functional silos Collaborative teams
else may usurp their customers.

THE FIVE FUNDAMENTALS FIGURE 1

OF DBS DEMAND-BASED SUPPLY APPROACH TO SUPPLY CHAIN
MANAGEMENT
There are five fundamental principles of
DBS. (See Table 2) These fundamentals
work together to accomplish the overall Value Spaces

goal of the demand-based process, Time Advantage

which is to deliver customer value while
maintaining good operating economies.
Customer
Centric Delivers Value
Fundamental 1—Value Spaces: The first
Focus
fundamental principle is to define value
spaces to identify a company’s competitive Means
edge. Value spaces are well-defined
customer groups. They are not traditional Methods
market segments built on customer
demographics and psychographics. Rather,
a customer is defined by how it creates TABLE 2
value in its marketplace. Value spaces are FIVE FUNDAMENTALS OF DEMAND-BASED SUPPLY
defined by in-depth analysis of how the
customer uses a product and/or service to Fundamental Principle Improves
its advantage. Customers are then grouped Value spaces Competitive edge
by commonality of elements, including Customer centricity Goal setting
time, complexity, variability, adaptability, Families Communications
and product features. Table 3 compares Throughput Performance metrics
the traditional approach to customer
Rates of demand Planning
segmentation by the value approach. The
value segmentation can be performed with
internal data that is readily available from TABLE 3
interviews with the sales force or from VALUE SPACES
simple Internet research. Traditional Approach Value Approach
Business Type Retail Need States Growth
For most companies, the DBS process Food service Mature
requires transforming themselves to Club
be more of a learning environment Firmographic Size Behaviors Business practices
where people are open to conversations, Region Cash flow approach
including the kind where the real Products/Services Full line Attitudes Aggressive toward
work often is accomplished—casual Broker the consumer
conversations around the company water Specialty
Product/Price Services they relish
cooler, over lunch, or simply before
Preferred metrics
or after sales meetings. For example,

THE JOURNAL OF BUSINESS FORECASTING, FALL 2007 7

the entire sales force regularly probes
for actionable intelligence regarding
customers and shares it in a timely manner
with marketing counterparts on the DBS
team. In addition, many vanguard DBS
companies are incorporating point-of-
sale (POS) data to measure consumer
take-away. DBS systems provide the
tools that are required to recognize trends
and timing and help manage a precise
response in the supply chain to estimated
demand. So, determining the value space,
at least in its basic form, from internally
generated research, will enable companies
to start developing value solutions for each
customer group and determining how to
differentiate competitive factors.
Fundamental 2 — Customer Centricity:
This principle is important because it
converts values into operating goals and
solutions. A DBS process is developed
to cater to the specific requirements of
major customer groups as defined in the
value spaces. For example, a company
will have one approach for a customer
group that uses a company’s products
as a simple tool and another approach
for a group that derives competitive
advantage from the products. Customer
centricity inside S&OP means setting
value-derived performance metrics and
making the needed changes in operations
to better serve a particular customer value
space. For example, a company might
fill orders for food-service customers in
three days instead of shipping from stock
as is done for retail customers. The longer
fulfillment time ensures that all items
are shipped together to food-service
customers with the required special
markings and without carrying excessive
inventory. It is this solution design that
establishes the proper framework inside
of which S&OP thrives and accomplishes
value delivery to demand. (See Figure
2) As customers are segmented into
value spaces, the company identifies
how its customers value its products and
services. The company then differentiates
its offerings to match what the customer
values, sets up its supply chain to deliver
that value, and measures its outcome in
terms of that value.
THE JOURNAL OF BUSINESS FORECASTING, FALL 2007
FIGURE 2
CUSTOMER CENTRICITY
(Operational Goals Are Set and Communicated in Four Steps)
1.
Grouping
Value
Customers
Creation
by Value
Values
Desired?
Fundamental 3 — Customer Value Com-
municated by Families of Products:
Families communicate customer value
at an operational level. Value spaces are
subdivided into families that are defined by
commonality of markets, manufacturing
processes, and/or materials. The 80/20
rule is employed to define meaningful
differences. Families of products are made
up of SKUs, but are not built from the
SKU detail. For example, a manufacturer
might stock 2,600 recognizable SKUs.
These 2,600 products at specific stocking
locations typically can be grouped into
about 30 major groups of products, or
major families, and some 20 or so minor
families. These families are determined by
the 3 Ms, meaning that the products come
from the same source (manufacturing
process or supplier), are derived from the
same raw materials (major components or
ingredients), or serve the same markets.
It is critically important that families are
easy to remember by both practitioners
and senior management. In addition,
families will significantly increase cross-
functional communication. They naturally
will be more predictable, simply as a
result of aggregation. Goals, metrics, value
definitions, patterns of demand, production
resource constraints, and all other key
factors can be defined into homogeneous
family groupings and, just as importantly,
can readily be managed.
Fundamental 4 —Throughput...The Key
Performance Goal: Throughput is the
2. 3. 4.
Value Value Value
Differen- Delivery Solutions
tiation
DBS Metrics? New
Setup? Service
Methods?
critical difference between DBS and
other operations strategies such as
manufacturing resource planning (MRP)
or Lean Manufacturing. Under DBS,
throughput is defined as using capacity
now to make only what the customer
is presently demanding, no more and
no less. The goal here is to maximize
throughput. In a make-to-stock business,
some inventory will be built. However, the
inventory management objective changes
significantly in DBS from what is used in
ERP. In DBS, inventory is balanced across
all SKUs such that each SKU has the same
level of stock-out risk, rather than having
some items with excess inventory and
others with exposure to stock outs, which
results from traditional individual SKU
replenishment inside ERP. The balancing
is done in a family each time that family
comes out of production. It is important to
note that inventory is balanced when the
family comes out of the manufacturing
process, not in the planning process, as
is the case with ERP systems. Inventory
for unpredictable families—those that
represent 20% or less of demand—will be
high to reduce the frequency of production
and to conserve capacity for the higher-
volume and predictable demand items.
The Pareto approach to inventory
classification is eliminated in DBS and
replaced by predictability measures and
manufacturing constraint management.
Also, the stratification of inventory is
not done at an SKU level, but at a family
level only. All items within a family
9
have the same inventory class and are
manufactured together. In DBS, the “A”
products represent the most predictable
families, not the highest volume.
Fundamental 5 — Rates of Demand
Improve Planning Accuracy: In DBS,
companies build to an order rate, not to
an order. Conversely, ERP systems, with
their reliance on safety stocks, respond
to an individual customer order, and
order product to be built if any particular
order draws down safety stock below a
predetermined level. The requirement
to produce, therefore, is thrust on man-
ufacturing or on a supplier without any
consideration for critical manufacturing
constraints. This logic flaw highlights the
famous ERP axiom of “building to infinite
capacity.”
Rate-based planning inside DBS
balances inventory among all SKUs in a
family and allows operations to continue
to produce predictable families to the
demand rate until a very significant shift
in demand is realized. The typical ups and
downs in demand are not considered. DBS
will change the rate of production to match
the rate of demand in organized steps. The
use of simulation to match the production
rate and the demand rate is an essential
element of DBS. The processes required
to implement the rate-based planning
approach are discussed in the following
section.
DBS UTILIZES FIVE
MANAGEMENT PROCESSES
DBS utilizes five processes to manage
to demand. (See Figure 3) Three of the
five processes are of most importance
and constitute the full S&OP process. The
demand-management process (DMP) is
used to balance capacity to demand. The
performance data base (PDB) is used
to correlate data from many different
systems, including ERP, forecasting,
and others, to demand information. The
capacity balancing data (CBD) process
interprets demand, aligning production
plans with actual demand as demand rates
become known. In these three processes,
10
FIGURE 3
FIVE MANAGEMENT PROCESSES OF DBS
Demand
Monthly Management
By month, by family
Calculates shifts required
Calculates pre-build
Cycle
Planning
Weekly
By shift for three weeks
Sequences families
Rate Mix
Planning
Daily
By family
Into SKU detail
as well as in two other DBS processes used
for deployment, inventory standards are a
critical element and are used as a measure
of demand pressure inside the S&OP. The
three key processes are discussed in some
detail below.
1. The DMP Makes S&OP Opera-
tional. The goal here is to manage
operations and suppliers to actual
demand, not to manage demand
from customers, which is not really
possible. The DMP aligns the demand
plan—with all its uncertainties and
variables—with capacity, using a
production cycle plan and an inventory
strategy. Further, the DMP replaces the
traditional ERP functions of capacity
planning, master scheduling, and
inventory management to maximize
throughput and deliver value. (See
Table 4)
Under DBS, the critical balance
between demand and supply can
be planned, and S&OP can become
the one place where marketing and
supply-chain operations can and
should talk and strategize. However,
this conversing and strategizing must
center on how to create (and measure)
value for customers, not on how to
hit metrics of relevance only to the
THE JOURNAL OF BUSINESS FORECASTING, FALL 2007
Performance
Data Base Shipments history,
production, and
past plans
Capacity
Cumulative actual
Balancing
By family
Data
By season
company’s operations. The supply
plan must be flexible enough to adapt
to demand while keeping the resultant
operational change costs in line.
The DMP will support constructive
conversation about value delivery
among senior functional manage-
ment, which previously was rarely so
focused. Typically, marketing talks
about customers by region, demo-
graphics, size, or product preferences.
Supply chain talks about products,
warehouses, and production lines.
Procurement talks about key suppliers
and sourcing strategies. There is little
common language between these
silos—no standard currency that
permits them to exchange mutually
useful information, let alone measure
the effectiveness of their joint
operations in delivering value to the
customer. No one functional area
or senior executive can really listen
and respond constructively to others.
A DMP is the solution because it
provides a common language and
customer-centric information.
2. DBS Systems Work Because of
PDB. (See Figure 4) The PDB is
not another system where alternative
forecasts and plans reside. The PDB
 is built directly from the active data
generated by various functional TABLE 4
organizations. Data from all sources is DEMAND-BASED VS. ERP-BASED S&OP
first screened and mapped into value Function Demand Benefit Current Approach
spaces and families. The original data Management
integrity and traceability is strictly System™ (DMS)
maintained, but new or missing data
Demand planning Families Relates demand and Focuses on forecast
is located before the DBS systems use
supply in events for demand only
the updated information. The PDB
eliminates the major reasons why
Trend analysis Capacity balancing Stabilizes Not related to
traditional S&OP systems fail. S&OP production using production
participants no longer bring conflicting rates
data to meetings. Marketing data are
Production DMS Balanced to demand Assumes capacity is
now coordinated with operational within constraints available
data such as capacity and inventory immediately
investment. Key performance metrics Inventory Inventory standards To demand rates To statistical
are now relevant to overall business Deployment using simulation forecasts at a SKU
strategy. PDB resolves data conflicts, level
coordinates and organizes data into Inventory Simulation Allows inventory to Safety stocks that
families, and provides standard management float in a range act as hard floors
feedback on throughput, as well as on
the value-space-defined performance
metrics.
FIGURE 4
3. Capacity Balancing Data Charts PERFORMANCE DATA BASE
for Interpreting Actual Demand.
One of the most significant tools Screened to
capture new Business Plans
in demand-based S&OP is the use and All Active History
of capacity balancing data charts Data from unassigned Data Inventory Outputs
(CBD). These charts align production ERP, data Assigned Shipments Graphical
by Variable cost Tabular
plans with actual demand as the Marketing
CRM, Family Throughput Trend
rates of demand become known. The Looks for
DRP, missing data Value Service Scatter
corrections are made at critical points Space Key metric data
etc. and
in the demand plan as key demand
completeness
variables appear. POS information
is a key input to the CBD. Entering
data into the charts transforms it from
just data to actionable information. year shipped. The user would then IMPORTANCE OF
The work is done at the family divide the actual quantity shipped by INVENTORY STANDARDS
level, where predictability is the 0.35 and compare this to the forecast.
greatest and the actual capacity plan If the forecasted quantity is higher, it Inventory standards are a barometer of
is functional. Figure 5 is an example should be reduced; if lower, it should demand. In DBS, inventory is deployed,
of how a producer uses capacity- be increased. The chart is used at rather than replenished. The deployment
balancing data to respond to changes critical points in the supply-chain calculation is accomplished using
in demand over time. The X axis is production cycle to adjust the thinking simulation modeling, with the CBD
the cumulative percent of total annual on how much capacity to reserve of a charts setting the future rates of customer
demand. The curve is the historical specific family of items. demand. This simulation sets an acceptable
cumulative demand at the end of each range for inventory, rather than a fixed
period, which normally is the end of CBD charts are enhanced by the floor like the safety stocks in traditional
the month. The chart is read by noting use of a “par book,” which records the ERP systems.
the historical cumulative percentage timing of historical events, such as major
at the current time in the business promotions, price increases, or new Safety stocks could be the one most
cycle, so at the end of month four, we product introductions, each of which alters significant reason why ERP systems
would expect to have 35% of the total the shape of the demand curves. continue to perform so poorly, even to the

12 THE JOURNAL OF BUSINESS FORECASTING, FALL 2007

point of failure. Safety stocks defy master
plans, resist rational responses to demand, FIGURE 5
flout logic, and are founded on statistical CAPACITY PLANNING CHART
error that is compounded by miscalculation
100%
in anticipating demand. Of keen interest to
the demand-based planner is the fact that,
in DBS, safety stock is never utilized.

Cumulative % of Total
Should be 2nd
Use of inventory standards is one of the
techniques that permits master schedules
to retain integrity and allows inventory 1st Actual
to move logically in response to demand Should be
variation. Inventory standards are built
upon the advanced operations research
technique of simulation. Using simulation, Actual
inventory standards can be tested against
common demand and supply variables
and, as a result, a range of acceptable 0%
1 2 3 4 5 6 7 8 9 10 11 12
inventory can be determined. Inventory
standards become a barometer of demand, Time
replacing the hard, unforgiving, and
splintered floors of safety stocks. Note: Starting point is mid point between seasons.

The result of S&OP in a make-to-stock

manufacturing or distribution process
is inventory deployment. Inventory
standards inside DBS will preserve
planning integrity and balance inventory
to demand. (See Table 5) Inventory
standards provide a warning when demand
is indicating a change from pre-planned
levels. This warning gives the DBS planner
time to make a well-considered schedule
change that has the least disruption to the
rhythm of production. In DBS, inventory
deployment is optimized because it uses
new inventory standards and eliminates
the need for safety stock.
With the rise of the demand-based
economy, where customers have greater
negotiating leverage, producers are
forced to get out of their comfort zones,
change their cultures, and operate more
effectively. To retain existing customers,
let alone gain new ones, producers are
being asked to do what once might
have seemed impossible: accept greater
supply complexity and narrower delivery
windows, all without raising prices. Such
requirements are viewed with trepidation
by many in the organization. However, the
economy is forcing the issue. Resistance to
such demands will prove costly. Suppliers
TABLE 5
INVENTORY DEPLOYMENT IN DBS VS. ERP
(Optimizes Inventory Deployment, Uses New Inventory
Standards and Eliminates Safety Stock)
DBS
Deploys AFTER production
To demand
Balances all SKUs in family
Forward looking
Starts at general (family)
Planned
who meet the requirements of demanding
customers will become category captains,
developing strong collaborative alliances
and competitive advantages.
CONCLUSION
But there is more than enough good news.
The changes outlined here require a shift
in internal organizational culture, rather
than deep structural changes. Orchestrated
planning liberates the organization from
stilted thinking and overprotection of turf.
DBS forestalls the re-engineering of the
physical plant and the organization chart.
If done well, DBS allows a company to
ERP
Deploys BEFORE production
To forecast
Treats each SKU separately
Backward looking
Starts at detail and moves up
Reactive
manage in a more streamlined fashion,
with good decisions flowing naturally from
solid information coming from multiple
external and internal sources. Value is
aligned with performance, cost-centered
thinking is eliminated, and capacity is
conserved for making what customers
are actually buying now. The outcome
is improved job satisfaction, enhanced
market share, better service, lower costs,
and improved margins. Further, inventory
reductions will range from 40% to 50%,
cuts in overhead expenses from 30% to
40%, and liberated cash flows from 20%
to 30%. „
(rburrows@opgmail.com)

THE JOURNAL OF BUSINESS FORECASTING, FALL 2007 13