Strategy-Driven S&OP

Our vision at Solventure.

by Prof.dr. Bram Desmet, CEO at Solventure
Strategy-Driven S&OP

At Solventure, we have invented a new concept called the “Strategy-Driven S&OP”. It uses S&OP as
your satellite navigation, steering your business towards value along strategically chosen financial
targets. Though S&OP has long been claimed as an executive process, many S&OP processes lack the
buy-in from the CEO and certainly fr
om their board of directors. We strongly believe our Strategy-Driven S&OP is about to change this.

In our vision paper on the “Strategy-Driven S&OP” we have explained how “Strategic Benchmarking”
can be used to derive strategy-dependent targets for key financial metrics, and make the S&OP
process truly a means to an end. The Executive S&OP meeting is the de facto meeting where all of
this comes together. In this vision paper, we will describe how we believe the Exec S&OP needs a
broader, and more integrated set of metrics to truly understand where the business is heading and
which actions to take depending on the course. If we want S&OP to be our satellite navigation, and
the Exec S&OP to be truly “Executive”, we need to go beyond OTIF delivery performance and inventory
turns as a discussion.

Figure 1 - Strategy-driven S&OP® as invented by Solventure

Building a balanced and holistic scorecard, based on the supply chain
triangle.
Most of the exec S&OP’s we see have a too
narrow focus on On Time In Full (OTIF) delivery
performance, Inventory Turns, and some cost
or efficiency metrics like actual and planned
plant utilization. As we will argument this set
of metrics is too narrow, lacks the strategic
context and has an efficiency bias.
To make the S&OP process strategy-driven we
need to account for that strategic context,
which will put efficiency metrics in perspective,
and, as we will show, it requires a broader KPI
base.
As mentioned in our vision paper on “Strategy-
Driven S&OP”, strategy is about making
choices. In essence it is about choosing a cost
or a differentiation advantage, as initially
explained by Michael Porter.
Treacy & Wiersema, have proposed a “product
leadership” differentiation or a “customer
intimacy” differentiation. Crawford & Matthews
take it one step further in explaining that value
propositions are made up of 5 key value
drivers: product, price, access, service and
experience, amongst which companies need to
choose. They can dominate on 1 driver,
differentiate on a second, and will have to play
at par at the others.
It repeats the same mantra that strategy is
about making choices. You can try to be the
best at everything but that will at best leave
you stuck in the middle as smarter competitors
do make a choice and leave you behind on their
chosen drivers.
Figure 2 shows our supply chain triangle where in
the service corner, we have used the advanced
strategy model of Crawford & Matthews to
highlight different possible drivers for ‘service’ or
more generally ‘value’ to the customer.
OTIF delivery performance is an aspect of access.
Important to remember is that if you can
dominate on 1 parameter, and differentiate on a
second, it is typically OK to be on par at the
others. As such, if you are a “product leader” in
the definition of Treacy & Wiersema, you may try
to dominate the market on “product quality’,
which means that customers buy from you
because you simply have the best and the latest
product.
In this situation the “OTIF delivery performance”
can be at par, and should not necessarily be best
in class. Next to “product quality” a high
innovation rate or a short “time-to-market” is
crucial for a product leader. You don’t want to be
in a situation where these parameters are lagging
behind whereas the OTIF is best-in-class. We
need to put things in perspective, and more
specifically in a strategic perspective.
Figure 2 also shows KPI’s for cost and for capital
employed. As different strategies lead to different
choices in the ‘value drivers’, they also lead to
different targets for the cost and capital
employed. As discussed at length in our vision
paper on the “Strategy-Driven S&OP”, as a
product leader you probably will be worst-in-class
when it comes to inventory turns but that’s OK
given you will compensate for that by being best-
in-class for gross margin and EBIT!
 Figure 2 - Linking metrics to the supply chain triangle

Figure 3 continues our story in retaking that
the value-drivers are drivers for the top-line,
that top-line and cost lead to bottom-line, and
that bottom-line over the capital employed
leads to return metrics.
It also shows that KPI’s for operational process
are causal or diagnostic metrics for the value
metrics and the financial metrics. Take forecast
accuracy as an example. An improvement in
forecast accuracy will typically help to improve
OTIF while at the same time lowering
operational costs and lowering inventory.
Like strategy impacts your performance in
financial KPI’s, as discussed at length in our
vision paper on “Strategy-Driven S&OP”, the
same holds true for operational metrics.
Let’s again take forecast accuracy as an example.
Product leaders have much more uncertainty on
their forecasts, driven by the higher innovation
rate and the bigger bets they place on new
products, as a result their forecast error will
always be higher than that of the operational
excellence player, who has a simpler product
portfolio, focused on fast moving products.
Again, be careful when benchmarking forecast
accuracy, as a product leader you may be the
worst-in-class instead of the best-in-class, but
that is perfectly normal, even required. Once your
demand becomes predictable, you may no longer
be a true product leader!

1 Porter, M., What is Strategy?, Harvard Business Review, November-December 1996

1 Treacy, M., Wiersema, F., The Discipline of Market Leaders, Basic Books, 1995
1
Crawford, F., Mathews, R., The Myth of Excellence, Why great companies never try to be the
best at everything, Three Rivers Press, 2001
 Figure 3 - A strategically balanced scorecard

Case Study from a The story behind the figures is that the company

‘Product Leader’. Taking had a huge success with a major new product.
With 5-6 major vendors, being on different
the Exec S&OP to a new
technologies, our company seemed to have won
level. the lottery, as for multiple reasons, our
technological choices, gradually turned out to
Figure 4 shows an example of a strategy-
deliver superior performance, making the full
driven KPI dashboard for a product leader
market shifting towards our products, because of
company. The targets for the key financial
our superior standards.
metrics (Gross Profit/COGS, EBIT/SG&A, DPO,
DSO, DIOH, CCC, Fixed Assets and ROCE) have
We see that this new product is propelling our
been defined using the strategic benchmarking
sales ahead of the targets and significantly
technique described in our vision paper on
beyond last years’ performance. In the
“Strategy-Driven S&OP”. The targets are
%SalesofNew we see the %Sales of New
shown here as the budget. We show the actual
products, which is an important KPI for us as a
performance, the delta with the budget, and
product leader, is significantly ahead of schedule.
the delta with the previous year.
As a product leader, this is what we dream off.
The business ‘problem’ or ‘challenge’ is that
some of our key suppliers are unable to follow
the growth rate. Given we did not anticipate
this to happen, they are doing what’s possible
to scale-up, however, as always, getting new
equipment in and ready takes some time, and
is catching some delay. The problems at key
suppliers explain the low supplier OTIF, and
actually that also weighs on our OTIF delivery
performance and on our customer order lead
time, which is at 3 weeks instead of just 1
week.
Figure 4 - Example Strategy-Driven KPI Dashboard for a Product Leader
Imagine you try to build that ‘business story’
by having only a fraction of the KPI’s. Though
this is what we see in exec S&OP meetings,
where we try to sift through 30 product-region
combinations, showing the forecast, the
inventory and the OTIF … at best.
All the expedited shipments and last-minute
production change-overs are weighing on our
direct material costs and our cost of goods sold,
which weighs on the EBIT, which at 7,53% is
below what we had budgeted, but is way ahead of
last years’ performance. From a ROCE perspective
we still are on schedule, given the somewhat
lower than planned EBIT, is compensated by a
lower working capital.
Many Exec S&OP meetings are no more than
demand review meetings, where instead of
discussing the forecast, half of the meeting is lost
in discussing whether the actual demand seems
to be correct.
We do believe an Exec S&OP meeting should
have a “state-of-the-business” in a “1-slide-
overview”, as the one shown in Figure 4. Based
on this 1-slide-overview, we can focus on the
business issues at hand, which in this case will
be “what are we doing to speed up the supply
of key components?”, “have we explore
alternative suppliers?”, “what if we’d use more
expensive parts with availability to substitute
for lower cost parts with a shortage?”, “what
would be the impact on the top-line, the
bottom-line, and the ROCE?”.
This is the type of scenarios that will keep your
CEO in the meeting instead of out. Other
discussions will be on “how will we do the
allocation of the finished product that comes
available?”, “will it be first-come-first-served
or do we want to differentiate for A-B-C
customers?”, “what if we’d cut some segments
of customers and products all together?”,
“what will be the impact on the top-line, the
bottom-line, and the ROCE?”.
Again, this is what will keep your CEO in the
meeting, where he will need to make the
decision. And as a publicly listed company for
sure I’ll want to have the latest update on
“when do we expect supply to start matching
demand?”, “what is our risk at that point if
demand would start slowing down?”, “what
kind of commitments are we making to
suppliers for them to expand their capacities?”,
. outside of the meetings, as we have so often
“how have we managed our risks when doing
so?”, “what is the potential impact on inventory
build-ups, free cash flow and write-offs?”, “what
is a conservative estimate we are willing to share
with investors?”.
All of these are discussions with substance so they
will have to be prepared. That is why some
companies will hold a pre-S&OP meeting, to
ensure the relevant questions get listed, so that
the different alternatives can be explored and
worked out for their top-line, bottom-line and
ROCE impact. When doing a pre-S&OP, do it with
your CEO and/or divisional president.
If you know their questions, and can propose
alternative answers, you will be assured of their
buy-in, at the time you organize a broader Exec
S&OP meeting.
Many S&OP meetings get killed by PowerPoints
showing graph after graph and table after table.
When reviewing your business, do it on a high and
aggregated level, like the one shown in Figure 4.
More important is to list the issues you are facing,
options to address them, and what is their impact
on the top-line, bottom-line, capital employed and
as such ROCE.
That’s what is so badly needed to make the Exec
S&OP a true Executive meeting, and have the
decisions being made in the meetings, instead of
witnessed.
Currently in the making: We’re down to 127days of CCC, which is 23days

creating an external focus better than planned … but what if our closest
competitor would have come down to 115 days
to the Exec S&OP
from historically comparable levels. It is hard to
be critical when times are good, as it is hard to be
In our “Strategy-Driven S&OP”, the target
positive when times are bad.
setting through “Strategic Benchmarking”
creates an extra Executive edge. Next to
Through our quarterly competitive benchmarking
monitoring your ‘own’ performance, at
we will bring extra challenge and focus in the Exec
Solventure we are working on a way to do a
S&OP meeting. We believe all of this is needed to
quarterly benchmark with the performance of
make the S&OP truly strategy-driven, with your
your key competitors.
CEO in the meeting instead of outside.

Maybe our +41M vs budget in Figure 4 looks

great, but what if our closest competitor would
show a 20% growth compared to last year,
where we’re only showing a 144/1041 = 14%
growth! .
 In summary
On Executive S&OP, a lot has been written on “what
should be on the agenda” and “who should attend”. For
all the paper knowledge we have, we believe 80% of
the meetings are killed by PowerPoints of +100 slides,
with a spotty attendance (at best) of the division
presidents and the CEO. The compiled overviews are
extensive, though still lack substance. We may see a
forecast, some actuals, some OTIF and some
inventories, but none of it comes close to the broader
overview we have shown in Figure 4.
If you want to talk business, you need to show the
business. Do your utmost best to compile the business
in a “1-slide-overview”. Prepare the Exec S&OP with
your BU president and/or CEO.
Get to know what he wants to know and what he
sees at the options. After the 1 slide overview, dig
into the business issues, show the options with
their impact on the top-line, the bottom-line, the
capital employed and the ROCE.
When setting your targets, account for your
strategy, and ensure your targets are balanced
across margin, cost and capital employed. With
ambitious but realistic targets, a well-attended and
highly energetic Executive S&OP “decision making”
meeting, the S&OP process will truly become your
tool to drive your strategy. That’s the vision we
have built at Solventure. That’s our goal when we
work with our customers.

We’d like to hear from you!

Let us know your thoughts. We’re curious on which aspects you’d agree or disagree. Where are you in the S&OP
journey? Which challenges are you facing? Together we can make it even more exciting and rewarding!

About the author

Prof.dr. Bram Desmet is the CEO of Solventure, a Europe based expert in designing and
implementing S&OP processes using the Arkieva software. Bram is also an adjunct professor in
Operations and Supply Chain at the Vlerick Business School. He obtained his Phd at Gent University
on the topic of “Safety stock optimization in multi-echelon production-distribution networks”. He
finished his first book “Supply Chain Strategy and Financial Metrics”, which is available for pre-order
at the website of KoganPage. Look out for more at https://www.solventuregroup.com
Bram welcomes your feedback at bram_desmet@solventure.eu.

About Solventure
As Solventure we proud ourselves of being experts in designing and implementing Sales, Inventory and Operations
Planning. We do that through a unique combination of people, processes, tools and analytics. Solventure is the
channel partner of Arkieva, an award winning S&OP software. Together with Arkieva we provide global support to
our growing customer base. Check us at www.solventure.eu or contact us at contact@solventure.eu for more info.