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“The biggest change is that we now think in terms of demand.” BIASES IN S&OP

A bias is a tendency or a disposition. In fact, they are automatic behavioural reactions to certain occur- rences. But because these behavioural reactions are automatic, they generally lead to irrational decision- making.

Research conducted by the Rotterdam School of Management at Erasmus University identified scores of biases in S&OP processes. Just some examples include:

Functional biases n Operations: striving to run machinery and trucks at maximum capacity

n Sales: selling as much as possible n Product management: launching as many new prod- ucts as possible

n Finance: reducing working capital

Unconscious biases n Thinking that you are better or smarter than average n Underestimating the time required to get something done

n Generally: overestimating turnover from new products

n Underestimating turnover from new products if the previous product was a success

n Overestimating turnover from new products if the previous product was a failure

n Overestimating results at times when business is going well

n Underestimating results at times when business is not going well

n Avoiding risk in the face of opportunities n Taking risk in the face of losses

Angle’. This gives the planners insights into the company’s performance on a day- by-day basis: what are the current stock levels? Are there any factories with a back- log? “The availability of this kind of infor- mation is crucial to being able to react quickly to any changes. You don’t want to have to wait until the monthly S&OP meeting.”


In order to create the right mindset, Per- fetti van Melle has given its sales depart- ment and its supply chain department shared responsibility for aligning demand and supply. This means that both depart- ments are directly responsible for good customer service and hence both are responsible for sales forecasts and deliv- ery reliability. “They both have a common

interest and they arrange to visit clients together, for instance,” explains Brouwer. It’s no coincidence that the demand plan- ning and supply planning departments are situated next to each other, either. “It may appear to be a minor factor, but it is very important for the contact between the two departments.”

Foundations in place

AkzoNobel Decorative Paints is cur- rently involved in implementing S&OP in line with Integrated Business Planning principles. This paint manufacturer has brought in consultants from Oliver Wight to help. “We’ve been working in this way in the UK for the past three or four years, and our management has now decided to roll out the concept right across Europe,” explains Fred Groenen, Manager of Finan- cial Planning & Analysis at AkzoNobel Decorative Paints EMEA.

The product management review and demand review aspects are already opera- tional virtually everywhere, and supply review is also up and running in the rel- evant countries. “The foundations are in place and the walls are up. Now it’s time to put the roof on. The circle is not complete until integrated reconciliation and the management business review have been added to the process,” continues Groenen. The first integrated reconciliation meet- ings took place in the local countries in October 2011, bringing together the issues from all the reviews with the asso- ciated financial projections. These ses- sions served to lay the groundwork for the management business reviews which – at least in the early stages – were attended by senior management from the country concerned. “The biggest change is that we now think in terms of demand. While that tended to happen before too, we didn’t take such a structured approach as we do now,” summarises Groenen.

Monthly forecast

Now, each country submits a forecast each month, and these are consolidated into a demand plan. “And more importantly, we are continually monitoring our opportu- nities and vulnerabilities. Can we bring a

product launch forward if demand is lag- ging behind? What cost savings can we achieve, if necessary? An example of a vulnerability could be a customer who gets into payment difficulties.” According to Groenen, financial projec- tions are essential. “If you only focus on volumes, you don’t consider the impact of those volumes on company turnover, margin and profitability. The financial projection indicates which customer, prod- uct group, innovation or opportunity you should prioritise. Naturally, as a company listed on the stock exchange, we’re judged on our financial performance.”

Financial projections

But making a financial projection is no easy task. Sales has to submit details of a product’s average sale price and estimate the annual level of discounts, while the supply chain department has to provide input on the average cost price including manufacturing costs, distribution costs, freight costs and stock levels. Combin- ing this with input from finance about sales and marketing costs and overheads enables the preparation of a profit & loss and a working capital forecast. Groenen recommends the use of a good tool. “We currently use Cognos Planning in the UK, but we’re also investigating whether we could use SAP BPC. That would be the best solution from an integration view- point, seeing as we’re also currently roll- ing out the SAP ERP system company- wide.”

AkzoNobel is working with a plan- ning horizon of 24 months for product, demand and supply. “For the financial projections, we take the current and next financial year. And if we’ve already set budgets for the next financial year, we consider the year after that too,” says Groenen, referring to the fact that S&OP also provides insights into the budgetary status. “By comparing the latest financial projection with the one from the previ- ous month during the strategic review, we immediately know how things stand. Plus, this process helps to spread the workload that normally peaks during budgeting and forecasting periods.”


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