As companies strive to provide the highest quality and service at the lowest cost, global supply chains play a vital role. Companies often approach their global supply chain planning with a “do it and forget it” attitude, expecting that a detailed identification, verification and qualification process will not require frequent revisits of past decisions. Global political climates, tariff wars, and the recent COVID-19 virus outbreak continue to illustrate the urgent need for supply chain agility, risk management and contingency planning.
Sales & Operations Planning (S&OP) is a mid-term tool to ensure alignment among corporate strategic objectives, whereas Sales & Operations Execution (S&OE) is a tool to ensure balance among supply and demand. The flexibility of S&OP allows for an organization to look for imbalances at intermediate levels in a product hierarchy without getting “lost in the weeds” at detailed SKUs but not at too high of a level to be less meaningful.
In order to review this supply and demand balance, one must create supply planning groups and a structure based upon the critical success factors for delivering high levels of service. These planning groups could be internal manufacturing groups, make/buy items, a specific external supplier, or country of origin groupings. Given the extended lead times for international supply chains, S&OP is an ideal process for looking several months out into the future to perform risk analysis.
Strategic Considerations for International Sourcing
Companies initially evaluate their strategic objectives when pursuing an international sourcing initiative, but this should be revisited on a regular basis to ensure that the chosen supply chain continues to meet the companies’ needs. The lowest total cost of ownership is the primary objective, yet as manufacturing has declined in Western economies, the only source for production is often in the younger global economies such as China, India, Malaysia or countries of Eastern Europe.
Over time, labor rates and raw material costs in these countries have fluctuated due to global supply and demand. Combined with changing prices for the underlying commodities in those local markets, companies are facing more frequent price instability. Additionally, tariff uncertainty or increases force a regular review of the global supply chain to ensure strategic objectives have not changed and are still being fulfilled.
Supply Chain Complexity vs. Diversification
It is easier for a supply chain team to manage a single production site within a single manufacturer or at least from within a single country of origin. The obvious downside to that approach is that if that country is subject to a sudden tariff spike, an organization can quickly find itself with no choice but to accept the increase in costs and a likely impact to margins. As a potential alternative, a company can pursue a dual country sourcing strategy where it can cost-average its pricing to mitigate the short-term impact. Over a longer-term, a purchaser has the opportunity to switch volumes between suppliers/countries to mitigate those impacts.
How can S&OP help?
By its very design, the S&OP process is an ideal vehicle to prompt a company to ask the necessary strategic questions on a regular basis. In addition, a robust S&OP process takes into consideration changing costs and gross margin impacts to the bottom line to ensure gross margin or revenue targets are met. Stepping out of the day-to-day S&OE during the S&OP process allows for that broader perspective to evaluate “what-if” situations that could impact costs, demand, supply and margins before they reach fruition. In this manner, S&OP is a useful scenario-management tool to look at these cost changes, price increases and estimated adjustments to volumes at an aggregate level to quickly identify the potential impacts to the bottom-line without having to perform a time-consuming SKU-by-SKU analysis.
Contemporary S&OP tools often have scenario-modeling capabilities and increase the speed and accuracy of these strategic evaluation exercises. However, depending upon the scale and scope of a company’s supply chain, an expensive tool is not always necessary. Well-designed spreadsheet models populated by databases may be a sufficient starting point for a business. No matter what tool is utilized, the S&OP process is designed to identify potential issues and act as a launching point for projects elsewhere in the organization to identify methods for addressing those issues in the most cost-effective manner.
Companies with well-designed and utilized Sales & Operations Planning processes have well-demonstrated benefits of:
-Reduced stock-outs, driving higher service level
-Lower variable labor costs
-More efficient raw material, work-in-process and finished goods inventory utilization
-Lower transportation and material acquisition costs due to more stability
-Higher gross margins
-Increased top-line sales
Strategically including tariff management and other global supply chain variables in the S&OP process to evaluate possible impacts to the supply and demand balance, as well as cost structure, is critical to ensuring the continuity of supply necessary to provide high levels of service and cost management.
Paul Baris is a supply chain expert with over 30 years of experience in the industry as a Vice President of Supply Chain for several companies as well as a consultant implementing Sales & Operations Planning, Inventory Strategy and Demand Planning practices.
Paul’s strengths include: Operational Performance, Root Cause Analysis, Lean & Six Sigma Methodology, Client & Vendor Liaison, Leadership, ERP, Strategic Procurement, Project Management, Warehouse Redesign/Implementation, Supply Chain Engineering, Statistical Process Control, 3PL Management, WMS, Demand Planning, Inventory Planning, Change Management, S&OP, and Operational Layouts. Paul is a certified supply chain professional from APICS and has a Certification in Supply Chain Management from the University of Tennessee. Paul’s professional certifications include: Change Management – Prosci ADKAR, Professional Negotiation – Karrass, Juran on Quality I & II – Kepner-Tregoe, Strategic Procurement – Stanford University, Statistical Process Control, Purchasing Strategy, Oliver Wight S&OP, and S&OP Implementation.