The Market-Driven Supply Chain: A Revolutionary Model for Sales and Operations Planning in the New On-Demand Economy

Overview

Customer demands for individual attention and specialized products are transforming commerce at every stage—including the supply chain. Today’s highstakes economy requires dynamic, market-savvy sales and operations planning (S&OP) to keep pace with accelerating service demands and response times.

It’s not as daunting as it sounds with the tools, tips, and case studies in The Market-Driven Supply Chain. This practical yet expansive book helps organizations transition from ...

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The Market-Driven Supply Chain: A Revolutionary Model for Sales & Operations Planning in the New On-Demand Economy

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Overview

Customer demands for individual attention and specialized products are transforming commerce at every stage—including the supply chain. Today’s highstakes economy requires dynamic, market-savvy sales and operations planning (S&OP) to keep pace with accelerating service demands and response times.

It’s not as daunting as it sounds with the tools, tips, and case studies in The Market-Driven Supply Chain. This practical yet expansive book helps organizations transition from outdated supply-driven processes to new market-driven models. Readers learn how to:

• Use robust analytics for conducting value segmentations and simulation analyses

• Develop a customer-centric culture and a collaborative organizational structure

• Dynamically rebalance the inventory mix to improve capacity and reduce costs

• Retool 26 management processes to achieve market-savvy S&OP

Unlike other books that focus on only supply chain strategies or S&OP or lean manufacturing, this book’s sophisticated approach unifies all three areas, and it’s the only one to explain how to operate in today’s on-demand environment.

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Editorial Reviews

From the Publisher

“…surprisingly easy and comprehensible read…The book is very informative and gets one thinking." --PM World Journal

"… provides the transformational steps required to achieve a market-driven supply chain resulting in a business that is highly responsive to the demand economy..."--Quality Progress

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Product Details

  • ISBN-13: 9780814431634
  • Publisher: AMACOM Books
  • Publication date: 10/16/2012
  • Pages: 288
  • Product dimensions: 5.90 (w) x 9.10 (h) x 1.20 (d)

Meet the Author

ROBERT P. BURROWS III is founder and managing principal of the On-Point Group, a firm that applies the quantitative science of operations research to supply chain management.

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Read an Excerpt

The Market-Driven Supply Chain

A Revolutionary Model for Sales and Operations Planning in the New On-Demand Economy
By Robert P. Burrows III

AMACOM

Copyright © 2012 Robert P. Burrows III
All right reserved.

ISBN: 978-0-8144-3163-4


Chapter One

Seeing Anew from a Market-Savvy Perspective

IN THE NEW DEMAND ECONOMY, a significant competitive differentiator is market savviness, which is another way of saying mastery of the marketplace. Companies prevailing competitively possess remarkable comprehension of their markets. They lead in understanding customers, demand, and competitors and in articulating a distinctive go-to-market strategy.

The marketplace actually distills this strategy, so the executive team no longer needs to rely on historical data for strategic planning. Plans come from observing signals about future trends, rather than seeking insights from the plans of predecessors or historical data about the past. This new approach is known as predetermined planning. Most companies currently rely on either a presumptive or a projection approach to planning: They presume their market position will remain unchallenged, or they project a modest, easy-to-achieve improvement. In predetermined planning, in contrast, the essence of planning is transformed from looking at history and internally developed strategies to discovering what has been determined about your products and segments by customers in the marketplace. The first guiding principle for designing market-savvy S&OP—market in—begins with this approach to planning. (See Figure 1-1.)

This predetermined planning perspective is the key to understanding the market-savvy approach to supply chain management. In the on-demand world, opportunities exist for those willing to discover market realities, gain marketplace mastery, and determine how to gain competitive advantage.

Planning is done best when there is clarity of both customers and competitors. When planning is done at a high level of aggregation such as for a whole profit center or, worse, for a group of profit centers at say a corporate level, different groups of customers are mixed together and a broad array of competitors are involved. The planning done in the market-savvy approach requires disaggregation down to the market segment level. We have found a value segmentation of the market works best.

Value segmentation is a departure from traditional segmentation, describing markets in the providers' terms, such as how much of your product they buy or where they are located. It determines how customers are grouped according to the values they hold most dear as well as how they generate cash. Value segmentation is achieved by research done by a cross-functional team of savvy professionals. The team approach seeks answers to the question, "How can we be of value to you?" Traditionally, the fieldwork is done by sales reps asking, "How much do you need, and how much will you pay?" This research seeks to broaden depth of knowledge about customers.

Value segmentation leads to the articulation of a go-to-market strategy. The go-to-market strategy by segment educates everyone in the organization about your overarching goal in each segment.

Market-Savvy S&OP Defined

Market-savvy S&OP is fundamentally different from traditional S&OP in profound ways. Most important is its customer focus and its impact on the performance of the enterprise. In market-savvy S&OP, the overarching goals are increasing market share and generating free cash flow (FCF). Both are goals of prime importance to senior management. In market-savvy S&OP, multiple teams are focused on achieving the goals for which the CEO is held accountable by the board of directors.

Four Levels of Maturity in S&OP

Market-savvy S&OP is the highest level of maturity in S&OP, as described in Figure 1-2. The market-savvy S&OP is the process used inside a market-driven supply chain.

In traditional S&OP, the goal is operational excellence, with a cross-functional culture in the internal organization. Traditional S&OP determines sales volume and identifies product mix requirements. The idea is to efficiently use manufacturing capacity.

Today, however, markets do not react to manufacturing efficiency alone; they require much more. Market-savvy S&OP changes the entire focus of the organization to the outside—to an "at-market" level—and brings those market insights in to start the planning processes. Specifically, it:

* Strives for market excellence with a collegial and customer-centric culture transcending the internal organization to include customers and suppliers in the most intimate levels of planning and decision making, including product selection decisions and inventory strategies.

* Is run at the major market segment level within a business unit—not one-size-fits-all, but tailored to customer needs.

* Requires forecasting demand two steps closer to actual demand. Traditional S&OP forecasts demand at the manufacturer level and may plan inventory at the customer level (vendor-managed inventory, or VMI). Market-savvy S&OP forecasts consumer take-away from the customer.

* Manages capacity to demand and manages production to demand through rate-based planning and flexible inventory standards, the replacement for material requirements planning (MRP), and safety stocks.

* Closely aligns performance measures to senior management's objectives: free cash-flow generation and market share capture.

The demand-economy requirement is to move to a market-savvy S&OP process. It should not be confused with the well-known operationally focused S&OP process, shown at Level I of Figure 1-2, used by most companies for the past 20 to 25 years. Market-savvy S&OP is practiced in part by fewer than 5 percent of the most successful companies in the United States and by an even smaller percentage of the world's manufacturers. Precious few—in fact, we have not found any—practice the full complement of market-savvy S&OP processes.

The P in Market-Savvy S&OP

The P in S&OP, planning, is the predetermined approach to planning as illustrated in Figure 1-1. This type of planning requires a more rigorous investigation of how your products are being accepted or rejected and how your selected competitive approach stacks up in the real market. Predetermined means the market will have provided signals about what will be successful. For sure, some aspects of your plans may be more difficult to prove than others. In the predetermined approach, the cross-functional team must find leading indicators of the success or failure of planning alternatives. Leading indicators may be very knowledgeable individuals or leading indicator stores. Often, the best approach is to structure your go-to-market strategy with well-defined trigger points at which a disciplined assessment of your plans is completed before just forging ahead. At the beginning of each business cycle, normally once per year or season, decisions can be made based on how the market reacts to your offerings and your competitor's. The key is to be in the market and finding the signals.

It is essential to adopt a predetermined planning approach. Most planning processes have been built on the concept, historical data regarding the manufacturer's shipments well defines the future, and all one needs is a little care given to new products and possibly marketing programs and promotions. However, in the new demand economy, product and demand patterns change so rapidly, and market forces are so specialized and volatile, historical data at the manufacturer's level become stale very quickly. Predictive information—gathered two or more steps further down the demand network of manufacturers, wholesalers, retailers, and consumers—is required.

In the future, planning must be done very close to the consumer/ customer to understand what is changing and by how much. Certainly, the basic demand driver of price points, combined with consumer/ customer perceptions of quality, still applies, and product applications remain somewhat constant. But what changes are competitor offerings; the availability of products from different sources, including the Internet; the customer's desire to sell; and network inventory. Predetermined planning relies on a high level of interaction between cross-functional market-focused teams and consumers/customers, using knowledge to anticipate changes in demand.

IBP Provides the Strategy

As shown in our seminal diagram, Figure PI-1, business unit strategy is within market-savvy S&OP. The process is commonly known as integrated business planning, or IBP. There is a fair amount of confusion around the definition of IBP today, so it seems appropriate to offer some explanation and clarification regarding our viewpoint about it. We see IBP as a formal process in and of itself; it should not be mistaken for a more advanced form of the common monthly S&OP process, as some authorities suggest. IBP provides the business strategy for the overall market-savvy S&OP process.

Some professionals may think of IBP as a financial planning process and not necessarily part of S&OP. IT professionals would like to see IBP as a very mature process within S&OP, with all data fully integrated by one mega-software solution. Neither view is correct. Financial planning cannot be done apart from market-savvy S&OP. Every piece of information financial planners require must come from it. In our client experience, financial and operations planning systems do not need to be integrated. However, they do need to be developed collaboratively.

IBP is in part a financial planning process, but it is more correctly defined as the annual business strategy redevelopment process. Financial projections and plans properly flow from the information and strategies developed through IBP. What is important is the process, not the IT solution. The analytics rely heavily on a database of information, but not at all upon having operations and financial data fully integrated in one mega-system.

IBP focuses on the supply chain—the network of customers, manufacturers, and suppliers. As A. G. Lafley, the highly successful former CEO of Procter & Gamble, said, "At P&G, supply chain is the business." In IBP, we want to understand the market dynamics leading us to a specific set of actions so we can determine whether or not they have potency and relevance in the real world.

IBP addresses a critical need arising because of the on-demand economy. The on-demand economy moves quickly; the rate of change is exponential in all aspects, including product technology, but also in terms of customer characteristics, competitive offerings, and sourcing opportunities. A strategy planning rhythm matching these dynamics is a requirement. An enterprise can no longer set a strategy once to last for many decades. In addition, the complexities of the on-demand marketplace are so extensive a separate strategy unit outside the business unit or including only one or two strategists is not going to be successful. The management team of the business unit must apply its considerable market savvy to properly develop an effective strategy.

Figure 1-3 depicts the process steps in IBP. It is a yearly thinking process of revitalization for the business unit. While done annually, it is updated quarterly through status meetings with customer groups. IBP normally has a three- to five-year time horizon. (Note that while product research is part of IBP, this is not product life-cycle management, or PLM. The output of IBP is the essential market view feeding into the PLM process.)

The output of IBP, the go-to-market strategy, is the IBP or market-in link into the monthly collaboration processes. Once the IBP steps have been completed, the output will provide the written and agreed-to statement of strategy and key metrics, namely, how much cash should be generated, how much market share should be gained, and how the company is to create competitive advantage.

Defining Market Segmentation

There are five steps, the first two numbered "1" because they are done simultaneously, in our model of IBP, as outlined in Figure 1-3. In this approach, individual market segments are defined. This is the second guiding principle of market-savvy S&OP design, segment level. When operating at the segment level within a market, stark clarity of competitive position is found. The customers by definition have homogeneity, and competitor strategies are more easily determined. The reason so many companies have difficulty setting strategies is they try to do it at too high a level of aggregation; find exception after exception; and, thus, end up generalizing. The result is a strategic direction providing no meaningful information for functional executives, so metrics become muddled and action plans uncoordinated. The key to success is to properly segment the market and then set a strategy for each segment.

Segments are aggregations of like consumers/customers within the business unit's overall market, with each member having essentially common characteristics of product preferences, buying habits, service requirements, and so forth. Sometimes, a segment is one very large customer, such as Wal-Mart, which can amount to 35 percent of business for consumer products companies providing tires, or beauty aids, or the like. Normally, we find only three to five segments of significance in a business. We had one client who believed it had one segment equal to 97 percent of its business, plus two smaller segments. However, we found the organization's thinking was incomplete. The large segment was actually three segments, and the two smaller ones were actually subsets of the three properly defined segments.

Segments tend to be large portions of the market. They may be as large as 40 percent or as small as 10 percent, but rarely larger or smaller. We had a client who had 3,000 different items in the product portfolio. Some 300 of them accounted for more than 95 percent of the overall market and 96 percent of the company's unit sales. A sales representative or a marketing professional inside the company could list a reason why each of the 2,700 items, accounting for less than 5 percent of the company's total market, was absolutely required. Focusing on market segments, we were able to pinpoint the duplication of items. When customer aggregates were interviewed, they said they were confused by all the extra items beyond the top 300, wanted direction from the manufacturer about how to cut back on the number of items offered, and did not want to inventory even the top 300 items, but only about 70 or so. After months of discussion and heavy application of analytics, more than 2,000 items were dropped from the portfolio. The team determined the other 700 items in the 5 percent group were emerging new products and could replace one or two of the products in the top 300 group. Some of the lower-volume items actually had an exclusive niche of 1 percent of the overall market.

We are talking market segments, not segments of your business only. A business traditionally serving only one part of a market should look at market segmentation for the broader market to find whether opportunities are available. The business may not be in some of the segments of the market, or it may have the segment defined in its terms, not in market terms. The business may chose to stay out of certain segments. The segmentation is useful, then, in determining those products and services not required.

For example, some years ago, I worked with a manufacturer of electric motors, nonfractional or one horsepower (HP) and up. Fractional motors represented a totally different technology and market so were not considered in my evaluation of opportunities. The client saw itself as a full-line manufacturer competing with GE, also a large electrical products manufacturer and full-line. Our client had one large assembly line in an older plant in the upper northeastern United States. Revenues and profits had been declining for a few years, and corporate management envisioned a turnaround.

We did the research to determine the market segments and the competitive positioning. From internal research, we developed a list of major motor buyers, including many multibillion-dollar electrical distributors and the rotating engineers in big A&E (architectural and engineering) firms. We found there actually were four significant market segments. There were, for example, groups of customers, accounting for 60 percent of the market, who treated motors as commodities and purchased only on price in the smaller sizes of one- and two-HP motors. Another segment existed for motors to be installed in Greenfield sites on longer lead times with a high variety of different sizes and configurations required; this was a nice fit for a full-line manufacturer. An additional segment existed for three-HP and up motors in the replacement market. The four segments were:

1. One-HP motors, sold on price only, primarily through distributors

2. Two-HP motors, sold on price only, primarily through distributors

3. Three-HP and up motors sold to A&E firms, original equipment manufacturers (OEMs), and large industrial companies

4. Replacement motors sold to maintenance managers for immediate use

(Continues...)



Excerpted from The Market-Driven Supply Chain by Robert P. Burrows III Copyright © 2012 by Robert P. Burrows III. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

CONTENTS

Foreword by Gregory P. Hackett, The Hackett Group ix

Foreword by Lora Cecere, Supply Chain Insights LLC xi

Acknowledgments xiii

Introduction 1

Seven Guiding Principles of the Design of Market-Savvy S&OP 8

PART I: CREATING VISION

Chapter 1: Seeing Anew from a Market-Savvy

Perspective 11

Market-Savvy S&OP Defined 13

IBP Provides the Strategy 16

Value Segmentation: The Preferred Method 26

Looking Back 44

Case Study: Sports Uniform Manufacturer 45

Chapter 2: Competing on Time and Customer

Connectivity 51

The Five Fundamentals of a Value-Segment Strategy 53

Portfolio Versus Segment Strategies 55

Segment-Level Strategies for Value Chains 62

Four Traditional Value-Segment Strategy Options 64

New Segment Strategies 75

Looking Back 86

Case Study: VTech 87

PART II: CHANGING BEHAVIOR

Chapter 3: Managing by Analytics 91

The 7 Characteristics of Strong Teams 92

The 7 Characteristics of a Proper Analytic 100

Market-Savvy S&OP, 70 Percent Analytics 109

Looking Back 121

Case Study: Frozen Food Producer 122

Chapter 4: Establishing a Customer-Centric Culture 127

Developing a Customer-Facing Organization 128

Establishing Collaboration 133

Driving Collegiality 139

Designing Horizontal Management Processes 145

Appointing Leaders with Passion 154

Looking Back 157

Case Study: Goodyear North American Tire (NAT) Consumer 158

PART III: DESIGNING NEW PROCESSES

Chapter 5: Designing and Implementing

Collaborative Planning (Segment-Level S&OP) 165

Design Starts with Education 167

Design to Implement Strategy 171

Design to Align All Planning Processes 175

Design with Interlocking Cycles 187

Design with Collaborative Goals 193

Looking Back 196

Case Study: Wright Medical Technology 197

Chapter 6: Designing a Rate-Based Planning Process 202

RBP Applicability 203

RBP Versus Traditional Scheduling Methods 204

RBP Scheduling Strategy 210

Cycle Planning 218

Inventory Standards 223

Rate-Mix Planning 226

Looking Back 230

Case Study: Canned Food Manufacturer 231

Chapter 7: Transitioning to a New Culture of

Market-Driven Supply Chain 237

The Transition Plan 237

Instituting the Audits and Recognizing the Team Responsible 247

Looking Back 257

Case Study: Medical Technology Company 258

Time to Start 260

Index 263

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