Chapter 5
Designing and Implementing Collaborative Planning (Segment-Level S&OP)
We now turn to monthly collaboration, the intermediate of the three major processes in market-savvy S&OP, as shown in Figure PI-1. This chapter describes how monthly collaboration aligns the essential horizontal processes of the customer-centric organization. We make clear that the segment-level S&OP process moves the business strategy from the executive suite through the entire organization and down to the shop floor, as well as out to the customers.
The guiding principle of design described in this chapter is Process Heavy, People Light, the most important aspect of the principle being collaboration. Only a truly collaborative process can bring management together in such a profound way to achieve the most profound results for shareholders, employees, and customers. The teams we described in Chapter 3 are put into effect to design and implement segment-level S&OP. All the team characteristics discussed in Chapter 3 are required. A leader with a passion for excellence in delivering value to the customer is put in place. Now the team accomplishes the process design in detail. It is useful to show this in management summary form as a high-level process map, as shown in Figure 5-1.
People participate in the design process in earnest if they see a big picture win. The process design overview can be developed in concept at the very beginning of the design process to help the team see where it is going. The integration of functional planning has an important overarching goal of developing wins for all three of the key constituents of a corporation: employees, customers, and shareholders.
Employees win by being empowered to participate with management to deliver customer value. Winning employees become passionate leaders and perpetuate the processes. Shareholders win when key financial metrics are achieved and the corporation has cash to invest in new products and market share growth. Shareholders win financially with positive stock-price growth as calculated and powered through the generation of free cash flow. The cash in your collaborative model is used to keep the company healthy.
I do not intend to mean you should run the corporation only for the benefit of the employees or to give cash to the investors to extract. Those two practices can very quickly drive you to destruction. The whole leveraged buyout practice of so-called investment bankers, as forced on many companies in the past 20 years, has failed in large part to produce healthy companies. These investors were not intending to build an enterprise to produce value; they were interested only in wantonly removing cash to gain excessive returns on their meager investments. Running companies for the employees is just as shortsighted. Just look at the disaster of the major U.S. airlines, such as American, Delta, United, and U.S. Airways. They now are totally ignoring customer values and instead promoting only employee satisfaction. I travel more than most airline employees, have traveled by air for more than 40 years, and have witnessed 
the switch from a business model focused on customer satisfaction to a new model that eliminates the customer from the equation and operates the company for the privileged employees. In the end, the employees are actually losers, because they will lose their jobs as general aviation and regional new-breed carriers such as Southwest Airlines take more and more market share.
On the contrary to trying to benefit only employees and shareholders, collaboration is aligning the major constituent values to produce a positive win for all, including customers. In Chapter 4, we described how to set the foundation for collaboration in customer centricity. In Chapter 5, we describe how collaboration is achieved.
Design Starts with Education
Almost all S&OP implementation efforts initiated by the best-known S&OP consultants fail. Almost all S&OP process improvement efforts started internally by a company go nowhere. I am defining failure and nowhere as producing few significant benefits, as well as lacking in sustainability, scalability, and reproducibility. These unsuccessful implementations follow a well-traveled “path forward.” In these unsuccessful efforts, an outside organization or one functional department runs the pilot, writes a design document, and then drops responsibility on employees who have little to no actual training. Sadly, implementation stops after great expenditures of money and time. The majority of all S&OP processes installed in major corporations never progress beyond the basics of scheduling and determining some estimate of future volume and mix. Basic S&OP resides in one function, with poor engagement by all the other functions, and senior management is not involved.
A much better design and implementation approach must be used if you wish to be successful and make your company a financially viable and high-growth enterprise.
You must work through people—not just with them. Successful implementation requires ownership of the process by many different functional organizations. Ownership is gained by working through the various functional organizations, rather than having one function as the lead and asking for representatives to work withit. When you work through each functional area, the functions are treated with respect and are trusted to design a process that works for them; thus, they will have ownership. If you have the behavior changes in place from Chapters 3 and 4, the process design developed by the combined group of process owners will work for the whole.
Guided Participatory Education Approach
Working through people starts with participative education. Education allows some people from all functions to actually participate in the S&OP design process, rather than just being handed a process in prepackaged form. The guided participative approach uses business simulation games, case studies, and directed discussion to increase knowledge. The opposite approach is the one we often find throughout the higher education system, with the exception of the few places that use the case study approach, such as Harvard Business School. The approach seen in many other institutions, where professors “hand down” their wisdom, often fails to engage the imagination of the students, because it treats them as know-nothing beginners. However, students in college are for the most part not know-nothing beginners. And, for sure, executives in major global corporations or small domestic corporations are not know-nothing knuckleheads, which is why the guided participative approach works.
In guided participation, the initial emphasis is to train trainers. The new trainers then in turn train other members of the organization into people who are engaged in a customer-facing organization of S&OP; and they do so as no other approach possibly can. Most likely, leaders will develop who are outside the supply chain function. Through this educational approach, leaders with a passion for the principles of market-savvy S&OP will surface, and they should be appointed to trainer status. In one of our client companies, the initial group of 15 people in participative education went on to facilitate participative learning with 150 new people, who then went on to facilitate sessions with 1,450 people. Eventually, more than 3,000 senior and middle managers were personally and respectfully brought into the inside of the S&OP design process. Talk about sustainability, scalability, and replication, with 3,000 well-educated and motivated people on the design team.
Guided Participatory Process Appraisal Approach
Education leads to a guided design process to encourage cross-­functional participation, rather than a dictated process design. The education should focus on the principles of S&OP that can or even should be adapted to your company’s unique requirements; education should not hand down a set of completed design documents. Benchmarking and having examples of best-in-class processes are good ways to spur thinking and to avoid groupthink, which usually results in the design of only a slightly different version of the current process.
The various horizontal processes in S&OP are outlined in the education to facilitate the participative appraisal of current processes in the company. Many of the necessary processes will not even be found in the current state. You will find that some are done poorly, while you may find a few that are done well. (The horizontal processes that could be included in your S&OP are covered later in this chapter.) Further work in defining what needs to be done may include visiting companies with very strong S&OP processes and/or having experts such as myself come to address your group.
The guided education principle was described by Paulo Freire in his book Pedagogy of the Oppressed, published in 1968. Freire calls traditional pedagogy the “banking model” because it treats the student as an empty vessel to be filled with knowledge, like a piggy bank. However, Freire argues for treating the learner as a co-creator of knowledge. The dialogue among a group of cross-functional leaders is more important than having the exact curricula or benchmark designs.
A good friend of mine who is a cultural change expert applies the principles of guided design to his work with East African communities fighting to overcome the scourge of HIV/AIDS. Dr. Gil Odendaal is a pastor with Saddleback Church in Orange County, California. He is responsible for the implementation of the global PEACE Plan (see www.thepeaceplan.com), with a special focus on East Africa. Saddleback Church was founded by Rick Warren, the author of the best-selling book The Purpose Driven Life. Saddleback itself is a good study in successful cultural change. Warren held the first church service there in 1980 with 205 people. At the 25th anniversary, 50,000 current and former members attended a service held in a professional sports stadium.
Odendaal has been working in Rwanda to develop civil societies (code words for “church”) to prevent the spread of HIV/AIDS and to care for those living with the virus. He has taken Warren’s PEACE Plan (plant churches that promote reconciliation; equip servant leaders; assist the poor; care for the sick; and educate the next generation) to the people of Rwanda. Odendaal started in Bwishyura, a sector in western Rwanda with a population of 30,000. Using guided education principles, he first held seminars for 124 church leaders and trained trainers inside the civil societies. Thirteen churches signed up for the train-the-trainer program. Through the use of participatory learning activities and participatory rural appraisal techniques, they developed home-health plans and community support programs working through local civil societies. The leaders, all Rwandese, trained trainers, also all Rwandese; thus, 225 trainers were developed. Each trainer then went into seven homes. The community was profoundly changed, and the program has been very successful. The government even asked to have its community workers included in the training programs. The program has moved on to five other sectors of Rwanda and now has 2,400 trainers trained and implementing home-health programs.
Odendaal describes the guided participation process as midwifery rather than fathering. The midwife is there, helping many mothers (think teams), and ownership of the product almost always results. Fathering with many mothers is bastardization, and the product is most often abandoned.
Design to Implement Strategy
The segment-level S&OP process is the most important tactical planning process inside any business. The purpose is to implement the business strategy in each market segment. The go-to-market strategy comes to real life inside the S&OP process. Each functional area has a specific role and is engaged in the overview of the whole business.
Design S&OP to Run the Business
S&OP is the way you run your business. Like no other process, S&OP can bring the functions together. It is not one of many management activities or regular meetings the CEO uses to manage. One of my clients, Thomas C. McDermott, is the former CEO of Goulds Pumps Inc., a global commercial and industrial products company. He summed up the first market-savvy S&OP meeting he ever attended by announcing to his staff, “This was the most productive meeting I have ever attended in 40 years of management. Attendance at this monthly meeting is now mandatory.”
Through the S&OP meetings, pre-meetings, and horizontal processes, the work of each function is fully vetted, with decisions made and accountability shared. The team determines how to interpret forecast inputs, and the team determines the consensus action plan. Thus, the team takes responsibility for the results of the decision-making process.
Design to Enable Customer Centricity
Market-savvy S&OP is centered on the customer through the go-to-market strategy. We discussed the go-to-market strategy form and content in Chapter 1. Now you must put it to work. The first process design required in S&OP is communication of and feedback on the go-to-market strategy. The process should have a one-page statement of the strategy using all the content shown in Chapter 1. Each functional area’s responsibility and approach should be briefly described. In the S&OP meeting, the strategy itself will be discussed, as will the progress in implementing it. You need to have specific metrics describing strategic implementation.
Regardless of which strategy you choose, the general customer metrics should be measured and reviewed in a strategic implementation process in each S&OP meeting.
The metrics or strategic goals will be very different than in traditional S&OP, which is centered on internal operations. Market-savvy S&OP considers enabling concepts, which may be anathema to internal goals. The customers want many results from your work that, on the surface, may increase cost, complicate service performance, and increase inventory. The customer in concept wants the results shown in Figure 5-2. Let’s look at each of these goals.
The S&OP process should enable complexity, as defined inside a market segment. How often have you heard manufacturing executives say they need to rationalize (reduce the complexity) of the product line? The goal of S&OP is to find the correct complexity for the market and align your product complexity rationalization to the collaborative standards developed with customers.
The S&OP process should provide maximum flexibility to meet the variability in the customer’s actual demand profiles. Note: Building massive inventory does not substitute for flexibility. The goal needs to be to meet customer demand variability without inventory at either your locations or the customer’s locations.
Customization is almost never allowed in make-to-stock manufacturing companies. What if you collaborate in the design of products so that what the customer sees as customized is actually an alignment of your product design with customer design criteria in the standard product?
Strategic alignment should be accomplished through market-savvy S&OP. Each of the options in the strategy discussion of Chapter 2 will be implemented well when your strategy is aligned with the customer’s strategy. Most often, senior executives develop strategy and tell the world what it is. But in market-savvy S&OP, you want to change the telling into asking and adjust your go-to-market strategy definition at the segment level to accommodate the customer’s strategy. The S&OP process for all strategies picked in Chapter 2 must include a strong horizontal process to achieve strategic alignment with customers. If the strategies cannot be aligned, you should go back to Chapter 2 and rethink your segment strategy.
Each of the customer-desired goals outlined in Figure 5-2 should have a metric within the context of the value proposition and go-to-market strategy. As an example, working inside the 3M families we discussed in Chapter 4, a complexity goal may be achieved by offering new products and rationalizing products to provide a product complexity mix defined by the customer without increasing the number of 3M families, thus not increasing overall cost of production.
The strategic implementation process should have a dashboard matrix that shows the overall segment strategy and then the metrics for each relevant customer value, perhaps by family, as shown in Figure 5-3.
The goal is to show planning alignment to the strategic plan and to the customer’s goals. The description of the customer group should describe how they interact with their customers or how they are grouped by market characteristic; high-touch providers have great interaction with their customers to achieve a pleasing shopping experience, on-demand providers need significant technical support and special services with short notice, mass-merchants are just that, and premium gold may be those providers who only offer our premium products and are our best customers. The process includes gathering feedback from the customer on a regular basis. As we have discussed in previous chapters, the feedback should be gathered by having customer-facing teams meet regularly with key customers in each segment. Each functional area should be ready and able to discuss its practices to achieve the business strategy for the segment and to pre­sent metrics related to customer goals. Not every functional area will have input 
in every box shown in Figure 5-3. The discussion should center on 
the functional areas having primary responsibility for each strategic initiative.
Design to Align All Planning Processes
Segment-level S&OP is a comprehensive planning process. The plans of all functions are fully aligned in the market-savvy S&OP process. Planning alignment is unique to segment-level S&OP in the following ways:
6	The alignment itself is uniquely different with market-savvy S&OP, since all other forms of S&OP do not even consider full alignment across all functions.
6	Alignment at a segment level is specific and uniquely different from segment to segment.
6	The alignment being tied to the customer’s goals and strategies is unique to market-savvy S&OP. Voice-of-the-customer (VOC) processes are just surveys sent out with an expec­tation of a 20 percent or so return; these may be useful, but they do not constitute alignment.
6	Alignment being done at the market-segment level is unique to this form of S&OP.
Align Up to 26 Horizontal Planning Processes
All the planning is done in the segment-level S&OP process, which is made up of 26 horizontal processes. Some of our clients find they have some of the 26 different horizontal planning processes already in place, at least in part. The 26 are shown in Figure 5-4; all are pulled together in the segment S&OP meeting.
In Chapter 7, we will discuss the three additional processes required when you expand beyond one segment level market-savvy S&OP to a profit center, or Global S&OP process. The first is executive S&OP, commonly characterized incorrectly as the place where major decisions are made. The executive S&OP in our approach is really an FYI (for your information) session. You use the executive S&OP to keep senior management apprised of your progress, but not to push all decision making to the top. That would be eliminating the employee empowerment you are seeking in the collaborative processes. The other two processes involve import and export families; these processes are required to bring alignment in planning globally. In these two processes, one segment level S&OP team is the provider and another is a receiver of production from capacity owned by the provider. Often, other segments are either suppliers or customers and can be handled without any additional processes. We do single out annual operating planning (AOP), which is process number 14 of the 26. AOP is a separate process even though it is simply an extension of the monthly process, with perhaps some emphasis on a longer time horizon and more formal emphasis on new product planning.
Each process shown in Figure 5-4 is important. Implementation of market-savvy S&OP builds upon certain processes that most likely are already being performed, but not fully aligned. Network design, demand planning, and financial reporting are the processes most companies include in a low-level S&OP process. Moving to market-savvy S&OP requires adding the sentinel processes of collaboration. The eight sentinel processes, highlighted by the shadow in Figure 5-4, plus the monthly S&OP (the meeting in which the eight sentinel processes culminate) will most likely require extensive process design work. Since this is a book on the change management process in implementing market-savvy S&OP and not a process design manual, I will not go into detail here on each of the 26 processes. I will describe the eight sentinel processes to help you to understand how to accomplish the planning alignment through process design.
Planning in CFCFs
Cross-functional coordinating families (CFCFs) are the families defined using the 3M process described in Chapter 4. These are highly aggregated families of items (SKUs) used to promote communication. This is no more striking than in scheduling. Normally, a company with thousands of SKUs has zero communication between the S and the O in S&OP, because it cannot communicate about thousands of items in a monthly meeting. However, inside a market segment, you can consider the eight to ten CFCFs that will emerge from the 3M analysis covered in Chapter 4.
Scheduling normally starts with a demand plan for every SKU, and MRP takes over to accomplish the planning, the schedules of future production, and purchase orders. Having taken a deep dive down to the item level of detail, no one can comprehend the resulting schedules. All enterprise management systems do this, and they are all flawed. We pointed out the basic flaw earlier in the book: The validity of the demand plan at the SKU level is zero for the vast majority of items. Just run a simple statistical significance test—something that is never done—to prove it. In addition, the SKU forecast is simply not required at the planning stage. Manufacturing does not need detailed forecasts for every SKU to accomplish its scheduling requirements. SKUs are combined into individual items, and then items are combined into individual groups or families. Scheduling using a rate-based planning approach is the subject of Chapter 6. The reason you do not want to schedule by item is that item forecast inaccuracy leads to errors in calculating safety stock. As actual demand comes in different from the forecast—which it must since the forecast is wrong—false triggers for requirements are generated. Since more than 50 percent of all items are ‘C’ items by definition, and forecast error is most profound in ‘C’ items, then the scheduling done using the forecasts in SKU detail will have a very large number of erroneous triggers, causing scheduling chaos.
To see a full picture, you should use highly aggregated forecasts, and in fact, multiple views of the aggregated forecast. We will discuss the specifics of multiple views below, but think about industry views, customer views, salesperson views, and others. The forecasts are aggregated at the level of the large CFCF families. With multiple views and this aggregation, you will be able to accomplish several important goals without causing problems in scheduling. This last point—not causing problems in scheduling—will be a point of contention with old-timers in manufacturing who can come up with endless examples of “one time” when not having a detailed item or SKU forecast makes a difference in some small cost factor. Please apply the significance rule to handle these objections. Not all costs are significant. We know from some of the better lean manufacturing work that aggregation into large families is very practical and significantly increases overall utilization, reduces unplanned downtime, and improves overall throughput.
The collaboration goals achieved using CFCFs are significant. They include:
6	Communication of capacity constraints and opportunities to the team
6	Understanding of near-term scheduling difficulties or lack of issues
6	Assessment of contingency plan complexity
We have found that CFCFs can be defined for very complex, job-shop-type manufacturing. Pumps, tires, and cosmetics processing all have thousands of SKUs, hundreds of specialty manufacturing processes, and many process variables. However, in each of these businesses, we have been able to aggregate the items into a handful of CFCFs and accomplished the collaborative goals.
Views of the Forecast
Forecasting should not be limited to just a statistical forecast, as is most often the case. Multiple views should be added to the straight statistical forecast. Perhaps you would even change the name of the statistical forecasting process and call it multiple view of the forecast. We have some clients that have up to 12 or 14 different views of the forecast. Let me mention just a sampling: econometric model forecasts, trade association forecasts, salesperson forecasts, sales management forecasts, historical trend forecasts (basic statistical), marketing forecasts of promotions, marketing forecasts of market share/segment sales trends, forecast from AOP, forecasts from key customers, and past period forecasts. All the views of the forecast should be displayed in a comparative chart to foster discussion and lead to a consensus of the forecast to be used in the S&OP meeting, as well as for defining inputs to the risks and opportunities process.
Inventory Simulation
Planning the physical movement part of the value chain is an area of significant collaborative difficulty. The sales side of planning wants every item stocked in many different locations, while the supply chain managers want few stocking locations, and on we go. Often, logistics cost is the driver of the network design decision. In reality, it is inventory, and perhaps more important, the utilization of capacity that should drive the decisions on network designs, along with significant consideration of the business and go-to-market strategies. The problem is that the standard models used for network design are not capable of assessing the capacity utilization impact, nor the full inventory impact, of the network design alternatives. The senior technical person at one of the most popular network design companies, located in Atlanta, told me he assumes away the capacity utilization issue and thinks about variation in demand simplistically. The common models used in network design are LPs, or linear programs. They do simplistic cost trade-offs and ignore capacity and demand variability problems.
Using inventory simulation modeling to determine the number of stocking locations significantly improves the network design. Since inventory simulation can be intimidating in the sheer size of the data requirements, care must be taken to summarize the outputs. Some of the simulation models we have used have very clear graphical outputs, which display the results of the simulation in a way senior management can absorb and appreciate. We described the eight reasons for inventory approach in the analytics chapter, Chapter 3. This is a simple form of inventory simulation summary output. In fact, several of the eight factors discussed there can be calculated using simple Microsoft Excel methods. (The sixth factor, the impact of demand variation, may require a more sophisticated modeling technique.)
Simulation has major benefits in inventory analysis. Using simulation, you can model the highly variable demand patterns of most products using random distributions and/or other discontinuous distribution patterns. Simulation has been known to business managers for decades. It was used in World War II to solve some of the distribution issues in marshaling war materials. In addition, it was used to determine the mixture of elements in the atomic bombs built and detonated in WW II. The actual mixture problems were very small in mathematical terms. However, the simulation had to be done manually since computers were not available in WW II. It took several months to complete using hundreds of mathematicians. Today, we have solved very complex simulation problems for companies with more than 100,000 items using laptops with large hard drives and fast processors. A very complex simulation model can be solved in a few hours.
Inventory simulation using a simulation modeling technique shows the impact of the full variation in customer demand on the inventory for each scenario of one or more stocking locations and also shows the impact of the demands on manufacturing capacity utilization. Intuitively, manufacturing must see a significantly increased range of daily demand, higher peaks and lower valleys, as the number of stocking locations increases. The effect is ignored if you are using linear models. In contrast, inventory simulation allows you to prove that fewer stocking locations are the most cost-effective when the entire network cost is considered. Using inventory simulation modeling, the resulting networks have performance characteristics 
in the live case nearly equal to those predicted in network design modeling.
Risks/Opportunity Analysis
In the area of planning sales activity, a demand-planning process is becoming very popular. Demand planning tries to convert the statistical forecast, the field sales inputs, the econometric model data, and other inputs into a plan reflecting the best forecast of actual demand.
Ideally, demand planning is trying to develop demand expectations at the time horizon most critical to manufacturing and suppliers. Often, the focus is on the next few weeks only or a month or so out, which is far too shortsighted to be of use to manufacturing. If we use the rate-based planning techniques that will be described in Chapter 6, this issue becomes moot.
The real breakthrough in demand planning comes when demand projections are augmented with assessments of higher-probability risks and opportunities. The output of demand planning can be one consensus set of future demand predictions. However, it would be the rare case to not have upside potential and downside risks. The demand planners must know about some of them. The sales force and other members of the customer-facing organization must know about additional risks and opportunities. Having a formal process to aggregate the upsides and downsides, apply probabilities, and have a fruitful collaborative discussion about the impact will be of significant importance. This process will then lead to comprehensive contingency planning and sales-gap closure analysis.
The director of supply chain at Goodyear, Ken Fletcher, observes that the risk and opportunity process, coupled with contingency planning, “makes lead time your friend.” You plan ahead, rather than let a somewhat predictable event just happen, which would cause you to jump to respond with little lead time. With a proper risks and opportunities analysis process, you identify and act upon opportunities to gain market share.
Integrated Projections
Certainly, financial managers make financial plans; it’s in their DNA. The market-savvy S&OP process provides them with all the information they need to make the projections that are a critical part of the financial planning process.
In my experience, companies finding themselves in severe difficulty with their banks are most often guilty of using only historical data to prepare the cash-flow forecast. The process is easy to understand and uses numbers accountants like, historical facts. The process also is not very useful in recognizing a potential cash-flow problem in the future, because all the future variability is assumed away. However, using the S&OP data, you have all the information required to make a cash-flow forecast, including the expectations of actual labor costs, actual purchase commitments, and actual sales mix. The cash flow based on integrating the plans of each function will be of significant value.
Senior managers, like bankers, do not like surprises, but when historical data are used to make the cash projection, surprises are unavoidable. Again, using integrated projections, lead time becomes your friend, as you identify and can adjust plans for future cash-flow issues. All the senior managers and bankers will be very pleased with a “heads-up” on future cash flow.
Projecting ahead using S&OP, particularly if the S&OP has an 18-month time horizon, makes annual operating planning (AOP) a routine extension of the monthly process, rather than a grueling year-end exercise of starting with a blank sheet of paper and developing “new” plans for the coming year. In fact, people who are good at S&OP can develop the AOP in less than a week.
Demand Sensing
We described how the market strategy is developed in Part I of this book. The monthly process involves keeping track of the progress 
of the strategy. Demand sensing is the starting point of the monthly process.
Actual demand is captured in the demand-sensing process. We call it sensing because the process is one of looking for key indicators, not necessarily one of capturing daily every scrap of demand data in databases of terabytes. Some companies do try to capture terabytes of data for consumer products; in the majority of cases, a much-simplified approach is appropriate.
Demand sensing can be done by identifying leading indicator situations and interviewing industry experts. Leading indicators could be key retail sites for several major retailers. We have seen companies take POS data from key Wal-Mart stores as demand-sensing data. Often, consumer packaged goods companies that successfully perform demand sensing are gathering regional data in summary to use as measures of actual demand trends. The regional summary data can be captured in trend-line form and presented in a short, powerful update presentation for the S&OP team to review. It is important to have concise summaries that show significant trends compared to your strategic expectations, rather than detailed store-by-store daily demand data, which even analysts—let alone an S&OP team—will not be able to comprehend. Industrial products companies can use actual demand from key customers to sense demand trends. A factory automation manufacturer can show trends by collecting data from customer groups; for example, it can collect data from early adopters, distributors, sophisticated OEMs, and other groups to sense demand trends for new technology, older technology, and its products versus the competition. Test marketing and sampling of randomly selected selling sites also works.
Industry experts may be senior management of major customers or representatives of customer groups. Having monthly or quarterly meetings with decision makers inside your customer organizations will tell you about their internal plans. Often, future demand is affected more by the customer’s decisions to increase or decrease inventory or to run promotions than it is by actual selling trends. We have an industrial products client that has meetings quarterly with two major distributors handling nearly 60 percent of its total business. The client has learned to sense changes in demand by understanding the distributors’ cash-flow issues and service interpretations. The distributors are very different. Just looking at orders received at the plant does not provide the necessary insight to near-term and longer-term trends.
Starting with demand sensing will lead to further collaborative planning with promotional planning, alignment to supplier plans, and competitor analysis. As you project demand using demand sensing, you can signal your internal and external partners to improve alignment, and you can sense when you need to look at a competitor more closely.
Customer Alignment
Customer alignment is the beginning of the strategic update processes. On a monthly basis or at least quarterly, the S&OP team should have formal meetings with customers to keep track of changes in their strategic thinking and forward planning. The alignment also includes gathering and interpreting customer-defined performance metrics.
Our “customercentricity” discussion from Chapter 4 covers this alignment subject well. The team needs to have a formal process developed to accomplish the monthly alignment. The process design should include who meets with the customers, how specific customers are selected, what topics should be discussed, how the relationship is maintained, and what senior management involvement should be. The customer-alignment process should lead into the new product planning process, which would be done in collaboration with the customer.
Meeting Performance Metrics
The planning process related to achieving performance results requires methodically measuring and responding to performance indicators. The dashboard that is central to the monthly segment-level S&OP would be maintained in this process. (The dashboard was discussed in Chapter 3.)
The high-level process overview in Figure 5-1 shows three groups of metrics to be included in this process: process metrics, performance metrics, and customer metrics. The team needs to define a specific process for gathering, maintaining, archiving, and managing to the metrics.
The process design should describe each metric to be used and the process for evaluating performance and action planning. For example, when is it necessary to perform a root-cause analysis of a change, either good or bad, in a metric? For the forecast accuracy and bias metric, the process design may call for root-cause analysis when the forecast falls outside the plus-or-minus-one-sigma limit on accuracy for two months in a row. For the sales planning metric, an action to initiate the sales-gap closure process may happen when demand forecasts show a potential to fall more than 3 percent off the AOP.
The archiving portion of the process of meeting performance metrics is an important part of the analytics. A formal history of the metrics and an action plan archival approach is necessary. As you go through the S&OP process and discuss update requirements, action plans, and information, all the information needs to be kept for future reference. The information exchanged during the monthly collaboration processes will be useful for future root-cause analysis, such as “Why did we take that action anyway?”
Action plans should be captured on a single page with a cross-reference header. The action plans could be set up in a database in which people who know how to make queries can find what they want. Better yet, the action plans can be placed into subfolders in a directory for easy access by team members who may not be IT-oriented. In either case, you need multiple archival references, as follows:
A.	Archival record storage sorts
6	By category (related to strategic goals or performance metrics)
6	By primary name of action
6	By alternative name (generic naming)
6	By meeting type (S&OP or pre-meeting on forecast, etc.)
6	By date
6	By milestone date/event date for progress or reporting
6	By person assigned
B.	Description of action
6	By standard phrase categorizing the background
6	By key metric chart involved
6	By data reference (e.g., April 4 forecast input at Step 2 in S&OP cycle)
6	Description of the action required in a paragraph or two
Process design is a team effort. The On-Point Group offers an S&OP process design workbook that you can purchase and may consider using to help expedite your design process. The seven principles of design, individually described in each chapter of this book, should be a guiding factor. Benchmarking is always a good way to assess your current processes and to define improvements. However, in the end, the team must define processes that work for your business. It is important to start with a well-thought-out process design emphasizing collaboration. You will not be perfect at the beginning, but you will move forward in a matter of weeks, rather than dwell on the design step for many months or more than a year. (Chapter 7 describes process clubs, a continuous improvement approach that may help you in your efforts at process design.)
Design with Interlocking Cycles
Market-savvy S&OP is actually a group of planning cycles for each of the integrated planning activities as depicted in Figure 5-4. Seven planning activities individually plug into the monthly cycle of pre-meetings and the segment-level S&OP meeting itself. These are shown on Figure 5-5; the seven are financial planning, sales planning, schedule planning, market planning, customer integration planning, business results planning, and value-chain planning.
The Main Cycle
The basic S&OP meeting cycle sets the rhythm and cadence of the integration. The rhythm is the assurance that a meeting bringing each planning activity to a conclusion will be held on a certain workday each month. The cadence is the pace of the series of pre-meetings in specific, prenumbered steps that march along on the same successive workdays each month. Figure 5-5 is an example of the monthly cycle.
The cycle chart in Figure 5-5 is one of the three key overview charts describing the monthly collaboration. The other two charts are the high-level process map (Figure 5-1) and the list of horizontal planning processes (Figure 5-4). These three charts should be posted and visible on every analyst’s and manager’s desk.
The monthly cycle in Figure 5-5 has seven major steps. The first four steps plus Step 7 integrated projections at the end of the previous month are pre-meeting steps—pre-meetings to the segment-level S&OP meeting. Each of the pre-meetings is actually the conclusion of a planning cycle in each of several planning activities.
Step 1: The Month-End Review. The first pre-meeting is the month-end review meeting, which is supported by the financial planning cycle. The financial planning cycle goes along from Step 7, specifically, from the integrated projections shown on workday 10 through the month-end close and publication of numbers for the Step 1 review. In the monthly cycle for finance, many work steps are completed, including financial analysis, closing preparation steps, and other normal financial work steps. The two critical aspects in your monthly collaboration with financial planning are (1) the absolute deadline of workday number 3 for the review of last month’s numbers, and (2) work Step 7. The timing is such that Step 7 is done after all the S&OP information is known. The projections going to shareholders and even to Wall Street analysts should come directly from the S&OP. The information that finance needs to make all its financial projections can be taken directly from the S&OP output in a greater level of detail than would normally be used for shareholder projections. The advantage is that both the CEO and CFO will have confidence that the whole organization is working toward achieving the numbers being projected. This, in essence, is the whole basis of the concept of “one set of numbers.” S&OP does not have just one set of planning numbers; it has ranges of forecasts and operating numbers. But it also has one consensus plan. The “guidance” given investors in the calls to Wall Street is the consensus plan. It is guidance, not guarantee. The critical aspect is that the guidance is developed from realistic operating plans.
Step 2: Views of the Forecast. This is the end of the sales planning activity. Step 2 starts the CFCF planning, which is supported in part by the old demand plan. The sales planning cycle has many steps that probably start near the end of the previous month, including gathering input from field sales, having coordinating discussions with sales management, reviewing inputs from groups outside the company, and compiling the various views. Prior to the Step 2 meeting, some analysis will be required to explain differences in the forecasted rates of sales from different views. During the Step 2 meeting, the decision is made regarding which forecast you will use as the consensus forecast.
Step 3: The CFCF Planning Meeting. This is where you discuss the impact of the newly configured consensus forecast coming out of Step 2. Normally, Step 3 is the end of a monthly cycle of schedule planning, where capacity updates are considered and assessed, attainment to schedule data is assessed from the Step 1 review, and inventory performance is assessed. During this meeting, a new manufacturing and procurement master plan for several months forward is agreed upon—another consensus plan. The output of Step 3 is the data used in rate-based planning to establish a cycle plan (discussed in Chapter 6).
Step 4: The Risks and Opportunities Analysis Meeting. Here, you compare the consensus plans for sales and manufacturing to the output of the market planning cycle. Demand sensing will have been pulled together over the few weeks prior to the Step 4 meeting and may even be one of the feeds into Step 2. The purpose of Step 4 is to use the updated sales plan, inputs from demand sensing, and the updated manufacturing CFCF plan to identify areas of supply or sales concern. Contingency planning is initiated out of the Step 4 meeting, and sales-gap closure may be started so that it is completed prior to the Step 5 S&OP meeting.
Step 5: The Segment-Level S&OP Meeting. Everything finally comes together here. During the Step 5 meeting, you discuss customer input from customer team meetings held in the previous weeks in the context of the newly updated consensus plans. The metrics of your achievement of business results can also be addressed in the same context. Decisions are made in Step 5 about actions required to mitigate risks or to capitalize on opportunities. Decisions also are made to take corrective action or to start root-cause analysis in the area of a particular metric. A summary of the Step 5 decisions is then prepared as input for the executive S&OP meeting.
Step 6: The Executive S&OP Meeting. Step 6 is a meeting with senior management and a group of representatives from each of the segment S&OP teams. During the Step 6 meeting, actions proposed by individual S&OP teams are discussed. The senior managers normally are merely gaining a comprehensive set of information about the businesses. Some allocation of resource decisions may be necessary during this step if multiple teams are proposing actions different from the AOP. Normally, the Step 6 discussion is just keeping management apprised of developments and avoiding big future surprises. Each segment management team is responsible for gaining the required approvals in appropriate form.
Step 7: Integrated Projections. Step 7 is the end of the financial planning cycle. The data from the previous meetings can now be pulled together into one combined projection to shareholders.
The value-chain planning cycle is shown in Figure 5-5 as not connected to a specific meeting or workday event. The activities of value-chain planning are not done monthly. Normally, they are quarterly or even annual planning processes. The inventory simulation, when performed with formal modeling software, may be done monthly as an input to the process of achieving business results and calculating goals for metrics. In that case, it would feed into Step 5.
Multiple Cycles
The seven categories of planning as shown in Figure 5-5 each has its own planning cycle. A chart similar to Figure 5-5 should be prepared for each one. The individual cycles should be coordinated fully inside the overall segment-level S&OP. The individual planning cycles will house some of the 26 horizontal processes in the segment S&OP group.
The essential part of the individual cycles is that they conform to the basic S&OP cycle as shown in Figure 5-5. You cannot have separate one-off planning being done in any form within the enterprise. The segment S&OP is the only planning function and is run by the only cross-functional team doing planning.
Predictable Rhythm, Fewer Meetings
Earlier in Chapter 5, we discussed the rhythm and cadence that results from planning according to the processes and cycles shown above. The overall picture looks like a good deal of meetings and processes. In fact, your enterprise probably currently has more meetings by a multiple of three to five and even more disjointed processes. In every case where we have installed this S&OP structure, people comment that the number of meetings is vastly reduced.
At one client, the supply chain people went from working six days a week, 12 hours a day, to having many afternoons available for actually performing analysis, rather than attending poorly run meetings. Executives at another client, a global manufacturing company, expounded on the benefits of knowing the rhythm, and thus, being freed from the hassle of having to call meetings.
I will not claim a reduction in planning personnel from implementing the monthly collaboration process and segment-level S&OP. I will claim a 30 to 50 percent reduction in time spent in meetings. We measured the actual productivity improvement for one client and found that we increased the productiveness/engagement of meetings from an average score of 4 to a 6 on a scale of 1 to 10, with 10 being high. When combined with holding 30 percent fewer meetings, the overall productivity gain for all managers was nearly 50 percent.
You will use the time savings to find ways to improve value delivery to the customer and achieve business results.
Mandatory Participation (Encouraged)
Because of the productivity improvement people will experience—and to help achieve improvement in the short term while there are many nonbelievers—you need to make attendance mandatory at the meetings of Steps 1 through 7. As noted earlier in this chapter, the CEO at a pump manufacturer claimed the meetings were the most productive he had ever attended in his more than 40-year career. He had his administrative assistant make sure people were attending the meetings. You could not miss more than one out of five meetings. If you missed more, you would be called in to explain the absences.
I had the privilege of working with Sam Walton when I was president of Rawlings and a supplier to Wal-Mart. He held management meetings every Saturday morning in Bentonville, Arkansas. Every store manager was required to attend all but one per month, and then an assistant had to be in attendance. I can tell you for sure that getting to Bentonville on a Saturday in the 1980s was no easy task, but the meetings were extremely important to Sam (and very much like an S&OP meeting for retail). The mandatory attendance rule worked, and the results are obvious.
Design with Collaborative Goals
Market-savvy S&OP is a very different process from anything an enterprise is doing now in 95 percent of cases. The emphasis is on collaboration embodied in the guiding principle “process heavy, people light.” Of course, the other six guiding principles (first discussed in the Introduction, and as part of each chapter’s introduction) are also important. Once the design process is started, the high-level process map is conceptualized (Figure 5-1), and you make a good pass at the horizontal process definitions, your team should name the new process. Do not use SIOP (sales, inventory, and operations planning) or S&OP or anything similar to whatever you currently call your planning process. The name needs to be representative of a new and aggressive planning process.
Claim the Goals in the Branding of the Process
The new process being designed should be branded or named. The name should communicate goals, and then those goals should be communicated throughout the company. Future participants will have a common affiliation with the goals.
We will discuss transition planning in Chapter 7, but here is a preview of one concept: communicating the new process and its goals. You can use a 5x5 communication process in which you pick five key messages and spread them in five different communication vehicles. The five messages describe the key elements of the new processes, the expected impact on the organization, the monthly processes, and the impact on customer value delivery.
Be creative with the five messages and the vehicles of communication. Here are some suggested venues to help in your brainstorming. (Note that only five are needed, although more are suggested here.)
6	A letter from the CEO for each message, probably one and a half pages long and including his or her own examples of effects on cash flow and share gains
6	An e-mail blast to all employees for each message
6	A one-page high-gloss sign in every restroom for each message
6	A colorful posting on the company intranet for each message
6	A sticky bun meeting (an informal gathering, normally at the beginning of the workday where simple rolls, Danish, or actual sticky buns would be served along with coffee and perhaps juice, tea, and water) for each message
5	Have a three- to five-question self-test sent out prior to the meeting
5	Everyone who answers all the questions correctly receives free sticky buns and coffee (the answers are found in the first two or three messages)
6	Town-hall meetings with all employees for each message
5	Perhaps a ten-minute presentation by the team with follow-ups
5	Be sure to hold the meetings on all shifts
6	Teleconferences or Web meetings for each message
6	Tweets announcing the messages and directing people to where to find them
6	Use of social networking tools to invite people to an informal outing at a bar or restaurant to discuss the messages
Specific Collaborative Goals
Collaboration is cultivated by having goals that cannot be achieved without collaboration. There are three such goals: free cash flow (FCF), market-share growth, and customer-defined goals.
FCF is an excellent collaborative goal. First, the goal must be defined, and by doing so, people learn what FCF actually is and is not. By defining FCF, you automatically engage people in trying to improve it when they could not have done so in the past, simply because they were not accountants and did not understand. I have seen engineers become very excited about FCF when they learn that new-product development projects are funded only through FCF. FCF becomes a job-security factor for them. Even accountants learn the difference between FCF and cash flow as reported in the third basic financial statement (the first two being a balance sheet and a statement of operations performance, or profit and loss statement).
FCF comes from making a permanent, systemic change to the operations that generates cash. Certainly, you will generate cash by reducing inventory by crunching ‘A’ items down, or by deciding to delay paying vendors until 15 days later, but both of these tactics would not be included in your definition of FCF, because they are most likely not sustainable. Making a new inventory policy as part of the go-to-market strategy will be a contributor to FCF. Working with suppliers to improve collaboration and decrease cost will reduce accounts payable permanently. To make these FCF improvements requires a fully collaborative cross-functional effort. The FCF benefits are real, and the team members working at the problem will find they are empowered to become real business partners.
The second collaborative goal, increasing market share, is an obvious goal. Most people don’t even know what their market share is and know even less about how to improve it. By setting market share as a common goal of the segment-level S&OP team, the market-share numbers become understandable and manageable. The team needs to work together to devise provisions that increase share in the go-to-market strategy. The improvements to market share will be measurable at the segment level.
The third collaborative goal, setting customer-defined goals that are practical at segment-level S&OP, can be a strong stimulator of collaboration. People who focus on the outside world will work together with far less friction. The individual silo organization goals become secondary to the customer-defined goals, or at least the silo goals are focused and put into a healthy context, which reduces the friction caused by arbitrary and parochial goals set inside a functional area.
Looking Back
6	The guiding principle of market-savvy S&OP design discussed here is collaboration.
6	Monthly collaboration is the middle process group of the three processes in market-savvy S&OP, as defined in the Introduction to this book.
6	A high-level process map can be used effectively to communicate and share the inclusion of all planning processes in this segment-level S&OP design.
6	The design process starts with education, to gain ownership by working through the formal organization.
6	Two basic, important phases of the educational approach are accomplished with a guided and participatory technique:
5	Guided participation education
5	Guided participation appraisal of existing process and future requirements
6	The business strategy defined in Chapters 1 and 2 is the foundation for the monthly collaboration process.
6	Alignment of all planning processes in the enterprise is the goal of segment-level S&OP.
6	There are 26 horizontal planning processes in the overall S&OP plan.
6	There is a specific seven-step cycle of monthly meetings in the overall S&OP plan.
6	At the segment level, you can define clear and understandable goals that encourage collaboration. Any planning level other than the segment level will have highly generalized goals that people can easily avoid.
Case Study: Wright Medical Technology
Wright Medical Technology is the fifth company my good friend Bob Palmisano has managed as CEO. Bob’s trademark approach is to implement HPMS (the High Performance Management System), which I touched on in Chapters 3 and 4. In many ways, HPMS is an IBP (integrated business planning) process. At a very early stage in Bob’s tenure at Wright Medical Technology, the management team went through an overall strategy definition meeting. The customer was defined, and the overall businesses the company was going to keep were determined. Then, the team defined revolutionary goals for the customer, the shareholder, and the employees. Sound familiar? The overall strategic goal for Wright Medical was “#1 in Customer Satisfaction.” The goal is a destination—a BHAG, or big hairy audacious goal. This goal reflected the overall strategy of the growth business for Wright Medical, foot and ankle orthopedics; it was also the customer-connectivity strategy for the segment. The strategy also applied to the low-growth, low-market-share business of hip and knee orthopedics, even though this segment was not being relied upon by Wright Medical for significant revenue improvement.
I worked with Bob and his management team to implement the HPMS goals, including implementing a market-savvy S&OP.
Situation. Communication between operations and commercial functions was nearly nonexistent at Wright Medical. S&OP was done by the supply chain people at a very detailed level, with very little input from the commercial side. Some 150 different product lines or product brands were discussed without regard to strategic impact. In fact, 86 of the product lines were very small; they represented less than 10 percent of the business overall but took up more than 25 percent of the inventory investment dollars.
Revenue was declining, cash flow was negative, and inventory was very high. Overall, the company had nearly two years’ supply of inventory. Most of the inventory was located in fixed consignment locations at hospitals or at distributors under the control of salespeople who had no training and no interest in good inventory management. Consignment stocks had items that were never used. In fact, nearly 8 percent of the inventory was in items that had no sales at all. Field locations often had excess quantities of many implants and shortages on other commonly used implants. Popular implants were “hoarded” by salespeople who were motivated only by a desire to increase their own commission checks. 
The inventory was not going to work for the company. The cash invested in the inventory was excessive; this was starving new product development programs and stifling any thought of an acquisition program. The inventory was not deployed to enhance sales growth prospects.
The factories were well managed and able to supply replenishment stock overnight in the United States and in two days for Europe and the rest of the world. 
Actions. HPMS teams were formed to study the situation. The steps in HPMS are as follows:
1.	Write a purpose statement
2.	Form a team
3.	Adopt a disciplined process of teamwork
4.	Document the current state
5.	Determine the future state
6.	Plan the transition
7.	Implement
8.	Monitor
A team was formed to generate free cash flow and eventually a new S&OP process with the following purpose statement:
Develop and gain approval of a plan that, when executed with excellence, will result in a dramatic reduction in inventory/
instruments and product line optimization that results in dramatic sustained improvement in cash flow worldwide while maintaining a high level of customer satisfaction.
The team completed the first six steps in HPMS, with the following actions:
6	Internal benchmarking was done to identify well-functioning distributorships and sales management practices.
6	The problems with the current state in ten major processes involved in inventory management and S&OP were identified.
6	Analytics were completed.
6	A future state was defined with three major areas of focus:
1.	Pro-growth inventory management through a monthly collaborative planning process (market-savvy S&OP)
2.	Product life-cycle management
3.	Market-driven implant kit configurations
6	The transition plan included branding the new process to extol the goals of collaboration and generating free cash flow.
6	The implementation began with a pilot of the market-driven supply chain design in one major market.
Business Results Achieved. The following results came about:
6	The work is ongoing as this book is being published.
6	The BHAG in inventory reduction is to initially cut inventory in half, to less than 12 months of supply. The project is proceeding well against plan, the reduction target should be exceeded. 
6	The HPMS team took charge of 14 implementation programs.
6	The emphasis is currently on education.
6	Field salespeople were given the facts about the current inventory practices and the “hoarding” going on that restricted sales growth. They went from demanding more inventory to fully supporting the new market-driven culture.
6	Plans were formed to use the cash expected from the program to achieve market-share leadership in the high-growth foot and ankle market. 
6	Double-digit revenue growth plans were formed and executable because the cash required to support sales growth was being generated internally, not by new equity or debt.
6	When the program is successful, Wright Medical will be the fifth company Bob Palmisano has managed to triple or more increases in the stock price.