Sales & Operations Planning – Two Decades of Learning at BASF

1. Advancing Productivity, Innovation, and Competitive Success Sales & Operations Planning – Two Decades of Learning at BASF Alan L. Milliken CFPIM CIRM CSCP April 14, 2007 Region IV

2. Alan L. Milliken CFPIM CIRM CSCP • 20+ years at major manufacturing sites working in Production, Logistics, Process & Quality Control, Industrial Engineering, Training, and Scheduling • 11+ years as a Supply Chain Consultant and APICS Instructor including two years in Mexico City helping BASF Mexicana improve their supply chain • Identified by an independent consulting firm as one of three APICS members who best answer the question, “What is a Supply Chain Manager?” • Served as an SME (Subject Matter Expert) on the team that developed the new Certified Supply Chain Professional (CSCP) program. • Served as an SME on the team that developed the new Certified Forecasting Professional (CFP) for the Institute of Business Forecasting (IBF) • Engineering Degree from Auburn University and MBA from Clemson University

3. Objectives of the Presentation • Define formal Sales & Operations Planning (S&OP) • Describe the primary steps in the formal S&OP Process and explain the purpose of each • Relate the inputs and outputs of each step in the process • Identify the participants in and responsibilities for each primary step • Discuss Key Performance Indicators (KPI’s) for each step in the process

4. S&OP Process Overview

5. What is formal Sales & Operations Planning? S&OP is the process with which we bring together all the plans for the business (customers, sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans. The objective of Sales & Operations Planning is to arrive at a business “Game Plan” to help manage and allocate critical resources to meet the needs of the customer at the least cost to do so.

6. S&OP as part of ERP S&OP links Strategic Planning to Operations Source: APICS Illustrated Dictionary

7. High Level Enterprise Resource Planning Model Strategic Planning 2-10 Years F O R E C A S T I N G & D E M A N D C A P A C I T Y P L A N N I N G Forecast Only Business Planning Annually Forecast Only Monthly Sales & Operations Planning Resource Planning Forecast Only Rough-cut Capacity Planning Master Scheduling Weekly Forecast & Orders Capacity Requirements Planning Daily Detailed Planning & Scheduling Orders Only

8. S&OP in Product Hierarchy Total Company Forecasts are more accurate higher in the hierarchy Too Aggregated Business Unit Family S&OP Levels Subfamily Actual Demand is collected at the detailed level. Model / Brand Package Size Stock Keeping Unit (SKU) Too Detailed SKU by Customer SKU by Customer by Location S&OP is usually performed at an aggregated level (e.g. Product Family or Group)

9. S&OP is a Five-Step Process: Pre-S&OP and Executive S&OP may be combined into one meeting

10. The Basic S&OP Grid: History is included to highlight past plan-to-actual performance Inventory Plan = Planned Opening Inventory + Planned Production - Planned Sales Actual Inventory = Opening Inventory + Actual Production - Actual Sales

11. S&OP is a Cross-Functional Process Marketing & Sales Engineering S&OP Process Product Definition Product Demand Finance Human Resources Workforce Availability Capital Master Schedule Capacity Business Plan Materials Operations Management Must champion the process

12. Benefits of S&OP If implemented and used effectively, S&OP will yield major benefits to the firm: • improved customer service • reduced inventory • lower manufacturing & distribution costs • better control of overall business performance • increased team work within and across functions

13. Steps in the S&OP Process

14. Step 1: Updating Input Data Data Remember the GIGO Principle. It takes much effort to ensure accurate & timely data is driving the process. R E O R R S&OP Planning Process • Results: • High Inventory • Low Service • High Unit Cost • Poor Decisions

15. Step 1: Updating Input Data (Continued) • Key input data (e.g. inventory, sales, production, KPI’s, etc..) should be updated as soon after month-end as feasible. Typically, 2-3 business days are allowed for this sub-process. Key Performance Indicators (KPI’s) for data gathering include: • Accuracy of the data • Timeliness of sharing the data • How well the data conforms to agreed upon formats “Take care to get what you like or you will be forced to like what you get.”George Bernard Shaw

16. Market Intelligence Sales Forecast InternalDemand Customer Orders Step 2: Demand Planning – Process Overview Marketing & Sales are responsible for this step in the S&OP process. The output is used to drive supply planning. Inputs Process Outputs Review and update forecast (Marketing & Sales) Demand Plan The key performance measure for output is accuracy and for the process step is meeting timing commitments.

17. Step 2: Demand Planning – Activities • Generate new forecast (IT if automated) • Marketing/Sales: • Review new forecast, revise if needed, and approve for updating of S&OP grid • Review previous months’ forecasting performance and identify root causes for data outside tolerance • Provide status for new product introductions • Document assumptions and risks associated with new forecast

18. Step 2: Demand Planning – Sample Plan The final plan is used to update the S&OP Grid and drive supply planning. Product Family or Group History Management Overrides Go Here

19. Step 2: Demand Planning – Forecastability The accuracy of the forecast depends heavily on whether or not the forecasting tool is applicable to the history data. One test to determine this is the Coefficient of Variation (COV). COV = Standard Deviation of Period-to-Period Sales/ Average Period Sales. If COV >0.8, conventional forecasting such as moving average should not be used.

20. Step 2: Demand Planning –Symptoms You Need a Formal S&OP Process Top-Down Directives Conflict Significantly with Current Market Conditions: 3-Year Plan Profits Revenue Forecast Actual Sales Shareholder or Owner Board of Directors Sales Manager Stuff Flows This Direction A formal S&OP Process will ensure alignment across organization & planning levels. Sales Representative

21. Forecast Inventory Output Manufacturing Step 2: Demand Planning –Symptoms You Need a Formal S&OP Process Marketing/Sales Suffer with the “Field of Dreams” Syndrome “If we make it, they will come!” Well guess what, in many cases we made it and they did not come. A formal S&OP process will ensure cross-functional review of forecasting performance.

22. Bill, this is Jim. I want to make an appointment with you to discuss our Demand Planning process? Oh, Hi Jim. Actually we don’t have a formal Demand Planning process. However, I’m updating the latest forecast at this very moment. Inventory +10% Forecast Supply Chain Manager The Supply Chain Manager contacts the Marketing Manager. The Marketing Manager responds. Step 2: Demand Planning –Symptoms You Need a Formal S&OP Process The Scope of Marketing/Sales Participation is Limited

23. Step 2: Supply Planning – Process Overview Manufacturing operations and purchasing are responsible for the Supply Planning step of the S&OP process. Inputs Process Outputs Supply Plan by Production Family Develop and Review Production & Purchasing Plans Assess Manufacturing & Supplier Capabilities Demand Plan Inventories The key KPI for the process output is the deviation between planned and actual supply. For the process itself, timely & accurate data to drive the next step is most important. Integration of Supply Planning

24. Step 2: Supply Planning – Activities Key activities for the Supply Planning sub-process include: • Develop the preliminary supply plan based on the demand plan • Perform Resource Planning (Capacity Planning) for key resources • Identify and resolve imbalances in demand & supply as feasible • Identify imbalances to be reviewed by management

25. Step 2: Supply Planning – Sample Plan Machine Hours & No. of Batches are Key Resources

26. Congratulations Fred, your unit cost in production was below plan last month and I’ve been authorized to give you a bonus. Jim, what is going on in Production. Fred did not make the rate decrease we had in the S&OP Plan and Inventory is out-of-control. Inventory Production JIM Sales Supply Chain Manager Plant Manager Step 3: Supply Planning –Symptoms You Need a Formal S&OP Process Manufacturing & Business Goals are not Aligned

27. Updated Financial View Updated Inventory Targets Exceptions Resource Recommend- ations S&OP Meeting Agenda Step 4: Demand-Supply Balancing – Process Overview The Master Scheduler will typically facilitate the balancing of demands with supply once the preliminary S&OP plans are developed. Inputs Process Outputs Balance Demand/Supply Demand Plan Demand Plan Balance 3 Balance 1 Balance 2 Customer Service vs. Inventory Model / Option Against Inventory Policy Load vs. Capacity Supply Plan Supply Plan The primary objective is to resolve any imbalances at the least cost to do so.

28. Step 4: Demand-Supply Balancing – Activities • Make decisions regarding demand-supply balancing • Resolve issues and formulate recommendations • Document the issues that could not be resolved and the alternatives for each • Convert the plans to financial units for management review • Develop the agenda for the executive S&OP Note: Depending on the size and complexity of the business, this step may require a formal meeting or may be done leveraging communications technology (e.g. shared files).

29. Step 5: Executive S&OP Meeting The purpose of this meeting is to approve recommendations, make decisions, and issue the firm’s “game plan.” • Sample Agenda – Executive S&OP Meeting • Review of Overall Business Performance • Review & Discussion of Key Performance Indicators • Discuss Status of New Product Introductions • Family-by-Family Review and Decisions • Approve Production/Supplier Rate Changes • Collective Impact on the Business Plan • Review of Decisions Made & Action Items Assigned • Critique of the Meeting

30. Step 5: Outputs & Objectives of Executive S&OP Meeting • The outputs of the meeting are the Meeting Minutes, modifications to the Business Plans, and the finalized S&OP Plan. Collectively, these are referred to as the “Game Plan.” Objectives for the meeting include: • Make final decisions for issues raised during the S&OP process - accept or change proposals - choose from alternatives provided • Compare the financial numbers from the S&OP Plan to the current Business Plan and reconcile the two. Finalize the S&OP Plan. • Review current performance for Customer Service, Inventory, etc.. , and make any necessary changes to plans or targets. • Review New Product Issues, Special Projects, and Business Level Issues and make the necessary decisions.

31. Step 5: Sample S&OP Plan in SAP DEMAND SUPPLY RESOURCE PLANNING INVENTORY Note: Most ERP Systems provide a platform to enable S&OP

32. Step 5: Sample S&OP Plan in EXCEL Plan Historical Performance

33. Step 5: Sample S&OP Business Scorecard

34. Keys to Success

35. Continuous Improvement S&OP is Journey not a Destination Focus the S&OP Process Learn by Doing /Align Efforts Get the basics in order

36. Get the Basics in Place: S&OP Basics – Early Implementation Tasks Responsible Person and Due Date required for each task.

37. Focus the Process: Sample S&OP Planning Calendar The Journey Begins 1 (1) 2 (2) 3 Update Actuals into FCST Model Mktg. Finalizes Demand FCST Dmnd Plng Mtg.- Final Plan Due 4 5 (3) 6 (4) 7 (5) 8 (6) 9 (7) 10 Supply Plan Finalized (Mtg.?) 11 12 (8) 13 (9) 14 (10 15 (11) 16 (12) 17 S&OP Mtg. - Exceptions Resolved KPI Scorecard Available 18 19 (13) 20 (14) 21 (15) 22 (16) 23 (17) 24 Sr. Mgmt. Approves S&OP Plan Approved S&OP Plan to SAP 25 26 (18) 27 (19) 28 (20) 29 (21) 30 (22) 31 All team members must meet sub-process due dates to ensure success.

38. Learn by Doing/Align Financials: Sample S&OP Grid with Financials Includes planned and actual as well as volume and value. Only white rows require entry; other data is populated automatically or calculated automatically. Includes estimated profit margins. The S&OP Plan must be aligned with the Financial Business Plan

39. Continuously Improve: Sample Key Performance Indicators (KPI’s) for the S&OP Process • Demand Planning • - Forecast Accuracy • - Sales Plan Performance • Supply Planning • - Plnd. vs. Actual Production • - On-time Supplier Delivery • - Prime Yield • - Cost to Acquire Overall Process - Customer Satisfaction (e.g. OTD) - ROI/ROA/Cash Flow,etc.. - Market Share - Inventory Performance New Product Planning - Due Date (milestones) - Velocity (time to market) - Revenue/Cost Focus on Performance-to-Target and Trends in Performance

40. S&OP - Barriers to Success • Process Ownership is with Planning not the Leadership Team • Lack of understanding of the S&OP Process • Insufficient resources for process implementation • Inadequate performance measurement • Resistance to giving up individual freedom to achieve best overall results

41. S&OP is a Key Process at BASF 2006 Supply Chain Project The Supply Chain Project of the Year 2006 Award goes to the “Implementation of a Global Sales & Operations Planning Process in the EVN Business.”The award pays tribute to innovative supply chain solutions and outstanding performance in the implementation of supply chain concepts. The award is sponsored by Dr. Kurt Bock, CFO for BASF Group.

42. BASF Corporation – 5-Year Stock Performance (PPS in USD) S&OP is one of many things BASF Corporation has done well to improve overall performance. At BASF, “We don’t make a lot of the products you buy, we make a lot of the products you buy better.” Source: YAHOO.com