S&OP As A Business Issue Business Optimization & Risk Management

1. S&OP As A Business Issue Business Optimization & Risk Management Martin Jarvis Scott Vanlandingham GMA IS/LD Conference April 2006

2. Agenda • What is S&OP? • S&OP and Risk Management • Making It Work • Case 1 • Case 2 • Indicators of Need • Reasons for Failure

3. So what is S&OP?

4. Do people still think of this as asupply chain issue? It is a business initiative, not a supply chain imperative. S&OP is no longer just a supply chain process; instead, in the most successful organizations, it has become a critical business process, championed by a cross-functional team of senior executives. AMR Research Report July 2005

5. S&OP - Missing Link BetweenStrategy and Execution

6. What do we mean by S&OP Definitions: What is Sales & Operations Planning? • S&OP takes a business’ sales & marketing ambitions, supply possibilities and financial goals and balances them to create a single, achievable plan • S&OP is a set of business processes and technologies that enable an organization to respond to demand and supply variations and risks with timely, data-driven decisions • S&OP is a means to translate demand data into an actionable and resourced operational plan; a collaborative process to align demand, supply and financial resources with a defined business strategy and priorities • S&OP is an effective means for senior management to practice and demonstrate leadership and teamwork • S&OP is senior management’s handle on the business and the means for management to orchestrate success • S&OP is the process by which a business makes its decisions

7. Demand Reconcile demand and supply Reconcile with financial plans Supply S&OP Develops From Forecasting to Demand Shaping and Sensing Getting the right info to make decisions into the last 60 minutes of the process “What if?” Rather than “Yes/No” Sales and Ops Planning Meeting From Cashed Up Turnover to P&L + Cash From Rough Cut Capacity Planning to Supply Network Design

8. How S&OP Relates to Risk Key Findings • Survey of 500 APICS members (largely MDT and CPG) designed to understand 1) the major risks facing organizations and 2) the best solutions available to management to deal with supply-related risk • The top Supply Risk facing organizations is the lack of effective senior-executive led sales and operations planning (S&OP) process: 55 percent (#2 after “supply interruption”) • The top Supply Risk Solution available to organizations is a formal and effective enterprise-wide supply chain risk management process: 63 percent (#2 after “strategic planning”) Source: “Understanding Supply Chain Risk Areas, Solutions and Plans” – Protiviti and APICS Study - 2004

9. S&OP and Risk Management “Executives commonly undervalue and fail to act on the threat of predictable risk” 1. 1.From the authors of “Predictable Surprises: The disasters you should have seen coming and how to prevent them” - Bazerman and Watkins, 2004, Harvard Business School Press. “An effective risk management program is a wide-ranging and continuous process that encompasses prevention, control and mitigation to protect a company’s value. Companies that have been successful at managing risks have brought multifunctional, multidiscipline people into the process together to look at all the risks in an organization” FM Global Study – 600 Executives 2005 Companies > $500m Rev Sounds like S&OP?

10. Making S&OP work Flex the process to adapt to local market & business conditions, but insist on fundamental principles • Fact-based • Clear ownership • Formal assumptions • Rolling horizon • Relevant lead times • Trade-offs, clearly articulated, evaluated The Aberdeen Group identified 6 common characteristics among S&OP leaders: • Profit focus (not just demand/supply balance) • Value Chain Focus (customers and suppliers) • Continuous Improvement Focus • Decision-Making – Teams Empowered • Technology Enablers – Integrated Systems • Risk Management – Multiple “What-If” Choices

11. Simple, but not too simple.. …..and honest

12. Case 1: Food Business, Volatile Economy Identifying and tackling underlying business issue • Symptoms as perceived by the “centre”; • Under-delivery of growth • Trade Margin erosion • Poor customer service; high stocks • Possible solutions as perceived by the “centre”; • Change the Chairman • Change the Chairman & the Supply Chain Director • Change the Chairman & the SC & Sales Directors • As we start our story the Chairman & Sales Director have been changed and the symptoms are still very prevalent

13. Case 1: Food Business, Volatile Economy Additional Symptom: High forecast bias - circa 10% overforecasting of turnover Little visibility of this - internally this felt like striving for a target and failing

14. Case 1: Food Business, Volatile Economy A deeper symptom: Month end peaking - 50% of monthly reported turnover occurring in last 5 days Internally seen as a fact of life - “that’s the way the market is here”; “It’s what our customers want”. Not measured, not talked about. A dirty little secret Average last 5 days (NIV)

15. Case 1: Food Business, Volatile Economy S&OP made things visible; customers were talked to; decisions were taken on customer and sales force incentives... Average last 5 days (NIV)

16. Case1: Food Business, Volatile Economy • From massively Biased forecast to unbiased • From Sales Peak to flat phasing • From uncontrolled spend to strategic investment Average last 5 days (NIV)

17. Case 2: Wide portfolio, Growing business Tackling the internal issues first.. • Symptoms as perceived by the “centre”; • Some signs of growth slowing • Poor turnover and profit forecasting • Starting to miss targets • Possible solutions as perceived by the “centre”; • Stiffer targets! • Change the Finance Director • Promote the chairman! • As we start our story the Chairman & Finance Director have been changed; trading is difficult - business is shrinking; financial forecast accuracy is poor

18. 7% Case 2: Wide Portfolio, Growing Business 2002 2003 2004 2005 plan Set out to tackle forecast bias; moved to “one set of numbers”; rolling forecasts; risk management; dynamic resource allocation = >S&OP in the fullest sense Brief given to redesign the business MAT revenue Changes implemented Chairman appointed NPS

19. 30% NPS Bias (Act vs previous mth forecast) Delma /Kasia 20% Saga/BB Dressings Lipton Snacks Heartland Rama Meals Flora 10% 0% -10% Always underestimated KEY LEARNINGS Balanced forecasts NO BIAS !POSITIVE BIAS ‘Honest’, integrated and up to date forecasts are the bedrock on which S&OP is built -20% Always overestimated !NEGATIVE BIAS -30% Case 2: Wide Portfolio, Growing Business Monthly - Volume & Value (P&L) Forecasting Brand Teams held accountable for unbiased forecasting based on OSOF (One Set Of Figures)

20. KEY LEARNINGS ‘Active’ management of risks increases responsiveness. Board focussed on strategic issues - no need for involvement in tactical matters. Case 2: Wide Portfolio, Growing Business Range Forecasting - Risks & Opportunities Range forecasts are key input to monthly Board Discussions Downside Risks matched with potential ‘remedies’ (mitigating actions) Upside ‘Risks’ matched with opportunities.

21. KEY LEARNINGS Combination of ‘Going for Gold’ and ‘Your Earn You Spend’ creates positive energy (vs negative/defensive behaviour around fixed targets and budgets) Case 2: Wide Portfolio, Growing Business Quarterly -Investment Management current best estimate and stretch ambition original target ranges Investment process triggered by review of range of possible forecast outcomes and stretching ambitions.

22. Case 2: Wide Portfolio, Growing business Key Elements of process change FROM TO TARGETS Annual fixed targets Negotiated Phased quarterly Ranges (‘Threshold to Gold’) Set within context of strategy Constant ‘gap’ management PLANS Annual fixed financial plan Multiple forecasts De-coupled from operations Continuously updated forecast With ranges One forecast linked to operations RESOURCE ALLOCATION Annual fixed budgets Functionally owned Budgets ‘an entitlement’ Owned by Brand Team Subject to sanction (qtrly) Driven by Business Case MEASUREMENT Variance against plan Variance against prior year Moving Annual Totals COORDINATION Fixed by Annual Contract Managed by Board Continuous alignment around ‘projects’ and strategy Different bodies/ differing roles

23. 7% Case 2: Wide Portfolio, Growing business 2002 2003 2004 2005 plan Brief given to redesign the business MAT revenue Changes implemented Chairman appointed NPS

24. Key Indicators of Need: • Absence of teamwork & shared risk management among internal functions - Executive-level on down! • Poor collaboration among business partners - internal or external (finger-pointing) • Unacceptable levels of forecast bias and lack of ownership of sales forecasts • Ineffective bottleneck and constraints management on the supply side • Material/product shortages - increased expediting $ • Supply Interruption – leading to production delays and on-time delivery issues with customers and profits “hits” and/or customer loss • Unacceptablelead times • Excessive on-hand inventories and obsolescence • Lack of confidence in planning systems; Chaos!!!! • Ineffective utilization of resources, and lack of resources when needed.

25. Key Indicators of a successful S&OP: • High levels of customer service, satisfaction, and retention • Senior management leads and is actively involved in the process • Short, mid and long-term demand/supply/financial risks and plans are managed, re-evaluated, and integrated continuously across a rolling horizon • Clear demand planning accountability, and unbiased forecasts • Ability to reliably execute on supply commitments • Trade-offs articulated and commercially evaluated • Prioritization of Business Initiatives • Disciplined, consistent process in place

26. Key Takeaways: • S&OP delivers business results • Risk Management thinking is at the heart of S&OP • Finance should be fully integrated into the S&OP process • S&OP needs to be a cross-functional process • The consumer does not care about your financial calendar • Decisions should be based on visibility of facts

27. Questions and Answers