Frequently, I get asked the question, “What is the value of S&OP?” When I get the question, I smile. For clients that I have worked with on this topic, the value speaks volumes, but to companies trying to get started, the value proposition is elusive. So, today, let me answer the question by telling a story.
Lora Cecere Supply Chain InsightsIn 2005, I engaged with Sonoco Products, a packaging products and services company, to initiate some work on Sales and Operations Planning (S&OP). They had the vision, but they lacked technology. Last month, I shared the microphone with Keith Holliday, Vice President of Supply Chain, on an APICS webinar sponsored by Logility to discuss the value proposition of S&OP to Sonoco Products.
To understand the value of S&OP, let’s contrast Keith’s performance to one of his competitors Owens Illinois. The two companies’ results on operating margin and inventory turns are shown in figure 1. Notice the more controlled pattern of Sonoco products.
Figure 1. Comparison of Owens Illinois Versus Sonoco Products for the Period of 2000-2012
Packaging suppliers are under pressure for costs. Each of the companies are suppliers to the CPG industry. Both companies were initiating a growth strategy. Owens Illinois is investing 3X more in R&D than Sonoco Products; yet Sonoco products had 5X greater growth with 1/2 the inventory. Why? There are three simple reasons:
- Clarity of Strategy
- Alignment on a Metrics Portfolio
- Consistency of Leadership
Owens Illinois, Inc. (OI) is a $7 billion manufacturer of glass bottles while Sonoco Products is a $5 billion manufacturer of paper packaging. Sonoco Products is an asset-intensive company founded more than 110 years ago and employs more than 19,600 employees. In 2012, Sonoco was listed in the top one hundred Corporate Responsibility’s 100 Best Corporate Citizens and listed for two consecutive years as one of Fortune’s most admired companies.
How did they accomplish this goal? The leadership team at Sonoco Products aligned a metrics portfolio against a business strategy in 2010. The goal was growth. The company made a conscious choice to give up margin in order to gain market share in the tough period following the recession. They worked cross-functionally to maximize asset utilization while maximizing share. In contrast, the Owens Illinois team focused on IT standardization and could not get clear on what drove value. As a result, their performance as shown in figure one lacks resiliency.
At Sonoco, the implementation of S&OP took hard work. There were conflicts between disciplined planning and driving an agile response. Sonoco is in an asset intensive industry. There was a faction that wanted traditional production agreements run to a forecast with pre-established lead-time agreements with customers. However, to win with customers, the company needed to have demand-driven pull-based short lead-time processes based on lean principles. Through S&OP, they worked to combine both and align the metrics to drive resiliency.
Sonoco established two supply chains. They pushed their buy-to-plan processes for paper manufacturing and stored roll-stock based on forecast accuracy for later conversion. This supply chain focused on efficiency.
Then they pulled the roll stock based on customer demand to convert the paper into tubes and cores for composite cans. This supply chain focused on agility. Each of the supply chains had a different target in the metrics portfolios. As a result, Sonoco Products is now number one in Days of Inventory Performance in their peer group with improving customer service.
Performance reliability is critical in the delivery of cash dividends to shareholders. In 2013, the company increased the dividend to shareholders for the thirty-first consecutive year. With this story, who can question that S&OP adds value?
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