Profit-focused supply chain planning

Accenture research has shown that enterprise-wide perspectives are critical to the attainment of supply chain mastery, and one of the best examples is a supply chain leader’s ability to understand and influence decisions involving corporate revenue, margins, and profitability.

At most companies, however, supply chain decision making remains a unit- and volume-focused exercise. Revenue, margins and profitability issues are acknowledged, but usually after the fact, once an execution-level decision has been made. Consider a product shortage or allocation issue involving two customers. Standard sales & operations planning (S&OP) approaches treat the problem as an inventory-allocation decision rather than concurrently examining the financial and logistical implications. The larger customer would likely gain the upper hand because it contributes more to the manufacturer’s revenue—regardless of whether that customer contributes more from a margin perspective.

Excess or constrained capacity is another common challenge. Standard S&OP processes rarely incorporate profitability implications into manufacturing decisions like making cost/benefit tradeoffs for overtime or examining the financial impact of expedited freight. A third scenario may involve product lead times that vary due to multiple sourcing locations or transportation modes. With traditional S&OP, lead times tend to be analyzed only when physical changes are made.

A more holistic approach

We are implying that companies may wish to consider a more comprehensive, profit-oriented approach to S&OP planning—making supply chain decisions that simultaneously optimize sales, balance demand and supply, and maximize profits.

This is not as radical a move as one might think. Traditional S&OP, and the more advanced methodology we’re suggesting, are both iterative processes focused on integrating demand and supply planning for enterprise-level decision making and execution. However, the new approach adds an important dimension because it emphasizes financially-based scenario modeling to create profitable outcomes. As a result, the focus is always on where and how to make the most profit and/or generate the most market share.

A good example would be enhancements to market life cycle planning based on economic conditions. When times are good, companies need to manage their pricing and promotion strategies to determine how to make a finite number of products generate the most profit (See figure).

Using a profit-centric S&OP planning approach, high demand and limited availability will automatically trigger a move to higher prices and higher margins for a particular segment and time period. Conversely, challenging times often require that a company find price points that help sell what you have—driving sufficient revenue to cover variable costs.

To make this happen, the same profit-centric S&OP planning approach can help you adjust pricing and promotion strategies to accommodate expected margin erosion and to alter production plans to cover drops in demand.

The bottom line

There is no one recipe for blending revenue, margin, and profit considerations into a company’s S&OP planning process. To drive the transformation, however, most organizations will need to modify their operating models (restructuring teams, individual roles, and responsibilities), enhance their analytical capabilities, train resources in financial modeling concepts, and establish new metrics for individual and organizational performance.

Deeper and more integrated demand and supply planning efforts will also be critical. On the demand side, that could mean aggregating forecasts by family groupings, incorporating more macroeconomic factors, and reworking pricing and promotional strategies. On the supply side, more attention would likely be given to recognizing supply constraints and opportunities, balancing and reassigning production across the network, and adjusting capacity based on newly formed pricing and promotional strategies.

Another reasonable certainty is the new approach’s potential to benefit industries ranging from consumer goods and high-tech, to media, mining, and oil and gas. After all, most companies and industries share a desire to understand and raise their bottom lines. Taking a more profit-oriented approach to S&OP planning can complement these goals by helping to:

• integrate unit/volume planning with financial/profitability planning;
• shape demand by considering production, inventory, and distribution strategies across customers with varying demand characteristics and service-level requirements;
• factor capacity and inventory constraints into decisions about promotional strategies and optimal price points;
• leverage scenario-based modeling to clarify operational and financial perspectives;
• improve product life cycle decisions and asset/product utilization; and
• continuously assess and refine profit/volume tradeoffs across products, channels, and geographies.

The most skillful supply chain decisions are usually those that extend from the design room to the store room to the board room and back—with a consistent emphasis on the bottom line. A profit-oriented approach to S&OP planning can help make that happen.