Subscribe to our free, weekly email newsletter!


Profit-focused supply chain planning

By Mark Pearson
April 01, 2010

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.

About the Author

Mark Pearson

Mark Pearson is the managing director of the Accenture’s Supply Chain Management practice. He has worked in supply chain for more than 20 years and has extensive international experience, particularly in Europe, Asia and Russia. Based in Munich, Mark can be reached at .(JavaScript must be enabled to view this email address).


Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Lyon, France-based Norbert Dentressangle, a $5.5 billion global third-party logistics (3PL) services provider focused on global logistics, transport, ocean, and air services, said today it has acquired Des Moines, Iowa-based Jacobson Companies, a value-added warehousing (VAW) company, for $750 million from private equity firm Oak Hill Capital Partners.

Download the newly released research report, "Transportation Management Systems" conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review and Logistics Management magazines. Learn what logistic experts are saying about their current supply chain technology infrastructures, how they tackle the transportation component, and revealed the gaps that still need to be filled in order to attain end to-end visibility of a streamlined supply chain.

From cost center to growth center. Get insightful opinions on changes in the marketplace from this independent survey of warehouse personnel. Motorola Solutions examined the current warehousing marketplace in our 2013 Warehouse Vision Report, conducted April-May of 2013.

Even though not all publicly-traded less-than-truckload carriers (LTL) have posted second quarter earnings yet, the early consensus for those that have issued results is looking very good.

The advance estimate for second quarter GDP at 4.0 percent could serve as a sign of a steadier and improving economy.

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2013 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA