Pearson on Excellence: Supply chain management is a tool for profitable growth

In Logistics Management’s April 2010 issue, we introduced Profit, Sales, and Operations Planning (PS&OP), a way to align supply chain decision-making with high-level financial goals and long-range strategic planning. Since that time, more companies have begun implementing PS&OP-like approaches—using financial data, scenario modeling, and analytics to concurrently optimize sales, balance demand and supply, and maximize profits.

Since 2010, Accenture has enhanced and refined the PS&OP operating model. As shown in this month’s figure, the model’s design parameters are governed by a handful of industry characteristics (external factors that a company cannot alter significantly) and management characteristics (practices and behaviors that the company defines and adopts).

The model itself comprises foundational cornerstones (design guidelines that are largely similar to traditional Sales & Operations Planning) and key variables (financial issues and components influenced by industry and management characteristics). This, of course, is a 50,000-foot view, but it can still be a useful way to conceptualize PS&OP.

More useful still, particularly because instructions for complex operating models rarely fit into a short column, may be a discussion of how Profit, Sales & Operations Planning can help companies deal with many of today’s dominant issues, such as:

• Permanent volatility. Supply chain upheavals in the first decade of the 21st Century included natural disasters, financial roller coaster rides, oil price shocks, jarring commodity price movements, and the rapid emergence of a middle (consumer) class in various parts of the developing world. Many now see these shifts as representative of a state of “permanent volatility.” PS&OP can make it easier for companies to accommodate permanent volatility by providing the information needed to rapidly shift short-term procurement activities, redesign sourcing strategies, and rationalize manufacturing operations.

• Shifting market dynamics. In the occidental world, roughly 80 percent of manufactured products flow through organized retail channels. However, most emerging markets have fewer organized retail channels; more local shops and markets that stock small quantities of product; and a large number of fluctuating labor issues. PS&OP can help companies adjust supply chain approaches to accommodate new supply and demand dynamics. For example, sudden demand growth or facility closures in a certain area may automatically trigger PS&OP-enabled decision-making processes for scenarios such as increasing production in a different region, altering product mixes, or developing new pricing schemes. PS&OP also adds value to network redesign efforts necessitated by shifts in sourcing and selling.

• Sustainability. Many companies are using resources more judiciously, increasing their adoption of alternative fuels, and using more green packaging. These commitments to environmental and social responsibility are key, but companies also are responsible to shareholders. For this reason, sustainability efforts require financial justification. This is part of PS&OP’s bailiwick, given its ability to help integrate supply chain issues with company-wide decisions about growth, profitability, and competitiveness. With PS&OP, organizations are better able to analyze the cost of “doing the right thing.”

• Quality and safety? Shareholders and consumers are less and less tolerant of product and service failings, which is why quality and safety must be embedded more completely into supply chain planning. Even when traumatic quality or safety events have already happened, supply chain mastery can play a huge role in areas such as labor deployment and service and spare parts management. PS&OP can help companies by focusing not just on cost-efficient planning but the financial implications associated with quality or service failures.

• Supply chain risk. Supply chain risk can be associated with natural disasters, the addition of far-flung partners, shorter product life cycles, sudden shifts in demand, quality breakdowns, political instability, cyber intrusions, and supply disruptions and vendor failures. PS&OP can be a potent risk management tool simply by virtue of its ability to link financial performance with supply chain performance. However, PS&OP tools also spur better monitoring of supply chain problems, thus ensuring faster and more informed responses.

PS&OP also helps companies understand where risks exist across the supply chain, how much exposure each identified risk creates, and what actions might be taken to reduce the amount of exposure.

Implementing a Profit, Sales & Operations Planning capability is not easy. If it was, virtually all companies would already have done it, because integrating unit/volume planning with financial/profitability planning is clearly a smart thing. Despite the complexity, such implementations are worth considering, given every company’s desire to grow profitably and every supply chain executive’s mission to make his or her field more valuable.