On the plan: Finances

Suppose a company receives orders from two customers at the same time for different goods to be manufactured on the same machine.

However, since the plant only has limited free capacity during the period in question, management has to decide on one of the two orders. After looking at the profit the company makes with the requested products in each case, the decision is easy:

It goes without saying that the customer whose goods order can generate a profit of 20 percent is given preference over the one for whom this figure is only around five percent.

The example illustrates the importance that financial metrics can have for effective supply chain planning. However, existing tools, such as SAP Advanced Planning and Optimization (APO), are not sufficient to integrate financial aspects such as profit into supply planning.

Thus, it can easily happen that a company's sales department focuses on products that can be sold in large quantities, but are so expensive to procure and produce that the company does not achieve the profits it had hoped for.

Integrated overall concept

In order to be able to flexibly coordinate demand, supply and financial planning at any time, an overall concept is therefore required that integrates all departments, employees and processes relevant to supply chain planning:

from procurement through production and distribution to sales. The technical basis for this is software that integrates the processes and thus enables simulations of holistic issues.

SAP IBP S&OP meets these requirements. To ensure seamless collaboration among all supply planning stakeholders, the solution uses SAP Jam, an enterprise social network from the cloud.

Jam provides employees with a central platform for sharing information, documents and files on specific topics across the company, for holding discussions and clarifying issues. Likewise, tasks can be distributed and predefined workflows executed.

Jam provides automatic process control and creates transparency as to the current stage of a process. In combination with IBP S&OP, users can continuously monitor the planning progress and intervene in time, for example, if delays in the workflow or other disruptions are imminent.

In addition, SAP Jam also serves as a "knowledge database" in which previously encountered S&OP planning problems, along with their solutions, are documented and can be accessed by users as needed.

S&OP's intuitive user interface provides easy-to-use analysis functions.

Flexible modeling options

By integrating financial metrics, IBP S&OP enables supply chain planning that takes into account not only logistical but also economic aspects, for example the profit that can be made with certain products.

It is the value resulting from the sales price achieved minus procurement, production and distribution costs. While these costs and the forecast are relatively easy to calculate, the selling price is a different matter because it is also affected by possible discounts or short-term fluctuations in demand.

However, the flexible modeling capabilities of S&OP allow such aspects to be taken into account. Marketing employees who plan certain promotional actions bring the corresponding information into the current planning via workflow. Since users can plan with IBP on different, arbitrarily selectable levels, new possibilities arise for practical planning.

The S&OP solution provides all planning participants with a virtual space to perform the necessary computing operations at short notice and to document the interactions of all parameters in the supply chain.

For make-or-buy decisions, for example, this can be used to find out whether the existing supply contracts are sufficient for the products required.

On the other hand, it is possible to calculate what impact in-house production has on capacities in manufacturing. Since IBP S&OP is based on the fast database technology SAP Hana, planning cycles are shortened due to shorter runtimes.

Cost-benefit analysis required

Although the integration of financial metrics significantly improves supply chain planning, companies looking to implement IBP S&OP should precede it with a focused cost-benefit analysis.

Project experience shows, for example, that there is no added value in trying to incorporate every conceivable key financial figure into planning - especially since this involves considerable effort.

On the other hand, it is recommended to show only the final result of the calculation of product costs and prices at customer level, not the complete costing sheet.

This is even more true for companies in sectors such as pharmaceuticals, where pricing is not as closely tied to promotional activities and customers as it is in the consumer goods industry, for example.

Companies should also make sure that the IBP S&OP planning process is implemented on a regular basis. In concrete terms, this means that everyone involved must look to the future once a month on the basis of this system in order to run through possible planning scenarios and set the right course for their company.

To this end, it makes sense to appoint a special S&OP manager to oversee the entire planning process. One of the tasks of this manager is to analyze and discuss any problems that may arise in a pre-S&OP review together with those responsible for purchasing, sales, distribution, production and marketing in order to be able to submit suitable solution proposals to management, which are then discussed with management in the S&OP meeting.

The manager must also ensure that S&OP planning is consistent with overall business objectives.

IBP: Everything under one roof

S&OP is one of several modules that SAP's IBP solution has brought together under one roof since 2014. In addition to the Supply Chain Control Tower, which provides an overview of the entire planning processes, the IBP for Inventory component is available for optimizing inventory and increasing the efficiency of tied-up capital throughout the supply network.

IBP for Demand is a relatively new sales planning component that helps companies with short- and long-term sales forecasting with a focus on managing demand volatility.

With demand sensing for calculating short-term demand, this component is particularly interesting for the consumer goods industry. In the future, IBP for Supply & Response will support rule-based supply planning.

Cost-benefit analysis

Even before introducing these IBP modules, companies should make a targeted cost-benefit assessment and carefully examine whether they can actually achieve the goals they are pursuing with their supply chain planning.

A consulting partner with comprehensive process and IT know-how in supply chain planning can help to leverage the potential of IBP modules in the best possible way without unnecessary effort.