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Turning Challenges into Opportunities with S&OP

See sustainability and resilience drivers through an innovation lens
  • Peter Murray
November/December 2016

I look forward to APICS magazine’s corporate social responsibility (CSR) issue every year. It’s a chance to write about the practical aspects of my two professional passions: supply chain sustainability and sales and operations planning (S&OP).

Climate change is a risk that supply chain professionals will need to grapple with, at least for the near future. Record temperatures and shrinking shorelines are creating serious business continuity challenges. Regulatory steps, such as the agreement between the United States and China, are a competitive necessity.

It’s also clear that breaking down such headlines into risks and opportunities is critical to incorporating these factors into a sound business strategy. Along the way, smart S&OP can help businesses embrace sustainability and resilience as drivers of innovation.

When I talk about CSR issues such as these, I often use the story of Storm Tough Windows (STW), a fictional hurricane-resistant window company. In early September, Hurricane Hermine made landfall in Florida, and this has inspired me to update the story through a lens of advanced S&OP.

STW’s hurricane-resistant windows require more structural support than building codes currently require, so the windows are difficult to sell—except after a hurricane. Thus, to build a larger market and maintain cash flow, company leaders decided to add product lines of more standard windows. That market is also a tough one, with low margins and lots of competition. Furthermore, scrap and old windows historically have been sent to the landfill.

A focus on operating with low inventories and faster throughput is typical. By building to stock for standard sizes and configuring to order for certain visible and functional features, inventories are kept low, and service levels are reliable and competitive. STW invested heavily in equipment and lean practices for faster throughput and reduced work in process.

Another issue is that STW’s warehouses and production facilities are located in zones that flood and lose power several times a year. Employees live nearby and face similar weather-related challenges.

Enter S&OP

The following describes STW’s S&OP efforts from one year prior to a hurricane up to the event. Consider how the innovations and ideas are accessible, drive bottom-line improvement, and serve to enhance business continuity.

One year before hurricane season: At this point, STW’s hurricane windows inventory is high and its standard windows inventory is low. This is because standard window production was cut to avoid losing any inventory to storm damage and to ensure the balance sheet is in line with working capital goals. The key decision is whether to discount inventory or hold it for next year.

New information is available from the Florida Department of Environmental Protection and other organizations overseeing building and zoning standards. The data aims to show more precisely where hurricanes will hit hardest and the locations of the most at-risk buildings and homes.

At the same time, a large number of absences across all roles and levels at STW are noted, as rising water and power outages are becoming a more frequent problem for employees who have little choice but to stay home.

Some good news is the research and development team discovered how to turn scrap material and reclaimed windows into insulation and structural components. STW is able to reclaim enough material to significantly reduce costs.

The team decides not to discount the hurricane windows and instead shifts marketing efforts toward the higher-risk areas. A modest investment is approved to use predictive analytics and demand modeling. In addition, a pilot program is approved for the new, reclaimed material capability with the goal of determining if enough material can be recycled to justify additional investment in equipment. Near-term concerns about the potential for missed sales on the standard window lines and the lost work time from absences drive a decision to work overtime and extend the current schedule. Importantly, the energy-reduction program means even windows made on overtime will cost less than they did the year before.

Six months before hurricane season: Service levels and sales are back up to goal levels, and sales for the hurricane-resistant windows are improving in the targeted areas thanks to the new risk data. New generators and a more easily deployable water barrier for the production facility and warehouses are proposed, and an option is mentioned for purchasing additional water barriers to protect employee homes.

The reclaimed material pilot program is working well, so a full production and complete return process is proposed. A plan to offer a builders discount also is suggested for the regular window line, with analysis showing a likely break even on margin and improved cash flow. The energy savings programs and the reclaimed materials capacity make up the margin difference from the discount. Predictive analytics provide benefits both with demand and for event planning. Finally, the time lost to storm absences was compared with the overtime cost.

Happy that the margins stay the same, team members decide to offer a discount for large-volume purchases to improve cash flow. The generators and water barriers also were approved, along with additional water barriers to have on hand.

Three months before hurricane season: A last push with rebates is proposed for residential and commercial installation in the hurricane risk zone. This leaves enough lead time for installation. The rebates are covered by the reduced material cost with the new capabilities. A new value-at-risk analysis is run that shows how much downtime and inventory loss could result from three different hurricane scenarios.

Several new co-generation units that burn any scrap material that can’t be reclaimed are purchased under the capital plan. The lower landfill and waste-hauling costs are showing up at the bottom line.

The team decides to go ahead with the rebate program but sets a limit based on how many windows can be installed before storm season. A budget also is set up to install protections for facilities and inventory. The plan includes bringing in temporary housing trailers and several on-site refrigerators and freezers for employees and their families. The cost is justified by the analysis of expected downtime reductions if a storm hits.

Hurricane season: A hurricane makes landfall. All of the planning and extra steps have paid off for the business and employees. Although the power goes off, the new generators keep operations running for those at the production site. Likewise, the new water barriers minimize damage to both facilities and inventory. Calls start coming in for the hurricane-resistant windows, demonstrating that the marketing efforts have created differential demand. All in all, the S&OP team feels satisfied with a job well done and begins planning for even more improvements next season.

Although this is just a fictional example, the issues considered and decisions made illustrate how sustainability and resilience do not require a different S&OP approach. Rather, it’s just a question of putting those considerations and decisions into the process. Transforming challenges—such as waste and employee absences—into opportunities for improvement simply requires a shift in mind-set.

Peter Murray, CIRM, is a consultant and practitioner for sales and operations planning, demand planning, and supply chain management. He also served on the APICS board of directors for two years, helped develop the APICS Certified Supply Chain Professional program, and is an active volunteer with the APICS Supply Chain Council and the Institute of Business Forecasting.

To comment on this article, send a message to feedback@apics.org.

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