ISG Software Research Analyst Perspectives

I recently attended Kinaxis’ users’ group meeting and learned some interesting things. The company, which has been around since 1995, provides software for large corporations with complex supply chains. Over the past decade its product has evolved well past its roots as a material requirements planning (MRP) support tool. It is now an analytics suite that facilitates supply and demand planning, analysis and optimization with a focus on sales and operations planning (S&OP). This is a discipline that is much talked about but less well practiced, done effectively by only a handful of very large companies (Cisco, for example) and smaller ones that have defined their functional strategy around S&OP and logistics management. In our S&OP benchmark research, we assessed the degree to which companies have a broad cross-functional representation in the process (a critical aspect of an effective S&OP effort) by asking which parts of the business were involved. When it comes to five of the most important ones – executive management, manufacturing, operations, sales and finance – our research showed that only 21 percent of companies have four or five participating, while 45 percent of companies have none or just one. I think that an emerging source of sustainable competitive advantage for product companies is the ability to optimize their matching of supply with demand by having visibility of both. “Visibility” in this casemeans that data about the supply chain is delivered in a way that enables managers to know whatever they need to know, whenever they need to and at whatever level of detail they need, and that allows them to analyze the data and take action based on the results of their analysis. The essence of supply chain visibility is the ability to know the location and status of all physical components, from raw materials to finished goods, as they move from suppliers through the stages of production to delivery to customers. It requires complete data that is immediately available, supported by a full set of analytics to speed modeling, assessment and decision-making. Moreover, visibility is no longer just about the supply chain. One of my notable take-aways from the Kinaxis users’ conference was that the discussions focused as much or more on demand management as on supply chain management. Kinaxis’ RapidResponse software is designed to enable companies to continuously identify the optimal supply and demand balance in a volatile business environment under conditions of high uncertainty – in today’s world, in other words. The name, RapidResponse, reflects an approach to business management that recognizes that planning and decision-making time frames have shrunk considerably. The software tightly integrates all planning functions (both supply and demand) to allow better cross-functional collaboration. It provides a single view of the supply chain, a collaborative tool for more accurate and timely demand planning, and a platform for more effective collaboration with suppliers. The recently released RapidResponse Control Tower has advanced dashboards and data visualization. It also integrates key S&OP functional processes, supply chain management (SCM) and related functions, and as well brings together basic sales force, human resources and profit optimization analytics and project management functionality. RapidResponse is available either as a cloud-based service or an on-premises deployment. Based on my observations and conversations, I would place the Kinaxis customers at the conference at the most mature end of our research-based Maturity Index for S&OP: They appear to be effective in applying information technology to improve communications, collaboration and processes. In this context several customers made points that are worth repeating. I will summarize two of their presentations. Matt Red outlined Barnes & Noble’s attempt to extend its information chain for supply and demand chain analysis and decision-making out to the point of sale (POS) in the individual bookstore to track sales and inventory (especially of its Nook e-reader). There are both business and IT challenges to doing this: gaining cooperation from individual retailers and handling the data, respectively, top the list. I look forward to hearing a litany of lessons learned at next year’s event. Still, the company’s approach could turn out to be a powerful tool, especially in the realm of consumer electronics, where product lives are short, supply chains are long and the important holiday selling seasons are abbreviated. When used with predictive analytics, a data chain that starts at the store-level POS can (in theory) compare actual to expected sales to gauge where promotions and pricing changes can be applied instantly based on ongoing day-to-day sell-through. With such a system in place, vendors can monitor and measure their channel inventories better. Applying more immediate sell-through data enables much faster reforecasting cycles and therefore better adaptability to specific market conditions. It also has the potential to be a powerful tool for managing inventory, understanding effectiveness of advertising and promotions, and performing other analysis related to market demand. Joe McBeth from Jabil Circuit put his finger on what I believe is one reason why S&OP has failed to become strategic in a majority of companies. He pointed out that the focus of mastering logistics and optimizing supply chains ought to be on maximizing profitability, not just minimizing inventories (as in the case in most supply chain organizations). The former is an income statement objective; the latter targets the balance sheet. To be sure, inventory management is important and has a direct impact on profitability. Yet it does not explicitly deal with the complex trade-offs that businesses are making in balancing revenue optimization and risk tolerance with decisions that must be made daily in purchasing and logistics organizations. He also related his company’s experiences in the wake of the Japanese earthquake and tsunami last March and the recent floods in Thailand. After the tsunami, Jabil was able to provide management, OEM customers and suppliers with a detailed impact analysis and risk assessment. In light of these experiences he commented, “In a constrained market, the guy with the best information wins.” From the conversations I had at the event, there appears to be limited integration of the S&OP team’s forecast and the finance department’s revenue estimates. This is consistent with the findings of our integrated business planning benchmark that just 20% of companies directly link their sales forecasts to the financial forecasting and budgeting efforts; more than half (55%) said the connection is indirect. The issue with having an indirect link is that typically there is a lag between when the sales forecast is made and when the financial forecast and budget is complete. In the case of the annual budget, this may be a month or more out of date. In stable conditions, the change in outlook may be small, but today’s volatile environment makes that less likely. The S&OP process will never displace financial planning and budgeting, but it can be highly complementary. Provided that a robust cross-functional team (including Finance) is involved in its preparation, the revenue forecast developed through the S&OP process ought to be directly linked to financial forecasts. There may be several reasons why Finance is reluctant to directly embrace the S&OP team’s projections. To me, one of the most obvious is that (as noted above) these teams lack the broad participation that fosters collegiality and accurate forecasts. To be competitive, companies engaged in product (as opposed to services) businesses – especially those that have some combination of complex supply chains, complex product lines and short product life cycles and/or shelf lives – must uses sales and operations planning effectively. Our research suggests that above all, for a majority of these companies their S&OP efforts must be more broadly based. Having the right technology and easily accessible data also are necessary components of a successful S&OP effort. I suggest that larger companies with complex products and supply chains examine RapidResponse to see if it can help them manage their businesses more accurately and effectively. Best regards, Robert D. Kugel – SVP Research

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