Margin-based order management in the chemical industry

1 2 3 4 5 6 7 5 Margin-based order management Current supply chain management faces the dilemma of how to meet increasing sales expectations with a decreasing operations buffer. Sales challenges are increasing due to net working capital reduction initiatives on the customer side resulting in the request for higher service levels. The globalization of supply chain networks extends process lead times, putting additional pressure on sales. The operations buffer is decreasing because of finished goods inventory reductions also caused by net working capital reduction efforts and high capacity utilization. After the crisis in the chemical industry a large propor- tion of production facilities is running at or close to capacity maximum. Partly this shortfall is artificially created by intentionally keeping production lines closed to keep price levels high. The way out of the current supply chain dilemma is an integrated and truly global sales and operations planning process. When demand is constantly exceeds capacity as it does these days, classical allocation of volumes is not sufficient. The key is to make significant information on margins and profitability available to enable the evaluation of financial scenarios and thus optimized margin-based allocation of finished goods. This is a core principle of state-of-the art integrated business management, one of the leading concepts to ensure margin-based order management Integrated business management Integrated business management goes beyond classical sales & operations planning with its merely tac- tical supply and demand balancing. It is a strategic process that delivers financially evaluated scenarios to reach the integrated strategic plan, the business plan and performance metrics. Integrated business management comprises five steps as consecutive meetings: product management review, demand re- view, supply review, integrated reconciliation meeting and management business review meeting. The most important is the integrated reconciliation meeting in which the plans that were developed in the three previous meetings are pulled into an integrated business plan and financially evaluated. Gaps to strategic plans, business plans and performance metrics are identified and gap filling actions devel- oped. This is the preparation and core input for the management business review meeting enabling senior management to effectively control and steer the business. The application of integrated business management with strong focus on business targets leverages a number of financial benefits: • Labour cost can be lowered, because statistical forecast and segmentation reduce the effort for account managers. • Automated processes for global distribution networks decrease the workload for regional demand planners and procurement. • Financial evaluation allows margin-driven decisions. • Gap-to-target monitoring drives operational processes towards business targets and inventory targets reduce and control working capital. • On the supply side higher transparency and anticipation of bottlenecks increase availability of finished goods, reducing lost sales and improving customer satisfaction. • The increased availability of intermediates raises overall asset utilization, thereby reducing labour and production cost. 25 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry Sales & operations planning 2.0 A comprehensive and advanced solution to fully support integrated business management is the sales & operations planning 2.0 methodology. The concept is named S&OP 2.0 because it is a platform for participatory information sharing similar to Web 2.0. It provides the platform for sharing and real time analysing all information required for building a single demand, supply and value plan covering all ma- jor business functions. S&OP 2.0 allows all participating users to create and adjust plans and scenarios at any time and to see the contribution of other users. Information visibility is leveraged by advanced analytics, thus bringing information quality to the next level. S&OP 2.0 tools and processes provide a platform for joint decision-making on all levels of planning for process-driven collaboration through clearly structured S&OP meetings and ad-hoc collaboration based on real-time high quality information between the meetings. S&OP 2.0 supports all essential elements of current integrated business management: executive end- to-end visibility of the SC makes value creation and problem areas visible, allowing management of all issues from a total business perspective (Figure 19). Segmentation of products, customers and supply chains become an integrated part of the S&OP process. Collaborative demand planning and advanced demand control based on segmentation is empowered. S&OP 2.0 integrates tactical planning with detailed scheduling, execution and with strategy through collaboration. Value (margin / profitability) planning is part of scenario simulation and visibility of the supply chain. Fast what-if scenario simula- tion enables agility and faster response time of business decisions. Product lifecycle management and people capability assessment and management are embedded into S&OP 2.0. Figure 19: Vision, mission, S&OP 2.0 integrates corporate strategy processes from strategy to execu- tion Strategic planning Competitive positioning Segmentation Strategic SC configuration & network design Strategic target setting; forward-looking analytics Tactical planning (S&OP 2.0) Base What-if Collect demand demand forecasts plan shaping Consensus demand, supply, inventory and Collect Base What-if P&L projections supply supply supply input plan scenario Base What-if financial financial plan scenario Performance monitoring; advanced analytics Scheduling & Collaborative execution PR scheduling production planning & Delivery scheduling & execution detailed scheduling Order to cash 26 1 2 3 4 5 6 7 Demand Control The current shortfall situation in the chemical industry requires a margin-based allocation of finished goods. Integrated business management based on S&OP 2.0 needs to be complemented by a system supporting daily order execution on a margin basis. It is important to provide an advanced demand control system which covers the requirements for margin-based allocation and is ready to be seamlessly integrated with S&OP 2.0. The basic concept comprises a segmentation of customers based on strategic importance and a segmentation of products based on margins, forecasts and sales behaviour. The S&OP 2.