At the University of Tennessee we have placed significant emphasis on a business model we call Demand and Supply Integration (DSI). In essence, DSI represents a holistic approach to managing demand creation and management activities by aligning them with all of the processes and activities necessary to fulfill demand. At the very core of DSI, therefore, is the notion of internal cross-functional integration. The promise and potential of leveraging this business model for organizational and supply chain success will only be realized if the appropriate infrastructure and culture are in place to facilitate integration.
I have talked to several companies that are engaging in perhaps the most popular application of the DSI concept – Sales and Operations Planning (S&OP). S&OP is a series of formalized meetings with a focus on aligning sales and operational plans.
By definition, therefore, the S&OP process is the embodiment of DSI, as it emphasizes the importance of synthesizing demand-side and supply-side activities. What I have begun to observe, however, is that many firms adopt S&OP processes but are not integrating them. The internal cross-functional integration that is assumed to happen by adopting a “process” is, in fact, not taking place.
For example, when observing the S&OP process of a firm that I’ll call “Company A”, it was quite obvious that this firm was holding S&OP meetings, yet the firm was not involving marketing or sales. However, the firm was convinced that it was “doing” S&OP because it was having S&OP meetings. When talking with a marketing executive within “Company A” about marketing’s noticeable absence from the S&OP meetings, he replied, “that’s an operations meeting – we go if and when we can.” Hence, the company was attempting to leverage S&OP, but with minimal success and participation. Operations and sales/marketing were good at working internally to develop forecasts and plans; they just didn’t come together for the synthesizing and adjustments that S&OP entails. As such, the company possessed large amounts of excess inventory and were mediocre in terms of customer service.
While spending time at a firm that I’ll call “Company B,” I was inspired by the initial findings regarding its S&OP process. Several employees were involved in S&OP from both the sales/marketing and operations areas of the firm. They were committed to the process and generally saw the value of DSI. Upon further observation, however, it became clear that the marketing group was significantly frustrated with “Company B’s” S&OP activities. The crux of its concern was the lack of cohesion among the operations managers. Instead of arriving at the S&OP meetings with a comprehensive plan, they would bog down the meetings by attempting to develop agreed-upon operational forecasts, which often slowed down the S&OP process and led to contentious debate and “tug-of-war” about which area of operations (i.e. manufacturing, procurement, logistics) would have to sacrifice its respective P&L in order to develop a comprehensive operations forecast. In the end, “Company B” leveraged DSI and realized the benefits, but its processes were lengthy and sub-optimal – all due to a lack of integration within operations.
These two examples highlight the importance of internal cross-functional integration, particularly when trying to focus on DSI. DSI requires integration both within and across functional areas. “Company A” possessed good “within” integration, but lacked “across” integration, and the opposite was the case for “Company B.” The reality is that effective organizations focus on BOTH, as both “within and across” integration are necessary to effectively streamline internal supply chain flows that, in turn, allow for more effective upstream and downstream exchange flows with suppliers and customers.
So, how do firms achieve effective “within and across” integration? Well, it’s definitely not easy.
The difficulty stems from the fact that integration must be undergirded by the organization’s culture. Without a corporate culture that emphasizes and facilitates integration, it’s very likely that elements of the disintegration we saw in Companies “A&B” will impede firm and supply chain process flows. Hence, integration requires more than meetings and process adoption; it must be part of the actual culture of the firm.
In order to foster an integrative culture, I have observed that many firms focus on performance measures, internal structure, and the support of corporate leadership. Each of these elements play a significant role in culture-shifting, as they all signal the values and managerial approaches that are considered important when engaging in day-to-day management activity. Although Companies “A&B” were clearly lacking on some aspects of these elements, resulting in either the absence of “within” or “across” integration, there are some insights that we can extract from their respective scenarios.
Performance Measures – It was no surprise, upon further investigation, that “Company B” lacked within-function integration, as its measures didn’t foster or facilitate it. Instead of comprehensive operational measures (i.e. total landed or supply chain costs, perfect customer order), it used fragmented measures that were very siloed in nature. Hence, procurement, manufacturing and logistics had no incentive to work together, as there were no holistic, comprehensive, total-cost-focused measures or rewards in place to foster such integration. The “tug-of-war” that ensued in the S&OP meetings was a function of the company’s measurement system; the company was, in essence, stimulating disintegration by using measures that fostered an “us against them” mentality.
Internal Structure – One of the key issues plaguing the DSI activity of “Company A” was lack of ownership. Marketing managers didn’t attend S&OP meetings because they, quite frankly, didn’t have to. There existed no shared lines of reporting or upper management control that would foster the type of “across” integration that they needed for success. The organizational structure of “Company A” was disintegrated, yielding a lack of integration across the firm. Outside of the CEO function, there were no structural points where joint responsibility of the demand-side and supply-side areas of the business overlapped. As such, it was difficult for the company to enforce DSI approaches like S&OP because it was viewed as an operations issue, not an operations AND marketing issue. Structurally, there were no touchpoints that would help facilitate integration from a top-down perspective. Which brings us to our last point.
Corporate Leadership – In both companies, there were a general lack of corporate leadership attention to the issues of “within and across” integration. Although upper management saw DSI activity as important enough to attempt to engage in S&OP, they didn’t emphasize it enough to focus on investing in the culture and infrastructure necessary to make it work effectively. In the end, if corporate leadership is not focused on integration, then integration will likely be a grass-roots effort, at best.
Both of our example companies were only able to scratch the surface of the benefits of DSI activity, primarily due to the lack of awareness of the deep-rooted issues that were plaguing their processes and impeding their success. Corporate leadership’s endorsement and facilitation of internal “within and across” integration is paramount. Otherwise, the other issues that foster disintegration, such as measures and structure, will likely be exacerbated and amplified – further impeding the realization of the supply chain benefits of DSI.
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Terry L. Esper
19:06
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