Retail in detail

By Ronald Ireland and Mary Adamy, Oliver Wight Americas, Inc.

As we discussed in the first article of the retail sales and operations planning series, S&OP has been considered a best practice in the manufacturing industry for the past 25 years. Initially started as a process to balance demand and supply, S&OP has evolved into a more robust integrated business planning (IBP) model shown below that links strategic plans with product portfolio reviews and new product introductions, unconstrained demand plans, supply plans and capabilities, and financial appraisals of the integrated business plans over a planning horizon of 24 months or more.

This evolution in maturity has been driven by the need to link strategic planning with the operational aspects of the business and ensure all functions are aligned to one operating plan. The monthly IBP reviews provide management with a view of whether the rolling operational plans and activities will not only meet the annual business plan but are in alignment with achieving the long-term business strategy and stated growth objectives of the organization.

Retail S&OP, much like the manufacturing sector over the past 25 years, is now recognizing the need to not only implement the fundamentals of S&OP but to evolve into the strategic focused, executive-led integrated business planning model shown below.

Typical retail processes in place today have been focused on tactical collaborative forecasting and replenishment planning in the 1- to 26-week horizon, at a stock keeping unit (SKU), and executed by middle management. Evolution into the IBP model, utilized by manufacturers and endorsed by the Voluntary Inter-industry Solutions Committee (VICS) for Retail, incorporates monthly reviews of the business at an aggregate level of planning across a 1- to 24-month horizon. Linked to the traditional CPFR activities, retailers and manufacturers can realize significant benefits.

With this in mind, let’s examine the IBP model for retail in detail. We will examine each of the reviews, their owner, key elements, and focus of the review.

The above five-step IBP model represents what many consider a best practice integrated business planning (IBP) model that has expanded sales and operations planning concepts from basic demand and supply balancing to an overall integration of key business processes through a series of formal monthly reviews. Clear accountability and executive ownership are critical to a successful IBP process.

Let us discuss each of the IBP reviews in a retail environment:

Product management review:
The primary purpose of the product management review is to plan and manage product portfolios. In retail, this can also be described as category management and assortment planning.  

Plans are made and reviewed in the product management process that include new product launches, phase-in and phase-out schedules, pricing strategies, product sustainability development, new product designs, product packaging designs, marketing and promotional material plans, seasonal event planning, and financial appraisals of margin goals for individual products as well as category performance.

The product management review process is typically owned and chaired by the vice president of merchandising. This person is supported by a product management process coordinator who prepares the material for the monthly IBP product review meeting.

Attendees of the monthly product review meeting include the directors or leaders of each retail merchandise category, as well as a representative from finance. If possible, the recommendation is to encourage the other process coordinators to attend from demand, supply, as well as the IBP coordinator, to ensure integration of activities across reviews. Each director of a product category prepares the material to be reviewed in the monthly meeting and presents the material in the product review meeting over a planning horizon of 1 to 24 months.  

As done in any best-in-class IBP review meeting, the primary focus should be on exceptions only and be strategic; typically on events and plans with planning horizons of 4 to 24 months. In addition, most of the review will be focused at a product or category aggregate level, with minimal discussions at an SKU level of detail. Projects are monitored to ensure they are on time, resourced effectively, and will deliver expected margin and growth targets. The portfolio will be reviewed to ensure a valid product plan is in place and that resources and activities are prioritized according to strategic value.

A typical agenda for the monthly product review meeting includes:

  • Reviewing key performance indicator scorecards for product management – merchandise planning
  • Reviewing prior month action items
  • Discussing decisions that must be made in this meeting
  • Engaging in a family review (i.e. retail merchandise category)
    • New category layout plans
    • New product launches
      • Changes in assumptions
      • Status of concerns or issues
    • Significant changes in the category plans
    • Changes in pricing strategies
    • Promotional and marketing plans
    • Special product buys
  • Discussing risks and opportunities and gap-closing actions
  • Reviewing of new action items.

 

Demand review:
The IBP demand review meeting typically occurs two to four days after the product management review. The primary purpose of the demand review is to reach consensus on the demand plans and forecasts, by merchandising category and store format with a planning horizon of 1 to 24 months at an aggregate product level, and develop actions to close gaps or exploit opportunities to drive more sales.

In manufacturing, the demand review process is typically owned and chaired by the vice president of sales and or marketing. However, in the case of a retailer, the demand review process is owned and chaired by the VP of store replenishment or by the VP of store operations. As described earlier in the product review, the demand review chairperson is supported by a demand management process coordinator who prepares the material for the monthly IBP demand review meeting.

Attendees of the monthly demand review meeting include the directors or regional vice presidents of store operations, store replenishment, marketing, and store-level point of sale (POS) forecasting managers, as well as a representative from finance. As stated earlier, if possible, the process coordinators from product and supply may also attend.   

As in the product review meeting, the primary focus of the demand review should be on changes in assumptions that impact demand in the 4- to 24- month horizon. In addition, most of the demand review will be focused at a product family or category level, with little discussion at an SKU level of detail. In retail, one major difference with manufacturing S&OP is a focus on store-level demands, including new store developments, expansions, formats, and closures. 

A typical agenda for the monthly demand review meeting includes:

  • Reviewing key performance indicator scorecards for store operations, store replenishment,  and point of sale (POS) forecasting
  • Reviewing action items from prior month
  • Discussing decisions that must be made in this meeting
  • Reviewing of assumption changes by family (merchandise categories, store segmentations, geographic regions)
    • Store expansions, closures 
    • Point of sale (POS) forecasts and consumption trends
    • Seasonal and store-level event plans
    • Merchandising and marketing store-level execution plans
    • Advertising and promotional plans
    • Competition
    • Market trends
  • Discussing risks and opportunities in the plan, gap-closing actions
  • Seeking approval of the plan
  • Reviewing new action items.

One of the key benefits of the IBP demand review is the extended horizon that allows more visibility and alignment of key promotional and shelf-planning activities that can be shared with manufacturers to optimize spend activities. One major retailer told us of instances where collaboration across a longer horizon and strategic level allowed them to catch significant disconnects with a major manufacturer around focus categories and planned advertising that was not synchronized with the retail promotional plans. Early warning allowed for changes in plans and improvement in business results for both parties.  

Supply review:
The supply review meeting typically occurs two to four days after the demand review. The primary purpose of the supply review is to assess the retail supply chain capabilities for store- level as well as distribution center order fulfillment over a planning horizon of 1 to 24 months at an aggregate product level.    

The supply review process is owned and chaired by the VP of supply chain. A supply chain process coordinator prepares the material for the monthly IBP supply review meeting.

Attendees of the monthly supply review meeting includes representatives from logistics, including transportation, distribution center (DC) management, third party logistics / wholesaler management, DC replenishment, and purchase order forecasting and processing. As in the other process reviews, a representative from finance is also present as well as the other process coordinators.    

The monthly supply review will be focused on product fulfillment capabilities as well as rough-cut capacity planning for transportation, warehousing, and supply chain partners’ abilities to satisfy the store- and DC-level demands for products. All plans should be based on demonstrated capabilities through metric analysis to ensure a valid supply plan exists to meet the consensus demand plan.

A typical agenda for the monthly supply review meeting includes:

  • Reviewing Key Performance Indicator scorecards for supply chain operations, logistics, Distribution Center Replenishment, Order Forecasting, and supply chain partners’ scorecards.
    • Reviewing action items from prior month
    • Discussing decisions that must be made in this meeting
    • Reviewing of supply chain capabilities and issues by category
      • Sourcing strategies
      • Storage and transportation capacity
      • Network modifications
      • DC/Warehouse expansions or modifications
      • Order forecasts 
      • Vendor supply plans and capability issues or opportunities
  • Review of new action items.

Integrated reconciliation and financial appraisal:
The integrated reconciliation (IR) step is owned by the CFO and is used to resolve issues that were discovered during the monthly IBP and S&OP review cycles. The goal of the IR step is to resolve as many issues as possible without having to escalate them to the executive level management business review (MBR). Resolving these issues may be done using one-on-one or small group meetings. For issues that are not resolved prior to the MBR, the IR team members will formally define the issue, provide solution alternatives, and a recommendation to the MBR for a decision to be made at the executive level.   

A financial appraisal has been occurring throughout all of the reviews, assessing the financial impacts on decisions and gaps in each process review. The financial appraisal in the IR process summarizes the findings to be presented to executive management in the MBR of all plans and identifies any additional gaps or opportunities that may not have been visible in the individual reviews.

The integrated reconciliation review is owned by the CFO, and the IBP/S&OP coordinator will serve as process coordinator to prepare the review material for the MBR.  

A typical agenda for the monthly IR meeting includes:

  • Preparing the management business review (MBR) summary material:
    • Product
    • Demand
    • Supply
    • Finance
  • Reviewing what decisions were made through the product, demand, and supply reviews  during the month
  • Reviewing what decisions must be made at the next MBR with supporting scenario documentation and recommendations.

Management Business Review (MBR):
The highest level executive in the retail organization, typically the CEO, president, or general manager, is the executive sponsor and process owner of the MBR. The attendees of the MBR are the process owners of each review and include the CFO as well as the IBP/S&OP process coordinator.

The MBR is a decision-making process with a strategic focus on months 4 to 24 rolling.       

A typical agenda for the monthly MBR meeting includes:

  • Reviewing the state of the business over the next 1 to 24 months for:
    • Product
    • Demand
    • Supply
    • Finance
  • Reviewing what decisions must be made and the recommendations being provided from the integrated reconciliation process
  • Discussing decisions made or action items assigned on recommendations
  • Approving the proposed plans from each step of the process.

Summary:
Retail S&OP is an executive-led, integrated business planning process with a primary focus on months 4 to 24 at an aggregate planning level of detail. It is a continuous re-planning process that is repeated monthly and is focused on change. It provides a formal methodology and structured process to integrate all the key retail business planning processes, ensures transparency and decision making to resolve issues, and creates a forum to strategically align plans with manufacturers for mutual gain.