December 2009

Breakthrough Sales &

Operations Planning: How we
developed the process.

By Dick Ling and Andy Coldrick

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 Breakthrough S&OP

LingColdrick.com

Ling-Coldrick is a leading edge consulting partnership specializing in Breakthrough Sales and

Operations Planning. Our mission is to provide external stimulus to initiate rapid implementation
of Sales & Operations Planning.

Our Right to Left approach yields dramatic benefits within six months.

Increased profits

Improved cash flow

Reduced cost-to-serve

Improved customer service

Reduced inventory and work-in-process

Our approach forces breakthrough thinking by helping organizations focus on aligning their Sales
and Operations Planning Process with their business agenda and strategic direction.

We help you assess the health of your S&OP process through our facilitated self-assessment.

We transfer our knowledge to you through customized education and coaching.

We help you create practical action plans that enable you to align your S&OP process to your
business objectives.

Our strength lies in our ability; the breadth of our experience, our industry knowledge, success in
small, medium, and large organizations all over the world, and our progressive attitude. We
believe we add value through our clarity of thought in understanding your problems and
developing solutions to enhance business success.

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 Breakthrough S&OP

About the Authors

Dick Ling and Andy Coldrick have been collaborating on S&OP for 25 years. They are a very
strong partnership and specialize in pushing the boundaries of Sales & Operations
Planning. They help businesses all over the world to maximize S&OP’s potential to
generate more cash and increase profits. Dick created S&OP, and he and Andy are two of
the leading thinkers and consultants on its evolution and advancement. They both now
live in the USA and are working together even more closely. They assist clients with
breakthrough success in implementing Right to Left S&OP.
They led the thinking on aligning the S&OP process to the strategic intent of the
business and future portfolio. Before that they were the first to recognize that new
product activity and financial links into traditional S&OP were treated as afterthoughts,
but were not being truly integrated. They pioneered integration of these two pieces, and
also created the Integrated Reconciliation step to explode the ‘single number’ myth, in
vogue at the time. The importance of understanding change, assumption management,
scenario planning all with a ‘range of views’ have reinforced management’s need for
information that built knowledge and knowhow, rather than data just supplying more and
more numbers. This led to the discovery that breakthrough S&OP necessitates strong
cross-functional leadership and behavior. Utilizing a “range of views” also saw the need to
use a different process from the traditional demand/supply balancing model. During that
time they encountered companies in complex environments. Clients in just North America
implement S&OP in one very large country – the USA. Europe is dealing with a more
complex picture having clusters of countries, and in many cases these clusters are
combined into a region such as Europe, Africa and the Middle East. In the 1990’s Europe
and Asia regions were microcosms of the global picture. Dick and Andy pioneered the way
to implement integrated S&OP in global, regional and country environments, from
experience in Europe. Their ability to work anywhere in the world with multinationals
built an unrivalled experience in helping businesses maximize the benefits of global S&OP,
while understanding potential road blocks with different cultures, expectation and
systems.
Working with small developing countries within a regional context, together with
parallel experience in helping small independent businesses, gave them the insights
necessary for a simplified S&OP approach, albeit a three step process.
They remain passionately committed to customizing S&OP for business environments.
There are common principles and themes, but each successful S&OP user has its own
uniqueness. Any successful business is striving to be different from its competition.

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 Breakthrough S&OP

Table of contents
1) Executive Summary 5

2) Introduction 10

What is Sales and Operations Planning? 10

What’s in a Name? 10

3) Traditional Sales and Operations Planning 11

S&OP the Manufacturing view 12

4) S&OP the Unifier – Traditional S&OP challenged 14

5) S&OP the Reconciler and Integrator 16

Integrated Reconciliation & Senior Business Management Review 16

Managing the Portfolio and New Activities 18

Managing Demand 19

Managing Supply 20

Monthly Timing and Integration 21

Managing Paradox 23

6) Knowledge and Knowhow versus Drowning in Data 24

7) Uncertainty versus Single set of Numbers 27

8) S&OP as the Aligner to Success and Future Sustainability 28

S&OP Executive Leadership Depends on the Strategy 29

Different Portfolio Models and their Impact on S&OP 31

Strategic Intent and Future Product Portfolio

and their Impact on S&OP 32
9) Discovery Leading to Breakthrough S&OP 33

10) Summary of Different Implementation Approaches 35

11) Conclusion: Best Approach is Right to Left 37

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 Breakthrough S&OP

1. Executive Summary
This article traces the evolution of Sales & Operations Planning (S&OP) from its inception in the
late 1980’s, where the primary objective was a medium to long-term stable production plan, to
the 21st century, where several successful businesses are using it as a dynamic business
performance management process enabling and tracking their progress against their future
portfolio and strategic intent. These businesses are maximizing the potential of S&OP by
increasing profits and generating cash.

The foundational benefits of improved customer service and lower working capital are still
important, but today more advanced companies have built on a robust operational foundation
and now use the latest view from S&OP to generate the quarterly forecast for corporate
headquarters. These businesses no longer have annual budgeting as a separate exercise. They
also demonstrate strong cross functional behavior throughout the organization and executives
are focused on long term sustainability. They also excel in execution. A monthly business process
tracking all these issues is mandatory in these times. There was a point when senior
management would say to us “Why a monthly S&OP process?” Since the financial collapse of
2008 many executives have said if only we had a monthly S&OP process instead of a financial
review once a quarter.

The evolution of S&OP, by examining it as a series of breakthroughs, has given us the knowledge
of what is important. Moreover, by understanding the big picture we can learn the optimal way
of successful implementation. S&OP evolving through time is shown (figure 1).

Evolution Of S&OP

Strategic Agenda and

Future Portfolio

S&OP
“The Aligner”

S&OP
“The Reconciler” and
“Integrator
Single Set of Numbers
S&OP “The Unifier”

Multiple Sets of
Numbers

Reactive Execution

Fig.1

Evolution from multiple sets of numbers to an S&OP process aligned to the future business
agenda has taken place over twenty years. Unfortunately, many practitioners have tried to
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 Breakthrough S&OP

implement S&OP in the same direction as its evolution - Left to Right. They believe their S&OP
process will eventually align to the business and strategic agenda, but it usually takes far too long
and senior management loses patience. More often than not the process becomes associated
with one of the evolution steps, and stalls. A common problem is having an objective of a ‘single
set of numbers’, whereas executive management wants to see a ‘range – including highs and
lows’. If a range is not provided they then treat S&OP as a side-show, and see S&OP ‘The Unifier’
as a false promise.

We believe that the powerful message in S&OP evolution is that you align the process to the
strategic agenda and future portfolio from the outset. One of Peter Drucker’s famous quotes is
“the best way to predict the future is to create it”. We show this in figure 2 where current reality
is in the bottom left and the created future is in the top right.

Top Down and Right to Left

!
! " #$ "
! % "" & " ! ' ! !
!" "
$ ( "

Fig 2

Senior management must stand in the future because they need to see the future as the means
and not the end. The direction from current reality to the future is north easterly, and by
standing in the future top management makes it clear that this is top down and implementation
is therefore in a south westerly direction. From a process implementation viewpoint successful
implementation is from right to left.

Senior management gets tired of hearing that “this needs top management commitment”.
Apparently every initiative needs top management commitment according to consultants. Is
S&OP another one of these initiatives? The choice is yours. If senior management does not pick
up the need to align the strategic agenda and future portfolio to the S&OP process, it will
become the responsibility of people in reactive execution, notably demand managers or supply
planners.

Our experience with many clients is that you can approach any S&OP implementation,
improvement program or reimplementation, and achieve dramatic results within six months by
utilizing our Right to Left breakthrough approach, which engages top management (figure. 3).

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 Breakthrough S&OP

Breakthrough S&OP
Right to Left
!
! % !

! " +

, ! *

') '

Fig.3

Whether it is “top down” or “right to left” as opposed to “bottom up” or “left to right”, the
difference between the two approaches is either quick success with the former, or a long drawn
out disappointment with the latter.

Having aligned the process at the beginning to the strategic intent and future portfolio, we can
reconcile the different views within the business to the future business agenda and sustainable
success. The end result, achieved through cross functional behavior, is an agreed upon latest
view over 18 to 24 months for both operational and business plans, and the ability to execute
strategy.

During evolution we were attempting to unify first, then reconcile and finally align S&OP. You
cannot unify unless you know what you are trying to accomplish. A common aim must be aligned
to something. What? You align to strategic intent. We now know that the evolution sequence
must be reversed to achieve successful implementation. We align the S&OP process to the
strategic intent and future portfolio, and then reconcile different views. Finally unification is done
through agreeing to the latest view of the future. The most rapid and sure way to implement
S&OP successfully is to implement from right to left.

The following learning points from the evolution of Sales & Operations Planning are worthy of
executive attention:

1. Executive leadership: The process should not be led by supply only. At the very
least supply chain and finance should jointly lead the process, and this is
1
appropriate in businesses following ‘Cost Leadership’ as a strategy. In other cases
direction of the process should come from sales & marketing; when the strategic
1
intent of the business is ‘Customer Relationships’ it should be sales led, and
1
marketing should lead when a business follows ‘Product/Service Differentiation’
Finance should always have a strong co-lead in the process because of their role in
business planning, whatever the strategic intent. We reference the Harvard
1
Business Review Book on Strategy chapter 3 , because it represents the modern
view of types of strategy. We do not include network effect strategy, sometimes
called “strategy shaping” because examples of these businesses are exceptions
rather than the rule. Ideally executives should champion the process, but in large

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 Breakthrough S&OP

multinational companies this is not always easy. Senior management does not
normally ‘buy the process’; they ‘buy the results’. However the process must be
rigorous and disciplined so that the executive can have confidence in the integrity of
the information. As a minimum the business should take care in selecting the
leader of the Integrated Reconciliation. This person effectively becomes the COO of
the S&OP process leaving the CEO to champion the implementation and lead the
Senior Management Business Review (SMBR). This topic is dealt with more
extensively in our second article titled, Breakthrough Sales & Operations Planning:
2
How you implement from Right to Left .

2. Importance of Finance: Volume and value must be integrated in the medium to

long-term view. Many businesses have separate processes for volume and financial
forecasts.

3. Roughly right vs. precisely wrong: Obsession with extrapolation of detailed

forecasts is unhealthy and will ‘turn off’ business management. ‘Roughly right not
precisely wrong’ is the recommended approach. There must be an understanding of
different ways of reducing and coping with uncertainty.

4. New activities: New activities must be integrated into demand / supply discussions
from the outset.

5. Knowledge vs. Data: The key to success is to get a shared understanding of what
the numbers in the latest view mean, rather than just debating the numbers.
Achieving this insight requires a focus on assumption changes, risks and
opportunities to understand different views and why there has been a change.
‘Drowning in data, but starved of knowledge’ are very important watchwords.

6. Cross functional behavior: The process must clearly ‘join up’ functions. There must
be recognition that different views add value, give a richer understanding of trends
and where the business is going. Cross functional behavior and executive leadership
are of paramount importance. Corrective action must be identified since flawless
execution in all functions is demanded. A functional silo culture where ‘the person
who shouts loudest wins’ is detrimental to S&OP success; such organizations get
stuck on a ‘single set of numbers’.

7. Benefits in Six Months: Successful implementation is achieved by setting an

aggressive schedule, focusing on fast results (in six months), and a commitment to
‘learn by doing’. Right to left implementation means that the first step is alignment
to the executive management agenda. The second step is the recognition that
different views add value, leading to a reconciliation process. An agreed latest view
comes from reconciling these different views to the strategic intent and a valid
operational plan.

8. S&OP Aligned to Strategic Intent: S&OP as the umbrella for operational excellence
is a dangerous premise. Some think that operational excellence is a strategy,
3
whereas it is a mandatory discipline for any business regardless of the strategy .
Michael Porter in his book “On Competition” in chapter 2 “What is Strategy” argues
that the root of many problems is a failure to distinguish between Operational

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 Breakthrough S&OP

Effectiveness and Strategy. Operational Effectiveness or Excellence is high impact in

a business that is following Cost Leadership as a strategy, along with restructuring,
lean, six sigma, etc, and in this case a single set of numbers is more appropriate as
an outcome of S&OP. However many fast moving consumer goods, pharmaceutical
and Hi Tech companies often follow different strategies such as ‘Customer
Relationships’ or ‘Product and Service Differentiation’. These businesses have
difficulty with the tenet of a ‘single set of numbers’, because their rationale is high
risk, innovation and uncertainty and they have a high incidence of new product
introduction. These businesses need an S&OP process which copes with these
issues. Scenario planning with ranges and documented assumptions are main
agenda items, and the ability to cope with ambiguity is critical.

9. Customized S&OP: Beware of prescription and ‘one size fits all’. Yes, the concept is
applicable but S&OP has to be tailored to your business needs. The dimensions of
values and behaviors, processes and resources must be understood. Our experience
clearly shows that leadership, behavior change, data integrity, and simple
integrated software are major issues to address, in insuring that your Sales and
Operations Planning process delivers sustainable business results. Customization is
essential when aligning to your strategic intent. Strategy involves differentiation
and the S&OP process must be aligned to your strategic intent. Breakthrough
results come by implementing from Right to Left.

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 Breakthrough S&OP

Breakthrough Sales & Operations

Planning: How we developed the
process.
By Dick Ling & Andy Coldrick
2. Introduction
Sales & Operations Planning has been used extensively since its creation in the late 1980’s. The process
evolved during the 1990’s and numerous companies have gained tangible business benefits in improved
customer service and reduced inventories, and have used the process to facilitate growth and sustained
profitability. Other organizations are struggling with supply chain planning collecting data for a monthly
meeting, in which sales, marketing and finance are less than enthusiastic attendees.
This article, first in a series, traces the evolution of Sales & Operations Planning (S&OP), and suggests
reasons why some companies have maximized the benefits while others have just become stuck in old
paradigms. Our intent is that, by understanding the evolution, we provide you a context and frame of
reference to allow you to identify where you are today and gain some insights in how to improve or
change what you have. Evolution takes too
What’s in a name?
long and does not guarantee success.
Achievement of fast sustainable benefits is
What started out as ‘Sales & Operations Planning’
through a challenging plan, identifying
has taken many different forms, now being referred
behaviors, activities and functions that need
to by a multitude of names. These include:
to change so that we can align S&OP to the
Integrated Business Planning, Integrated Business
executive management agenda. For those
Management, Integrated Performance
who are just about to start an
Management, Rolling Business Planning, Regional
implementation, or re-implementation, we
Business Management, and Sales Inventory and
suggest taking the learning from the 1990’s
Operations Planning [SIOP ] to name a few. Several
and insist on business leadership from the
organizations continue to use the phrase ‘S&OP’,
start and avoid the pain a supply driven
although stages of maturity are quite different from
process brings. Our Right to Left approach
company to company. Unfortunately for many who
which we call Breakthrough S&OP is
love renaming initiatives, a change in name does not
explained towards the end of this article in
guarantee a corresponding change in the underlying
section 9.
process, behaviors and results. We still call this
The second Article in the series, ‘Sales and Operations Planning’. Why? We have
Breakthrough S&OP: How you Implement never seen an improvement in S&OP’s potential in a
from Right to Left, shows how you drive the business, by merely changing its name. Our work as
implementation from the strategic intent educators, coaches and consultants has driven us to
and the business agenda. These two articles help companies maximize S&OP potential. Some still
go hand in hand. A third article deals with use S&OP for demand supply balancing; others use
scaling the S&OP process to fit different it as a powerful cross functional business process
environments i.e. large global focused on executing strategy.

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 Breakthrough S&OP

multinationals at one end of the spectrum, to small businesses(1m to 10m) and S&OP in developing
countries on the other.

What is ‘Sales and Operations Planning’?

Today we see Sales and Operations planning as a process for cross functional decision making.
Ultimately the process enables a business to accomplish the monitoring, updating and executing its
strategic intent using the monthly operating plan as a robust foundation. Through its evolution,
however, it has taken different forms in different applications (See ‘What’s in a name?’), and in
many cases fallen short of its full potential. It is a forward looking process with a minimum horizon
of 18 months or 6 quarters, integrating and aligning strategic and tactical views and decisions, and
directing operational planning and execution. It is not a short term scheduling tool with only a 4-6
month horizon. (figure 4)

STRATEGY / TACTICS / OPERATIONS

STRATEGIC
PLANNING 2-5 years
Change

Change
BUS. PLAN 0 to 18 months
Sales & minimum
Operations
Planning

TACTICAL
PLANNING Up to ‘year end’

Daily / weekly
OPERATIONAL
PLANNING

Fig 4

There are two key points in figure 4. Firstly, S&OP as a powerful decision making process
has to be the driver of tactical and operational planning and execution, with the financial
view from S&OP credibly supporting the business plan. Secondly, the planning horizon
must be a minimum of 18 months to ensure that decisions are made about ‘year end’ in
the context of the following year. A simple way of visualizing this is to see operational
planning as the short term ‘day-to-day’ flawless execution. Tactical planning is about
delivering ‘this year’s budget’, and strategic planning is delivering ‘future years’
performance’. S&OP, a monthly process, looking both inwardly and outwardly enables
changes in assumptions to be evaluated, and is used to monitor progress forward and
update strategies when needed.

The principal focus of S&OP during the 1980’s and 1990’s was how to get a good
operational foundation in place. This foundation provides the ability to evaluate demand
and to ensure that sufficient resources are in place across the business to meet it.
Changes are assessed monthly, and plans updated and communicated. The first impetus
was provided by Dick Ling with the creation of S&OP, to which we now refer as
‘Traditional Sales & Operations Planning’.

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 Breakthrough S&OP

3. Traditional Sales & Operations Planning

4
S&OP was created in the late 1980’s by Dick Ling (his book "Orchestrating Success " co-
authored with Walter Goddard was published in 1987). At the time Manufacturing
Resource Planning (MRP II) was in vogue and S&OP started to be seen as a driver whose
principal focus was to make MRPII work in a single manufacturing plant within a business.

At the time Sales & Operations Planning was seen as a breakthrough, because in
many businesses annual business planning, sales planning and production planning were
completely separate exercises. There were ‘one-way hand offs’ and massive disconnects;
finance as the neutral function were often used as the referee of disputes between sales,
marketing and manufacturing. Multiple sets of numbers existed and all improvements
were functional and therefore disconnected. For example, an inventory reduction project
to improve cash flow would be initiated by finance, and supported by manufacturing.
Sales and marketing would make no contribution until customer service suffered. The
inventory reduction project would then be followed by a ‘Customer First’ project led by
sales, until inventory again, or the cost of complexity, became the focal point.

The premise of traditional S&OP is that customer service and inventory are ‘resultants’. To
effectively manage them we must manage the drivers, i.e. demand and supply.

Sales and Operations Planning was a breakthrough in that it forced sales, marketing and
manufacturing to agree once a month to ‘one set of numbers’ for sales, production and
inventory. Within the month there would be a sales planning meeting chaired by the sales
director agreeing the volumes at family level, predicted for sale for the next 12-18
months, called ‘demand
planning’. The S&OP – The Manufacturing View of the World
manufacturing director Early versions of S&OP were driven by manufacturing to make Material
would then run a Planning and Manufacturing Planning more stable. These manufacturing
origins show through in many applications of ‘S&OP’ and are
meeting called ‘supply
characterised in some telling ways, including:
planning’ to respond,
•The timetable set around ‘Supply Meetings’ – representatives from
using resource capacity
sales, marketing and commercial having to attend a set of ‘S&OP
management, with the Meetings’ established around manufacturing locations and planning
corresponding routine, rather than category/range reviews, or customer and market
production and driven events and calendars

inventory plans. This •The view that ‘Sales and Marketing’ are one homogenous organisation
would be followed by a with ‘a view’ – missing the very fact that sales and marketing have
different drivers and objectives and potentially conflicting views that
pre- S&OP meeting
need to be understood and reconciled
where sales, marketing
•The obsession with a ‘single set of numbers’ – based on the naive belief
and manufacturing
that it is possible to create ‘one number’ that will represent all views of
agreed with each other the business, and that all uncertainty can be eliminated to the degree
for one day in the that you can plan and control the future that rigidly through the entire
month (in those days a planning horizon. This is a relic of what was called Best Practice MRP ll. At
the time many people were fixed on the idea that S&OP was a new part
major step forward!), to
of MRP ll, designed to give one number upon which MRP ll depended. In
prepare for a fact the truth was, and still is, that S&OP is the big picture, and MRP ii was
management meeting merely the planning and execution piece. Now ERP provides the detailed
with the G.M. /M.D. planning and execution to support S&OP across the enterprise.

and other board

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 Breakthrough S&OP

members in an S&OP meeting. Following the S&OP meeting, or just before, some
reconciliation of volumes with financials would be done as a check against the budget. Is
this revolutionary? No! It is merely ‘organized common sense’. The process is shown
(figure 5).

Organized Common Sense

DEMAND
PLANNING
PRE
S&OP
S&OP MEETING
MEETING
SUPPLY
PLANNING

Fig 5

The focus on managing demand and supply as drivers (seeing inventory as a resultant)
gave many businesses improved customer service and lower inventories. These
operational benefits often stemmed from an attention to detail and the ‘S&OP
Spreadsheet’ provided the data that helped to spot the results of independently managed
events.

Many early applications of this focused on ‘manufacturing views’ of product families,

rather than external views of the business e.g. channel or brand. An example of the
output from traditional S&OP meetings for an assembled product is shown (figure 6).

Product Family Volume Plan

% $- . $- .

/0 /1 /2 2 1 0 3 4 5 6 7 8

% 9 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 233::

% ;- 2122 2286 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 233:7

<% -= 2122 2286 2146 2114 214: 214: 214: 214: 214: 214: 214: 214: 2378:

9 22 /0 46 14 4: 4: 4: 4: 4: 4: 4: 4: 38:

$9 22 7 54

% -9 -

% 9 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 233::

% ;- 2284 21:1 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 21:: 23086

<% -= 2284 21:1 2286 21:: 21:: 23:: 214: 214: 214: 214: 214: 214: 23783

9 /4 1 /0 : : 1:: 4: 4: 4: 4: 4: 4: 383

$9 /4 /0 /5

; -

% 9 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5:: 5::

% ;- 473 478 478 478 478 478 478 478 478 478 478 478 478

<% -= 473 478 418 4:3 343 5:3 5:3 5:3 5:3 5:3 5:3 5:3 5:3

9 /25 /22 /62 /85 /235 3 3 3 3 3 3 3 3

-; >?@ A 1B:5 1B:6 2B70 2B64 2B45 1B:7 1B:7 1B:7 1B:7 1B:7 1B:7 1B:7 1B:7

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 Breakthrough S&OP

Fig. 6

During the late 1980’s and early 1990’s we saw many people struggling because they saw
basic demand and supply planning as an end in itself. The ‘attention to detail’ and desire
for stability that drove early benefits was pursued to extreme lengths, creating a new set
of problems.

4. ‘SOP the Unifier’ - Traditional S&OP Challenged

Following the initial euphoria of ‘getting control’, enthusiasm waned and traditional S&OP
started to be seen as a logistics project, merely demand and supply volume planning
focused on ‘year end’ only, with too much detail (sku / pack level / line item forecasts
going out for 12 months). The dream that ‘S&OP was the Unifier’ faded, and it started to
be seen as a middle management logistics responsibility. Demand planners, often
reporting into the supply organization, owned the numbers rather than sales and
marketing management, and the process was designed not to cope with the impact of
increased innovation and customer responsiveness that many organizations were driving.
It appeared at the time that S&OP was only relevant in organizations with limited
innovations, committed to a Cost Leadership strategy.

A ‘single set of numbers’ was a supply chain dream, but it was an obstacle to other
functions. Sales and marketing and finance were more interested in a ‘range’, doing their
own financial scenario planning in separate activities from supply. Executive management
needs to manage uncertainties, probability, ‘odds’ on events planning, and ranges of
numbers.

Without robust financial linking, volume forecasting became a lower priority than financial
forecasting. Sales, marketing and general management were measured on financial
results, and manufacturing and supply chain were measured on operational targets based
on volume predictions, where new activities were not well forecast (figure 7).

STRATEGIC Annual
Annual PLANNING Change
Change
BUSINESS
PLANNING

Annual Budget

S&OP
Change

Change

TACTICAL
PLANNING

OPERATIONAL
PLANNING

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 Breakthrough S&OP

Fig 7

The two vertical arrows illustrate the point: whatever the output is from S&OP (thin
upward arrow), the ‘weight’ carried by the budget number (thick downward arrow) takes
precedence, overriding any decisions made in S&OP.

Because the operational number for the supply chain was lower in priority than the
financial number, and was very often different, the S&OP meeting became the forum
where supply people grumbled about forecast accuracy against their ‘single set of
numbers’- the impossible dream. It was becoming apparent that getting a single number
from a pre-SOP meeting where people had their own functional agenda was virtually
impossible. Very often the ones who shouted the loudest got their way, but if finance did
not agree the number was questionable.

In fact this obsession with one number was seen as the Holy Grail and ‘S&OP as the great
Unifier’ – the way to get a single number. Why? Because multiple sets of numbers create
confusion. They do, but the antidote is not a single number. What is needed is an agreed
latest view which comes as a result of reconciliation of different views (see next section
S&OP as the Reconciler and Integrator). In a traditional pre-S&OP meeting in an
organization with a silo culture, there was no recognition that different views add value –
they were considered as an obstacle to a decision. In such organizations one can observe
the politics. What is said in a meeting is influenced by functional positioning. It influences
where and when things are said, by whom, to whom, against whom. It is impossible to
harness all the ability and knowledge of all participants to obtain the optimal ‘agreed
latest view’ in such an environment.

This culture is often reinforced by the A vs. B syndrome. The symptoms of this are polarity
and argument around two different options, when creation of a third or fourth option
may well be the best solution. Here verbal dexterity in support of one, or criticizing the
other, absorbs all the talent and time. Often whoever is fastest on their feet with the best
information, or examples in support, ‘wins’ for A vs. B – even if more considered thought
would produce the opposite and conclude that B is better and even a solution where an
undeveloped C or D would be better still.

Some reconciliation of different views must take place before there is agreement on what
a number should be. We should have seen that S&OP must be the great Reconciler
before it could be a ‘Unifier’.

The early 1990’s saw an additional complication, the advent of the ‘single market’ in
Europe. This heralded the regional business concept, where the business unit or category,
strategic marketing, finance and supply chain were to be managed regionally. Sales,
tactical marketing and financial management of the legal entity were to be managed in
the countries. This added complexity and ambiguity to the traditional S&OP process.
Multiple sales and marketing units interfacing with multiple sourcing units raise questions.
How many meetings do you have? Do you have a meeting in a sourcing unit or in the
market or both? Should you have meetings or should you focus on an integrated process?

We know some people wedded to the traditional S&OP concept who religiously hold
Executive S&OP meetings at their European plants, and ensure that sales and marketing

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 Breakthrough S&OP

attend monthly meetings at all the plants which supply their products. Imagine a sales
director/manager who sells product supplied from 5 different plants in Europe! This poor
soul wastes five days a month of precious time with customers by being trapped in some
outdated S&OP concept.

S&OP not only requires a Reconciler – a Cross- functional Integrator is also mandatory.
We created the term Integrated Reconciliation to describe a process that performs both
functions.

5. S&OP the Reconciler and Integrator

With this background, and some early work on Europeanization with several multinational
businesses, we developed a more robust model which is often called the Five Step
Process. Since then the process has continued to evolve into a model that we use to frame
the key steps of Sales and Operations Planning (figure 8).

Sales & Operations Planning -

(Ling / Coldrick Model)
3. MANAGING THE
PORTFOLIO &
NEW ACTIVITIES

1. SENIOR
4. MANAGING 2. INTEGRATED BUSINESS
DEMAND RECONCILIATION MANAGEMENT
REVIEW

5. MANAGING
SUPPLY

POTENTIAL ISSUES POTENTIAL ISSUES POTENTIAL ISSUES

MULTIPLE SUPPLY CONSOLIDATION WHAT LEVEL TO ESTABLISH
PLANTS(INT/EXT) THE OWNERSHIP OF THE
REGIONAL MARKETING MULTIPLE BUSINESS UNITS
PRODUCT FOCUS TEAMS PROCESS?
REGIONAL MANUFACTURING HOW TO HANDLE GLOBAL,
MULTI-CHANNEL MULTIPLE SOURCING OR
ALLOCATION REGIONAL AND COUNTRY
MULTI-COUNTRY ORGANIZATIONS.

Fig 8

The relevance and significance of the five steps and how they must be integrated have
been tested over the last decade. They have been adapted to meet the pressures of
different business strategies, and handle the needs of different industry sectors within
and beyond manufacturing, including retail and services. A number of key themes have
emerged.

Integrated Reconciliation & Senior Business Management Review

The development of Integrated Reconciliation has highlighted the importance of financial

involvement and leadership early in the process and has changed the agenda from a
volume discussion to a business one. It is about reconciling different views and how they
contribute to optimal profit. There is added value in discussing different views and the
reasons for them. It increases the understanding of what the numbers mean which

16
 Breakthrough S&OP

focuses the attention on the assumptions underpinning the numbers, with opportunities
and vulnerabilities. The conversation is principally about what has changed since the last
review and why. Without assumptions the conversation revolves around why the numbers
have changed. When the focus changes from just numbers to assumptions, the need for
marrying forecasting with foresight becomes even more apparent.

Integrated Reconciliation is the most crucial step in successful S&OP. Why? It is the vehicle
which executives drive to resolve issues related to the strategic agenda. It is there to
recognize potential difficulties in executing strategy. It also has a responsibility to discover
new opportunities for profit, and make decisions or recommendations to senior
management, as needed. It is also the translator for managing significant issues in
portfolio and new activities, demand and supply.

These are some of the questions raised in Integrated Reconciliation:

I. What is the impact of integrating new activities; demand and supply

on the business (not just supply chain)? What are the emerging
issues and gaps? What are the opportunities and risks? You must
have volume and value information and assumption changes to
answer these questions. Understanding these questions leads to an
imperative that finance is an integral part of all five steps, whereas in
many examples of S&OP finance is added at the pre-S&OP meeting
and the S&OP meeting.

II. What scenarios are important to make better decisions on the

future?

III. What decisions should we make, and which ones should be escalated
to the senior management review?

The step is not a meeting as such, but an iterative process run by a senior cross functional
team in the business. They highlight key issues and decisions required for the senior
management team. In fact, they determine the agenda for the Senior Business
Management Review. Players in Integrated Reconciliation are the future executives in the
business. Participation in this exercise is seen as a key training ground for the next
generation of presidents and vice –presidents. This is fundamentally different from the
pre-S&OP meeting in traditional S&OP, where the main focus was on volume and its
impact on resources. Understanding Integrated Reconciliation has directed a broadening
and changing of the scope of new activities, demand and supply management. Integrated
Reconciliation as a process leads directly into the Senior Business Management Review,
which focuses on understanding change, what is our current performance, what decisions
are still outstanding, and what decisions have been made already in Integrated
Reconciliation. The business agenda also raises further questions - are we on track with
the business plan, and are we still on track with our strategic intent?

You will note that in this model, there is no such step as a pre-S&OP meeting or Executive
S&OP meeting. Our thought is that the aligned and integrated five steps define the entire
S&OP process, and we have deliberately omitted reference to an S&OP meeting. We have
seen too many examples in large companies of the S&OP meeting being the focus ,and

17
 Breakthrough S&OP

within large multinationals S&OP meetings were springing up everywhere by country, by

cluster, by business unit, by manufacturing plant, etc. Renaming S&OP as Executive S&OP
meeting only exacerbated the problem. Our view is that the Senior Business Management
Review may be similar to a real Executive S&OP meeting; however, if this is preceded by a
traditional pre-S&OP meeting the agenda would certainly be more operational. The
agenda and discussion of a Senior Business Management Review is colored by how
different the Integrated Reconciliation process is from the traditional pre-S&OP meeting.

The importance of Integrated Reconciliation and its necessary direction from the Senior
Business Management Review led us to understand that the best approach to successful
implementation is from Right to Left (See sections 10 and 11). Nick Hodges, CEO of
London International Group was the catalyst for Right to Left thinking when he said to
Andy “Let us discuss what I think we should get out of the Senior Management Review
before we get involved in the other process steps”. This is why we number the steps from
Right to Left. The first step in implementation must be the Senior Business Management
Review. It directs the scope of the Integrated Reconciliation process and how it will work.
This scope and agenda will also help senior management decide on the participants of the
Integrated Reconciliation, and how they can communicate the strategic intent to
members of step 3 (managing the portfolio and new activities), step 4 (managing demand)
and step 5 (managing supply). Aligning S&OP to strategic intent and future portfolio is the
first step of a Right to Left approach. These issues are discussed in section 10. Our
experience is that the Right to Left approach is at the very heart of Breakthrough S&OP
and guarantees success in 6 months, because it engages senior management’s strategic
agenda from the outset. The alternative is a traditional left to right approach (which is
western style logic), where the steps are numbered from left to right and are
implemented in that sequence i.e. step 1(new activities), step 2 (manage demand), step 3
(manage supply), step 4(integrated reconciliation) and step 5 (senior business
management review).

Experience shows that this approach takes too long and there is no guarantee that the
combination of steps 1-4 will ever relate to the priorities of the executive team. We find
that this works only if the strategic focus is ‘Cost Leadership’. We discuss this more in
sections 9 and 10, but if the strategic intent is either ‘Customer Relationships’ or
‘Product/Service Differentiation’ not only is the left to right approach seriously flawed, but
will disengage senior management completely.

Managing the Portfolio and New Activities

New activities have developed significantly over the last fifteen years. As with traditional
S&OP in the ‘80’s, the notion of integrating new product planning with supply and
demand planning of the existing portfolio was something of a breakthrough, despite being
common sense. With increasing focus on innovation and the use of ‘stage and gate’
decision processes and ‘innovation funnel management’, some companies took the
opportunity to integrate these approaches that were emerging and developing in parallel
with S&OP. Early attempts at integration often focused on the commercialization /
introduction stage of the funnel. The aims were to ensure preparation for launch, phase-in
/ phase-out, and that cannibalization effects were understood, motivated by helping
production not to be ‘caught-out’ when introducing a new product.

18
 Breakthrough S&OP

Progressive organizations, often those driving very aggressive innovation agendas,

realized that connecting only the ‘back-end’ of the process missed opportunities to
manage the innovation funnel in an integrated way.

The scope was also broadened in another direction by those who saw the need to manage
new activities beyond the narrower definition of product. Although the list is different in
every application, a common theme in opening up this step beyond just product is the
identification of those activities that:

I. Have a significant impact on demand and / or supply (volume and value)

and any other support resources.

II. Need to be managed across the business in a ‘joined-up’ way, with

decisions driven through a structured review process.

III. Require visibility and management across a portfolio of activities,

leading to better prioritization, resource allocation and decisions.

This redefinition from new product to new activities opened the scope outside of a
‘business as usual’ and in doing so opened up the appeal to a much broader audience in
the business.

This changing context had a dramatic effect on the view and understanding of the demand
and supply steps of the process.

Managing Demand
Demand Management including the accountability for forecasting has developed
significantly. In the early years of S&OP, a lot of effort went into agreeing a volume
forecast emphasizing a ‘single set of numbers’. Demand forecasting was very often part of
the supply organization, and forecast accuracy was seen as the principal measure rather
than customer service. Some organizations even went as far as saying, "You did not
forecast this, therefore we cannot make it!” obviously alienating sales and marketing. The
thinking that sales and marketing form one homogeneous organization with ‘a single view’
of the numbers misses the fact that these two functions have different drivers and
objectives.

By the mid 1990’s, people realized the importance of sales and marketing inclusion in
forecasting. At the same time, “Customer, Customer, Customer!” was fashionable, and
sales became the focal point for forecasting and the ‘one size fits all’ solution, ignoring the
importance of marketing input.

In many businesses following a ‘Customer Relationship’ strategy sales leadership is

appropriate, but in organizations with’ Product/ Service Differentiation’ strategies,
marketing is the principal driver of medium to long term demand prediction. This
distinction is covered in more depth later in this article on Alignment to Success and
Future Sustainability (Section 8).

19
 Breakthrough S&OP

Giving sales single accountability for the forecast led to some organizations spending too
much time analyzing detailed history trying to get the forecast accurate, instead of being
with the customers gaining knowledge about future trends.

Against this background of trying to get the forecast accurate there was a growing
realization that there is a different inherent uncertainty in different markets, channels and
sectors, and with different products and customers. After years of complaining about
forecast accuracy and trying to ‘crank the handle faster’ on the same old detailed
forecasting machine, companies began to wake up to forecasting for what it is – it is
predicting the future! By no means does this remove the responsibility for forecasting, but
it did lead to new and innovative ways of making a more educated prediction. In agreeing
a forecast an important piece of knowledge is to understand the range (high and low), and
providing numbers without supporting documented assumptions is unhelpful. In some
companies the rule is that a forecast number cannot be changed unless an assumption is
also changed. This stops the febrile number adjustment which goes on forever in the
weekly/monthly forecast review. A summary example, showing the importance of
assumptions underpinning numbers, is shown in figure 11.

Today we understand that a robust demand plan over a minimum of 18 months is only
possible by reconciling cross functional views; volume and value must be integrated.
Finance and logistics / supply chain are committed to this output. In general sales input by
major customer (with input from account managers) and channel is important in the short
term, typically the first 4 – 6 months. Marketing provides information beyond 4 months
based on market share, goals and brand / product health and marketing investment.
Strategic marketing and research and development in many cases, have a role beyond 12
months particularly in new activities. There must be reconciliation between foresight
(strategic marketing) and forecasting (tactical marketing and sales). These are guidelines
only to illustrate the collaborative approach and will vary depending on the business. The
responsibility of finance and supply chain / logistics is to insure that the volume and
financial forecast are reconciled and aligned. The demand plan is at an aggregate level and
the aggregate families chosen, understood and used by all functions. Simulations at the
aggregate level are more helpful than trying to do ‘what ifs’ at the sku. Choose a software
solution that facilitates this capability.

Traditional S&OP tended to use manufacturing families. In demand driven environments

and product differentiation businesses today, we see the aggregate product family being
brand or brand / technology. Why would one choose an aggregate group with little
relevance to marketing and sales?

Managing Supply
Supply Management has also broadened in its scope. Traditionally it used to apply to just
manufacturing but it is now extended from manufacturing to a wider view of ‘sourcing’,
which includes other resources including external ones. In multi national organizations it
has extended to supply chain optimization, making the best sourcing decisions from
scenario planning. This has challenged the planning capability in many organizations in
that traditionally many planners have been used to management and execution in detail
at single supply points; supply chain optimization is a wider role calling for the ability to
test different scenarios and recommend and make the right choices.

20
 Breakthrough S&OP

In service companies there is no manufacturing. Managing supply is managing resources

e.g. people, different skill sets, facilities, equipment, etc. In this application S&OP is really
Sales and Resource Planning.

Monthly Timing and Integration

The widening scope of new activities, demand and supply has put even greater pressure
on a more ‘joined-up’ approach as businesses have become bigger and more complex.
Integration throughout the entire Sales & Operations Planning process has become an
even bigger challenge. We have noticed that without a robust S&OP process, some large
organizations attempt to solve complexity by being more loyal to each other by functional,
and each function follows its own agenda. Without a clear business strategy this loyalty
by function surfaces as supply following a cost leadership agenda, sales a customer
relationship agenda, and marketing following product differentiation. This is a classic case
of chasing universal functional excellence, and ending up world class at nothing.

Aligning new activities with its impact on demand and supply from the Senior
Management Business Review, through the Integrated Reconciliation process we have a
business management understanding of the latest view.

This integration, combined with the increased future horizon, emphasizes the connection
between the steps as the most important element in success (two-way arrows are more
important than the boxes). We also stress the need for this to be seen as an iterative
process, normally run on a monthly cycle so that decisions taken during the process and
confirmed in the senior management review in the month are fully communicated into
the organization and executed through the process in month 2 and beyond (figure 9).

Sales and Operations Planning

A Process, Not Just Meetings

Fig 9

The arrows from the senior business management review into the next cycle show the
importance of making, committing to, and communicating decisions and taking action.

These changes to the process had a major impact on the leadership of the
implementation, and its use in the organization.

Traditional S&OP was normally led from the supply side of the organization. The
importance of new activity integration and early volume/financial reconciliation can not
be recognized if only supply people lead the implementation. The result will be a process
which has all the hallmarks of figure 5.

21
 Breakthrough S&OP

Early engagement of finance is crucial and strategic influencing of sales and marketing is
vital from the beginning to ensure success. The paradox is that supply chain people are
normally the first to recognize a need for S&OP, but they should not be seen as the
principal leaders. We deal more with leadership when we discuss different strategies and
their impact on S&OP in section 8.

Without understanding the impact of strategic alignment, many practitioners have gone
from traditional S&OP (figure 5) to a five step copy of the Ling/Coldrick model (figure 8),
even plagiarizing our term ‘Integrated Reconciliation’. They have missed the vital connect
to the Senior Business Management Review. They implement from left to right because
they are process thinkers, not business leaders, and start with new activities, demand and
supply which results in an operational agenda for Integrated Reconciliation. A lot of them
even specify the steps by numbers, and always call Integrated Reconciliation the “step 4”.
Eventually they see senior management disconnected from the process and wonder what
went wrong. We discuss this implementation problem in section 10.

22
 Breakthrough S&OP

Managing Paradox
Used properly, the S&OP process provides a means of managing the choices and trade-offs across the business,
and taking decisions to keep on track with strategic direction. Inevitably, these decisions will need to cut through
the conflict caused by opposing pressures of seemingly contradictory views. The implementation, as well as the
use, of S&OP is riddled with paradoxical choices.
Reconciling these paradoxes is a key to unlock the real potential of Sales & Operations Planning. To illustrate, here
are a few of the ‘repeat offenders’:
The ‘Leadership’ paradox – in many companies, the ‘supply’ organization initiate the S&OP process as a
reaction/response to the pain caused by changing forecasts and the apparent disregard from the ‘demand’ side of
the business for stability, efficiency and reduced complexity. By biasing the S&OP ‘agenda’ with a supply
perspective, typically those functions that need to be actively involved and driving the process are often alienated.
These situations pose a challenge: those who have initiated the process need to relinquish their leadership of it, if
they are to realize the total business benefits. Leadership choice must come from an understanding of the
strategic intent of the business.
The ‘Horizon’ paradox – there is a constant tension between the need to take decisions to protect long-term value
and the necessity to hit the numbers now! There are compelling arguments for each of these objectives and the
only sustainable proposition is to do BOTH! Some have made the error of defining S&OP with a horizon of 3-18
months; the intention was good in attempting to focus management attention beyond the immediate short term.
Unfortunately it led to disconnected processes – a short term Sales and Operations Scheduling process (0-3
months) with weekly or daily review, and a separate S&OP process (3-18 months) reviewed monthly, and sadly no
link between the two. A major benefit of S&OP is that decisions taken in the medium to long term will decrease
the number of ‘surprises’ in the short term. For example, a demand peak in months 9-11 must be solved by
outsourcing; S&OP would make that decision proactively knowing ahead of time the consequences of that
decision so that when months 9-11 become months 2-4 we already know how to manage this peak. If S&OP is
disconnected, planners in short term scheduling will behave reactively when they see the demand peak in month
3, make decisions and count the cost afterwards. Sales & Operations Planning done properly would show a
minimum of 0-18 months at an aggregate level over the whole horizon providing an aggregate view of the short
term in the context of the medium to long term. Quarterly and ‘year end’ targets are important, but decisions
must be taken in the wider perspective of ‘next year’ etc. A ‘year end’ focus is pragmatic and appropriate; a ‘year
end’ obsession is unhealthy for future sustainability. This is why a minimum of 18 months visibility is
recommended. The horizon dictated by strategic intent is normally 24 months.
The ‘Consistency’ paradox – ‘One person’s consistency is another’s bureaucracy’. A mix of personal preferences,
functional bias, national and company cultures all add-up to a very specific reaction to a ‘prescribed’ way of doing
things. Ultimately, we would want to strike the appropriate balance between allowing ‘space’ for people to be
creative in addressing issues and opportunities, taking decisions close to ‘the action’, while providing a framework
to direct that creative energy and allow the multifunctional elements of the organization to effectively mesh
together. The paradox is buried in the phrase ‘appropriate balance’. Why is it in some environments a ‘timetable’
is taken as an ‘absolute deadline’ while in others it’s merely a ‘suggestion’ or even an ‘imposition’? Why do some
organizations see a consistent ‘template/format’ as a necessary way to allow integration and aggregation of
information, while others see it as a request or challenge for innovative ideas on how to lay-out things differently?
In this article we have touched-on some other potential dilemmas that will need to be reconciled. We work to
develop the behaviors and capabilities to cope with, and thrive on, this ambiguity and confront the choices -
allowing you to break through these paradoxes and establish solutions that ‘get both’ and in doing so add more
value!
6
Our Business Guide to S&OP gives a blend of consistency in disciplines and choices in strategy, some of the
assessment questions are ‘checklist type’, requesting a yes or no answer. These are typically searching questions
on how well operational effectiveness is being followed in the S&OP process. Other questions in the guide revolve
around differing responses, given that strategies are different, and practitioners are at different levels of maturity
in the processes.
23
 Breakthrough S&OP

The changes made from the traditional S&OP model (figure 5) to our five step process
(figure 8) have led many businesses toward a robust and credible foundation (figure 10).

STRATEGIC Annual
Annual PLANNING Change
Change
BUSINESS
PLAN

Reconciliation Process

S&OP
Change

Change
TACTICAL
PLANNING

OPERATIONAL
PLANNING

Fig 10

The two arrows between S&OP and the business plan are of equal strength, which means
that we have a robust and credible latest view of the business which may be different
from the budget, but the two must be reconciled. Each is credible, and we must answer
questions on what we need to do differently to meet the business plan. Building the
ongoing reconciliation is the first step towards a cross functional business planning
process.

The next step is the updating of strategies from the reconciliation of the business and
tactical plans, which is the goal expressed in figure 4. The ultimate test is whether the
senior team has the commitment and confidence in the process to dismantle the
incumbent budgeting process. The need for this is made clear when S&OP is directed
Right to Left from strategic intent. Then senior management has the commitment and
confidence to drive the process.

6. Knowledge and Knowhow vs. Drowning in Data

Any implementation puts pressure on the need for management information and not
transactional detail. We designed a typical management information spreadsheet showing
the importance of integrating volumes and financials, with underpinning qualitative
information on assumptions, changes to assumptions and decision support. This format
has been proven as a powerful means of communication and ensuring consistent
understanding of the 'story behind the numbers'. Enhanced by today's powerful
information technology, this allows succinct management information to be available in
any environment for fast, effective decision making (figure 11).

24
 Breakthrough S&OP

Volumes, Financials and the Story in One

Sheet

Fig 11

Our experience in developing S&OP into a business management process has led to some
interesting findings that aggregating data alone does not necessarily give good
management information. This is sometimes called “drowning in data, but starved of
knowledge”.

Our emphasis is on ‘roughly right rather than precisely wrong’ to help businesses avoid
the trap of projecting forward two years worth of detail at the stock keeping unit level.
The detailed approach commonly found in statistical forecasting software leads to an
answer which looks about right but cannot be understood. Thousands of minor changes
within the ‘Black Box’ are not visible at a higher level. Management has no idea why the
latest view has changed, or whether the latest changes to plans have been incorporated.
Instead they are told the system says, "This is the answer, you have to believe it!" A
better approach is to build knowledge and knowhow by having a business discussion
around the following questions:

What major assumptions underpin the forecast?

What changes to assumptions have been built in to this forecast since last cycle?
What are the issues and gaps I should know about?
What are the risks and opportunities around this latest view?
What decisions have already been taken but are not yet reflected in this view?
What decisions should we be taking now?

The statistical forecast is always a useful input to the S&OP process, but is not as valuable
as understanding changes to assumptions. For example, the assumption on low volume

25
 Breakthrough S&OP

growth in the budget to support increased margin, may now have changed to a big
volume push to hit a ‘year end’ target at the expense of margin. Making a high level
adjustment on the ‘roughly right’ principle will be easier to do and more accurate for the
medium to long term than changing the forecast at customer or SKU detail level.

If businesses pour enough resource (sales people, demand managers and systems) into
planning numbers at detailed level over a medium term to long term horizon, they can get
an answer, albeit an answer which will not be understandable to management because of
the lack of high level assumptions. The main danger, apart from diverting the sales force
from selling, is in creating an illusion of accuracy. The huge effort and cost involved in
creating the forecast means people will tend to believe in it, whatever external changes
may be occurring.

A further problem with detailed planning over the medium to long term is that no
businesses have enough resource to do scenario planning and optimization at
SKU/customer level. Simplification by looking at the overall context (e.g. region, brand,
channel, technology type etc.) of the data that reflect major drivers of change in the
market place and align the application of ‘roughly right’ assumptions rather than ‘precisely
wrong’ tinkering is fundamental before trying to model even a few options.

Finally any strategy that calls for fewer and faster innovations, and shortened product life
cycles will mean that more items will fall into the planning horizon even though they have
not been invented yet, let alone have an assigned product code!

$ ,

$ ! #

#$ $ '( )$ * +

%& ! &

!"
# $

Fig 12

The level of detail involved in planning should change as the time horizon changes (figure
12). In the short term businesses need accurate transactional data on supply, sales, stocks
etc. and will be focusing resource on collaboration with customers and the deployment of

26
 Breakthrough S&OP

advanced supply chain optimization tools. In the medium to long term the ‘roughly right,
not precisely wrong’ level of detail is required. Aggregating data, using brand families,
average revenues by technology type etc. with a focus on the development of scenarios
using business planning / simulation tools becomes important. This can only be achieved if
finance has a strong leadership role in the implementation.

7. Uncertainty vs. Single Set of Numbers.

Although there has always been a recognition that forecasts are either wrong or lucky, the
early S&OP movement followed a premise that with immense pressure and focus the
quest for a ‘single set of numbers’ could remove uncertainty. In the early years that
pressure and focus often created some benefit by putting a basic rigor in place in sales
and marketing, and raising the profile of the need for improved forecast accuracy for
operations. But for many, the operational ownership and quest for a ‘single set of
numbers’ continued to dominate the conversation and became a mindless pursuit of
accuracy beyond what was intrinsic in the markets in which a business operated.

Finance, meanwhile, had their own systems and realized that robust projections about the
future relied on understanding scenarios. S&OP demands for a ‘single set of numbers’
were perceived by many finance people to be naive.

In the context of decisive action, the role of managing and communicating assumptions
played a huge part in enhancing the understanding and reconciliation of different views of
the future. Supporting the numbers with the underlying assumptions, risks and
opportunities brings a richer dialogue about future projections and helps to focus on the
greatest causes of uncertainty. Understanding the range (high/low) opportunities, risks,
and uncertainties is crucial to the discussion before agreeing to the ‘latest view’ (figure
12).

In recent years, increased innovation, broader offerings to customers, reduced product

lifecycles have made the old ‘one-size-fits-all’ approach to crunching the numbers simply
inadequate. Progressive organizations have switched the focus from numbers only, to
balance numbers with the underlying assumptions to reduce the inherent uncertainty to a
minimum, and better manage risk.

However, uncertainty cannot be removed completely. There is still a range and that range
needs to be understood in the context of the decisions that will be taken on that
information. In environments with extreme uncertainties (for example, companies on the
‘bleeding-edge’ of technology breakthrough, movement into new markets and channels,
pharmaceutical companies in the early stages of development), there is a need to go
beyond understanding the ‘range’ around a given projection and may be the need to run
alternative scenarios based on unique sets of different assumptions.

This level of sophistication requires a different level of input from across the business, and
an understanding of how and when to use the output from different scenarios, but the
acceptance of a range of uncertainty and the probable need for scenario planning typifies
maturity in the S&OP process. Making decisions based on ‘probability’ and/or ‘odds’ of an

27
 Breakthrough S&OP

event occurring with a particular result becomes very relevant. At what point should the
‘odds’ trigger a scenario that we should include in the ‘agreed latest view’?

‘S&OP as a Unifier’ for a single set of number was a false hope. ‘S&OP as a Unifier’ for
understanding and agreeing assumptions underpinning numbers is a sensible goal. To do
that we need reconciliation process which welcomes different views? We need to align
that view to a sensible business parameter. Is there a better parameter than future
business sustainability?

8. S&OP as the Aligner to Success and Future Sustainability

In the last five years we have worked with several clients who had strong fundamental
S&OP processes. They had a focus on a business agenda spanning 12-18 months in the
future, aligned to business planning. However to gear the S&OP process to future
sustainability we need to ensure that there is alignment to the first two years of the
strategic view, as a continuum rather than year one discretely followed by year two.
Without this, S&OP becomes aligned to the business agenda only 18-24 months out, with
a temptation to focus on the first 12 months.

With these clients we have found great benefit in helping them align their S&OP process
to the strategy of the business and the shape of the future product portfolio. It is also a
mistake to assume that when strategies are formulated they do not change. In the 1990’s
when strategy was in vogue there was a misconception that strategy was set for several
years. We know that many businesses change their strategies more frequently in today’s
challenging business environment. For example there are organizations that are formed
from the merger of two companies, who having promised the stock market reductions in
the cost structure, see this drive for efficiency as a necessary foundation for profitable
growth. A common problem is that executives recognize that the strategic thrust must
change, but some managers still believe that the business is still following cost reduction
as the primary target. Executives recognize they should follow profitable growth but they
do not communicate it well. Supply tries to control based on forecast accuracy, but
business growth potential can be damaged by the business not realizing that growth is
accompanied by greater forecast unreliability. Manufacturing gets blamed for not
supporting growth potential.

S&OP done properly and aligned to the business strategy is a great tool for ensuring that
the strategic and operational plans are in sync. We do not see the Senior Business
Management Review as a forum to develop strategy, however it certainly is the proper
forum to review strategy execution; it is there to ensure that the operational plans and
the latest view are in line with the strategic plan. Any major divergences are highlighted
and discussed at a separate strategy review. This is an important distinction, S&OP in
itself is not strategic – it is the bridge between strategy and operations. Done properly it
is also focused on flawless execution.

Earlier we highlighted the breakthrough that S&OP is the ‘Reconciler’. However it must be
reconciled to something. The choices are to reconcile to an 18 month business planning
agenda, with an emphasis on hitting the budget, or alternatively seeing the next two years
as continuum towards future sustainability. The first year would be the budget, and the

28
 Breakthrough S&OP

second year would be the early part of the strategic plan in this latter option, but viewed
as a continuum.

The two questions which need to be posed to any business whose S&OP process needs to
be aligned to future sustainability are:

I. Of the three most the well known strategies - Cost Leadership, Customer
Relationships and Product/Service Differentiation - what is the strategic
1
direction in your business? Network strategy as a fourth choice is not
discussed here, S&OP still applies but only a small number of businesses
follow this strategy, two prime example being eBay and Microsoft.

II. How much is new product introduction part of the future portfolio? How
much is really ‘new’ as opposed to what is ‘repackaged’?

The type of executive leadership and the differing emphases of elements within S&OP
depend on strategic intent and the future product portfolio (Figure 3). Understanding the
difference in emphasis comes from aligning S&OP to the business agenda through Right to
Left thinking.

S&OP Executive Leadership Depends on Strategic intent:

Every business has a strategy; it is either crafted by executives or it exists in the
organization by default. The most common strategy default is Operational Excellence!
3,5
However, as Michael Porter explains in ‘On Competition’ operational excellence , is not
really a strategy; it is a necessary discipline and is a very important element of Cost
Leadership. He points out in his book ‘Can Japan Compete?’ that competing on
operational excellence or operational effectiveness leads to competitive convergence,
which means that all competitors in the same industry compete on the same dimensions.
This sounds like trying to achieve some arbitrary standard with a checklist on universal
excellence.

Operational effectiveness is needed in any organization following any strategy, but in itself
it does not guarantee uniqueness or differentiation. These two, uniqueness and
differentiation, are at the heart of strategic intent. As an example, there were some
businesses in the early twenty-first century that followed ‘Customer Intimacy’ blindly and
even called their S&OP process “Demand Driven”. They became very responsive, but
ignored the discipline of operational excellence (sometimes called operational
effectiveness). These businesses grew revenue by being responsive, but became less
profitable because they paid little attention to the cost of responsiveness.

Improving operational effectiveness towards excellence is necessary to achieving superior

3,5
profitability, and is imperative but not sufficient. In itself it is not a strategy . A common
problem is that people see operational excellence as the only strategy underpinning Cost
Leadership, and they ignore all the other activities that they should be following.
1
A business with a Cost Leadership strategy aligns more to the traditional S&OP process.
Managing the portfolio of new activities is a minor role. Managing supply, because it is
the biggest cost has the major role and the objective is to supply demand at the lowest
cost. Therefore supply feels the need for S&OP more than most. Eliminating forecast bias

29
 Breakthrough S&OP

and improving forecast accuracy are the priorities. Other critical success factors include
discipline, efficiency and effectiveness, clearly defined roles, waste elimination,
continuous improvement and reducing layers in the organization. A single set of numbers
in this environment is appropriate and executive leadership should be from finance and
supply. Key measurements, in addition to forecast bias and accuracy are customer service
to promise, asset utilization and cost. (Figure 13)

Impact of Strategic Focus on

the S&OP Process
!
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7 .$ $! . 3$ & $
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$ & ' . $( & $ $ 1
+ % $! + ' & -- , 2 #

Fig 13
1
Customer Relationships is a strategy followed by businesses who believe that customer
segmentation and providing a tailored service are the keys to growth and success. S&OP
implementation is led by sales with strong support from marketing, finance and supply
chain. The decision making process focuses on volume and revenue growth, with an
understanding of opportunities and risks – a ‘range’ of numbers rather than a ‘single set’.
Emphasis is on sales planning with extensive involvement of account managers,
promotional activity, and the timely introduction of product line extensions. High levels of
customer service and supply chain responsiveness at minimum cost are standard
expectations. Principal targets include customer retention, customer penetration,
revenue and profit by customer/channel.
1
In businesses that follow Product /Service Differentiation as a strategy, leadership in
S&OP implementation is normally strategic marketing, with support from research and
development. Strong support is also needed from sales, finance and supply chain.
Decision making focuses on volume and margin growth, understanding opportunities and
risks – again a ‘range’ of numbers rather than a ‘single set’ and in certain cases scenario
planning; uncertainty goes with the turf. Emphasis is strongly on strategic marketing, new
activity success, pipeline fill, minimizing obsolescence, and portfolio management. High
levels of customer service and supply chain responsiveness are expected, although there

30
 Breakthrough S&OP

is forecast uncertainty. Primary targets include new products as a % profit, new product-
time to profit, and profit by brand / segment, brand health and market share.

Getting clarity in strategic intent is important before embarking on a Sales & Operations
Planning implementation or a re-implementation. Without this clarity an S&OP
implementation embarks on a “one size fits all”, where by default the assumption is that
operational excellence is a strategy. If the ‘one size fits all’ approach is followed for
businesses utilizing the strategies of Customer Relationships, Product/Service
Differentiation, there will be no enthusiasm from marketing, sales, finance or business
management. These key participants resent spending valuable time in a process which
spends several hours in a month focused on volume and cost implications, one set of
numbers for supply, and a set of measures which mainly interests supply chain, and only
one measure i.e. customer service, of interest to sales, and little to offer marketing.

Different Portfolio Models and their Impact on S&OP:

How different the future will be from the past and present is important in understanding
the business issues that connect to the S&OP process – S&OP is all about managing
change and its consequences! In figure 14, we show five different portfolio models with
their different emphases on S&OP:

Which of the five portfolio models best

describes your market segment or brand?
:

; 9

Fig 14

From models 1-5 we go from a future devoid of new activity to one with a high degree of
new product introduction; in fact, in model 5 the new activity impetus is coming from
products which are ‘new to the world’.

An S&OP process in portfolio model 1 would be traditional, and since there is no new
activity in the next five years, demand and supply balancing would be the emphasis in
S&OP. Because forecasting standard product in markets which are not growing is
relatively straightforward, there will be an emphasis on forecast accuracy and a single
number in supply. A business of this kind would be typically following a strategy of Cost
Leadership. An example would be commodity chemicals.

31
 Breakthrough S&OP

In model 2, there is more new activity but it is relatively straightforward and the business
appears to have linear growth. New activity would play a part but it would be a minor
role. An example would be an industrial chemicals organization whose main business is
commodities, but is also looking at specialty chemicals and may be acquiring small
businesses to augment the ‘new to us’ category. The strategy here is primarily Cost
Leadership, but the response in specialty chemicals could be ‘differentiated service’
because of the higher margins of these products.

The most challenging business model for traditional S&OP is model 5, where the existing
portfolio today will not be around in four years time. These are businesses with a high
degree of technology change and rapid implementation of new products. Portfolio
management including new products is the single most important step in the operational
processes. The traditional S&OP model of demand and supply balancing would appear to
be of little relevance to executives in this environment. ‘Uncertainty’ and a ‘range of
numbers’ in the Integrated Reconciliation step, and the importance of simulation and its
impact on profitability have enormous consequences. Measurements such as ‘time to
market’ and ‘time to profit’ are immensely important. Standard S&OP software that does
not facilitate forecasting of new products before they are given a specific product code is
an obstacle in this environment. Electronics manufacturers, mobile phones, software, and
computers are in this portfolio model. The strategy normally followed in these companies
is Product/Service Differentiation.

Many food and drink companies and fast moving consumer goods and pharmaceuticals
are examples of portfolio models 3 and 4. They would typically follow product/service
differentiation or customer relationships.

If your business has a portfolio similar to 3, 4 and 5, spending time on only implementing a
demand and supply process such as the traditional model in figure 4 is really
inappropriate.

Strategic Intent and Future Product portfolio and their Impact on S&OP
Understanding the business strategy is essential to understanding how S&OP will work. In
the previous section we discussed how S&OP product portfolio models work and how
these go hand in hand with the understanding of strategic models. Strategies are about
choices and tradeoffs, and each business needs to understand the principal strategy it is
following. It is not unusual to find that some organizations might have different business
units following different strategies.

A principal goal of the business pursuing a particular strategic direction is ‘Differentiation

from Competition’ leading to competitive advantage. A business guide to S&OP showing
different nuances and choices can be very helpful, whereas a one-size-fits-all universal
6
checklist for S&OP is not appropriate . Why would a business strive to end up the same as
its competitors?

32
 Breakthrough S&OP

9. Discoveries Leading to Breakthrough S&OP:

We have summarized the breakthroughs in S&OP knowledge, and demonstrated the
sequence in which they were discovered (Figure 1). The pattern is left to right and from
bottom up. This is because we are trying to discover a remedy for reactive execution

Evolution Of S&OP

Strategic Agenda and

Future Portfolio

S&OP
“The Aligner”

S&OP
“The Reconciler” and
“Integrator
Single Set of Numbers
S&OP “The Unifier”

Multiple Sets of
Numbers

Reactive Execution

Fig 1

Discovery 1: S&OP as the ‘Great Unifier’. The desired outcome was one view or a single
set of numbers, which was the considered antidote to multiple sets of numbers. This
pursuit of the ‘Holy Grail’ created dysfunction in the organization. In hindsight S&OP as
the unifier cannot be achieved until the process is aligned and reconciled.

Discovery 2: S&OP as the ‘Great Reconciler’ and ‘Integrator”. It is not possible to get an
‘agreed latest view’ unless the different views are reconciled. There must be recognition
that different views add value to the process and provide a greater understanding of the
latest business view. In addition when multiple markets and supply points are involved
the S&OP process has to be integrated in a timely fashion. These two factors are the
reason behind why we changed the “pre-S&OP” term to “Integrated Reconciliation” i.e.;
reconciling different views across functions, countries and regions.

Discovery 3: S&OP as the ‘Great Aligner’. Reconciliation involves ‘making apparently

conflicting things compatible or consistent with each other’. In the early days, we tried to
align S&OP with the budget only. Unfortunately this led to behavior supporting a 12
month view at the beginning of the fiscal year, but became shorter term as the fiscal year
progressed. The ‘breakthrough’ came, with S&OP as the ‘Great Aligner’, was when we
realized that it must be aligned beyond ‘year end’. That future involves the Product
Portfolio and the Strategic Intent of the business.

Although this is how S&OP has developed, we must reverse the discovery sequence to
implement Right to Left. This will guarantee success and means that you will get real

33
 Breakthrough S&OP

financial benefits from the process in six months. We start the implementation from the
Strategic Intent and Future Product Portfolio. (Figure 3)

Breakthrough S&OP
Right to Left
Strategic Agenda and
Future Portfolio

Align

Reconcile and
Integrate

Unify

Agree latest view

Execute Strategy

') '

Fig 3

The implementation phases are:

Phase 1: S&OP as the ‘Great Aligner’: The first step is to recognize that success comes
from a Top Down commitment. We said in the Executive Summary that executives get
tired of the “Top Management Commitment Syndrome”. But it is a simple issue in S&OP:
without it implementation will be left to right or bottom up. Therefore the Senior
Business Management Review and how its agenda is driven from the Strategic Intent and
Future Product Portfolio becomes the primary driver.

Phase 2: S&OP as the ‘Great Reconciler and Integrator’: This means that the business
agenda in the Senior Business Management Review [step 1] drives the activities and
discussion of Integrated Reconciliation [step 2]. The different views adding value are
explored and reconciled with the strategic intent of the business. In more complex
companies involving global, regional and country wide activities, a mandatory step is to
integrate and reconcile these views both top down and bottom up.

Phase 3: S&OP as the ‘Great Unifier’. This means that the operational steps of New
Activities, Demand and Supply are directed from the needs of the integrated reconciliation
process. Different views are welcomed because they add value to the knowledge of the
business. Functional behavior is not tolerated in these steps and cross functional
discussion is expected. All participants in the S&OP process are committed to a unified
agreed latest view having considered the different options.

34
 Breakthrough S&OP

Phase 4: Executing Strategy. This is maximizing the full potential of S&OP. Because the
agreed latest view is aligned to strategic intent, executing that view is executing strategy.
Short term execution is compatible with long term sustainability.

35
 Breakthrough S&OP

10. Summary of Different Implementation Approaches

This is a time phased implementation plan showing the activities that should take place
over an implementation time frame of six months. Phase one takes place in months 1 and
2, i.e. alignment with senior management, and driving its agenda through the Integrated
Reconciliation. Phase two takes place in months 3, 4 and 5 i.e. driving the needs of
Integrated Reconciliation to be the outputs from new activities, demand and supply.
Phase three is the realization of benefits and executing strategy. (Figure 15)

S&OP Implementation
Ling Coldrick Approach
" ' (
• C-% !" ) C !" 9 )'
! D* 9
C
• !" ') D !" D !

Scope Step 1
Senior Business E " E
Management ) )" 0F3F , ! *
! * Review 4 + "F
! % !
9 ' )) *

Scope Step 2
Integrated
Reconciliation
% ! !' D
$ '
! ! Scope Required
Output from Steps
3, 4, and 5 New
Activities, Demand
and Supply
$ 1 ./ - 1 $ &
Understand Software Define scope of Develop templates Integrate Software Enhance, Simplify,
! $ and - +$ &
Needs & Required Software and and support tools and reports Integrate Software Needs
Excel Spreadsheets Reporting needs information needs

Months 1 2 3 4 5 6

Fig 15

Although we believe a customized approach to S&OP is important, there are certain

principles that remain constant. The first and most critical one is that no business can
afford to spend time on S&OP unless there is a return on S&OP in six months. Early
successes and breakthroughs are mandatory. This implementation approach must be
customized for your environment.

Our Right to Left approach is unique to Ling-Coldrick. As far as we can see most
alternative approaches are left to right. Some, who are wedded to the single set of
numbers mantra, implement from left to right as in figure 16.

They still have the goal of a single set of numbers and believe that ‘S&OP is the Unifier’
although agreement is mostly superficial. For one to two days a month they agree to a
number, then post S&OP meeting they realize it will not happen. They then think up
excuses why the number will not be met and get ready to present an alternative one at
the next meeting. At best this is operational planning only, unless the organization has
Operational Excellence strategy by default, and is disconnected from the senior
management business agenda.

36
 Breakthrough S&OP

Traditional S&OP !
! % !

Emphasis on $ C-%
# !

C-%
!G
# ! !
Senior Management Disconnected

C-% $
'& !"
# !
$ ) "
'& !"
,
Emphasis on Volumes

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Fig 16

Other consultants have tried to copy our five step model, including Integrated
Reconciliation, but have missed the point by recommending a left to right approach. They
have confused process mechanics in figures 7 and 8 where the arrows go from left to
right, showing that decisions from the Senior Business Management Review in month one
flow into month two. In figure 16 the five step copy is shown and the implementation
sequence from 1-5. Some even compound the error by going really traditional, and
advising their clients to start the process by managing demand and supply, followed by
new product introduction. They then hope to evolve into an Integrated Reconciliation
step which may or may not coincide with the agenda of Senior Business Management.
This is a “ready, fire, aim” approach and unlikely to hit the target.

Operational S&OP
Five Step S&OP Copy Left to Right !
! % !

Implementation left to right

C-%
# !

Disconnected from Strategy

1. New Products

C-%
-) !
5. SENIOR *
2. Demand 4. INTEGRATED BUSINESS
Management '& !"
RECONCILIATION MANAGEMENT # !
REVIEW $ ) "
'& !"

3. Supply ,
Management

') ' ! '

Fig 17 Fig 18

The result of such an implementation is invariably an operational process disconnected from

strategic intent. People who advocate this approach are very often those who believe that
Operational Excellence is a strategy not a discipline. They are then surprised to find that the
CEO or leader of the business is following a real strategy, and has difficulty understanding what

37
 Breakthrough S&OP

S&OP will give the senior team. The worst solution is to allow someone who understands
operational S&OP, but is not in the senior team, to tell the CEO how to run the Senior Business
Management Review. People who follow this approach are recognizable in that they always
refer to Integrated Reconciliation as step 4, showing that for them it is the fourth step in the
process coming from left to right.

11. Conclusion: The Best Approach is Right to Left

We conclude by recommending our Right to Left Approach which insures that the S&OP
process from the outset is aligned to the strategic agenda.

Breakthrough S&OP
Breakthrough S&OP
Ling/Coldrick Model
Right to Left
Strategic Agenda and
Implementation Right to Left Future Portfolio

Align
3. MANAGING THE
PORTFOLIO &
NEW ACTIVITIES Reconcile and
Integrate

1. SENIOR Unify
4. MANAGING 2. INTEGRATED BUSINESS
DEMAND RECONCILIATION MANAGEMENT Agree latest view
REVIEW

Execute Strategy
5. MANAGING
SUPPLY

') '

Fig 18 Fig 19

Apart from the fact that this is the fastest implementation approach that guarantees
successful alignment, the compelling reason is that senior management are taking the
leadership role from the very beginning. The right to left versus left to right results in a
totally different emphasis on the way Integrated Reconciliation works. The context and
content are entirely different. In left to right with the five step copy in figure 18 and 19,
integrated reconciliation (step 4) is developed from operational issues. The IR team will
predominantly consist of operational people.

Our Right to Left Approach guarantees that Integrated Reconciliation is driven from
strategic intent, and therefore is responsible for resolving business issues (figures 18 and
19). The outputs from the operational steps 1, 2 and 3 are determined by the Integrated
Reconciliation. The IR team will be made up of more senior business people.

38
 Breakthrough S&OP

References:

1. Strategy – Create and Implement the best Strategy for Your Business
2005 Harvard Business School Press.

2. Breakthrough Sales and Operations Planning: How to Implement from Right to Left
By Dick Ling and Andy Coldrick January 2010.

3. On Competition
By Michael Porter
Harvard Business Review Book 2008.

4. Orchestrating Success: Improve Control of the Business with Sales nd Operations

Planning.
By Richard C. Ling and Walter Goddard
Wiley Press 1992.

5. Can Japan Compete?

By Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara
MacMillan Press 2000.

6. Breakthrough Sales and Operations Planning: An Assessment Guide for your Business.
By Dick Ling, Duncan Alexander and Andy Coldrick with senior management input from
Bruce Bissell and David Whitewood February 2010.

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If you would like to contact us directly:

Dick can be reached at:

Email [email protected]
Telephone +1-336-214-5911

Andy can be reached at:

Email [email protected]
Telephone +1-508-439-3698

39