Uncovering Sales and Operations Planning Involvement in Managing Demand Side Risks: an Explorative Case Study

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Uncovering Sales and Operations Planning

Involvement in Managing Demand Side

Risks: an Explorative Case Study

Master thesis, MSc Supply Chain Management

University of Groningen, Faculty of Economics and Business

Master thesis

June 21, 2020

Author: Dennis Wijkstra

Student number: S3216144

Email:

d.wijkstra@student.rug.nl

Supervisors/university: H. Dittfeld and D.P. Van Donk

Co-assessor/university: X. Tong

Word count: 11,822 words

Acknowledgement:

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ABSTRACT

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1. INTRODUCTION

Increased complexities and urbanization have strengthened the negative effects of disasters all around the world (Cavdur, Kose-Kucuk and Sebatli, 2016). A recent example is the outbreak of the corona virus. After the outbreak of the virus, Apple communicated that demand for their products had been affected (Apple Inc, 2020 and Financieel Dagblad, 2020). All Apple stores and many of their partner stores in China were closed due to the virus and the few partner stores that did not close, experienced low customer traffic (Apple Inc, 2020). Due to the same virus, Foxconn – Apple’s main iPhone manufacturer - had to close multiple factories. (Stevenson, 2020). But not only Apple, whole economies are hit by the virus outbreak (Financieel Dagblad, 2020). The example illustrates that both the demand and supply side of organizations can suffer from risks. Therefore, involvement of the company’s sales and operations planning (S&OP) process seems to be of great importance because the main task of S&OP is to balance supply and demand and to provide warnings when there is an imbalance. (Vollmann, Berry, Whybark and Jacobs, 2005). Managing demand side risks is one of the most effective supply chain improvement practices (Johnson, 2001). The importance of demand side risks is substantiated by Spekman and Davis (2004) as they give the example of Cisco Systems Inc. that wrote off 2,5 billion US dollars of inventory due to a lack of downstream supply chain communication.

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managing demand side risks. Only Gallucci (2008) linked risk management to S&OP. However this research incorporated scenario planning into S&OP instead of the risk management cycle used in this study. Because S&OP matches customer demand with supply capabilities (Tuomikangas and Kaipia, 2014), demand side risks are dealt with by S&OP processes because a demand risk can lead to imbalances between demand and supply. It is however not yet understood in literature how different phases of S&OP contribute to managing demand side risks. Therefore, demand risk management needs to be integrated into risk management literature.

In their literature review about S&OP, Kristensen and Jonsson (2018) acknowledge that risk management is a response to demand and or supply risks and that the design of S&OP can change due to risks. However the other way around, so the contribution of S&OP in the management of risks is not covered in current literature. This means that it is not yet known which S&OP process covers certain risk management steps. Olhager and Selldin (2007) found that S&OP has a positive, mediating effect on firm performance in markets with demand risks. However they did not research how companies manage demand risks within S&OP while this could be an important topic study. Data gathering for initial forecasts and demand planning are the first steps in the S&OP process (Kristensen & Jonsson, 2018; Grimson & Pyke, 2007; Ivert et al., 2015; Lapide, 2004). If deviations in the demand due to demand risks are not taken into account by the S&OP process, balancing demand and supply is not manageable anymore by the process. This leads to the following research question:

What is the role of sales and operations planning in risk management when managing demand side risks?

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characteristics. This does not only contribute to the existing risk management and S&OP literature, it can also be important for managers to understand the role of S&OP in demand side risks better. This knowledge could help companies to organize their demand risk management more effectively which lowers the chance on performance drops due to unforeseen demand variations.

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2. THEORETICAL BACKGROUND

The goal of this section is to provide an overview of the current state of the literature in order to make the importance of the study more clear. Additionally, the research framework will be presented.

2.1 Demand Side Risks

Due to the increasing complexity and interrelation of supply chains, risks have become hard or even impossible to predict (Helbing, Ammoser and Kühnert, 2006). This makes dealing with risks more challenging for organizations. After an extensive literature analysis, Heckmann et al. (2015:130) developed the following definition of supply chain risks: “Supply chain risk is

the potential loss for a supply chain in terms of its target values of efﬁciency and effectiveness evoked by uncertain developments of supply chain characteristics whose changes were caused by the occurrence of triggering-events”.

Supply chain risks can be differentiated into two major parts namely supply risks and demand risks (Johnson, 2001). Demand side risks are disruptions in the downstream supply chain (Jüttner, 2005). Sources of demand side risks are insufficient supply chain coordination, a mismatch between a company’s future sales projection and the actual sales (Wagner and Bode, 2006), random customer demands (Nagurney, Cruz, Dong and Zhang, 2006), delayed customer orders (Chopra and Sodhi, 2004) seasonal imbalances, volatility of fads, new product adoptions, product life cycle lengths, perceptions of product safety and companies’ ethics (Johnson, 2001). Poor downstream supply chain coordination as well as random customer demands can lead to forecasting difficulties (Wagner and Bode, 2006). Demand volatility, deﬁned as inconsistent, unstable, or high variance demand for a company’s goods (Saldanha, Melville, Ramirez, and Richardson) is amplified dependable upon the position in the supply chain by the bullwhip effect which complicates the forecasting as well (Wagner and Bode, 2006). Furthermore, companies’ ethics might be a bit more indirect as this form of demand risk is caused by the public’s perception of ethics, for example use of child labour that affects customer demand (Johnson, 2001).

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inventory and possible lost sales (Baghalian, et al., 2013). So not managing demand risks properly causes not only production related difficulties but also difficulties at the supply side. Demand side risks are major risks for organizations as the consequences are costly shortages, obsolesce and inefficient capacity utilization (Wagner and Bode, 2006). In order to prevent big losses as mentioned by Spekman and Davis (2004), companies need to structurally manage demand side risks.

2.2 Supply Chain Risk Management

After summarizing existing definitions and executing an extensive literature review, Ho et al (2015) defined supply chain risk management (SCRM) as: “an inter-organizational

collaborative endeavour utilizing quantitative and qualitative risk management methodologies to identify, evaluate, mitigate, and monitor unexpected macro and micro level events or conditions, which might adversely impact any part of a supply chain” (Ho et al., 2015: 5036)

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9 TABLE 1: DEMAND RISKS SPECIFIC LITERATURE

Demand side risk identification

Demand side risk assessment

Demand side risk mitigation

Demand side risk monitoring

Definition: Process to discover all relevant demand risks (adapted from Kern, Moser, Hartmann and Moder, 2012).

Definition: The occurrence probability of an event affecting the demand side and the significance of the consequences of this event (adapted from Harland, Brenchly and Walker, 2003).

Definition: Process that seeks to actively reduce demand risks to an acceptable level, applicable to reduce the

probability of a risk event and the consequences (adapted from Norrman and Jansson, 2004). Definition: actions to monitor developments regarding demand in a supply chain that could increase or decrease risks on an ongoing basis (adapted from

Zsidisin, Melnyk and Ragatz, 2005). Forecasting techniques (Hopman, 2007) Inventory management under increasing demand volatility (Radke and Tseng, 2012)

Optimal order placement methods under demand risks (Schmitt and Singh, 2012; Sodhi and Tang, 2009)

Real time risk monitoring tool to monitor retailers, distribution centres and end customers (Goh et al., 2013) Product risk identification (Erhun, Gonçalves and Hopman, 2007) Demand risk quantification tool (Basset, Gunasekaran, Mohamed and Chilamkurti 2019)

Demand risk sharing contracts (Chen and Yano, 2010) Demand visibility (Smaros, Lehtonen, Appelqvist and Holmström, 2003) Supply chain network design under demand risks (Baghalian et., 2013)

Note: Definitions of the demand risk management steps are adapted from general definitions of those steps because they were not given yet in literature.

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the knowledge based approach uses knowledge in the form of rules in a supply chain risk identification system in order to identify risks (Kayis and Karningsih, 2012).

Demand side risk identification has been mostly neglected in current literature. Researchers in the field of demand side risks mostly focus on demand side risk assessment and mitigation (Ho et al., 2015). However Hopman (2007) discusses forecasting techniques in order to predict markets, guide business decisions and manage demand risks. However, achieving high quality market forecasts consistently is very hard and mistakes are costly (Erhun et al., 2007). Improving visibility of demand, improves production and inventory control efficiency (Smaros, et al., 2003). But, not all risks can be forecasted so forecasting methods are only a part of the risk identification process. Other risk identification processes such as supply chain vulnerability mapping (Blos, Quaddus, Wee & Watanabe, 2009) and the analytical hierarchy process (Tsai, Liao and Han, 2008) however, have not been linked to demand side risks specifically. Besides this, S&OP involvement in the process of risk identification is not yet included in literature except for forecasting methods.

2.2.2 Supply chain risk assessment

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The risk assessment stage has gained more attention in current literature than the risk identification phase (Ho et al., 2015 and Sodhi et al., 2012). Risk assessment can be characterized as the occurrence probability of an event and the significance of the consequences of this event (Harland, et al., 2003). Managers as well as researchers in the current business environment have realized that risk assessment practices within supply chains is crucial for organizational success (Dong and Cooper, 2016). Risks can be assessed by using data –if relevant data is available - or expert judgement and scenarios (Cohen and Kunreuther, 2007). Following from this, risk assessment can be formal or informal and quantitative or qualitative (Zsidisin, Ellram, Carter and Cavinato, 2004). In order to create a robust construction of risks and thus improve the effectiveness of risk assessment, a combination of objective data and subjective perceptions are needed (Tsai, et al., 2008).

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studies have addressed demand risk assessment, none of them included S&OP in their research. Nevertheless S&OP could be of importance for (demand) risk assessment because the data needed to assess risks (Cohen and Kunreuther, 2007) can be gathered by S&OP because this

“process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing, and financial) into one integrated set of plans” (Avila, Lima,

Moreira, Pires and Bastos, 2019: 1383).

2.2.3 Supply chain risk mitigation

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The next phase is the risk mitigation phase. In this phase, the most appropriate mitigation strategy for each risk or each combination of risks is identified (Khan and Burnes, 2007). Many different risk mitigation strategies have been discussed in current literature such as increasing capabilities, aggregating demand, increasing flexibility, increasing inventory, increasing responsiveness, acquiring redundant suppliers and increasing capacity (Chopra and Sodhi, 2004). In order to successfully deal with risks, managers need to determine how to adapt one of the general risk-mitigation strategies to the circumstances of their specific company (Chopra and Sodhi, 2004).

Demand side risk mitigation research has focused on determining the optimal order placement method while taking uncertain demand into account (Schmitt and Singh, 2012; Sodhi and Tang, 2009). Also, Hopman (2007) used Information Aggregation Mechanisms in order to increase market forecasts in order to deal with demand risks. Besides this, risk sharing contracts can be used by organizations in order to minimize performance decrease due to demand risks (Chen and Yano, 2010). S&OP seems to be of importance in mitigating demand side risks. Demand side risks could in the end also cause difficulties at the supply side (Baghalian et al., 2013). One of the main tasks of S&OP is to balance demand and supply (Thomé et al., 2012) and therefore it seems that S&OP has to deal with demand side risks. Previous studies however, have not yet included S&OP in the risk mitigation process.

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risk management practices, however risk monitoring should always be conducted even in times of no crisis (Blome and Schoenherr, 2011). Supply chain risk monitoring is critical for modern supply chains in order to alert on time and effectively plan risk management (Goh, et al., 2013). Goh et al. (2013) propose a real-time supply chain visualisation platform that can be used as a tool to effectively manage supply chain risks such as demand risks. This platform (RiskVis) facilitates real-time collection and monitoring of risk information including information from the company itself, its supply chain and external information (Goh et al., 2013). Such a system could be of great importance as well for monitoring demand side risks and could be used by S&OP in order to match demand with supply as risk monitoring could help to provide early warnings about possible risks. This study however is a mathematical study and empirical work on this subject is very limited at the moment of writing.

2.3 S&OP

Sales and operations planning (S&OP) can be defined as the key business process to balance customer demand with supply capabilities (Tuomikangas and Kaipia, 2014). The main features of S&OP are the following: it is a cross functional and integrated tactical planning process within the firm, it integrates all business plans in one unified plan, it has a planning horizon between three and eighteen months (Thomé et al., 2012), it functions as a bridge between strategies and operations (Feng, D’Amours and Beauregard, 2008) and it creates value for the firm (Nakano, 2009). S&OP’s main responsibility is to balance supply and demand and to provide warnings in case of imbalances. (Vollmann, et al., 2005).

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(Thomé et al., 2012) but could vary per industry as extreme cases can have a planning horizon of 3 years (Grimson and Pyke, 2007). Companies therefore need to match their planning horizon with the industry characteristics such as product seasonality and lead time length (for high seasonality products or long lead time items, planning horizon is generally longer) in order to deliver reliable demand plans (Grimson and Pyke, 2007). Other design parameters are planning hierarchy and product aggregation levels of S&OP (mostly aggregated level, i.e. product groups) (Oliva and Watson, 2011). Meetings and collaborations in S&OP structures refer to the design of S&OP sub-processes, including the final balancing meetings and decision-making activities (Kristensen and Jonsson, 2018), the organizational dimension is focused on the corporate structure, the information technology dimension comprises the IT structure that is used in S&OP and at last S&OP metrics concern a firm’s S&OP process performance (Ivert et al., 2015; Kristen and Jonsson, 2018). The outcome of the S&OP process is an integration of plans from different departments within an enterprise (Thomé et al., 2012).

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come to a final S&OP plan which is then implemented (Ivert et al., 2015). Additionally, in this executive S&OP meeting, top management gives direction to the S&OP process and determines steps to improve S&OP performance (Kumar, 2016).

2.4 Literature Gap and Research Framework

The goal of this research is to explore the integration of demand risk management into S&OP. S&OP plays an important role in balancing demand and supply (Vollmann et al., 2005). This balance can be disturbed by demand risks and therefore S&OP is expected to play an important role in managing demand risks. Both S&OP and demand side risks are quite well covered in existing literature (Baghalian et al., 2013; Johnson, 2001; Radke and Tseng, 2012; Sodhi and Tang, 2009) However, a link between both subjects is not yet being researched. This research will fill this gap by uncovering S&OP’s contribution in managing demand side risks. This will be done according to the conceptual model as depicted in figure 1.

FIGURE 1: CONCEPTUAL MODEL

Note: The risk management cycle as presented in the model is adapted from the model introduced by Ho et al. (2015).

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3. METHODOLOGY

The importance of S&OP’s role in managing demand side risks has been discussed in the previous sections. However it is not yet known how exactly S&OP contributes to managing demand side risks. Therefore, this study aims to explore how both phenomena are intertwined in real-life settings.

3.1 Research Design

The aim of this research is of exploratory nature since it is not yet being studied how S&OP contributes to managing demand side risks. Therefore, an inductive case study will be executed in order to answer the research question. Case studies can be used in order to answer ‘why’, ‘what’ or ‘how’ questions in order to understand and explore a phenomenon (Yin, 2009). According to Yin (2003) an exploratory case study is appropriate when the phenomenon that is being studied is not clear yet or does not have a single set of outcomes. As discussed in the previous section, the role of S&OP in managing demand side risks is not clear yet. The research is conducted in 8 different companies though 15 interviews meaning that the study is a multiple case study. The advantage of this type of research is that including multiple cases enhances the external validity of the research because only one case is not enough to make sure the study is generalizable (Yin, 2009). Additionally, results obtained from a multiple case study are considered to be robust and reliable (Baxter and Jack, 2008). The unit of analysis of this research are the departments included in the S&OP process. According to Ivert et al. (2015) sales, marketing, operations, supply chain, procurement and finance are part of the S&OP process.

3.2 Case Selection

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product lead time lengths and seasonal imbalances could differ a lot between industries meaning that the S&OP process could be designed differently as well (Grimson and Pyke, 2007). Furthermore, interviewees were selected based on their expertise in cooperation with a contact person at the participating companies. This means that the interviewees of the same case have their expertise in different subjects such as sales, marketing, supply chain, operations, finance, procurement (all departments involved in S&OP according to Ivert et al., 2015) or risk management. Besides this, all companies involved in this research are located in The Netherlands to prevent different outcomes due to cultural dissimilarities.

3.3 Data Collection

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18 TABLE 2: CASE SELECTION AND DATA COLLECTION

Case Industry of operating Function of interviewee Interview duration

A Industrial: manufacturer of equipment and machines

1: Director Sales &

Marketing 00.35.00

2: Director Operations 00.38.00

B Industrial manufacturer of machines and equipment

3: Logistics & Production

Manager 01.23.00

4: Regional Sales Director 01.30.00 C Industrial: manufacturer of

electrical systems:

5: Global Supply Chain

Manager 00.58.00

D Manufacturing: manufacturer of starch products

6: Supply Chain Manager 01.22.00

7: Sales Planner 01.00.00

8: Risk Manager 00.54.00

E Retail: many kinds of products 9: Supply Chain Director 01.34.00 F Industrial: manufacturer of

system water solutions

10: Supply Chain Planner 01.26.00

11: Business controller 01.26.00

G Industrial: manufacturer of plastic and rubber products

12: Fulfilment planner 01.26.00

13: Supply Chain

Coordinator 01.26.00

14: Financial/Business

Controller 01.22.00

H Food processing industry 15: Supply Chain Manager 01.14.00

3.4 Data Analysis

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4. RESULTS

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20 TABLE 3: CHARACTERISTICS OF THE INVOLVED COMPANIES

Company Production process S&OP process Main demand risks

A Product: Multiple

products

Process: Large batch Product-process: Batch flow

S&OP cycle length: Two weeks

Meeting includes (pre S&OP meeting and executive meeting are one): Sales, production, supply chain, purchasing and engineering (sometimes)

Description of S&OP process: Yearly budget in S&OP in which sales indicates what they expect to sell the next year. S&OP meeting is based on sales input: the probability of successes for hot prospects. Finance checks incoming order on compliance before the order can be accepted. New planning is based on the WIP and the new orders. After this, new production orders are put in the ERP system. The system does MRP runs to determine the schedule. After this, another tool – Slim stock – predicts the purchasing of products which is then being checked by purchasing employees to try to group things.

1: Fluctuating demand 2: Forecasting difficulties 3: “Copy cats” B Product: Multiple products

Process: Large batch Product-process: Batch flow

S&OP cycle length: One month

Meeting includes (pre S&OP meeting and executive meeting are one): Sales representative, operations representative, purchasing representative and logistics representative

Description of S&OP process: Yearly rolling forecast (horizon) based on information from dealers and experiences from the past. Demand plan is adjusted every 3 months because operations is not yet flexible enough to adjust the planning monthly. Supply plan is thus adjusted based on the 3 monthly demand plan changes which is discussed in the S&OP meeting.

1: Fluctuating demand 2: Decreasing prices customers products C Product: Unique products Process: project Product-process: Project

Meeting includes (pre S&OP meeting and executive meeting are one): Manager sales, operations manager, global supply chain manager, plant manager, plant planner, group leader of engineering, purchasers of long lead-time items and - not always but many times - the CFO

Description of S&OP process: During S&OP meeting: sales prospects discussed together with the capacity to match supply and demand based on predeveloped demand- and supply plans from sales and operations. CFO joins the meeting to discuss the consequences of moving production to other slots changes are needed based on the S&OP meeting outcomes.

1: Spread of the demand

D Product:

Standardized Process: Flow

Meeting includes: Pre meeting: four production planners and sales planners, product managers and production managers. Executive meeting: supply chain manager, supply chain director, site managers, product line directors (all supervisors of the employees involved in pre S&OP meeting)

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21 Product-process:

Continuous flow

Description of S&OP process: S&OP starts at the sales side. Sales employees around the world can import their sales forecast into the planning system. Once per month, this data goes into capacity planning and this is the basis for the S&OP meeting. Also, forecasts go to the operational planners daily. Based on their line planning, the systems determines the need for components and this goes to the purchasing department.

Customer orders arrive at the S&OP planners (all of them have their own area), they make a planning and a report based on the orders. The report is the basis for the pre S&OP meeting. Most urgent topics are discussed. Decisions can be assigned to the master S&OP including executives. Many details in pre meeting, in master meeting only decisions need to be made.

2: Forecasting difficulties E Product: Standardized Process: Mass production Product-process Line flow

S&OP cycle length: One week

Meeting includes: pre meeting: Purchasing representative, sales representative, operations representative, supply chain representative and finance representative. Executive meeting: Management team.

Description of S&OP process: Starts on Friday at buying and sales with the sales forecasts for the 4 main product categories. This is an adjusted 6 weeks forecast based on market circumstances, weather forecast and market interaction. Monday: sanity check on the forecasts from Friday with the commercial controlling to see if the forecasts match with the figures of the budget. This is done in money and this is then translated to the amount of products and packages (supply planning). Next is a discussing in the S&OP meeting.

Monthly process: the same as the weekly process but now the view is at 12 months. Including stock level projections from buying and sales. Here the focus is more on managing the capacity as the interviewee said: “no warehouse is made of rubber”.

1: Changing demand 2: New market entrants

F Product:

Multiple/Standardized Process: Large batch/ mass production Product-process: Batch flow/line flow

Meeting includes (pre S&OP meeting and executive meeting are one): Business controller, supply chain planner, head customer service, commercial director and operational director (sometimes) Description of S&OP process: From September, business managers (regional sales leaders) forecast the revenue for their region for the next year based on historic data, market environment and customer contacts. This is then translated to a more detailed level and then to a product code level to the 100 most selling products. This is translated to the main production plan. The supply chain planner then can add or decrease 10% if he expects more or less sales. Forecasts are updated at least every month. Customer service monitors the difference between the forecast and the actual sales and indicates this.

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The demand plan is the basis for the supply plan which is made in the ERP system. The demand plan can be downloaded by everyone who needs it.

G Product:

Standardized Process: Flow Product-process: Continuous flow

Meeting includes (pre S&OP meeting and executive meeting are one): Sales director of the Benelux, sales director The Netherlands, Logistics, sales back office Demand planner, and if they are available Europe supply chain manager, Europe West supply chain manager and production manager The Netherlands

Description of S&OP process: Sales forecasts are yearly forecasts (horizon) but are updated every month (now during corona every 2 weeks). First a central planner for a region discusses the forecasts from sales with the sales managers. Those forecasts are discussed with finance to validate the numbers to see if it matches budget (demand planning). This leads to a final sales forecast that is used in the S&OP. Then production needs to have the capacity to make the orders and finance need to accept it budget wise (supply planning). This is discussed in the S&OP meeting. Other discussed topics: sales forecasts and progression, stock availability.

1: Forecasting difficulties 2: New market entrants 3: Governmental regulations H Product: Standardized Process: Flow Product-process: Continuous flow

S&OP cycle length (only executive S&OP): One month

Meeting includes (pre S&OP meeting and executive meeting are one): Commercial director, finance and operations

Description of S&OP process: Starts with demand forecasting and the demand review. In the demand review, supply chain and sales discuss the demand forecasts. Next, during the supply review, supply chain and operations discuss the production plan. And this is then presented in the master S&OP to the directors

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4.1 Demand Risks Identification in S&OP

After analysing the demand risk identification process of all the companies involved, it became clear that the companies identify demand risks within their S&OP process. However the stage of the S&OP process in which the organizations identify their demand risks differs as can be seen in table 3.

TABLE 4: DEMAND RISK IDENTIFICATION IN S&OP

Companies S&OP step Demand risk identification

Company A Data gathering Area managers (sales) gathering customer data Company B Data gathering Trade magazines, customers & interest groups Company C S&OP meeting Discussed in S&OP meeting

Company D Demand planning Identification based on the demand forecasts

Company E Demand planning Applying historic data and an uncertainty factor to the forecast

Company F Demand planning Business managers (sales) indicate risks in forecasts

Company G Demand planning Using customer forecasts and media information which is checked by sales and finance

Company H Demand planning Discussed in the demand review between sales and supply chain

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on the data that are performed during the demand planning have not yet been done here. After this, the demand risks can be taken further in the S&OP process until the S&OP meeting but many times it is already handled in more informal pre meetings between sales and operations and/or supply chain. But this will be discussed more in depth in section 4.3.

The second group just consists of one organization. Only company C identifies risks directly within the S&OP meeting based on the separate plans of departments involved in the S&OP process. Here, insights from multiple departments are used to identify risks. This company is project-based meaning that projects for customers are always different. This could explain why demand risks are identified within the S&OP and not before as demand side risks can be more complex because every order is different. Another indication for this is that the S&OP meeting in this company comprises many different functions: the sales manager, operations manager, global supply chain manager, plant manager, plant planner, group leader of engineering, purchasers of long lead-time items and - not always but many times - the CFO. All those functions together discuss the situation of their respective insights every two weeks in an S&OP meeting in order to identify possible demand side risks suffered by the company.

The last group clearly is the biggest group in the first step of demand risk management as five out of eight companies are in this group (see table 4). The companies in this group identify demand risks during the second step of S&OP: the demand planning process. This thus goes a bit further than just identifying demand risks based on gathered data. Those companies gather data first to make the initial forecasts based on periodic forecasts from customers and market data. The sales planner of company D said on this: “At which customers do we see growth? We

always try to identify based on prognosis”. After the first forecasts, more detailed forecasts are

made in which companies translate the initial forecasts to higher detail levels such as product family levels or product levels. And in this step, demand risks are identified mostly. Additionally, some companies also identify demand side risks a bit later in the demand planning process when the forecasts are checked by finance, supply chain and operations during informal meetings before the actual S&OP meeting.

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batch flow/ line flow because this company offers custom solutions as well as very standardized products. So even though the S&OP processes of the organizations and the demand risks that they face could vary, the categorization based on the product process matrix gives the same groups as the categorization based on demand risk identification methods.

4.2 Demand Risks Assessment in S&OP

After the analysis of the data gathered about the demand risk assessment process of the different companies, it is found that all companies involved assess the impact of demand risks they are facing within their S&OP process. The method of assessment and the placement of the process differ however. This can be seen in table 5.

TABLE 5: DEMAND RISK ASSESSMENT IN S&OP

Companies S&OP step Demand risk assessment

Company A Data gathering Area managers assess demand risks using a CRM tool

Company B Data gathering Continuously gathering information from key customers, interest groups and the market

Company C S&OP meeting Finance does budget checks

Company D Data gathering Customer contacts: risks impact assessed on finance, employee, environment & reputation

Company E Demand planning Impact attached to the forecast Company F S&OP meeting Discussed in the S&OP meeting

Company G S&OP meeting In the S&OP meeting, also by making scenario's

Company H Demand planning Discussed in the demand review between sales and supply chain

Just as the demand risk identification phase, the companies can be divided into three different groups but the composition of the groups changes. The first group of companies (companies A, B and D) perform the demand risks assessment in the data gathering step of S&OP. However all of them have a slightly different approach in assessing the impact and probability of demand risks. The area managers who identify the risks at company A during the data gathering phase, do assess the risks as well. To do so, they use a CRM tool which calculates probabilities that certain orders are cancelled. Based on this, the probable impact can be calculated. The operations director said about the CRM tool: ”At the sales side, we work with a CRM tool in

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added about risk assessment: ”For that we use a CRM tool which attaches the probability of

arrival of certain orders”. Company B gathers information from customers such as their sales

revenues and from interest groups, trade magazines of the industry and the market itself. However unlike company A, this company does not use a specific tool to assess probabilities. Demand risk assessment here is just based on the raw, gathered data. Also company D assesses demand risks in the data gathering stage of S&OP. They have a formal risk management system in which risks are assessed on multiple aspects as can be seen in table 5. However, for demand risks, those risks are assessed based on data gathered from customers. But this counts mostly for operational risks. For tactical and strategic risks, the risk manager can assess and treat the risk in a more formal procedure outside the S&OP process.

The second group of companies consists the companies C, F & G. Those companies assess the probability and impact of their faced demand side risks within the S&OP meeting. Company C and F assess their demand risks in the same way. Within the S&OP meeting, each function gives their opinion and based on a discussion between all involved parties and common sense, the impact and probability of a demand side risk are assessed. After this, the risk is only financially. The global supply chain manager of company C commented on this during the interview: “We look at it purely from a financial point of view, what we can suffer”. Lastly, company G has a bit more formal process to assess demand side risks. Similarly as companies C & F are the impact and chance of demand side risks discussed within the S&OP process. However the difference between both is that company G does scenario planning on an aggregated level based on this discussion to make sure the company has enough resources to satisfy demand.

The last group of companies (E and H) assess their demand side risks in the demand planning phase of S&OP. Company E attaches the impact of certain demand risks to the demand plan. This is mainly based on historic data as the interviewee told: “We know from history and data

collected in the past what the impact will be when temperature rises with three degrees Celsius in sunny weather. We know quite sure that if temperature next week is 24 instead of 20 degrees, what the impact will be on our biggest product groups”. Assessments such as this example are

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For the first group (companies A, B and D) it can be noticed that the demand risks that they face are similar but not exactly the same. So this does not completely explain why those companies assess their demand risks in a similar way as some other companies suffering the same risks, have other methods. However the similarity between companies A and B can also be determined by the context as they have a similar place in the product-process matrix. For the second group (companies C, F and G), results of company C are explainable because of the industry they are in with projects being different every time meaning that consultation is important here. Also, the combination of demand risks faced by companies F and G are very similar. Lastly, companies E and H are facing the same demand risks which could explain why those companies assess demand risks in a similar way.

4.3 Demand Risks Mitigation in S&OP

From table 6, it can be seen that all companies mitigate demand side risks within the S&OP meeting. However some companies (C & F) indicated that multiple S&OP steps are used to mitigate demand side risks however the most important tool in balancing demand and supply and thus mitigating demand risks was the S&OP meeting for all companies.

TABLE 6: DEMAND RISK MITIGATION IN S&OP

Companies S&OP step Demand risk mitigation

Company A S&OP meeting Discussed in S&OP meetings but many times informal pre meetings

Company B S&OP meeting S&OP meetings to discuss balancing demand and supply

Company C S&OP meeting Match capacity with demand during S&OP meetings

Company D

Demand planning, supply planning & S&OP meeting

Demand plans can be changed immediately meaning that the S&OP discussion and the supply plan can be changed quickly as well

Company E S&OP meeting

Scenario management within the S&OP meetings, higher frequency of S&OP meetings to create alignment and discuss cushion

Company F Supply planning and S&OP meeting

Production capacity discussed in combination with sales, cushion can be changed

Company G S&OP meeting

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Company H S&OP meeting Scenario management in S&OP meetings

Companies A and B have a very similar process of demand risk mitigation. Both companies use the S&OP meeting to mitigate demand side risks but when interruptions are small, demand risks can be solved in smaller, informal meetings between problem owners. In company C, this is a bit different. Demand risks are mainly mitigated in S&OP meetings including many different functions. An important role, according to the interviewee, is for the purchaser of long lead-time items who attends the S&OP meetings. He knows exactly what the reserved production slots are at their suppliers. When a demand risk needs to be mitigated, the demand plan can more easily be balanced with the supply plan within the S&OP meeting because not only internal capacity data is known but external capacity is known as well. In order to combine all information, the S&OP meeting is needed. Company D manages demand side risks mainly within the S&OP meeting. However when a demand risk comes unexpected, it is possible for sales employees to change the forecast immediately in the company’s IT structure so that operations can adjust the supply plan accordingly. The main balancing however between both is done in the pre S&OP meeting. When some companywide decisions need to be made, this is taken higher up to the executive S&OP meeting.

Companies E, G and H all use scenario management within their S&OP meetings to mitigate demand risks. On the coronavirus outbreak, the supply chain director of company E commented: “We made three scenarios: high, medium and low”. The supply coordinator of company G said: “We mainly discuss the most likely scenario….but keep in mind that sales

could be 10-15% higher”. Also the same interviewees from companies E and G mentioned that

the frequency of the S&OP meetings was increased during the corona crisis in order to be able to balance supply and demand better. Company H did not increase the frequency of S&OP meetings. Lastly, when the demand plan is translated into the production plan at company F, a cushion is applied by the supply chain planner of +/- 10%. This cushion is determined after the results of the S&OP meeting. Overall, companies mitigate demand risks in S&OP in similar ways but still some differences remain.

4.4 Demand Risks Monitoring in S&OP

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Companies S&OP step Demand risk monitoring

Company A Data gathering Area managers gather market information

Company B Data gathering Sales monitors interest groups, milk prizes and regulations

Company C S&OP meeting

Discussed in S&OP when a demand risk is found. Finance then monitors the risk by checking the expenses

continuously.

Company D Data gathering Data gathering on risk profiles Company E Data gathering /

S&OP meeting Daily S&OP calls and demand forecast adjustments Company F Data gathering Monitoring expectation in relation to the real sales by

customer service.

Company G Data gathering Information gathering from media

Company H Not in S&OP Monitoring KPI’s such as delivery reliability and quality.

Company A monitors demand risks by continuously tracking the order statuses of their customers. Additionally the area managers who are also responsible for identifying demand risks, monitor the demand risks as well by continuously gathering market information and information from customers. Company B uses a similar method, however they engage in more information gathering methods as they also monitor selling prizes of their customers’ products, regulations and they are in interest groups. Company C is different from all other companies as this is the only company that is not monitoring demand risks in the data gathering phase. Here again, insights from all S&OP participants are presented and discussed in the S&OP meeting in order keep track of demand risks faced. After the discussion within the S&OP meeting, finance continuously monitors expenses and incomes on the projects. This already starts after a demand risk is identified. The global supply chain manager commented on this: “We do this

(demand risk monitoring) directly in S&OP. But after a risk is identified, we have to make a decision, do we take the risk or do we not? Then it is just a financial risk which is monitored by finance”.

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during daily S&OP calls if needed. The input for those calls are data which is gathered earlier, in times of heavy demand risks it is the data gathered the day before. Also sales employees have input for demand risk monitoring, the supply chain director commented on this: “In an S&OP

meeting is also a representative from sales so there is a link with sales. What are your or your colleagues’ signals, does it (demand) stay on this level, does it stay so volatile”.

Company F has a very similar process here as company A. Data is gathered on order status to see if it matches expectations. If deviations are found, then the production plan can be adjusted based on a new MRP run which is then shared with the procurement department. Next, company G has a similar method as companies A, B and F. Company G monitors demand risks by continuously gathering data from media. Finally, company H did not monitor demand risks within the S&OP process.

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5. DISCUSSION

In line with the purpose of this research to explore the integration of demand risk management into S&OP, this study contributes to the existing literature by delivering empirical insights on the topic. More specifically, this study highlighted which demand risk management activities are executed in different parts of the S&OP process and in what way organizations do this. Even though Gallucci (2008) linked scenario planning to S&OP, now also the links between the risk management cycle and S&OP are explored for demand risks specifically.

5.1 Demand Risks Identification and S&OP

Demand side risk identification literature was mainly focused upon forecasting methods (Hopman, 2007; Erhun et al., 2007; Smaros et al., 2003) and vulnerability mapping (Blos et al., 2009). Also the link between demand side risks identification and S&OP was not yet been made. This study however linked demand risks identification to S&OP by determining in which S&OP step what demand risk identification activities are performed and how this is done. Companies deal with demand risks in S&OP in different methods but could be grouped based on how they perform demand risk identification. Grouping organizations based on how they identify demand risks within the S&OP process, gives the same groups as grouping organizations based on the product-process matrix (Davies and Frederiksen, 2010) as can be concluded when table 3 and table 4 are compared. All batch flow companies identify demand risks within the data gathering phase, the project organization in the S&OP meeting and the line flow and continuous flow organizations identify demand risks in their demand planning processes. This also confirms the expectation mentioned in section 2.4 that data gathering and demand planning play an important role in identifying demand risks.

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5.2 Demand Risks Assessment and S&OP

Demand side risk assessment literature has focused on the different impacts of demand volatility on inventory management when demand are taken into account and when demand risks are not taken into account (Radke and Tseng, 2012). Also demand risk quantification tools are researched (Basset et al., 2019). This study added to the currently existing literature how demand risks are assessed within the S&OP process and in which S&OP step this is done in practice. The results show that companies assess demand risks within S&OP in multiple ways. Organizations can be grouped based the stage of S&OP they assess demand risks in. Existing literature concerning dynamic complexity has focussed on the effects of demand risks on S&OP design concluding that S&OP design could be changed due to demand risks (Kristensen and Jonsson, 2018). This study found that the type of demand risk seems to affect S&OP design. Companies suffering similar demand risks, assess demand risks within the same S&OP step. Organizations facing different demand risks, use other S&OP steps and methods to assess their demand risks meaning that their S&OP is designed differently.

Secondly, risks can be assessed by using data or expert judgement and scenarios (Cohen and Kunreuther, 2007). One way to assess demand risks is by using the economic quantification tool proposed by Basset et al (2019). This study found that companies that assess demand risks within their S&OP process use multiple ways. The findings of Cohen and Kunreuther (2007) are partly confirmed by this study as well. Some companies involved in this study relied very much on gathered data, and one out of eight organizations (company G) uses scenarios to assess demand risks. However the S&OP meeting is found to be a way of assessing demand risks as well which is not being mentioned by Cohen and Kunreuther (2007).

5.3 Demand Risks Mitigation and S&OP

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increase the frequency of S&OP meetings during important and unpredictable demand risks as the coronavirus outbreak meaning that the design of the S&OP process could change as well because of demand side risk mitigation. Gallucci (2008) already found that the design of the S&OP process could change due to demand side risks. Gallucci (2008) recommended to operationalize scenarios using trigger points (e.g. if demand reaches a specific trigger point, a predetermined scenario is used). This study added to the literature that the design of S&OP could also change because demand risk mitigation can force companies to change their S&OP design by increasing the S&OP meeting frequency. Lastly, the expectation mentioned in section 2.4 that supply planning and the S&OP meetings are important to mitigate demand risks is confirmed as all companies involved in this study use the S&OP meeting to mitigate demand risks and two companies mentioned supply planning as a part of demand risk mitigation as well.

5.4 Demand Risks Monitoring and S&OP

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CONCLUSION

This study was executed in order to empirically explore the role of S&OP in risk management when managing demand side risks. After building a framework based on the risk management cycle (Ho et al., 2015) and the S&OP process steps (Kristensen & Jonsson, 2018; Grimson & Pyke, 2007; Ivert et al., 2015; Lapide, 2004), it was found that S&OP plays an important role in managing demand side risks. All companies involved in the research manage their demand risks in their S&OP process. The S&OP process brings together crucial departments that play a role in managing demand risks as well. Additionally, the design of both the S&OP process as well as how the different steps of the risk management cycle are performed, depend upon factors as the type of organization (product-process matrix from Davies and Frederiksen, 2010) and the type of demand risks faced. Furthermore, all steps of the risk management cycle (risk identification, risk assessment, risk mitigation and risk monitoring) (Ho et al., 2015) are covered in the S&OP process. Only risk monitoring was not included in the S&OP process of all companies as only seven out of eight companies covered this in S&OP. Nevertheless this research filled an important gap in existing literature as demand side risks can have a crucial impact on many businesses and understanding how this is managed is therefore important to prevent big losses.

This study provides some important insights for managers as well. Because demand risks can have a very crucial impact on businesses, it is important for managers to understand the processes of managing those type of risks. Besides managing the risks, managers also need to understand that the design of the demand risk management process used by a company, does not have to be the same as other companies. The design of the demand risk management process differs between companies and needs to be adapted to the circumstances a company is dealing with. Only one organization involved in this research has a specific risk management department. However all companies manage demand risks in their S&OP process. So demand risk management processes may not seem to be so frequently occurring, it is continuously being managed but in multiple departments throughout organizations as a whole.

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APPENDICES

Appendix 1: Interview Protocol

Interview protocol - [Interviewee] [Date, 2020 XX:XX ]

___________________________________________________________________________ 1. General questions (± 15 min)

1.1 Can you briefly introduce yourself and your role within the organisation?

• Function

• Team

• Department

• Background, education, work experience

1.2 Can you provide an overview of your organisation and corresponding supply chain (upstream and downstream)?

• Core activities and/or products

• Organisational goals

• Important aspects (organisation size, turnover, number of employees)

• Number of suppliers (upstream) and customers (downstream)

• How many stock keeping units (SKUs) does your organisation have? 1.3 Could you explain how the S&OP process works in your organisation?

o What are the steps?

o Who are involved?

1.4 What IT structure is used for demand/supply planning and S&OP?

• Excel spreadsheets - Is there a single one or several? How many?

• Specific software that you use?

• ERP system - SAP, etc.

1.5 Could you explain how the risk management process works in your organisation?

• What are the steps?

• Who are involved?

___________________________________________________________________________

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1. What are the main sources of demand risks that your company encounters?

(e.g. insufficient supply chain coordination, a mismatch between a company’s future sales projection and the actual sales, seasonal imbalances, volatility of fads, new product adoptions, product life cycle lengths, perceptions of product safety and companies’ ethics)

2. Could you give a specific example of how you managed a demand side risk previously?

• How is it integrated into S&OP and in which S&OP steps?

3. Could you also give an example of a badly (or well in case the first example is bad) managed demand side risk?

• How is it integrated into S&OP and in which S&OP steps? 4. What was the main reason that the risk was not managed properly? 5. When creating demand forecasts, how are demand risks identified? 6. When creating demand forecasts, how are demand risks assessed? 7. When creating demand forecasts, how are demand risks monitored? 8. When creating the supply plan, how are demand risks taken into account?

- Demand risk assessment - Demand risk mitigation

9. When the demand plan and the supply plan are integrated, how are demand risks taken into account?

- Demand risk identification - Demand risk assessment - Demand risk mitigation - Demand risk monitoring

2.2 Supply risks

1. What are the biggest supply risks for your organisation?

2. Where does your organisation manage these supply risks? (think of: departments) 3. Could you elaborate on a supply risk that has occurred (recently)?

4. How did you manage this supply risk?

Uncovering Sales and Operations Planning Involvement in Managing Demand Side Risks: an Explorative Case Study