Sales and Operations Planning at The Hershey Company Jason Reiman Director, Customer Service & Planning April 20, 2006

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3 Why implement a Sales and Operations Planning Process?  Product line complexity  In & Out items – only available 4-12 weeks during the year –Seasons – Valentine’s Day, Easter, Halloween and Holiday –Limited Editions – 25 LE programs in 2005 –Merchandising Units – shippers, counter units, modules  Everyday Items –Turn items –Promotions –New product introductions – 35 products launched in 2005  Plants – 17 sites  Co-Manufacturers and Co-Packers – 35 sites  Distribution Centers – 5  50.3% of purchases are impulse driven Source: Hershey sponsored Omnibus Study completed by Market Facts Telenation (1,000 adult consumers); 6/12/00

4 Ubiquitous Availability of Products Wholesale Clubs 3% Vend & Concession 6% Mass Merchandisers 18% Convenience Stores 13% Supermarkets 35% Fundraising 1% Small Retailers 7% Drug Stores 16% Military 1% Confectionery Channel Mix (%) Data Source: Confectioner Magazine, Hershey estimates

5 Setting the stage for Sales and Operations Planning (S&OP)  A monthly process for balancing supply and demand by:  Ensuring cross--functional collaboration of the operating plan  Aligning expectations across the organization  Reconciling the operating plan with the financial plan  Planning at the aggregate product family levels  Creating ownership by measuring performance against the plan  Evolving process

6 How will S&OP help Hershey’s evolve the supply chain? Functional Plans Functionally driven Weak accountability Multiple, disjointed plans Measure accuracy Internal Integration Internal collaboration via S&OP Clear accountabilities; action plans required Common goals & objectives Single financial & operating plan Measure quality External Integration CPFR/VMI enablers Establish critical mass Joint business planning Customer centric Time Effectiveness

7 Strategic 12 + months Tactical 3-12 months Execution 0-3 weeks Operational 0-3 months Business and Financial Planning Demand Plan Operational Forecast Deployment Forecast Operations Plan Master Production Schedule and Distribution Requirements Planning Finite Schedule and Deployment Plan Sales and Operations Planning Collaboration Sales and Operations Planning Demand Planning Supply Planning

8 Why implement a S&OP Process? Before S&OP  Multiple, disjointed plans  Reactive executive involvement based on issues  Weak accountability  Limited collaboration in planning  Goals focused on functional performance  Performance review in reaction to fires After S&OP  Single financial & operating plan  Formal cycle for proactive executive review and commitment  Ownership and accountability in all areas and levels of organization; action plans required  Sales, inventory & production plans reviewed by all areas  Goals focused on business performance  Formal proactive monthly review of performance and future plans It ensures alignment and commitment throughout the organization

9 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review

10 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review Who:  Demand Planning, Supply Planning, Marketing and Sales What:  Update S&OP tools and reports with month-end information regarding sales, inventory and actual production  Gather additional information and distribute to appropriate teams  Explain variances, risks, opportunities and assumptions with plans

11 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review Who:  Demand Planning, Sales, Marketing, Supply Planning and Customer Service & Planning What:  Review performance against the previous month’s forecast  Identify significant changes to forecast  Identify risks and assumptions associated with the forecasts  Establish forecast recommendations by family for the planning horizon

12 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review Who:  Supply Planning, Manufacturing, Distribution and Demand Planning What:  Review performance against previous production plan  Identify significant changes to production or inventory plans  Establish supply plan recommendations by family for the planning horizon which optimizes the revenue/income potential

13 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review Who:  Leadership positions from Marketing, Sales, Logistics, Finance and Manufacturing What:  Review of S&OP process metrics and key drivers  Review areas where forecasts and supply plans are not balanced  Operating plan reconciled with financial plan  Review of key initiatives impacting the team  Identify issues requiring executive team attention

14 Sales and Operations Planning Process - Monthly Meetings Gather Information Forecast Consensus Supply Planning Create Partnership Executive Review Who:  Senior leaders from Marketing, Sales, Operations and Finance What:  Review status of action items from previous meeting  Discuss impact of the operations plan on the financial plan  Review significant product family issues  Conduct a process check

15 S&OP Results Achieved Improvements have been achieved in each of the following key metrics Forecast Performance (WMAPE) Forecast Bias Service Levels Average Inventory Material Losses Obsolete Packaging Donated, and Destroyed Revenue Drains Unsalables Distressed

16 Lessons Learned  Executive involvement and sponsorship is critical to the success  Align the forecast around the demand creation process (Marketing and Sales)  Establishment of a forecasting/demand planning process is a critical first step  New items tend to dominate the process  Forecast variability and new manufacturing capability  Create linkage to the financial plan  Rolling 12 months vs. fiscal year focus  The process is more than numbers  Document risks, assumptions and decisions along the way  Create a process that incorporates mid-cycle changes  S&OP happens everyday … it’s not just a couple of meetings a month  Focus on decisions, not just reporting the news

17 Next Steps  Leverage customer level planning capabilities in the S&OP process  Vendor Managed Inventory and Collaborative Planning & Forecasting  Creates visibility into channel level inventory  Forecasts incorporate POS (Point of Sale) consumption data

18 Customer insights will create a more productive S&OP process Gather Information Forecast Consensus Executive Forecast Review New Products Supply Planning Create Partnership Executive Review * Customer 1 * Customer 2 * Customer 3 * C-Store COT Club/Dollar COT Drug COT Key Food/Grocery Pack Season Brand Sales ReviewMarketing ReviewExecutive Review Monthly Business Review

19 Next Steps  Leverage customer level planning capabilities in the S&OP process  Vendor Managed Inventory and Collaborative Planning and Forecasting  Implement “What if” capabilities throughout the process  Ability to analyze multiple demand and supply scenarios  Reduce the overall cycle time of the S&OP process  Create linkage to the company’s P&L statement  Full financial integration  Extend S&OP practices to customers and suppliers  Use benchmarking to incorporate new ideas

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