How familiar are these statements?
- Each department takes decisions in isolation and usually not based on facts, but instead designed to satisfy their own priorities.
- Sales and operations are not aligned, with trading making promises and creating plans that manufacturing and procurement cannot fulfill -resulting in poor customer service and fostering a blame culture.
- There is a large inventory of product that is not selling and on-going availability problems on popular items, which means too much money is spent on expediting, compensating customers and utilizing resources poorly.
All of these issues conspire to have a profoundly negative impact on the bottom line through unnecessarily high waste, inefficiency and an internal blame culture.
Sales & Operations Planning (S&OP) is the business process used to manage the balance and trade-off between the conflicting needs of the supply and demand sides of the total supply chain. Its aim is simple – to do what is best for the total business and not just parts of it.
S&OP has been defined as being “the only enterprise process to balance the supply and demand side equation. In fact, a formal, well executed S&OP process was identified as one of the top practices of performance leaders” (AMR Research).
An interesting word within the above definition is ‘process’. S&OP is not an IT system. At its heart is a one-number culture, one plan that requires a maturity and honesty from a business that cannot be achieved ‘out of a box’. S&OP is a culture and needs to be a whole-company way of working. IT systems are important enablers, but the business process and associated people and ways of working must be in place first.
So, what is needed to make S&OP happen and thrive within an organization allowing it to realize the benefits of lower total inventories, better customer service, higher revenues and sustainable bottom-line improvement?
To achieve the cultural change needed. An appetite, desire and endorsement from the CEO down. This is, arguably, the most important criteria for success.
Recognition or realization of where the business is now. An honest and frank assessment of current ways of working and the resultant issues identifies the gaps and shapes the sequence of change required. For many businesses, a full S&OP implementation where demand and supply areas constructively challenge each other and the process is fully integrated into financial and strategic planning, is not realized and is not needed.
Demand Forecasting is a usual start point. This must be fact based and explainable rather than ‘gut feel’ or aspirational. It will be the consolidation of some form of statistical analysis of history with an overlay of market intelligence. A common error is to drag forecasts up to equal budgets so as not to show any planned deficit – This is the wrong approach, as a budget is a snapshot in time when created, whereas a forecast is ‘live’ and evolves as the business and market change. Tracking forecast versus budget is useful, whereas the alternative can be a ’fool’s paradise’.
Supply planning then needs to follow, taking the demand forecast and generating plans to deliver – be they procurement plans, manufacturing plans or both. Planning to the forecast may seem an obvious statement, but all too often it does not happen because of interference at a departmental or local level and a lack of sharing information about such changes. Confusion can then reign.
Recognition that inventory is a consequence rather than capable of being planned itself. Service levels, variability of demand/forecast accuracy and constraints such as lead times, minimum order quantities and batch sizes all have a influence on how much inventory will need to be carried. Trade-off analysis of these is a key task to delivering successful S&OP.
Building a monthly ‘pulse’ into the business to ensure the sequencing of demand planning feeding supply planning, with everyone using a single version of the truth in terms of numbers to drive healthy debate and shared decision-making for the well-being of the whole company is key.
Good supply chain planning is a good place to start and for many companies is as far as they are happy to go. An honest forecast from demand planning for supply planning to react to in a coordinated and shared way is often a huge step forward.
S&OP, on the other hand, takes this one step further and rather than the supply side reacting to the demand side, it actively promotes healthy conflict between the two – driving out balance and trade-offs, which ultimately result in decisions being taken that are best for the whole business.