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24 Seconds on Optimal S&OP Output

Second Exceprt from Supply Chain Brain Interview in September

Click the photo for another brief insight on S&OP.  You can see the whole interview at Supply Chain Brain.

An S&OP Insignt in 45 Seconds

I decided, in the end, to make a post this Friday, but of a slightly different nature.  Click on the picture to watch 45 seconds of my interview with Supply Chain Brain from September.  This may be something you haven’t thought about before.  

Thanks again for stopping by. 

For those in the U.S., I hope that you and yours are enjoying a really good Thanksgiving time.

My Thoughts from the IBF Leadership Conference in Las Vegas

Although it is not yet Friday, I want to take this opportunity to share my thoughts on what I heard at the Institute of Business Forecasting and Planning’s Leadership Business Planning and Forecasting Forum.  I was privileged to spend a couple of days with a rather distinguished group of practitioners, software vendors, academics, and consultants exploring three major areas of interest to most supply chain managers and planners – best practices in Leveraging Integrated Demand Signals, Sales and Operations Planning and Demand Planning.  I managed to leave my notes in my hotel room, but here are a few of my thoughts in no particular order that you may find immediately useful (some completely original, some borrowed, some modified from something I heard):

• Make use of syndicated data as a leading indicator.  More and more of this is available.  Determine what is available and match it to your business needs, leveraging econometric models.
• Collaboration is still partly a function of bargaining position.
• Before you collaborate, make sure you have done your analytical homework so that you understand the total opportunity and how much you need to capture and how much you can afford to give away.
• A “forecastability” or “reasonability” analysis allows demand planners to be more efficient by highlighting areas where they can engage their education, training, and experience rather than sifting through data is becoming a best practice. 
• Two key performance indicators that might not have been in your textbook probably ought to be part of your demand planning process:

              √ Forecast Value Added (mean absolute percentage error for new forecast approach  – mean absolute percentage error for old (or possibly naive) forecast approach)

              √ Cost of Inaccuracy (margin and lost goodwill * units underforecasted less safety stock) + (cost of holding inventory * units overforecasted) all summed over the relevant time period

• Consider engaging finance in the demand planning process.
• Know the difference between your financial or sales objective and the demand plan.
• Many companies struggle with the harmonizing of qualitative and quantitative forecasting.  A generally helpful concept here is that qualitative input tends to be best from a top-down  perspective and allocated down;  quantitative forecasting tends to be at a lower, if not the lowest level and rolled up.
• Forecast both shipments and end-customer consumption and the difference.  In  the consumer goods industry, this is essentially “trade inventory”.
• Microsoft Excel is still the predominant planning software.  It is how people and organizations innovate quickly.  However, building models in Excel, itself, is problematic in terms of scale, maintenance and process standardization.  A useful improvement would be getting IT or a consultant to create your model in Visual Basic, leveraging Excel as the user interface. 
• Enterprise software is useful, but customers and users need to demand more from their software vendors.
• Fit both your model and your metrics to the nature of the business and the data.

While we are on the topic, allow me to also point you to my blog post of a few days ago (September 9) where I outline some of the differences between forecasting per se and a robust demand planning process.

Sales, Supply and Operations Planning

If you read much on this topic, you have started to see an increasing number of articles, columns, and presentations about Sales, Inventory and Operations Planning, or SIOP for short.  This is particularly true if you read some of the collateral from some software firms, some consultancies, and probably some of those self-declared omniscient ones, the industry analysts (I will leave the potential examples to your imagination).  For a moment, I would like to examine why that emphasis makes sense in a way that has not been adequately represented (as far as I know) to date.

Sales planning, broadly speaking, is about determining which customers to serve, through which channels, for what they will demand, at what price (strategic pricing strategy).  The execution of this plan results in revenue.  Operations planning, focused on making, storing and transporting product, determines where to place what manufacturing capacity, from where to distribute to where, and how to transport product in service to the sales plan.   The result is operational costs.  Sometimes missing from this equation is supply planning and management which determines how much stock to position where and when, for each level in the bill of material (or formula/recipe), as well as where and from whom to source, when and how to execute strategic purchases, and how to structure contracts for minimal risk and maximum flexibility. 

The result of the supply plan directly affects cash because most manufacturing companies spend the majority of their cash flow on inventory, most of which, hopefully, is sold and appears on the income statement as the cost of goods sold.  What is not sold (always more than planned) appears as inventory on the balance sheet. 

Inventory is one of the key drivers (along with cash, accounts payable, and accounts receivable) of working capital requirements.  If working capital requirements can be reduced, then cash flow can be spent on innovation, capital equipment, and other opportunities.  The supply plan also manages the risk from the supply base and creates opportunities for the business through strategic supply management.

So, then, S&OP is really more about Sales and Supply and Operations Planning (SS&OP anyone? . . . I know that sounds like an industry “analyst” making up another redundant acronym, but it sounds better and is more descriptive than SIOP).  Anyway, my point is supply planning, including planning for safety stock to account for uncertainties in both demand and supply, as well as how to minimize risks from the supply base and leverage opportunities with suppliers has a disproportionate impact on working capital, operational risk and flexibility within your value network. 

Typical S&OP often omits these interdependent variables and decision sets and their huge potential impact on the value of the company.  This decision set which I am calling supply planning and management is interdependent with both sales planning and operations planning so that no one of these decision sets can be properly considered without incorporating the other two.

Find more of my thoughts on S&OP here or here.

I’ll leave you with this thought from Cicero:  “Of all villainy, there is none more base than that of the hypocrite, who, at the moment he is most false, takes care to appear most virtuous.”