Ten Sins of S&OP (Part 3)

This is the final post in a series of three on the “Ten Sins of S&OP”.  Hopefully, these “sins”, (not necessarily in order of priority) dealing with key attributes of an effective S&OP process, will be both instructive and practical, but from the literary gimmick of what not to do.

7.  Track lots and lots of metrics for each business function.  S&OP process stakeholders must jointly be held responsible for a few shared metrics that drive profitable business and enterprise value for your company within your industry.  At a minimum, they should include revenue growth, margin growth, and inventory turns.  Metrics within each function should directly drive these.  The dangers in establishing metrics for the S&OP process are in setting too many metrics, metrics that are not clearly understood, and metrics for which there isn’t shared responsibility.

8.   Only include sales and manufacturing in the S&OP process.  Omitting key stakeholders like finance, marketing and even procurement from participating in the process can create blind spots in the business plan, the whole point of which is to avoid such blind spots by creating an integrated decision set that is informed by the identification of risks, scenarios and alternatives.

9.  Focus on detailed product mix.  The purpose of S&OP is to determine, as a company, the best way to make money in the coming quarters.  The primary focus here is on volume – volume of sales and the resulting implications for capacity, inventory, sourcing, working capital, etc.  These are “big picture” issues and therefore, primarily questions of how much you will sell, source, make, store, deliver, etc.  Where constraints in manufacturing or risks in sourcing impact decisions about what to sell in order to make the most money in future quarters, then product mix (i.e. which portion of the business to pursue to what extent) at an aggregate level becomes relevant.

10.  Don’t worry about having solid “feeder” processes.  To avoid “sin #4”, you need to have robust supporting processes that deliver quality output to the S&OP process.  While forecasting is a business requirement, you need to have a functioning demand planning process for S&OP (see Forecasting vs. Demand Planning) in order to validate and reconcile quantitative and qualitative forecasts, determine the range and confidence of future forecasts, evaluate forecast accuracy and bias, estimate the magnitude of previously unmet demand, coordinate demand shaping requirements with promotional activity, collaborate with customers, etc.   All of the work from the “feeder processes” such as demand planning and supply planning builds the foundation for delivering a complete picture upon which to base an S&OP decision set.

Thanks once more for reading Supply Chain Action.

This week’s quote is from the first sentence of chapter one of Jonathan Byrnes’ book, Islands of Profit in a Sea of Red Ink:

The most important issue facing most managers is how to make more money from their existing business without starting costly new initiatives.

I’m a little late with this post, so I hope that you are having a wonderful weekend!

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The Ten Sins of S&OP (Part 2)

There are lots of “experts” telling us about “best practices” in S&OP.  Most of the pundits say the same things with varying semantic schemes, and much of what they say is useful.  I thought I’d take a slightly different approach.

Hopefully, these “sins”, dealing with key attributes of an effective S&OP process, will be both instructive and practical, but through the literary gimmick of what NOT to do.  The first three were posted last week.  Here are “sins” 4 through 6 of “The Ten Sins of S&OP”.

4.  Ignore strategic questions, alternative decision sets (plans), and the relevant tradeoffs. 

Part of having solid feeder processes leading up to the executive S&OP meeting is unearthing the potential demand and supply scenarios with which your company might have to contend in the coming quarters.  (The current quarter, more or less, should be mostly about short-term planning and execution with given assets, suppliers and visible demand.)  You must know the range of demand possibilities and what is driving them, potential needs for incremental storage or manufacturing capacity, where the risk factors are and how sensitive the revenue and profit streams will be to those factors.  This is where your business acumen comes in.  This is all about making money with other people’s (investors’) money – how can you make the most money given the range of decisions that you have to make?  What decision set will give you the most profit?

5.  Assume that the sales goal and the demand plan are the same thing.  

This should not be hard to understand.  The annual sales plan, original or revised, is a financial goal.  The demand plan should be what you think is likely to reasonably happen.  They should be in-synch (based on common assumptions and context), but there will likely be differences. At the S&OP meetings, the variances and their reasons should be clearly understood.

6.  Focus only on a single number, not a range around your demand plan. (Revised for clarity based on great feedback from multiple smart friends.)

You definitely need one consensus plan to make the most money that represents an integrated decision set that has been developed out of an understanding of common assumptions, potential market eventualities, plans for resiliency, and evaluation of all relevant, interrelated tradeoffs.  But, don’t make the mistake of not going to the trouble to calculate and understand the range and potential distribution around your plan – in that sense, it is not just “one number” that matters.  The context is equally important.

Thanks for stopping by.

As you move into the weekend ahead of another work week, I hope that you think about your S&OP process and also this anonymous quotation,

“You cannot always have happiness, but you can always give happiness.”

– and maybe that is one of the secrets to being happy anyway.

Have a wonderful weekend!

Ten Sins of S&OP (Part 1)

There are lots of “experts” telling us about “best practices” and “biggest mistakes” in S&OP.  Most of the pundits say the same things with varying semantic schemes.

Few if any of the loudest voices are really giving any new practical insight.  I have been writing (e.g. When Cheaper, Faster, Better is Not EnoughSales and Operations Planning:   The Key to Continuous Demand Satisfaction), speaking, and working with manufacturers on S&OP for years now.  In this blog, I have written about an emerging best practice that I call a “forecast reality check” that I see manufacturers in consumer products and other industries embracing, although sometimes with different names (e.g. “forecastability [I know it isn’t a word] analysis”; “forecasting priorities analysis”; “demand curve analysis”, etc.).  Other companies are still struggling because they have not effectively addressed the challenge I have described last month in Supply Chain Action.

Here and in the next couple of posts, I am going to talk about key attributes of an effective S&OP process, but from the literary gimmick of what not to do.  A competent treatment will take a bit of effort to write and to read, so I’ll start with the first three of the Ten Sins of S&OP.

  1. Run an S&OP process without P&L ownership involved.  This isn’t news, but it is important enough to reiterate.  An S&OP process is about how you will run the business.  You can’t have a decision process about how to run the business without a decision-maker with P&L responsibility.  ‘Nuff said.
  2. Incent the stakeholders to act in conflict.  This point languishes in obscurity, but it remains absolutely essential, not only to integrated business decisions, but particularly to integrated business actions.  If sales leadership is incented only on revenue, while manufacturing is rewarded for overhead absorption and procurement is rewarded for reducing per unit purchase costs, then meaningful agreement on the business plan will stay out of reach.  Certainly, coordinated actions to meet a coordinated business plan will continue to elude you.  The stakeholders in the S&OP process must be held accountable for performance across metrics that drive business value – revenue, costs, and working capital.  More on S&OP metrics later.
  3. Express the S&OP plan only in dollars at an aggregate level.  The mantra that S&OP is people, process and technology is frequently repeated, and the technology contribution is minimized without being explained.  Let me bring that into sharp focus.  The principal contribution from software to the S&OP process is translation.  Stakeholders, including operations, sales, marketing, finance, and procurement, as well as the P&L owner, need to be able to simultaneously see the plan in their own terms.  When marketing plans to introduce a brand into a new region through a particular channel, manufacturing needs to understand this in terms of capacity utilization at a plant.  Finance needs to see the impact in terms of revenue, margin and working capital.  Whether you use an enterprise software application or Microsoft Excel to express the S&OP plan, it needs to be capable of instantly translating the impact of alternative actions in multiple dimensions (think a marketing hierarchy, product hierarchy, and geographical hierarchy) and in terms of both currency and units.

I’m not as generally thankful a person as I would like to be, but I am always grateful for and flattered by those who read any of my work.

As you head into the weekend, consider with me these words from Cicero, “A thankful heart is not only the greatest virtue, but the parent of all other virtues.

Have a wonderful weekend!

Protected: Five Best Practices for a Demand Plan Sanity Check

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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.

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