Uncovering Unprofitable Decisions

Last week, I expanded on the concept of a profitability profile, the first point of three that I highlighted here.   This week, as promised, I want to expend a few words on analyzing decision processes that are hurting profitability because they could be improved. 

Execution is important in business, but knowing what to execute is even more fundamental and critical, at all levels from strategic to tactical.

You can make better business decisions (some of them are called planning – demand planning, supply planning, capacity planning, transportation planning) in less time if you embed the decision points in a process and support the process with necessary analytics (see “Finding the Value in Your Value Network“).

Decision processes need to be integrated because many of them are interdependent.  If made in isolation, reduced profit is almost guaranteed.  This has driven a continuing interest in Sales and Operations Planning, the goal of which is to include the relevant data, perspectives and analytics so that key decisions about running the business are coordinated and optimal for the business as a whole.  Sometimes, this process is called Integrated Business Planning or Integrated Business Management, or perhaps other titles.  The important thing is not the moniker, but the fundamentals of getting the process right for your business. 

Business decisions that frequently lead to reduced profit can include pricing, new product development, supply chain network design, demand planning, capacity planning, inventory planning, production scheduling, and others.  One big reason these decision processes can fail is that they are not sufficiently linked, leaving blind spots that keep relevant tradeoffs from being considered.

Finally, just because you have spent lots of money licensing, implementing and supporting software applications that were supposed to address specific decisions or even decision processes, doesn’t mean you are any better off.  (You already know this!)  There are lots of reasons, including the following:

  1. The software didn’t fit the business challenge
  2. The data model doesn’t effectively abstract reality
  3. Your master data is inadequately maintained
  4. The planner or analyst doesn’t have sufficient experience or skill to deal with data model deficiencies and master data defects
  5. The software application doesn’t allow the skilled planner or analyst to interact with it so that they can compensate for data model deficiencies and master data defects
  6. The parameters of the software application aren’t correctly set
  7. The software application leaves out important tradeoffs
  8. And the list can go on . . .

Remember that rapid execution is only as good as the plan to which you are executing, and that’s the thought for this weekend.

Thanks again for stopping by and have a wonderful weekend!

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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!

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!

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