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!

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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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