By Karin Bursa
Does your company have the right S&OP process in place?
These 5 steps to success allow you to assess trade-offs between many interdependent business components: demand and market opportunities, customer service, inventory investments, production capabilities, supply availability, and distribution concerns.
The sales and operations planning (S&OP) process brings together all major operational departments—sales, marketing, inventory, procurement, manufacturing, and finance—to decide how best to manage company resources to profitably satisfy customer demand and pursue strategic initiatives. Today, companies view S&OP as a means to execute corporate strategy, which may include new markets, new product introductions, acquisitions, and much more.
Often the biggest obstacles to S&OP excellence stem from complexity—difficulty gathering data, too many meetings, a hard-to-govern process, or difficulty analysing key data. The natural tendency is to attend to the “squeaky wheel.” The change in thought process has to be towards the activity that provides the greatest impact toward reaching corporate goals and strategic alignment. Additionally, understanding the role of finance in S&OP and integrating it into the process is critical to fully understand the impact of forecasting sourcing, inventory, postponement, production and other pivotal business strategies.
So, while S&OP helps develop a plan and set priorities to maintain this focus, real success flows from practical thinking, guided by three principles: make it easy to implement, make it easy to execute, and make it easy to sustain.
5 Steps to Success
The monthly S&OP process aggregates results from connected and recurring planning processes. It allows executives to assess trade-offs between many interdependent business components: demand and market opportunities, customer service, inventory investments, production capabilities, supply availability, and distribution concerns.
A number of tasks and analyses must be completed prior to each executive S&OP meeting:
• Innovation and Strategy Review – impact of new product introductions (NPIs)
• Demand Review – base-line demand, demand sensing and demand shaping activities
• Supply Review – monitor inventory levels and production capabilities
• Financial Integration – ensure balanced demand and supply plans meet company financial objectives and are within working capital constraints
• Executive Business Review – executives from all major departments review future plans and impact
Step 1 – Innovation and Strategy Review
Introducing new products is a key aspect of the innovation and strategy review. NPIs can significantly impact the well being of a company including inventory and lost sales. The ability to predict sales on NPIs, where there is no sales history to model, can be difficult. Companies that have been successful in managing NPIs utilise advanced techniques such as attribute-based forecasting which generates demand profiles for new products based on existing product demand tied to identifiable attributes such as style, colour, season, material type, etc.
In addition, attribute-based forecasting techniques can be used for product retirements. When retiring a product, the history for that product is no longer a reasonable indicator to predict a retirement demand profile. Attribute-based forecasting is a preferred method to predict how fast or slow the product will sell during the retirement phase by looking at how products with similar attributes have been previously retired.
Having solid forecasts for NPIs and retirements is an essential first step in preparing for the S&OP meeting.
Step 2 – Demand Review
A primary output of the S&OP process is a decision on the level of customer service the company will strive to achieve through the effective use of all of its resources. To plan to meet demand, you must know what current demand is and how it can change over time, the art and science of the forecast.
Proven forecasting techniques rely on rigorous statistical analysis of past demand including orders, shipments and point-of-sale (POS) patterns overlaid with demographics, product lifecycle projections, seasonality factors, and management judgment. These techniques abound for mature products with a sales history though each still requires consistent and accurate information. To this end, collaboration is critical and must be sought whenever possible while developing, refining and creating consensus forecasts. Customers, distributors, sales reps, and marketing all have information and insight that can augment and improve on the statistical forecast to boost accuracy.
Step 3 – Supply Review
Once the demand plan is finalised, the supply team needs to determine how they can meet the demand plan. Two elements are key in determining how to profitably satisfy the demand plan. They are:
• Inventory Optimisation – how much inventory is currently available and where is it in the supply chain. Inventory is one of the largest investments that a company will make and is the primary determinant of customer service. It is therefore appropriate that inventory policy and specific inventory positioning decisions be key outcomes of the S&OP process. Where to keep product across the supply chain including raw material, WIP and finished goods helps optimise the financial investment in inventory.
• Production and/or Procurement Optimisation – do we have the production or purchasing capability to meet the demand plan? The bottom line is about shipping product – when, where and how much. The challenge is to develop a supply plan that profitably meets company objectives.
Step 4 – Financial Integration
The ultimate objective of the S&OP process is to leave the meeting with an operational plan that best achieves the company’s objectives within known constraints. The deliverable from the executive business review is a list of actions that implement the decisions and plans agreed upon.
Besides reviewing best case and alternative demand and supply scenarios, it is imperative that executives assess risks to their supply chain, including:
• Supplier Failure
• Demand Spikes
• Demand Disruptions
Karin L. Bursa is a vice president at Logility, a provider of collaborative supply chain management solutions. Ms. Bursa has more than 25 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. You can follow her industry insights at www.logility.com/blog. For more
information, please visit www.logility.com.