Ok, maybe not you personally, but your company should be doing S&OP. Sales and operations planning has been around since the 80s. Until recently, adoption has been slow, but steady. In the last 5-7 years, S&OP has started to become mainstream. Why? Because when implemented properly, it just works. Let’s think about a world (maybe your world?) where S&OP isn’t done.
The high-end DVD player your company makes is not selling well. There is excess inventory in the system, driven by an overly optimistic forecast. The product is good, but complaints are that the price is too high. The marketing team puts together a sale starting in a few weeks to increase demand for the high-end DVD player. They put the sales plan into effect and it works wonderfully. The high-end DVD player sells out in the first few weeks; however, customers and stores are complaining because they don’t have any stock. So they go to manufacturing and ask them to build more. Manufacturing is busy building the mid-range DVD player. Why? Inventories on those were low (they were the ones that were selling). Now, however, demand for the mid-range DVD player falls off because those people looking to by a mid-range DVD player decided to buy the high-end player because of the reduced price. In fact, inventories are now too high on the mid-range DVD players. So, manufacturing puts a stop to the mid-range production and ramps up production of the high-end DVD players. As the procurement orders start to go out, Finance raises an alarm because the ramp up in high-end production is impacting cash flow. They are also concerned because of the inventory levels on the mid-range DVDs. An emergency meeting is held, fingers are pointed, tempers flare.
Been there? Done that? Got the t-shirt? No one wants to be in that position. While S&OP isn’t a magic pill that solves all problems, many of the problems identified in the story above could have been avoided if there was a functioning S&OP process in place. Many of the top companies are running sales and operations planning. Your company should be too. Here are 5 of 10 reasons you should be doing sales and operations planning. I'll provide the remaining 5 tomorrow so not to overwhelm everyone in one sitting.
- Alignment – Sales and operations planning forces alignment at multiple levels of the company. At the highest level, it represents an agreement between Sales, Marketing, Manufacturing and Finance on the volume of products to be produced over the horizon of the plan. In the vignette above, Marketing would have announced the plan for the sale on the high-end DVD player and Manufacturing would have been ready for it, and would have reflected it in the plan. Finance would have had visibility to the anticipated spend impact and could have raised concerns BEFORE commitments were made. When a sales and operations plan is approved, it represents agreement between the department heads on the plan. Alignment from Sales and Ops goes beyond just the S&OP meeting. With a well functioning S&OP process, the entire company is aligned to a given direction. The Master Scheduler is implementing the decisions made by the S&OP team. The planners and buyers are aligning to the Master Scheduler. Capacity is being increased and decreased in accordance to the plan. Changes to the financial plan are made in advance given the decisions from the S&OP meeting.
- Decision Making – One of the huge benefits of a sales and operations planning process is that it brings people together to make decisions. It is a monthly meeting, held on a regular schedule, where issues can be raised, tracked and resolved. As noted in my first point above, the key department heads are present so that the entire company can be aligned behind a decision.
- Visibility – The sales and operations planning process provides team members with visibility in a couple of different ways; First, the sales and operations plan looks 12 – 18 months into the future. For people accustomed to thinking in terms of the next month or so, this level of visibility opens the door to a different way of thinking: a longer term view. Second, the sales and operations plan brings together data from different departments and presents it to the team. Now, Operations has visibility to Sales and Marketing’s plans. Sales and Marketing have visibility to the supply plan. Finance now has visibility to expected revenues and expenses.
- Finance Integration – The company exists to make money. Further, it takes money to make money. It constantly amazes me how many people forget these simple facts.& Any successful S&OP process must include Finance to ensure that the financial plan and the operational plan are in alignment. Further, especially when times are tight, companies need to monitor their planned spend to ensure that they have the resources to implement the proposed plan. It’s no good planning to ramp up 50% if you only have the resources to ramp up 20%. That being said, given enough lead time, your Finance team might be able to negotiate bridge financing to cover the ramp-up costs until the revenues start coming in.
- New Product Introduction– This is often one of the most difficult and risky events companies need to deal with. Forecasts are tricky because there is no history. Pipelines need to be filled. Costs go up with new product introduction. Manufacturing challenges abound; changing processes, new suppliers, technical issues, ramping production, quickly changing versions driving obsolete inventory. You need to make sure all stakeholders are aware when a new product introduction is happening. Marketing needs to be talking to Operations. Operations needs to be talking to Finance. Issues need to be raised and resolved. Sales and operations planning is a perfect place to manage this process. Many companies have an agenda item dealing specifically with new product introductions and many identify new product demand separately on the S&OP spreadsheet. A related topic is end of life. This needs to be managed carefully because the last thing a company wants is lots of inventory (end item and component) hanging around after a product is dead and gone.
Have I sold you yet? If not, tomorrow, I'll provide you with 5 more reasons....stay tuned! Part 2
- S&OP frequently asked questions