Imagine a typical business review meeting where the management team are reviewing the order book for the month:
Sales Director: What do you mean, I can’t have the product? I told you about it last week!
Operations Director: Well, you didn’t forecast it. We said we needed a three monthly forecast, so we used the raw materials for the other product you wanted.
Sales Manager: Well, I didn’t want the other product, you should know that!
Operations Director: It’s going to take another 12 weeks to get the materials in and by the way we don’t have the capacity either because you increased the quantity of orders without telling us.
Sales Director: We have to deliver! I promised them.... and I had to really heavily discount to get that order.
Finance Director: “We will still make good margins, won’t we?
Sales Director: “Well, if we are late, we will get penalties.
CEO: “So - let me get this right: we over-sold on our commitment, discounted heavily, we cannot deliver on time. We put money into a product that we didn’t need and we have no idea if we will make any money on the product we are selling?”
This is not an unfamiliar discussion. A root problem in supply chain management is the unavoidable uncertainty in predicting future demand. What typically goes into the upstream side of the chain is quite different from what is needed at the downstream side.
In the early levels of the supply chain evolution, this complication leads to allowances being made for forecast error, additional buffers to inventories to cover contingencies, changed schedules, and heroic efforts to respond to special customer conditions. This condition manifests itself in the unreliable sales forecasts that form the heart of many inventory management and planning systems.
Traditionally, the marketing, sales and manufacturing groups within an organisation have operated in “silos” with different goals, which threatens overall enterprise objectives. But increasingly, companies see the need for a robust S&OP (Sales and Operations Planning) model that helps groups jointly address operational issues affecting overall corporate goals.
What if it were possible to tightly link sales, marketing, supply chain, manufacturing and finance, so that executives could see with ease the financial impact of plans, note variances between supply and demand plans, and identify supply constraints and align actual results with financial and operational targets?
What if manufacturers could simulate multiple scenarios to determine the best balance among customer service, operational productivity and financial performance?
Decision-makers could continually fine-tune plans backwards and forwards to improve business agility and financial
That’s the promise of S&OP —to align demand, supply and finance plans. S&OP enables decision-makers to reach consensus on a single operating plan that drives increased market share and balances critical resources to meet performance goals.
So what went wrong in the example above? The company had not really implemented S&OP at all. They had a pale imitation.
The process was too short term – one to two months – they should have been looking medium to long term, 12 to 18 months, so that they could plan the acquisition of long lead-time resources
They were planning at the SKU (finished product) level, rather than at the product family level – top management did not have the time to look at individual SKU’s. They should have grouped these into ‘families’ and reviewed the big picture!
The finance department was not involved – S&OP should be about matching the medium-term sales and operations plans to the financial numbers in the budget and the business plan.
There was too much of the ‘silo’ mentality, passing numbers over the ‘wall’ from one department to another – S&OP is about agreeing plans across the whole business.
No medium to long-term resource planning was conducted at all. They realised that they had policies and procedures that were both incomplete and out of date. They had adjusted the process as they went along, but had not updated the quality manuals.
The best success with Sales and Operations Planning happens when it is designed from the outside in.
Build the competency, ask the right questions: such as what is the goal of your S&OP Process? How do you make decisions? And What do you measure?
Column written by: Masood Hassan, PWC partner, Middle East Advisory Service.