The journey for S&OP is a road with many ruts and potholes. In my opinion, the road is tougher today because it is paved with good intentions but creating ruts. I am also amazed. In my twenty years of following the progression of S&OP as an analyst, I am amazed at the number of “experts” with so little expertise.
Let me start by saying that the process is not a panacea to solve all supply chain ills. For most companies, building a great S&OP process is a missed opportunity. I write this post as a guide.
What Does Good Look Like?
For me, there are ten characteristics that define a great S&OP process:
- Clear and Actionable. Clear operating strategy and definition of supply chain excellence across plan, source, make and deliver.
- Drives Value. There is a clear definition of the role of the supply chain in the delivery of value. S&OP is a business process. When it is defined as a supply chain process, it is hard to make progress.
- Governance. Definition and alignment on why should make a decision and what a good decision looks like. Most companies buy decision support technology, but do not redefine work to improve decisions. Funny, isn’t it?
- Metrics. A shift from functional metrics to a balanced scorecard. I like the use of growth, margin, inventory turns, Return on Invested Capital, customer service and ESG metrics. The focus on functional metrics sub-optimizes balance sheet results.
- Balance and Organizational Alignment Between the “S” and the “OP”. In a mature process the focus is on the “&”. This includes design of flows, the design of inventory buffers, analysis of the effectiveness of demand shaping programs.
- Design. Holistic design of the form and function of inventory with a focus on setting inventory targets for each flow.
- Improved Forecast Value Added (FVA). While many companies focus on demand error, my caution is that this does not drive results. Instead, focus on Forecast Value Added analysis. Hold the organization accountable for improving outcomes.
- Bad News and Good News Travel at the Same Velocity. In most organizations, good news travels fast while bad news moves at a glacial pace. In mature S&OP processes, that are connected to market data, the process moves at the speed of the market. Good and bad news are embraced equally.
- Market-Driven Process. In mature S&OP processes, the focus is on serving markets. Companies are clear on the difference between sales-driven and market driven signals, and marketing-driven in comparison to a market-driven process. Sales and marketing-driven processes are functional and no substitute for the use of channel data and improving the time for the organization to respond at the speed of business.
- Reports to a Profit Center Manager. The best processes report to a profit center manager, ensuring that the decisions translate to the P&L.
For each, I have attached a relevant article for supportive reading. Linking is just so much easier than including all the details in the text.
Mistakes Made.
Here are seven mistakes frequently made:
- Lack of Well-defined Governance. Political sandbagging. This is so prevalent that it makes my head spin. This behavior is especially acute when global companies delegate S&OP to the regions without clarity on the management of political bias.
- A Focus on Error in Demand Planning. In mature companies, the focus shifts from error to Forecast Value Added (FVA) measurement. Companies chasing the APEs (WMAPE, MAPE, etch) will chase their tails. Fire the Apes.
- Time Horizon. S&OP is a process to focus outside of lead time. Sales and Operations Planning should be followed by Sales and Operations Execution inside of lead time.
- One Supply Chain. Treating all supply chain flows equally. Instead, the supply chain should be managed by defining multiple flows. There are typically five-to-seven flows:
- Efficient: High volume/forecastable, medium volume/forecastable, and low volume/forecastable. Use Advanced Planning Solutions (APS) to gain economy of scale.
- Seasonal. Profiles based on seasonality.
- New Product Launch. Profiles based on characteristics of lifecycle.
- Agile Supply Chain. High volume/not forecastable, medium volume/not forecastable, and low volume/not forecastable. Design of flows with products with a Coefficient of Variation (COV) greater than .5.
- Responsive Supply Chain. A supply chain based on time (responsive). The non-forecastable flows need to be managed as an agile supply chain (designed to flex with demand and supply variability).
- Waste. This includes Slow and Obsolete Inventory (SLOB), returns, quality issues, and expired product. Great S&OP processes recognize waste quickly and drive resolution.
- Not Paying Attention to Process Latency. Over the last decade, as companies became more global, more and more meetings were added to the calendar to manage the S&OP process. The result? An increase in process latency making it longer to make a decision. Today, it takes companies 4-6 weeks to make a decision on S&OP. This is addition to demand latency (4-5 weeks).
- Tight Integration to the Budget. While integration of the process to the budget may sound good, it is detrimental to results. The reason? The budget is backwards looking while markets are forward facing. Tight integration of S&OP to the budget limits opportunity.
- A Focus on ‘One-Number Forecasting.’ Anyone that espouses one-number forecasting does not understand forecasting. The reason? There are many numbers in the forecast, the goal needs to be agreement on a common plan with the ability to drive ‘what-if analysis.’
My thoughts. I look forward to hearing yours.
For additional insights on S&OP, please check out these articles.
- A Look at Technology. Putting Together the Pieces on S&OP.
- The Need for the Supply Chain Reset. The Need for a Supply Chain Reset – Supply Chain Insights
- The need to shift from a sales-driven or marketing-driven focus to build markets. Market-Driven S&OP.
- Or sorting through the politics as outlined in the article, Why is S&OP so hard?
