Sales And Operations Planning
Competitive organizations use a sales and operating planning (S&OP) team to manage variations in demand and supply across a supply chain. The S&OP team uses several performance metrics to manage supply and demand. These have been discussed in previous chapters and include asset utilization efficiencies, invested capital, forecasting accuracy, scheduling changes, metadata accuracy, end-to-end order-to-cash lead time, on-time delivery to customers, supplier on-time delivery, and many others. In most situations, an S&OP team can navigate and negotiate across functional silos to improve process workflows. In summary, initiating an S&OP process is an effective and efficient way to coordinate complicated and constantly changing demand and supply information within a supply chain.
At any point in time, there are several pressing issues around the management of demand and supply. The S&OP team coordinates and manages the resolution of these issues. These include the loss or gain of major customers, management of seasonal or promotional demand patterns, and increasing inventory levels in anticipation of work stoppages. There are many other risks and concerns that may impact an organization’s supply chain. The S&OP also manages resources such as inventory, equipment, labor, and available capacity. Properly structured, an S&OP team will have the authority to coordinate operational changes as need to balance demand and supply.
Organizations develop three- to five-year strategic plans to estimate demand and supply across the global supply chain. These planning and coordination activities are done at various forecasting time horizons, geographical locations throughout the supply chain, as well as its various product families or groups. Once the goals are aligned, all participants create their own plans to ensure operational plans are executed to meet annual operational goals. Some goals may require reductions in lead time, demand management, yield improvements, and capital expenditures or reengineering. Monthly or quarterly reviews are held to ensure all levels of an organization and supply chain participants meet their annual operations plan. Adjustments, including recovery and risk-mitigation plans, are also created. As an organization works through its annual operating plan during the year, all lessons learned regarding what has worked or has not worked should be incorporated into the next year’s plan. This will enable the organization to develop more of an execution culture in which goals and objectives are consistently met regardless of external factors impacting the organization.
Key financial and operational metrics should meet the annual plan’s goals if the combined activities of the S&OP team are successful. In other words, revenue from product sales, cash flow targets, and operational budgets should be at planned levels that approach 100% of annual operating plan goals. Another indicator of an effective S&OP process is that the master production schedule and actual shipments to customers balance each other relative to the original plan (i.e., the organization delivers products on schedule without having to process backorders). Backorders require longer order-to-deliver cycle times and higher transaction costs. When schedules or shipments are missed, the reasons need to be investigated and actions taken to ensure root causes are eliminated from the process. An effective S&OP process also ensures schedule changes occur within a product’s lead time or frozen time fence. Production schedules should also be accurate and realistic. This means that processes should be standardized and available when needed for production. Work schedules should not be changed except on very rare occasions. Supply chain metadata should also be accurate and governed.
The accuracy of supply and demand metadata and actual data should be frequently reviewed because decisions regarding the efficient allocation of resources requires accuracy. If forecasting accuracy is poor, demand will be poorly estimated, causing inaccurate production schedules, inventory buildup, or errors in production (e.g., a product may be produced at a wrong location). On the supply side, lot sizes, lead times, and other measures directly impact an organization’s internal or supplier schedules. Problems in these areas result in longer order-to-delivery cycle times and higher transaction costs. To resolve these issues, S&OP participants must be empowered to make supply and demand decisions at a product-family level or even lower to ensure a fast response to disruptions of the supply chain.
There are several indications an S&OP process is not properly working. As an example, if product forecasts are not based on an S&OP consensus, there may be differing demand estimates across the organization or supply chain participants. In this situation, several different estimates for demand may exist. These create an imbalance between demand and supply if teams second-guess each other. This can occur in several different ways. In one scenario, senior management may force an S&OP team to plan its supply using unrealistic forecasts due to external pressures to meet certain levels of sales revenue. This poor practice can seriously reduce operational efficiencies by causing production on the basis of nonexistent orders. Inventory will increase throughout a supply chain and, over time, the inventory pipeline of a supply chain may be filled with products that will not sell. After a time, customers will not accept additional inventory, even with pricing discounts. This causes a temporary suspension of internal production or supplier deliveries until the inventories are worked off over time. Another indication of a poorly performing S&OP process is excess inventory for some products or not enough inventory for others. There may be several reasons for this, such as new products that could not be sold or ordering lot sizes that are multiples of lead time.
Inventory is barometer of successful supply chain practices. An S&OP team should continually monitor its inventory investment levels and take corrective action to prevent an increase of E&O inventory. The build-up of E&O inventory usually indicates that a consensus demand forecast was not reached by an S&OP team. Another indication of a poorly performing S&OP process is capacity deterioration. Capacity deterioration can occur by building products that cannot be sold or not achieving needed operational efficiencies because of poor operational practices. Another is an arbitrary reduction of inventory at the end of the fiscal year to meet cash flow and investment goals (i.e., to avoid showing too much inventory was built). Arbitrarily reducing inventory causes lower order-fill rates and operational inefficiencies early in the next fiscal year because internal production must be increased to meet expected demand that was not met by low inventory levels. Excessively long lead times are another indication of breakdowns in the S&OP process. Reducing lead times dramatically improves the ability of a supply chain to dynamically respond to changes in customer demand.
Relative to the S&OP team’s membership, the finance team is focused on revenue, cash flow, and budgetary targets needed to execute the annual operating plan. Variations to the annual operating financial plan require an S&OP team to adjust its demand and supply planning to meet financial goals. A financial forecast is one of several versions of a forecast that may exist in an organization. It is allocated linearly down through to the product group level and a finally to a forecast at an individual item or location level. It is also converted to a unit forecast using an item’s standard cost. Initially, marketing and sales may have different forecast estimates based on the information they obtain from customers and the sales force. The differences between what finance has forecast versus forecasting estimates by the marketing and sales organizations must be reconciled by the S&OP team. A reconciliation process should have occurred during the strategic planning process. At the strategic planning level, forecast variations between finance, marketing, and sales are reconciled. If there are gaps, then planned promotions and increased sales activities are created to increase demand and close the gaps prior to starting the new fiscal year. In summary, a major function of the S&OP team is to reconcile financial, sales, and marketing forecasts to obtain a consensus forecast or “one number” for an organization. This may require additional promotional and sales efforts, but it is important that the S&OP financial forecast, based on strategic goals from the annual operating plan, is met at a product group level so supply is matched to demand.
Key marketing team activities include the introduction of new products, expansion of current markets, or development of new markets and customers. It is very important that marketing use statistically based market research tools and methods to develop forecasts for new products. These are inputs to an organization’s sales plan and directly impact its supply chain. New product forecasts should be very carefully built by marketing and evaluated by the S&OP team. Miscalculations can significantly increase E&O inventory investment. Some organizations assign the cost of the E&O inventory to marketing’s budget as an effective way to ensure marketing is held accountable. New product forecast accuracy is especially important for industries in which new products are the basis for an organization’s revenue growth and profit. As an example, in high technology industries, the first company to get to market with a product or service often obtains a sizable market share and maintains this market share even after competitors later enter the same market. Marketing also impacts the degree of design obsolescence as it changes product packaging and other features of products and services. If the changes are not properly phased into a supply chain, through the S&OP team, the result may be that products or services become obsolete more quickly.
The sales team focuses on the revenue and gross margin on current product sales as well as product returns and other adjustments to sales. Failure to meet the original sales forecasts creates a situation in which the organization cannot achieve revenue and other financial goals. The information from field sales is critical for estimating demand at a product group level. Also, because sales are points of contact with customers, valuable information can be obtained that will help an S&OP team more efficiently manage supply to meet demand. Organizations should not use ad hoc or informal methods to obtain sales information. This may result in missed opportunities to manage supply and demand effectively.
Design engineering responsibilities to the S&OP team include resolving issues for new product development, design revisions to current products or services, bill-of-material issues, and warranty claims. Issues in these areas will delay the time to market of new products, increase the standard cost of products and services, and may have negative impacts on quality. They also directly impact sales forecasts for new products and the supply of current products. Bill-of-material and warranty issues may also impact an organization’s operational costs. Chapter 4 discussed how product design and marketing drive the eventual cost of production and distribution over product life cycles. The more complex the design of a product or service, the more difficult it is for an S&OP team to manage supply and demand. Also, when design errors are found after release to production, any changes that need to be made will increase returned goods, warranty, and other costs.
The procurement team is responsible for the purchase of raw materials, components, and other resources needed to produce products and services. Key procurement activities are acquisition cost management, management of supplier lead times, new product launch lead times, and strategies for sourcing materials. In some organizations, procurement may also manage scheduling and inventory systems. Otherwise these systems are managed by materials planning or manufacturing. In addition, procurement is concerned with supplier development, optimum inventory levels, reducing order expediting and premium freight costs, studying new sourcing opportunities, and consolidating supply sources where possible, as well as insourcing or outsourcing activities. Finally, procurement works with design engineering to standardize product and service designs and their purchased components. As part of the S&OP team, procurement is responsible for managing major portions of an organization’s supply chain.
The production team is responsible for creating and managing available capacity to meet production schedules, as well as resolving production scheduling and quality issues, material throughput, new product and process design issues impacting production, and supplier issues that impact production. It is important that production be provided with the resources and information needed to successfully produce an organization’s products or services. The representatives of manufacturing or operations have major responsibilities on the S&OP team.
The production activity control team may be a separate team or a part of procurement or operations. Key activities include the maintenance of customer fill rates to meet service levels, management of lead times with procurement and suppliers, management of inventory, and improvements to forecast accuracy in collaboration with the forecasting team, which may reside within the finance, marketing, or the materials team. Additional responsibilities nclude managing unplanned orders and material controls systems, managing order backlogs, ensuring materials are available to production, and certifying that supporting metadata are accurate.
Distribution is focused on achieving customer fill rates and service levels, inventory investment goals, lead times by product class and inventory type, balancing inventory levels across distribution centers to improve inventory turns, reducing unplanned orders for products and service parts, working to eliminate excess and obsolete, managing labor expenses and overtime, ensuring orders are shipped on time and accurate, eliminating damaged products, reducing emergency orders, and reducing order redeployment and backorders. Additional responsibilities are an efficient transfer of materials across the supply chain.