Nine Common Weaknesses in Sales and Operations Planning

Author: Dr Keith McNeil

Introduction

Sales and Operations Planning (S&OP) can be described most simply as a monthly process in which various business functions, principally manufacturing, distribution, sales and marketing meet formally to agree a rolling forward plan that balances customer requirements (demand and price) against the costs, capacity and capability of manufacturing and logistics (supply).  This balancing of supply and demand has the intention of ensuring that various business functions (and in some cases suppliers and customers) can meet in an organised manner and generate one overall agreed operating plan.

A recent study by the Aberdeen Group highlighted the fact that many businesses fail to reach best-practice in their S&OP.  Aberdeen Group regards best-practice S&OP as being able to achieve:

·         “Customer service levels (on-time and complete by the customer’s requested date) – 97.5%

·         Average cash conversion cycle – 15 days

·         Average forecast accuracy at the product family level – 82%”.

In this article, I will list nine common failings in S&OP which hinder companies in achieving best practice.

The Nine Common Short-comings of S&OP

1.    The planning process is too long and too infrequent.  An increasing conflict for most companies comes from the requirements of having disciplined supply chain management and internal business alignment at the same time of being agile and responsive to customer demand.  True demand pull and lean supply chains emphasise agility and lower inventories.  The "monthly" requirement to balance supply and demand is in reality a paradigm emanating from our past limitations.  Many businesses have a requirement to balance supply and demand far more frequently.  Further, the longer the S&OP process takes, the higher is the exposure to inaccuracy of demand forecasting.

2.    Many S&OP processes are volume-based allocations rather than value-based plans.  This arises for two reasons.  First, sometimes, finance see budgeting as a separate role from S&OP.  However, second, many businesses find it fundamentally difficult to have the data and systems to understand value implications of their rolling plans.  The budget, rolling financial plans and S&OP should be one integrated process.  In fact, the budget should be the S&OP process frozen at one point of time, each year.  All S&OP plans should specify what they will contribute in revenue and margin and what the requirement for working capital will be.

3.    Increasing product proliferation and differentiation requires more dynamic product portfolio management.  Traditional S&OP usually involves managing capacity and production allocations as an aggregation of stock-keeping units (SKU's) called product groups.  Planning at product group level masks critical lower level SKU issues and planning infeasibilities.  This becomes a particularly acute issue when implementing S&OP in certain processing and resources industries which involve a process of "exploding" a raw material into many different SKU's.  The decisions about which SKU's can be made and the interactions between them in terms of cost and capacity are often immensely complex.

4.    The development of multiple scenarios is often difficult.  Many companies find it challenging to prepare one agreed plan let alone be in a position to analyse several alternative options for management to consider.  The collection of data, time and lack of effective decision support tools are the major limitations.  Planning for "one set of numbers" in the twenty-first century in some respects is flawed because with so much change around us, management need to plan around a range of risk, reward and opportunity scenarios.

5.    Complex, multi-site and global companies struggle to co-ordinate timely S&OP across their businesses.  This is an outcome of time constraints, limitations in technology and communication, and a failure to resolve conflicts between central and regional locations.  Across a multiple site or multiple business unit organisation, the correct sequence for achieving greatest value is first to optimally balance supply and demand across the whole business and then to optimise within the individual business units or locations.  This often appears to be counter-intuitive but the more common reason for failing to achieve this optimal value lies with old-fashioned organisational politics.

6.    Poor feed-back and monitoring of performance to plan.   One common weakness is that companies focus primarily on generating each forward plan and give less emphasis to execution and re-calibration.  Consider a situation where two weeks into the plan cycle, demand has increased or decreased by ten percent, or a major shipment has come forward or gone back because a ship schedule has changed.  Events such as these require a re-balancing of S&OP.  Further, performance against the Plan should be reviewed weekly to determine if the Plan will be achieved, if it needs to be re-calibrated and if it is at risk, what corrective actions are required.  Closure and feed-back on the planning loop is critical and this should be done daily and weekly.  Weekly "mini-S&OP's" confer upon the business greater agility in their planning and greater agility in responsiveness.

7.    Key Sales and Operations Planning measures and commitments are not reflected in individual performance contracts.  S&OP requires wide spread commitment from individuals, for example in making critical data available in a timely manner and being measured on the accuracy and quality of that data.  Sales forecasts are a very good example and it is still common to find instances where sales managers have no real accountability for forecasts.  Additional problems arise when managers have key measures that are in conflict with S&OP outcomes.  I have seen an instance where a senior production manager had as a key performance measure, to maximise product out-turn from a raw material.  However, this resulted in creation of inventory for which there was no immediate demand and which ultimately had to be price discounted to avoid obsolescence.

8.    Reluctance to commit to technology.  Three technologies that are very relevant to S&OP are Master Data Management, Demand Forecasting and Advanced Planning and Scheduling (APS).  Data management is very time consuming and most companies still labour with inefficient spread sheets for many of the S&OP tasks.  Demand forecasting technology significantly improves the capability to improve forecast accuracy, to update forecasts weekly and to calculate required safety stock requirements for specified levels of customer service.  APS confers the ability to develop a truly optimal plan (see below).

9.    The Sales and Operations Plan is sub-optimal and perhaps infeasible.  The inter-relationships between all of the parameters in an S&OP plan are extremely complex, numbering in the tens and hundreds of thousands and to develop a truly optimal and feasible plan is beyond the capability of the human brain.  Typically, an S&OP plan has to consider all or part of material availability, machine and labour capacity, customer due dates, inventory safety stock levels, costs, sequencing set-ups, distribution requirements, facilities locations and transport costs, demand and price.  It is hardly surprising that when it comes to executing against a flawed plan, failure or re-work is common.

Conclusions

This article has described nine failings for many S&OP processes in meeting the needs of modern businesses and supply chains.  The failure of many businesses to meet the best-practice capability comes from many of the nine failures.

Importantly, the evidence that S&OP is delivering real benefits is now coming forward.  Muzumdar and Fontanella (2006), for example, have provided survey outcomes linking best in breed S&OP with greater levels of order fill rates, gross margin and customer retention.  Worthy goals for every company to pursue!!

Reference

Muzumdar, M. and J. Fontanella, The Secrets of S&OP Success, Supply Chain Management Review, April 2006.