“One Number Planning” & S&OP

Scott Roy

Scott Roy

I was asked recently to clarify my previous objections to a “One Number” planning world! In the late 90’s and early 2000’s there was a movement underfoot to drive the entire organization from a single operating number. In theory that would be a good thing as long as you have the right number. Too many times that one number was driven by finance and in actuality the budget. What ended up happening next was everyone else was left to reverse engineering the budget down to item level forecast or sales plans. In my experience the budget is what the company wants or wishes to happen, not necessarily what is going to happen

When it comes to Sales and Operations Planning (S&OP) you do need to have “One” number that you are executing towards; production planning, purchasing, inventory management, plant operations.   In most companies that one number is not the budget but a demand plan or demand forecast. The demand plan should be a plan that represents the best indication of the future adjusted to the risk that the company wants to plan/execute against. This risk should be made clear in the S&OP process and bought in by everyone. You use the S&OP meeting to develop plans to cover the uncertainties and risk in any plan by maybe deciding to enhance your inventory position or getting more capacity lined up. You want a demand plan to be realistic and probable.

In reality you will have multiple numbers and they will all have a role in the business. You will most likely have a revenue budget, sales targets, and other numbers that people have created.  What you do now is plan to the demand plan and manage to the gap in those other numbers; call them out, make them visible but don’t force all the numbers together for the sake of having One Number.

The bottom line is S &OP has to execute against one number the demand plan/forecast.  You will have other numbers, but you manage to the gaps.  Don’t force a number for the sake of having one number.  The demand plan should be the most realistic and probable out come of the future!

Scott Roy
Collaboration Planning
Wells Dairy Inc

11 Responses to “One Number Planning” & S&OP

  1. Hello,

    Up until recently I was a Finance Planning Mgr for a pharmaceutical sales organization( Baxter Sales).

    Well, I relate a lot to this cause this was exactly my problem. Every month trying to explain why are inventory levels were off target. Well, to me, the realistic budget is the demand budget. Sorry for sales people, but in the operation plan, they hide figures in their pockets. The truth is given to the supply chain people. You do not want to missed sales due to not properly projecting your inventory levels.

    Totally agree.

  2. Scott,
    Totally agree with you. Have been a Forecast Manager for 15 years, and those years the manufacturing company tried to drive the company to the budget we had a mess on our hands. Bottom line the forecast drives Inventory, Purchasing, Manufacuring, and SOP. We talk to the gap between the forecast and budget and discuss any opportunities which would close the gap between a forecast which might be lower than the budget.
    Sue Sassaman

  3. Scott

    I agree that the S&OP process has to execute against the demand plan/forecast. We only have to look at the recent economic downturn to understand the falicy of driving the S&OP from the budget.

    But I think that this is only true in the “near term”, where near term term will depend on the industry. I know of some companies that run a 3 month S&OP in weekly buckets and others that run a 10 year S&OP in monthly buckets. Typically the longer the term the more companies use “range” forecasting (optimistic, pessimistic, realistic) rather than “single number” forecasting.

    In the longer term though, the S&OP plan should focus not only on risk, but also on demand shaping activities which can range from new product introductions, to promotions, and should also include risk factors such as legislative changes. There is a lot of uncertainty this far into the future, which is why companies use range forecasting. The S&OP process in the longer term should be focussed on determining how to execute at an operational level to meet the corporate financial objectives. Many in the analyst community refer to this activity as Interated Business Planning (IBP).

    But I agree that the demand/supply balancing aspect of S&OP should be driven by a realistic forecast, not the budget.

    There is also a great need to reconcile the forward looking plans of all planning activiities, but particularly the S&OP process with the corporate financial goals, typically contained in the budget. Too much of Corporate Performance Management is focussed on analysing what has happened using BI tools. IBP can provide the projected financial performance of the company, which is of course a lot more valuable than analysing what has happened. One of the key outputs of IBP is the variance between the budget and the plans using financial metrics. To do this effectively requires the seamless integration of financial and operational information. It also requires projections of average selling price, component costs, and operating costs. In the not too distant future it may even require carbon footprint calculations.

    In summary, while I agree that the near term S&OP should be driven by a realistic demand plan, I think the budget is a better number to use in the long term as it encapsulates corporate financial goals. In the longer term the purpose of the S&OP should be, as you point out, to identify the gaps and the risks involved in reaching the corporate financial goals.

    Regards
    Trevor Miles
    Kinaxis

  4. Scott,

    Great points!!! You completely nailed one of the most frustrating exercises in Planning. What has baffled me time and again is all of the work and preparation that goes into a well thought-out “bottom-up Demand Plan” that may not be viewed as accurate because it does not match the “top-down Financial forecast/budget”. I am in your camp … forcing these numbers to align may actually be detrimental to delivering solid results.

    A “Two-Number” system actually seems to work best, but there is a catch. The angle here is to get the Consensus Demand Plan (realistic) to become the baseline for the Financial Forecast. Therefore, Finance starts to build their Forecast/Budget with the aligned realistic Demand Plan, but they have some license to modify projections for risk/opp messaging in the Financial Forecast. As you point out, as long as all parties are aware of the gaps and the rationale, the organization can plan successfully.

  5. “Pull” methodologies, rather than “demand planning” are proving to accelerate profits (Throughput) while holding the line on Operating Expenses and reducing both Inventories and demand for new investment. All of this is good for finance — improving cash flow, driving profits and ROI up. However, these need to be implemented across the supply chain. After all, despite what the accountants claim, no one has REALLY made a profit until the end-user (the consumer) has purchased a product. That is the action that should drive replenishment.

    This is NOT to suggest that no planning must occur at the point of manufacture. But under such a “pull-based” system, the planning should be accurate (because it is at the highest level of aggregation) and it should be based on filling “buffers” in the pull-based replenishment system, nothing more.

    Under such a system, forecasting profits should relatively easy and, after all, it is the financial forecast that is most flexible. Missing the financial forecast does not leave the company with too much or too little inventory, or make one guess incorrectly on the amount of warehouse space or manufacturing capacity one needs.

  6. It is a great subject for discussion! I would like to bring my contribution and comments to this topic based on my experience as Director of Operations in a plant manufacturer of Industrial valves in Brazil where the products are highly customized according to its application and kind of sales( MRO, Projects).

    I used to be in charge of conducting the S&OP meetings and I have learned that sales contribution is key for the success of planning.

    It is common to see that sales people is not aware about statistics, trends and details upon products that are imperative for a good planning of materials and resources. The most of data comes from historical of sales and open proposals where you try to extract information in advance to start operations with less risk possible.

    There is a “war” agaist working capital, mainly attributed to avoid building inventory of low turns goods. At same time, the market is calling through sales to reduce the lead times and improve the on time delivery.

    Should not we have a crear “pact” with sales in order to force them to dedicate a time for planning the sales, conduct the market study and so define the “rules” for delivery guide lines? I usually feel operations commited to delivery the best products, at lowest costs and highest quality but frequently penalised by sales due to lack of information.

    According to group members experience, how to “bring” the sales force for a truth contribution on S&OP?

    Regards to all,

    Rogerio Amarello

  7. Rogerio, I agree with you that the Sales force needs to be completely involved in developing the forecast. Actually they should be responsible for the forecast. In leading Demand Planning teams in the past I have worked in companies that were aligned by product category and others by customer. I have assigned a demand planner to the sales person for S&OP purposes to help educate the sales force on the forecasting process. The demand planner is responsible for the historically adjusted forecast but gets input from the sales team to develop the final forecast. The final forecast then includes promotions, new customers, and new product introductions. Many times the sales organization takes a while to adopt to this change.

    Hope this helps
    Steve Schaffer

  8. I ran the global S&OP process for a high-volume consumer electronics business for a number of years and while I agree with the desire to have a one number forecast, I think is isn’t really the right goal. If all we do is focus on a single demand number for each planning time period, we ignore much of the most useful information available to run the supply chain. We know that even the best demand forecast is wrong. Usually we have a pretty good idea of whether the forecast is biased high or biased low and some feeling for how much off it is likely to be.

    Using this information, you can make adjustments in the supply chain. If the official forecast is biased high, cut you safety stock levels. If the forecast is biased low, increase the safety stock levels. If there is a large range around demand, work to postpone product and keep it in sub-assemblies that can be used in other products.

    I am not arguing for doing this in the back room by yourself. Make it part of the management team discussion. Involve sales, finance and the general manager. I have found this to make for a much richer and more useful discussion than arguing about how to change the demand forecast. It requires the management team to be willing to trust each other with the truth. It also requires the operations team to have control of the important levers within the supply chain.

    I expect many will argue that if you know the forecast is biased, change it. Sounds like a good plan, but I have found that the information you gather in a discussion of the weaknesses and risks of the current demand forecast yield much more useful information than a discussion about whether the forecast should be 3 or 7.

    Of course, if you can agree on making a forecast change, you should make it, but don’t stop there. You are ignoring a lot of important information if all you do is focus on the one number in the demand plan. You need to understand what is behind the number.

    I am interested in what others think about this approach. I know it worked successfully for us.

    Ed Hancock

  9. Ed,

    what you are describing is reality in most places. However I strongly believe that you must agree on THE number.

    One number does not mean, that this number is always correct, however it ensures that everybody is working against that ONE agreed number. Otherwise there is a risk, that i.e. Supply Chain always second guesses the demand plan (because they know it better) and so does everybody in other business processes ending up with a huge pocket of contingencies, which in fact are wast (e.g. overcapacity, high stocks, obsoletes, to many resources, etc.)

    I fully agree with you, that conversation is key here. Everybody must get an understanding, what a bias (and this is not only demand bias think about the CEO always asking for more than he actually needs to please the banks) causes in terms of waste. A lot of it has to do with trust and openess and the reward culture in the organisation. And you are right in saying, that it is also important to understand the assumptions behind the number. It is much better to discuss and challenge those assumptions than the number.

    Helmut Runschke

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