The Sales Department’s primary function is to sell the firm’s product or service. They are judged on their sales performance based on what is achievable according to market conditions. If the market is buoyant and there are tailwinds, we would expect Sales to perform well.
At the same time, you would expect Operations to plan ahead so sales have what they need, and Management to revise targets upwards to make sure the team is pulling their weight and maximizing sales opportunities. Conversely, if the market deteriorates, then we need to look at reducing cost and minimizing inventory, and to revise sales targets down so that the sales staff have realistic targets and their hard work is still recognized.
This requires a few things: a robust forecasting process and demand planning function; regularly updated forecasts; a culture whereby Sales contributes with insights on changed assumptions based on the latest information; and for Sales operations to be closely connected with Operations so that potential gaps can be identified and closed. The key objective in all of this is a succinct, integrated, and collaborative process that everyone including sales participates in.
Integrated Business Planning – ‘Integrated’ Being The Operative Word
A major part of the process goal is to operate as effectively and profitably as possible. All of this may be accomplished through an integrated Sales and Operations (S&OP) process with cross-functional communication and collaboration that connects Sales with Demand Planning and other major functions in a structured way. Not having a good cross-functional collaboration or S&OP process in place may lead to missed opportunities for Sales, or unneeded risk for the company. Imagine the all too familiar scenario below and consider where it leaves your Sales Department and your company’s bottom line.
The forecasting Team generates an annual forecast which is revised to some agreeable number by top management as per the budget. This forms the basis for Production plans. Subsequently, this provides Production with a guideline for how much to produce each month (and what the annual production budget should be). At the same time, Sales has created stretch goals or targets for their salespeople and are planning to hit those numbers. Unfortunately Production, which is still tied to the budget, is not prepared. When Sales begins to outpace the plan and begins hitting their target, the corresponding production is not available. With no S&OP process in place, sales targets are regularly missed, with little understanding why. Left in the dark about the stretch goals, Sales is constantly fighting an uphill battle. Sales staff miss targets, miss out on expected bonuses and are seen to underperform. Sales blames Operations for not having the product and Operations blames Sales for not giving a good forecast.
This kind of approach is all too common for organizations with underdeveloped Sales and Operations Planning processes. We see obvious negative consequences in Sales missing targets and experiencing high staff turnover, but this belies other structural and systemic weaknesses in the understanding of how forecasts are created, and the importance of cross-functional collaboration in creating those forecasts. Below are the systemic and cultural problems in our above scenario.
Sales and Production Work toward Different Figures
Sales are working towards different figures to Production. Whilst Sales are trying to hit targets based on updated assumptions, Production was not able to provide enough stock on time. This means that Sales teams are habitually missing their targets when the market is developing positively, and unnecessary stock accumulates when market conditions have deteriorated.
This creates unrealistic expectations and dissatisfaction … and missed opportunities. If you’re a sales manager hoping for your team to hit bonus every month, you would consider it unfair to not have the necessary stock available to do so. This would also impose clear limitations in increasing the company’s top and bottom line. He/she should seek to instigate changes in the S&OP process to resolve this issue.
The Sales Team Is Excluded from the S&OP Process or There is no S&OP Process
If the Forecasting team does not receive Sales input into the forecast, it means it is impossible to identify gaps between forecast and targets. We are not asking Sales to create an entirely new forecast every week or after any new market intelligence but they do own the assumptions and have a responsibility to provide insights. The exclusion of Sales input means they are not having any input into the projected figures and no companywide consensus is being reached.
If our fictitious company had the benefit of a mature S&OP environment, the revised forecasts that they send to Production would be discussed at the Monthly Demand Plan Meeting, where they are presented to Management, Sales and Marketing, Finance, Production, and Operations. This is the opportunity for all to reach a consensus and decide on a final unbiased and unconstrained figure for the month that all departments will work towards achieving. In our scenario above, these meetings simply aren’t happening.
From the Sales department’s point of view, they may not generate the forecast but they should own the assumptions and need to be involved in the process to make a decision as to whether, and how, they can close the gap between forecast and target based on previous performance, production capacity, and available resources like marketing initiatives. In our scenario, Sales cannot be expected to hit targets when the overall market doesn’t allow for it, nor should Management allow for sales opportunities to be missed by not having realistic quotas.
The Sales Team is Not Helping to Establish True Demand
There is an important concept that is going unnoticed in the above scenario: Sales and Marketing, along with forecasting, must be aggressive in their efforts for forecasts to reflect true demand. Sales and Management should help work to identify the true demand drivers, and the levers they can pull to affect these demand drivers. In our scenario above, none of this is happening. To get Sales to realistically hit the targets set by Management, discussions must take place about what marketing initiatives would be taken to close the gap, enabling Sales to hit their target.
What’s more, Sales has great insight into the latest developments in the market, particularly at a regional level. They know about competitors entering the market and they gauge the sentiment of their clients in real time. They know what products are accelerating in demand, which accounts are growing, and client expectations before anyone else. Sales are the firm’s eyes and ears into the market. It should go without saying that Forecasting should use their information and assumptions when creating forecasts.
The Bottom Line: Join The Dots For Effective Forecasting and Demand Planning
Within an effective S&OP environment, it’s not just Statistical models, Management, or Operations that work with (and help create) the number created by the Demand Planning team, it is the Sales department as well, and their role in helping to paint an accurate picture of demand. If the above scenario sounds familiar, your Sales Team must move beyond simply reacting to sales targets and start to help shape the demand plan and be a part of a collaborative process. It must work with others, such as Demand Planning teams and strive to establish plans for closing potential gaps.
In an established S&OP environment, there are two key ingredients that comprise the forecast:
- A statistical forecast based on historical data and other variables (what we know)
- Sales input based on changing market assumptions (what we need to know)
This allows the organization to capture what we know in current sales levels and trend and seasonality, whilst adjusting it for what we need to know about and anticipated variables as perceived by Sales. Whilst there is a lot of debate surrounding a true “one-number forecast”, companies need at minimum a “one-number attitude”. Any S&OP process must be truly cross-functional and collaborative if it is to succeed, where each department has a clear understanding of the others’ objectives, resources, biases, and assumptions. Any differences in opinion must be resolved within the understanding of each department wanting to revise figures where possible, and presenting realistic plans to achieve them. To succeed you need a robust Demand Planning and S&OP process and Sales must be part of both those processes and contribute with insights. That way, everyone operates under the same set of assumptions, and that is how successful companies achieve the wider goal of increased efficiency and profitability.