It’s your first day at a new company and you’re tasked with implementing S&OP. What’s the first thing you do? The best starting point is to figure where to get the data for your forecast, and how you’re going to prepare it for input.
When we start with S&OP implementation it is essential to have the support of senior management and key people in each function to put all the pieces together. We’re talking Sales, Operations, Finance, Logistics and Purchasing. This collaboration is crucial for many reasons but primarily because this is how we get data, and without data, you don’t have an S&OP process.
The S&OP process must be aligned with Finance, making sure data inputs for both forecasts come from the same source. But before you start thinking of preparing your forecast, it is necessary to understand the following:
1. Know The Financial Performance Of The Company
The income statement of the company provides insight into what is really going on in the company. I consider it highly advisable to spend some time studying these statements and talking with the Finance people to identify the burning issues of the moment that are driving the decision-making process. Never lose sight of the fact that the S&OP process is a decision-making tool that directly impacts the income statement. Work to build the trust of senior management to reinforce this idea.
2. Know How Finance Uses Financial Statements
If Finance is using this information to plan for demand, the company will almost inevitably have planning problems. Using only this information is limiting because it is simply sales, dispatches and credit and debit notes applied to the account of each client. Dispatches and sales are not enough to plan effectively. It may happen that the difference between billing and dispatches is minimal, but either way, we need to know what the difference is in order to align the objectives of the business with those of Supply Chain and Operations.
3. Use Finance’s Data For Your Forecast Input
Use the same dispatch/sales information used by the Finance team as the input for your forecast. Why? Because we must use the same data if our forecasts (and subsequently plans) are to align. In every S&OP process, shipments to customers valued in USD is the first information we get from Finance. Use this data as the main input for your sales forecasts. If we skip this step and use Sales’ data for our capacity planning, we can end up Production not having the required resources, because Finance has developed the budget using completely different assumptions.
Once we have covered these 3 points, we can move onto data management.
1. Look At The Data In Different Ways
Breakdown the data by client, by product, by production plant etc. This allows us to identify customers and their buying patterns. We can manually check for quirks that, if not picked-up on, can create errors in the forecast. One such quirk is a customer who used to buy products from one of your production plants, for but for whatever reason now buys from another. It can look like two different customers in two different locations, but in reality is the same customer. Another example is a customer changing its business name – it looks like two different customers but is again the same customer. Statistical forecasting without this manual override will not identify these quirks and will result in forecast error that is easily avoidable.
This bit of the process is repetitive and, frankly dull, but it’s important at the beginning because we need to cleanse our data that goes into the forecast. The old adage of garbage in, garbage out applies.
2. Look At product Mix
Looking at product mix is valuable because it allows use to identify changes in consumer behaviour, drops in demand of a particular product, changes in a specific customer’s behaviour etc. We can gain insight into what customers are doing and why, relating their behavior to specific demand influencing factors.
3. See If New Products Will Be Released
The S&OP process pays special attention to new products. Why? Because there is no historic demand to help us understand how many we’ll sell. We have very little idea how it’ll perform until it’s released into the market, by which time the initial planning phase is already completed. This means we must leverage the S&OP process, with its benefit of cross-functional collaboration, to gather as much qualitative insight as we can. We may not have hard data, but this knowledge can help us predict how it’ll perform.
With these steps completed we can start our forecasting process and arrive at numbers we can take into the pre-meeting. In the pre-meeting you’ll sit down with representatives from the Sales team and gain their input into short term demand and another factors that may influence demand that salespeople have unique insight into. This qualitative knowledge will help us refine our statistical forecasts. We’ll then be ready to go to develop a one number forecast all functions will work from. And when we have done that, we will have achieved the core component of S&OP – the creation of an integrated approach to understanding and fulfilling demand.