In the previous article we talked about the essential requirements for people and processes to ensure successful S&OP. In this second part, we will talk about the initial business decisions that must take place before the implementation process begins.
Understanding The Business
Rather than implementing a methodology that involves a cycle of meetings with key people, S&OP leaders and their teams need to understand the business they are in, and understand their products, competitors and trends. Benchmarking data is highly valuable when it comes to staying current with how your products and processes should be performing. [Ed: IBF members get access to world-leading S&OP, forecasting and planning benchmark data.]
I have seen poorly-aligned S&OP processes that have not only failed to deliver wide strategic goals, but cost the company a lot of money in the process
Strategic Planning
A mature S&OP process supports the delivery of the strategic plan. With this in mind, it is necessary that S&OP’s objectives are 100% aligned with the business strategy. I have seen poorly-aligned S&OP processes that have not only failed to deliver wide strategic goals, but cost the company a lot of money in the process. I was recently in a situation where a new S&OP team at a midsize company was focused on reducing inventory without analyzing the risk of stockouts on the business. This was a major problem because the company’s strategy was to grow exponentially in almost all product categories. All teams were working towards this goal (including Marketing who were pushing the products aggressively) apart from S&OP. With the strategic misalignment of the S&OP team, many products were unavailable, causing a non-recoverable loss to the business that year.
Swot Analysis
The S&OP team needs to be clear about the Swot analysis of the business that will be covered in the S&OP process, primarily to tackle the Opportunities and improve the Weaknesses. One recommendation is to have a discussion with key managers to raise these already-known opportunities and pain points and prioritize those to be helped by the S&OP process. With this clarity and prioritization, results from the S&OP will happen faster.
Planning Horizon
This planning horizon depends on the type of business but as we are talking about an immature S&OP process, the shorter the planning planing horizon the better – when we start out, we want the process to be manageable and that means not looking too far ahead. Some businesses, however, do not allow for a short planning horizon – you’ll need to decide on what is most appropriate at the outset.
Set up KPIs so you can monitor how the implementation process is evolving and make any necessary adjustments
Key Performance Indicators
Another point that often ends up being an afterthought are key performance indicators. It is important that these are defined and set up so you can monitor how the implementation process is evolving. This way we can see if we’re on track and make any necessary adjustments.
You should measure the performance of the following:
Strategies: Service Level (OTIF) , Working Capital, Growth Revenue, Margin, P&L. (Measure by Region, sales channel, product categories, etc.)
Sales: MAPE (Mean absolute percentage error) or Sales Forecast Accuracy, Bias. (Measure by Region, sales channel, product categories, etc.)
Operations: Accuracy of plans: production, materials, transfer of products to warehouses, revenues.
Inventories: Inventory days, inventory turn, inventory health.
Projections: Storage, % use of head count, % use of the industrial park.
S&OP Maturity: If the company already has an S&OP initiative in place, the recommendation is to measure the current maturity of the S&OP process using a maturity model.
Everything you are planning needs to be measured so that adjustments are made exactly where you need them. If the company does not have a KPI process in place, the recommendation is to carry out performance measurements afterwards. This way you can identify what level of maturity the team has managed to achieve, and put together a plan for further improvement.