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 The S&OP process is one of the key decision-making forums for an organization. The conflicting objectives from various departments can prove to be a challenge, especially when seeking alignment on decisions at the Executive S&OP meeting. This article provides insight into stronger decision-making methods to support the financial and strategic goals of an organization.

The S&OP process needs to be one of the key meetings for an organization where decisions are made to help the organization achieve its business, strategic and financial goals. The S&OP horizon is typically 12 to 18 months which includes the current and next fiscal years. The cross-functional representation within the S&OP process—which includes Senior Executives from areas such as Sales & Marketing, Operations, Finance and Supply Chain—need to align on recommendations for decisions brought forward from the S&OP process meetings. The S&OP process meetings include the Demand Review, Supply Review and Pre-S&OP forums.

The meeting facilitator at the Executive S&OP meeting is typically a management representative from Supply Chain or Operations and assumes responsibility for coordinating the flow of key actions and recommendations for decisions from the prior S&OP process meetings. The data and justification for the recommendations can be included as part of the backup files or information provided to senior leaders.

Financial Decision-Making Factors

The decisions made within the S&OP process can have a significant impact on the organization from a financial perspective, but these decisions may also impact objectives for specific areas.

One example is the decision to carry safety stock for an upcoming product launch. The Sales & Marketing team may want to carry a higher level of inventory as the product launches to meet any incremental demand above forecasted demand. This higher level of inventory will impact Finance and Operations who will want to maintain lower levels of inventory. It will also negatively impact cash flow and working capital in the event that the inventory is not sold. This is a common topic of discussion within S&OP. Developing a process to address issues such as safety stock for product launches allows different areas to align on the final recommendations and reach a consensus. There will be occasions where consensus cannot be reached and the Senior Executive Leader of the organization will have to make the final decision at Executive S&OP. Escalating such matters, however, should be the exception to the rule.

A method for decision-making that can prove to be effective is to consider the overall impact on the business which includes the financial and strategic implications. Finance plays a key role, particularly when this group is involved in each step within the S&OP process. Knowing the overall impact on the financial projection for the organization can help to support a recommendation for decision. In the example of safety stock for a product launch, the team can evaluate the negative impact of the safety stock in terms of cash flow and working capital. This analysis can then be compared to the positive impact of safety stock in terms of additional sales revenue for the organization. This comparison provides the cost/benefit analysis that helps stakeholders align on the final recommendation. Many other factors may need to be considered such as shelf life of a product, potential disposal costs and any incremental costs needed to support the build of the safety stock. Stakeholders will ideally consider the impact of different decisions on the overall business versus the impact on their own area objectives. This can be very challenging when objectives are aligned to compensation.

Strategic Decision-Making Factors

Another factor which needs to be considered as part of the decision making process is the strategic impact of the recommendation. Factors that need to be considered include the following:

  • The overall market size for the product,
  • Available portfolio for this customer which may increase if other products are available,
  • How competitors will react in response to the decision, and
  • Need for internal support related to any positive or negative impacts of the decision which could include the need to flex Operations either up or down.

Once the S&OP team understands the financial and strategic drivers that inform the decisions taken by Senior Leadership, they can work more efficiently to strengthen the analysis which supports the recommendations being made at the Executive S&OP. Each scenario differs and the assumptions that are being made need to be revisited on a regular basis as they change over time. As part of developing the recommendations, it is critical to document these assumptions so that they can be reviewed by the stakeholders.

The other critical element of documenting the analysis is the learning which can come as part of the post review once the final outcome is determined. This learning can be useful in the future when similar situations arise because we can reference the efficacy of previous initiatives to develop a more reliable recommendation. Remember that any change in assumptions can have a significant impact on the outcome. An example of this change is the assumption that the customer is a “strategic customer” and if this assumption about this customer changes for any reason, then the recommendation may change. One way to manage this is by developing a process which defines each customer’s status (in terms of importance) which is revisited and approved annually.

This helps the team understand the dynamics at play for each customer, and the consequences of each decision upon them. This avoids the debate surrounding the priority of the customer during the monthly process. It also lets the team focus on the actual recommendation which is important because this step can be very time consuming. This is an example of making the process more efficient, spending less time aligning assumptions and instead using that time to analyze the financial and strategic impact of the decision. There is limited time available for many of the stakeholders and participants within the S&OP process, so maintaining focus on the key items is critical for success.

Another recommendation for a decision could be the rationalization of product SKUs. In this situation, there may be both a positive and negative impact on the financial projections as seen below in Table 1. The financial risks, as outlined in Table 1, are defined as the sales revenue loss caused by SKUs which are being removed (due to low margin and no opportunity to improve the margin for these products). The assumption is that the SKUs being rationalized are not linked to a strategic customer and, therefore, will not impact other business. The other financial risk highlighted for this S&OP cycle could be the projected loss of sales revenue due to the price increase on selected

 

Table 1

 

SKUs which may be caused by material or manufacturing cost increases. The risk is, therefore, that the price increases may lose customers. The total overall financial risk in this example is $1,250,000.

The financial opportunities identified in Table 1 include the aforementioned price increases because a price increase does not necessarily result in the loss of business. It is possible that the price increases result in increased revenue if sales remain constant. The other opportunity identified in Table 1 is the reduction of operational costs which improves the financial projection for the organization. Operational improvement initiatives may include a continuous improvement project to increase product yield or reduce changeover time. The total overall financial opportunity in this example is $1,650,000.

The latest financial projection for the organization in Table 1 considers the risks and opportunities for this S&OP monthly cycle and provides a net positive impact of $400,000. This will allow the stakeholders of the S&OP process to identify where to focus resources and time, allowing them to mitigate the risks and accelerate the opportunities. This process can help to facilitate the decision-making process within S&OP as there is a direct link to the financial projection.

Consider applying a probability factor for each of the recommendations, where each outcome has a certain likelihood of occurring. All teams should align on the probability factor. This helps to clarify the impact of risks and opportunities for each recommendation. (See Table 2 below)

Table 2

The alignment of the S&OP team on recommendations requires the active participation of several areas including Sales, Marketing, Finance, Operations and Supply Chain. Analysis of risks and opportunities ahead of time allows management to take the appropriate decision at the Executive S&OP meeting.

The demand review forum can identify the items related to sales revenue, and the supply review forum can identify items related to overall costs. There may not be a specific strategic decision that needs to be taken but you may need to decide things like allocating resources to either mitigate a risk or accelerate an opportunity. Delays in proceeding with these actions have a direct impact on the financial outcome for an organization. Therefore, it is important that the team understands the items which are time sensitive and prioritize as necessary.

The S&OP process—and specifically the Executive S&OP meeting—is seen as a decision-making forum. That means it is critical that the information needed to support the recommendations for decision are available. The teams within the demand and supply review forums need to consider the recommendations for decisions as it relates to overall impact on the business. Key factors include the financial impact, which could be short term in nature, or it may include strategic implications which are longer term in nature. Considering these factors early on at the demand and supply reviews prepares us nicely for decision-making at the pre-S&OP and Executive S&OP forums.

 

This article was originally published in the Journal of Business Forecasting (Spring 2019).