To borrow a phrase from the late comedian Rodney Dangerfield, customer service just doesn’t get the S&OP respect it deserves.
One of the more important but overlooked areas of S&OP is the integration of customer service into the process flow. I suspect this integration is largely ignored and thus unexplored because customer service is considered by most to be a function of supply chain execution rather than planning. Unfortunately, this train of thought derails when one considers that customer service can provide a vital feedback loop and tremendous insights to the S&OP process.
Of course, when we think of customer service in the context of S&OP, we’re not referring to consumer-based customer service—those post-holiday, 20-person, frenzied queues that form in early January at Walmart stores across the land. In the parlance of supply chain professionals, customer service is the part of the organization that manages, and processes orders and owns responsibility for distribution and transportation of product to customers. I know this role because in addition to my supply chain planning responsibilities at Combe, I also manage customer service. And with the passing of each day, I become increasingly aware of the importance of customer service throughout the S&OP process.
Customer service leaders are the hands-on owners of supply chain execution, managing day-to-day operations—the highs and the lows— throughout the enterprise. As such, they are a font of wisdom regarding “true demand.” True demand is a relatively new expression for an old concept. It is an interpretation of historical demand based on a netting of orders placed vs. orders shipped in a given time period, after considering cuts, substitutions, back orders, excess order quantities, and future deliveries.
Working to determine true demand during the consensus process can result in a better demand signal in an otherwise imperfect world by netting all the adverse impacts on historical shipments. So, whether true demand results in an adjustment to history, or to the forward forecast, or are simply events to be remembered in subsequent planning years—recognizing true demand helps dial in a clearer demand signal with less noise and incidental chatter.
With direct line of sight to fill issues, order line cuts, delayed inbound shipments, unreliable carriers, and so on—customer service leaders can provide invaluable insight on true demand at key touchpoints across the S&OP process – if they are invited to the discussion.
In my twenty-five years of S&OP experience, I have witnessed only one instance of perfectly harmonized, four-week periods (thirteen in total within the year). Because of this reality I have become accustomed to speaking of “Wal-Mart weeks”, or “31-day months” or “5-week months” as a way to point out the natural irregularity of demand caused by variations in the calendar. Understanding the timing of order drops, warehouse turnaround times, as well as when shipments are invoiced can be very instructive to the demand plan.
In addition, this detailed knowledge of order pacing—inherently understood by customer service leaders—can offer great insight in the pacing of the baseline demand and operating budget plans. Certainly, during the budget development process, input from customer service can be extremely valuable to the S&OP process generally, and the demand consensus meeting specifically.
End of Month Order Flow and Timing
When five customers make up 70% or more of your total sales volume, as is typical with many companies, the fortunes of any given month become heavily dependent on the clean execution of order flow during the last week of the month. If, for some reason, order flow is disrupted to any one of your top customers (i.e. orders are delayed because of an overwhelmed warehouse, a late order drop cycle, an extreme weather event, or by the failure of a carrier to pick up at month end) the volume planned for that month is likely to shift into the following month, thereby altering two months of demand at the same time.
Of course, all this volume shifting occurs within the supply lead time, so the real impact to the plan is mostly financial—leading to a typical planning reaction of “rolling the (financial) miss into next month.” That is, take a percentage of the shortfall attributable to order flow (for the prior month) and then push that volume into the current month’s estimate.
If your end of the month does not have a clean cut-off, with all orders processed as expected, then your customer service leader should inform the S&OP process, with the impacts discussed in consensus, Pre-S&OP, and Executive Review meetings.
If your company offers “deals” to its customer base at the end of a year, quarter or month, you are likely to experience a surge in demand, followed by a weakening of orders in the subsequent time period(s). This dynamic is essentially the opposite of an order flow disruption, since demand is intentionally pulled forward from future periods instead of delayed.
Ideally, these periodic loads are planned in advance, but more often than not they are a surprise, offered at the last minute in an attempt to close some financial gap. Loads of this sort tend to be poorly communicated within the S&OP process. Instead of just passively ignoring or accepting such occurrences, however, recognizing and assessing the impact of the load after the fact enables you to estimate any residual impact (usually downside) on future demand. Again, while this ‘inside of supply lead time’ information has little value in terms of supply chain planning, it can be very helpful in estimating dollar-volume shifts from one month to the next and gaining a more realistic version of the financial plan emanating from the S&OP process.
Cuts and Back Orders
While some might consider this identical to order flow timing, keeping track of cuts and back orders is helpful to the planning process since these factors represent pent up demand that will snap back during the customer’s next order cycle or after inventory has recovered. Cuts and back orders are tremendously important inputs for the demand consensus meeting, since poor demand planning (e.g., an oversold forecast) might be a root cause of the cuts.
Likewise, it is important to make sure that supply planning personnel stay abreast of all cuts and back orders to make sure they recheck safety stock settings, lead times, or production-attainment statistics, since each of these parameters might indicate alternate root causes for the cuts. And in this era of heightened scrutiny and fines imposed by trading partners for failing to deliver in full orders, carefully managing all supply chain parameters to avoid stock outages has greater importance than ever. Thus, the topic of any materially significant cuts or back orders should be a regular conversation in demand and supply reviews within the S&OP process flow.
Substitutions and Diversions
When I worked at Snapple we would often substitute one flavored beverage for another if we ran out of stock. For example, if we ran out of Lemon Tea at a distribution point, we might substitute it with Half and Half Tea, or Peach Tea. Most of our customers allowed such substitutions—some even encouraged them—to help maintain any level of product supply during their peak beverage seasons.
These substitutions, especially if considerable, are an important input to demand consensus, helping to explain SKU shipment-mix shifts, and enable adjustments to the demand plan at the mix level. Similarly, if we had a run on a product at one distribution center (DC), it was common practice to ship (divert) product from a suboptimal DC (at a higher cost or more miles) to help assure fill levels. These diversions would alter our SKU/DC shipment history (and eventually our future forecasts) by attributing demand against the wrong DC. This may be manageable in small doses, but making significant substitutions represents important changes in the demand, supply, and sourcing plans; and it warrants discussion and review during the consensus and supply review meetings.
Price changes impact the dollar value of your demand plan (and therefore your top-line plan) and thus warrant discussion in both the pre-S&OP meeting as well as the executive S&OP meeting. But there are other subtleties of pricing that deserve S&OP consideration as well. For example, in the long term, it is helpful to discuss how price elasticity may impact future demand for items impacted by a price change. And in the short term, price changes often trigger a “loading” effect during which customers will pre-load inventory in advance of an announced price increase.
This behavior alters the normal pacing of demand and thus impacts both supply planning assumptions and the pacing of the financial plan, hence the urgency to include discussions around price changes in both demand and supply reviews, as well as in the pre-S&OP and executive review meetings. Customer service leaders are close to the price change dynamics as they happen, and therefore can offer great insight to the demand consensus process.
Quite unlike the returns associated with the proverbial post-Christmas queues noted at the outset of this article, the returns of greatest interest to S&OP practitioners are most typically product returns damaged in transit, along with damaged and shopworn products returned from our customers’ shelves.
While managing such items may seem like merely an accounting transaction, requiring a simple financial crediting to the customer for the return, advanced S&OP practitioners recognize these returns as a treasure trove of data about the “shopability” of the products, or the need for pilferage measures, or the real-world proof of “shipability” and the like. Reducing these sorts of returns has the potential to improve your overall consumer experience and enhance margins. Thus, any root-cause insights derived from analyzing such returns is especially important to the product portfolio process within S&OP.
Customer Metrics and Fines
Knowing your customer’s expectations is the key to business success. At Combe, nearly all of our customers measure our success based on On Time and In Full (OTIF). OTIF metrics represent the culmination of your entire supply chain’s performance, and hold tremendous value as a capstone measure of your entire S&OP process. For more than a decade, OTIF has been our most important measure and recent changes in customer expectations have only heightened its importance.
Over the last few years, many of the retailers we serve have tightened their tolerances for delivery. They are using enhanced metrics and have implemented compliance fines to assure timely and in-full deliveries. And the fines are no longer small, nuisance amounts, they are now significant, often 2-3% of invoice value. Prudent planners must understand that the fill portion of the OTIF measure is directly correlated to the quality of all demand, inventory, and supply plans that preceded delivery to the warehouse. And it is an important measure to hear and consider when planning. An honest discussion of customer expectations vs. actual results will help improve your S&OP process.
Special Packs and Offerings
All consumers are familiar with demand-shaping events such as bonus packs, instantly redeemable coupons (IRCs), Buy One Get One offers, and open stock store displays. Even non-consumer businesses offer similar special features such as discount pricing on container sizes or special one-time requirements. I have been in many consensus meetings where we observed an inflection in demand at a retailer or within a product line due to some special pack dynamic. Inviting your customer service leaders to participate in demand consensus will aid in the understanding and impacts related to the execution of such demand-shaping events.
This list of potential demand-altering events observed by customer service leaders could go on and on. Poor inbound carriage, DC receipt backlogs, freight that has been stolen or merely gone astray, customer receipt backlogs, customer system changes, weather events, allocations of special-pack inventories, changes in customer in-stock levels, changes in customer ordering patterns, holiday ordering patterns, and so on. Each of these scenarios has the potential to alter the shape of your demand curve, your supply requirements, financial pacing, and fill levels. And each can yield input worthy of consideration during one or more of your S&OP process meetings.
Considering all this, it is surprising that I can’t recall a single webinar, seminar, training session, or conference discussion in which there was meaningful discussion about the role (and value) of customer service within the S&OP process. Customer service leaders are the eyes and ears of your supply chain, and they see and live with all the weaknesses and uncertainty inherent throughout that chain every day. They see true demand. So, the key takeaway here is simple: invite your customer service leaders to the S&OP discussion. They will offer valuable insight to the process, and your final S&OP plan will be better for their participation.
This article was originally published in the Spring 2019 issue of the Journal of Business Forecasting.