Do you even know why you are doing an S&OP/IBP process inside your organization? I got news for you, if you answered just balance to supply and demand or build a consensus forecast, you are missing the bigger picture.
Why? Because S&OP needs to align to the strategic vision and goals.
Performing the duties of a demand planner is one thing; understanding their impact on the wider business is another. For example, it is all well and good for a demand planner to calculate forecast error, but the planner that can communicate what a 3% decrease in error means to the business is really making a difference.
So why are we doing an S&OP process? Let’s be honest, the goal of most organizations is to maximize shareholder value. In order to do this, there are three main strategies for driving profitability in a company: increasing operating margin (Cost), increasing capital efficiency (Cash), and revenue growth (Service). Understanding your organization’s core strategy is important, and aligning your process to that strategy is what generates success. S&OP/IBP drives value in any organization but understanding the bigger picture is what maximizes value.
S&OP Increases Growth & Revenue (Average 1% – 4% Top Line Growth)
The added visibility into demand and supply alone will increase customer service. Improved forecasting and collaboration will allow you to improve fill rates and deliveries by 10% or more. Product planning and collaboration on issues will also drive improvements in your products. By producing better products and delivering them to customers in a timely manner, you’ll be able to elevate your brand in the eyes of your target market. Happy customers are generally return customers and since it costs five times less to keep a customer than it does to acquire a new one, you are saving money there too. And happy customers have the potential to become brand advocates which drives your marketing. As you can see, both customer retention and increases in new sales are more easily achieved when an effective S&OP process is in place.
S&OP Makes You More Profitable & Efficient (Average 8% – 14% Cost Reduction)
Efficiency comes with optimization and trade-offs which are improved through collaboration, visibility, and planning. Planning ahead not only eliminates expediting and reactionary costs but also allows you to effectively optimize. If your company is able to work collaboratively, predict inventory requirements more accurately, boost throughput and product quality, and better serve its customers, higher profitability is inevitable. Greater efficiency is always beneficial to businesses and S&OP allows this intelligent streamlining of operations.
S&OP Increases Cash Flow & Improves Working Capital (Average 15% – 25% Improvement)
Inventory is often a major component of a company’s total assets, and a company always wants to increase its inventory turnover. Because an S&OP process improves forecasts and a company’s ability to meet demand, inventory management greatly improves. Having more of the right inventory means inventory turns improve, thereby freeing up precious cash for the business to reinvest.
There are numerous key performance indicators that measure the value of our S&OP process. Yes, we should see forecast error reduce by 10% to 15%. Inventory should right size and on time in full (OTIF) should improve by over 10%. We see soft benefits arising from collaboration and a one number attitude that create transparency and accountability. Your manufacturing, planning and sales are all healthiest when everyone focuses on the same thing. When measuring these, we need to understand how they impact and align to the overall strategy as well.
Never Lose Track Of The Big Picture
So why are we running an S&OP/IBP process? The real appeal of S&OP lies in its ability drive dramatic improvements in shareholder value. Looking at the vanguard/mature S&OP organizations, we know that the effective use of S&OP can help grow the top line of the business while reducing operating costs and increasing working capital. Few business improvement initiatives match the economic return that implementing an effective S&OP process can generate. This is the real benefit and why your company should be doing it.
Eric Wilson will be speaking at IBF’s Business Forecasting, Planning & S&OP Conference in Orlando, held from October 19-22 at the Wyndham Orlando Resort. The biggest and best event of it’s kind, it’s your opportunity to learn best practices in S&OP, demand planning and forecasting, and network and socialize in a fantastic setting. See here for details.