Rarely do I see discussions on the cost of implementing a mature S&OP process or what will it cost once we get it up and running. Nor I do see discussion about the ROI it will provide. Without defined costs and an expected return, you have just a concept rather than a well-thought-out business plan. As a result, you’ll struggle to get buy-in and funding.
Understanding the real cost of S&OP helps you to determine if you should start an S&OP process, or continue or halt an existing process. It also helps build transparency in the process, avoids unexpected costs and is an invaluable input for good decision making.
If you want executive buy-in, how do you get support for something that is relatively unknown? Or, if you are making decisions regarding allocation of limited resources, how do you make optimal decisions when you don’t know the potential upsides and downsides? Too often in our field we implement an idea without doing the due diligence. Then, inevitably, we find resistance from key stakeholders on the way and we face the impossible task of justifying what we are doing after the fact.
As process and project owners, we need to understand the cost/benefit of S&OP/IBP and be able communicate it to the rest of the business.
So, what will cost to implement an effective S&OP/IBP process?
Calculating The Cost Of Implementing S&OP
Cost are broken down into 4 primary categories: acquisition, implementation, operational, and maintenance/improvements
- Acquisition Costs: System reconfiguration, data extraction, formatting, dashboards, reporting, and baselining (design). $50,000 to $300,000.
- Implementation Costs: Allocation of people’s time to the project which may include a full time S&OP coordinator or project manager, external advisory, and training. $250,000 to $400,000
- Operational Costs: All the resources supporting monthly cycle and reviews including an S&OP Champion or Lead, as well as allocation of any systems expenses: $250,000 to $750,000 a year.
- Improvement Costs: Continual training and education costs (training and conferences), along with additional implementation and process improvement costs. Typically 15% of the original acquisition and implementation cost. $15,000 to $60,000.
Calculating The ROI Of S&OP Implementation
So, now you know the cost, is S&OP worth it and what is your expected average return on this investment? There are real advantages of a mature vanguard S&OP/IBP process. IBF research reveals that companies that implement S&OP and achieve Next Level maturity (the 3rd of 4 S&OP maturity levels)* can see an average of a 2.4% improvement, of which 1.8% is in operational savings and 0.6% from increased revenue.
They also see a reduction in inventory of 9% to 14%. It should be noted that much of this improvement was not on day 1 – there was anywhere from 4 to 6 months of design and pilot work before the first meeting. The benefits do not just materialize overnight following said meeting. You work at them and, as you mature in the process, the results begin to manifest themselves.
It will take about 9 months after your first formalized review meeting or approximately 15.4 months from the kickoff of the project to break even. Only 5% to 10% of the total benefits are achieved after go-live. 100% of benefits are not realized until year 3.
For an average organization of $500 million, after 3 years, annualized ROI is 63% for a return multiple of 7. As mentioned above, the data indicates that you will start seeing some results after about 3 monthly S&OP cycles and have payback of total investment in the second quarter of year 2.
While some organizations require payback or ROI in less than 12 months, it is doable if you cut some expenses but I would not recommend short cutting the long-term advantages. Very few process improvements can provide this kind of return or align all functional areas to a unified set of assumptions to help make coordinated business decisions.
* The 4 stages of S&OP maturity as defined by IBF are Emerging, Essential, Next Level and Vanguard.
For more insight into forecasting and planning best practices, join us 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.