By Jonathan Eaton | VP, Integrated Demand & Supply Planning
Getting to one agreed-upon number in sales and operations planning can be difficult. Many companies fall far short of their potential for a happy S&OP “relationship”: Lora Cecere recently noted in Forbes that only two out of five companies actually believe that their S&OP processes are effective. Many firms’ executives find supply chain management an enigma, she says, with its tightly interconnected nonlinear relationships of supply chain metrics and conflicting objectives that make it difficult to stay focused and arrive at success.
No Short-Cut to Bliss
Any successful, long-term relationship requires significant work. But developing a true supply chain management organization means both sides of the house—sales and operations—must take ownership for mutual goals and develop fact-based objectives that measure for success. This “collective approach” ensures your company can cull out/rationalize poor-performing products, identify popular products with larger margins and revenue streams, and make a strategic “inventory investment” on products that are more relevant to your customers, accelerating your revenue, expanding your margins and increasing your service levels where it really counts.
Five Steps to Making S&OP a Win-Win for Your Entire Company
The five conversations below can help your organization get started on making your best inventory investments:
1. Start With Reliable Input and Accurate Data for Good Decision-Making.
If your S&OP process is based on bad information either side will lose faith in the relationship. S&OP is only as effective as the data that’s put into it, analyzed and shared with those who can act on it. In the same light, a poorly structured process or lack of understanding of the best way to get to a consensus forecast means your S&OP process will suffer. Likewise, if you don’t do a good job on the supply side—with understanding the trade-offs between service and inventory and understanding how, when and where to add capacity or place strategic buys and execute from a supply perspective—it really doesn’t matter, from a supply perspective how good your process is: S&OP is just a way to collaborate around bad information. And yes, this happens. Frequently.
2. Develop Common Objectives and KPIs to Rally Team Around One Number.
How can S&OP communicate effectively, to develop a demand and supply planning/integration process with common goals/objectives? To Cecere’s point, start by considering your incentives: Is the demand side of your house (sales and marketing) incented differently from the supply side? One of my favorite KPI’s is gross margin ROI (GMROI). Both the sales and operation sides of the house can get on board with accelerating revenue and expanding margins.
By holding a monthly collaborative executive S&OP meeting within your organization, you can address ongoing, common demand and supply planning issues. To really kick-up your processes’ effectiveness take advantage of the below low-hanging items that are often ignored, on a quarterly basis.
3. Segment Your Product Portfolio.
Product portfolio management requires rationalizing your SKU base. To do so start by asking; Which products contribute to the most revenue? What is the margin per unit? What is the balance of inventory in relation to product turns? By knowing which products generate the most bang for their buck you can accelerate revenues and expand margin by focusing improvement efforts where it really counts.
Chainalytics begins every S&OP engagement by looking for the products that provide the most revenue as a percent of total revenue, the margin created for each product sold, as well as inventory balance and turns.
Our gross margin ROI – a.k.a. “GMROI” – which provides a rating for each product on a scale of 0 to 1 (the closer to one the better)—has proven a good tool for clients to use in quarterly SKU rationalization exercises. By stratifying your portfolio by this metric, you can easily identify your “cash cows” enabling you to make better investments with your inventory decisions. One such exercise we did revealed that almost 50 percent of a client’s portfolio contributed to less than 5 percent of their annual revenue. By having this hard conversation with sales, operations was then able to free up working capital and prioritize improvements on the half of the portfolio that really impacted the bottom line.
There’s an inherent risk in obsolescence. Having these supply chain resilience and risk mitigation discussions can serve as the basis for developing successful, long-term supply chain strategies both sales and operations can appreciate.
4. Review Product Lifecycle Phases.
This should go without saying, however new product introductions (NPIs) are an increasingly common but uncoordinated S&OP activity. To effectively introduce new products, you’ll need to proactively manage and communicate the lifecycle transitions, understand future demand or lack thereof, explore best channels for introducing the new product or depleting the old, and consider your market share and whether you might be cannibalizing one of your existing products or product lines. Due to the sheer number of stakeholders often involved in this product development process, coordinating this activity within your S&OP process is easier said than done but essential for a streamlined process end-to-end. Ingraining and prioritizing S&OP as a part of your corporate culture can help to reduce siloed-department friction.
5. Discuss Postponement Strategies.
Postponing the final commit point for finished goods can be helpful when you have no idea how fast the product will sell, especially if it has multiple configurations for various outlets or undergoes other seasonal product demand spikes. This step also gives you the flexibility to avoid packaging decisions until demand is clarified. Analyzing past deployment studies that are based on accurate data can also help you explore best lead times, actual customer requirements and demands, best ship-from locations, etc. to determine a logical commit point. Postponement is an effective strategy that can minimize inventory, increase flexibility and simultaneously simplify your manufacturing process.
Most everyone can agree on the benefits of a well-oiled, integrated successful S&OP process: It can positively affect all stakeholders in your supply chain (including manufacturing, operations and transportation); help control escalating logistics costs; and support changing sales channels, new customer destinations, new product launches, shipping formats, transportation modes and packaging and customer requirements when done right. These five aspects need to be an integrated part of your S&OP discussions to adequately meet the needs of the business and keep the dynamic relationship between sales and operations a win-win for all.
Jonathan Eaton is Vice President of the Integrated Demand and Supply Planning practice at Chainalytics. In this role, Jonathan focuses on the delivery of professional services related to S&OP process improvement and implementation, demand-supply balancing, materials management, and inventory optimization.
