Phil Heenan Consulting > S&OP FAQ by John Dougherty

S&OP FAQ by John Dougherty

January 22nd, 2009

How would you show the Production line on an S&OP supply & demand spreadsheet for a lean pull production line?

The title and definition of a production plan would not vary between a lean or not lean environment. A lean environment does not preclude making some product to stock. This is often called a supermarket. But in a pure make-to-order environment, when the finished product is never made without a customer order, the monthly production plan would be equal to the monthly sales plan. And its purpose is the same in the lean environment as in any other, that is to establish a rate at which a master schedule would be set to drive future material and resource requirements, that can be then communicated to the suppliers and manufacturing, so they can set up the resources in a way that will allow them to respond to a lean pull signal.

How would you measure and report monthly production attainment for a lean production line?

Again this doesn’t really vary whether the environment is lean are not. At the end of the month, the amount of the product family actually produced would be compared to latest production plan for that family. If the production plan going into the month is not attained in a pure make-to-order environment due to a lack of customer orders, then the production plan should be adjusted down to equal the amount of orders received in that month, and then compared to the actual production.

What is the composition of the customer service metric?

In an environment with many items and many orders, it can be calculated two ways: First a “line item fill rate” would be the percentage of individual line-items that were shipped complete, and on time within the month, for all items, all orders, etc.. Depending on the industry, some small tolerance may be set in both quantity and days, as long as that matches the expectation of the customers.

Second, an “order fill rate” would measure the number of customer orders shipped complete, for every line item, within a reasonable date and quantity tolerance. This second one is a much tougher measurement, since if even one line item was on back order, it could affect many individual customer orders and cause them to be counted as incomplete, late orders.

In environments with relatively few items and few customer orders, typically only the order fill rate is used.

How does S&OP drive innovation?

In several ways. By monitoring KPI’s, and identifying where targets are not being met, thus triggering management attention to spur innovation to improve performance. Also, by maintaining an up-to-date rolling plan for the year, and comparing this to financial plans and budgets, shortfalls or problems are identified which can then be addressed. Finally, for whatever plans are not met, a root cause analysis should be undertaken and discussed in S&OP meetings, which also can lead to management applying its creativity to solve these problems.

Who typically “owns” the S&OP process?

Ideally it should be the CEO. Even if the CEO does not attend an executive S&OP meeting, as sometimes occurs in very large companies, the CEO should be supportive and insistent that the process be maintained and executed well, since it can have such a dramatic effect on achieving business objectives. But some companies appoint an “owner”, who isn’t a senior executive, but rather a management level person whose job it is to ensure that the process is followed, does not degrade, and ideally is constantly improving. This person could be from any function, but often comes from manufacturing planning or marketing, since those functions play the largest role and have the greatest stake in a good S&OP process.

How do you change behaviors in support of S&OP?

By a clearly communicated top management support and insistence on the specific behaviors that are defined as needing change. These should be supported by conceptual education and process training, with occasional refreshers. It should be monitored by setting specific, quantifiable, where possible, targets or goals, and then monitoring them with KPI’s that are reviewed in the S&OP process. What’s key is that people see the potential personal and organizational gain from these changed behaviors. But what is often also necessary, and sometimes equally effective, is a clear understanding of the “pain” that will occur if the behaviors don’t change. That pain could be continued business problems, missed targets, etc. or it could be continued negative attention from management because the behaviors have not changed.

What focus on forecast accuracy is typical in an S&OP process?

Many people start an S&OP process or attempt to improve it with the specific goal of improving forecast accuracy. So in almost every case, this is reviewed throughout the S&OP process. But it’s critical that a reasonable expectation of forecast accuracy exists. It’ll never be 100 percent, and rarely can it be held even in the high 90% ‘s. Also needed is an understanding that it may drift based on factors outside the control of the organization, such as customer, market place, competitive, economic, regulatory, etc. issues. What’s important is that sales performance and trends are monitored once a month and the forecast adjusted based on the latest best information, to minimize forecast errors in the future.

What level of forecast accuracy is considered best practice or world class?

This question is literally impossible to answer. First, because so much of forecast accuracy is outside the company’s control, as described in the answer to the previous question. Forecast accuracy is measuring how well the sales and marketing people are tracking and anticipating the performance in the marketplace, and sometimes this can be very good, while in other cases, unexpected events can blindside anyone. It is also affected by the number of products and the type of deliveries offered by a given company. If they have quite a few low volume items, statistics tells us that the smaller the number, the harder it will be to forecast accurately, and the greater the percentage error. In our opinion. “Best Practice” for any company is to be constantly measuring forecast accuracy, setting goals for improving it, and continuing to do that month after month, year after year.

Do companies that are successful with S&OP typically have centralized or decentralized operational management?

There are examples of both. Some are highly centralized, with a single VP in charge of each function, reporting to a single CEO. This is often the model in a smaller company. Others have general managers or product teams responsible for the entire performance of a given product line, and only the very large, capital-intensive decisions go to the CEO. In some cases, manufacturing is more centralized or decentralized, than sales or marketing, or product development; in other cases, it’s sales or marketing that’s more decentralized.

Can you get by without an S&OP process if you’re running in a Lean Manufacturing environment based on a pull process?

Only if the demand is very level, constant and predictable, such that every manufacturing resource and supplier could count on future demand that was pretty much equal to past demand. We’ve never seen this to be the case, except in the rare situation where a specific plant or division may be producing product for a few captive customers, perhaps their parent corporation, who kept the demand on that plant level to optimize its performance.

Are there cross-functional teams with joint/shared metrics like forecast accuracy, inventory turns, etc.?

By its very nature, the S&OP process brings cross-functional teams together to jointly review metrics. However most companies assign primary responsibility to a single function, for each metric. It’s important to understand that multiple functions can have an effect on each metric. For example, late launch of new products or production shortfalls could inhibit sales and cause forecast inaccuracy. The two metrics that have the most equal cross-functional responsibility are customer service and inventory, since both of them can be equally affected by the supply side, the demand side, and sometimes product development.

To start out, can S&OP be conducted on a smaller time frame?

If the issue is about the horizon, how many months out that are reviewed, this shouldn’t be a problem to start out with a shorter horizon, perhaps six or nine months. Frankly, particularly in the beginning, most of the review, adjustment and discussion centers around the next two to four months anyways. But until the horizon covers at least the balance of the fiscal year, it’s hard to compare the S&OP plans back to the financial plans and budgets, or to use S&OP as the basis for next year’s budgets and plans. And occasionally, not every month, there may be some long-term decisions to be made, such as hiring, firing, new capital investment, etc. that should be based on plans looking out a year or more. For this reason, your management team should see the need for extending the horizon after you get started. We recommend a rolling 18 months.

Our product managers are focused on their committed forecast to Corporate. How do we get them interested in a more granular level? We (in planning) often know more about forecasts than they do.

I’m presuming that the “committed” forecast you refer to is the financial target for the year, which they’re not allowed to change within the year except in unusual circumstances. One of S&OP’s key strengths is to allow a more realistic recognition of shifting demand patterns during the year. This will help keep production and inventory better tuned to what’s actually selling, thereby keeping customers happy and financial numbers healthy. But equally important, it would give the product managers the opportunity of tracking how well they’re doing against these “committed” numbers and help them identify when they need to take action to get back on track or to make up shortfalls from other products or product lines. The idea is to convince them that the S&OP process will benefit them by helping them hit their numbers more easily and profitably, and keep their customers happy.

How does S&OP apply to supply chain networks that are stable vs. ones growing by acquisition?

Whatever network of suppliers exists, if it’s changing, growing by acquisition or any other means, that could mean it’s even trickier to balance supply and demand until stability is reached. S&OP is the best management handle for doing this, providing management the ability of monitoring how changes are progressing, and then slowing down or speeding up the supply chain changes plans based on that.

Who facilitates the S&OP meetings? How is ownership shared?

Usually there should be a single appointed facilitator for both the Partnership and Executive meetings. This person is typically a “champion” of the S&OP process, and often may play a role in monitoring and facilitating the collection and updating of data for the process. Often this is a supply-chain management, materials management or planning person. Occasionally it can be a manufacturing or marketing person. Sometimes the same person does it for both meetings, ensuring continuity. In rare cases, this is a floating responsibility shared by different people in the meeting either monthly or on some less frequent rotation.

Ownership needs to be shared for the process by ensuring that each function has clearly defined, documented and accepted responsibilities. This would include specific KPI’s, specific plans or data within the meeting (for instance, sales and marketing owning the forecast, manufacturing the production plan, etc.) and any specific assigned action items coming out of the process. Then management from the CEO, down to the VP’s, etc. must hold the specific people responsible for performance and explanation of shortfalls and root cause problems.

This emphasizes the ownership. Management must also insist upon consensus based decisions, holding the key functions responsible for reaching mutually acceptable alternative approaches to problems. As for many things, it comes down to management holding people’s feet to the fire.

What are the key learnings to shape S&OP to specifically drive inventory reduction?

The key learning is that S&OP is the best way to coordinate a company-wide inventory reduction program. Rather than having individuals make tactical adjustments such as lot size reductions, safety stock reductions, frequency of manufacture, etc., S&OP can monitor the net effect of all activities and ensure that all the functions know what’s going on.

In this way, cross-functional input can help identify where inventory can be cut with no impact on customer service, and where lower inventories will present the greatest risk of customer service or cost problems.

S&OP does not provide any new or different ways to cut inventory, just a process to coordinate the use of each different way.

Which S&OP software packages appear to deliver the best results?

There ware a variety of ERP software packages used by companies successful with S&OP. So by definition, all these various packages support success. Most companies successful with S&OP do NOT use any commercial software package or module for S&OP. Most develop their own S&OP functionality based on customized Excel spreadsheets, and Access databases. This reinforces our experience of over 29 years of consulting, that no one software package has a significantly better track record than another. The real issue is not the tool, but how well the users are trained and managed to use the tool effectively.

We have a big disconnect between the monthly family S&OP forecast and the demand management forecast that is sent to the plants. What’s the best way to make them meet?

Before we can answer this, we need to know at what level these forecasts are developed, and what inputs and methods are used to develop them. Do you measure accuracy against both of them? Is one better than the other? Is sometimes one better, then at other times, the other one is better? Do you know why?

Or is the issue simply that the S&OP forecast is by family and the other by SKU? If that’s the case, if one is better than the other, then it should be the driver. If the SKU one is more accurate, than just sum the total for the SKU’s in each family and use that for S&OP, as long as the responsible sales and marketing people understand and are committed to that.

If the aggregate, family forecast is more accurate, and there are many SKU’s, then you’ll have to develop a tool to “disaggregate” this family forecast down to units, using either the historical mix factors of the items within the family or projected future mixes based on sales and marketing input. Some forecasting or APS software packages provide this functionality; it’s often called “pyramid” forecasting. But beware, the fancier the software package, the harder it is to use, and the more features and functions you have to learn “Not” to use.

If it’s just a matter of spreading one large number down to many small ones, you probably could do this yourself with a simple spreadsheet tool.

But what’s most critical is that the two numbers are reconciled. Otherwise, the detailed functions are making decisions based on one set of numbers, and management making them on another, which sooner or later will cause problems and missed targets and objectives.

Does S&OP review both SKU and brand level forecasts?

Typically, S&OP should be looking at family or aggregate totals. It’s presumed that demand management, and sales and marketing people are managing the SKU and brand level forecasts as part of their detailed forecasting job, and the results of this are then rolled up or reconciled to the S&OP number, as discussed in the previous question.

However, if an SKU or brand forecast played a significant part in the total, it could be discussed either by exception in an S&OP meeting, or perhaps routinely in a forecast meeting or partnership meeting prior to the executive meeting. Some companies have a few SKU’s that represent a significant percentage of their total sales in a family, so they routinely review those SKU’s in each meeting.

Other companies hold very extensive demand review meetings prior to their S&OP meetings, where they spend hours reviewing brand level forecasts with key customers, since they may sell huge amounts through a few large customers, such as mass merchandisers.

Do most of the companies you deal with incorporate a forecasting tool as well as raw sales input into their consensus decisions?

Probably the majority of the companies we’re aware of use some sort of statistical forecasting tool. But virtually all of them will use management input to override at least some portion of the statistically generated numbers.

In some cases, when past demand is a very poor indicator of future demand, companies just develop the forecast numbers on their own, using the forecast package merely as a place to hold the number that they input. An example of this would be manufacturers of large, expensive capital equipment, where economic factors, marketplace trends, and the number of customer inquiries and bids, are the best indicators of future demand.

< Back