By John Dougherty, Senior Partner Partners for Excellence
In a manufacturing or distribution company, bringing supply and demand in balance is a fundamental “law of nature” — it happens as a natural course of events, whether you want it or not. It’s only a matter of who will bring this balance about and when.
Too often, business companies don’t operate in just a “top down” approach. They start that way, but they constantly adjust and reconcile based on “bottom up” and “side in” input. The “bottom up” inputs are the tactical, short-term issues in manufacturing, distribution, sales, marketing, technical development, and human resource planning. As things change, adjustments to the timing and mix of the overall plan must change, while holding to the original business objectives (sales, profits, market share, etc.) for the year in total.
The “side in” inputs come from customers and competitors who force a readjustment in how the needs of the marketplace are satisfied, and from the supplier base where changes in their situations and in technological approaches alter how supply is best able to meet the everc-demand. Managing this adjustment process is called Sales & Operations Planning (S&OP).
The Benefits of S&OP
Formal S&OP provides a single set of numbers and a routinized process to ensure that top management’s objectives and plans are realistic and accurately reconciled to the detailed scheduling and execution activities.
Without this, different functions could be working at cross-purposes, thus causing confusion, chaos, and conflict. For example, Marketing could be planning promotions to increase sales, while Manufacturing was responding to financial pressure to cut inventories. The result: Backorders and extra costs to catch up after the fact.
Without this structured monthly review, it may take several months to identify a trend, thus wasting valuable time, and the opportunity to adjust in a series of small steps rather than one major reactive change.
If management wishes to control or improve lead times, inventories, backlogs, and employment levels, it must ensure that the level of manufacturing output scheduled recognizes current sales plans and backlogs.
Without reasonable plans that are well communicated and committed to, improved execution is impossible. In fact, S&OP is the process where management can identify opportunities, initiate efforts and monitor progress on major business improvement efforts such as synchronizing process flows that lead to an agile manufacturing environment.
The Mechanics of S&OP
S&OP provides a process for all functions to review progress against their part of the business plan. More importantly, it encompasses updating future plans and synchronizing them among all functions. Rarely does this mean changing the business plan, but often it means changing the timing and mix of activities from family to family, month to month, and region to region, to properly reflect what’s truly going on in the marketplace and within the business itself.
This process must address the current status of new product development, areas of vulnerability or risk where contingency plans need to be developed (such as strikes, supplier interruptions, sales variations, etc.), opportunities for continuous improvement, and a reinforcement of the functional accountability in each area.
Rather than reacting after the fact, the focus should be on anticipating opportunities and vulnerabilities. The impact of future tactical changes such as sales promotions, price changes, new product introductions, product changes, etc., must be considered. Marketing, manufacturing, development, and finance should review statistical performance against past plans, and then jointly identify potential problems, opportunities, and solutions.
The process then culminates in a monthly meeting attended by the heads of all major functional areas who review performance, and select from alternative strategies. Then, the company has one totally integrated set of plans which have been committed to by the senior executives and can be used by all departments.