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Sales & Operations Planning: Performance Measures and Tools - S&OP series post #3

9/24/2015

By Charles Dietz, CIO,
SMB Value Partners, Inc.

S&OP is a business process used by many organizations across many different industries, business types, organization sizes and structures (including for-profit and non-profit entities).

At its basic function, the S&OP process allows an organization to regularly review its consumer / customer / client demand, and key organization performance against these forecasts and production / execution plans. It has a tactical / strategic focus, as it generally is looking in time units of your planning cycle (generally monthly, but sometimes weekly (retail) or quarterly or longer (capital equipment)).

The key process of S&OP is the periodic, scheduled mandatory meeting of the stakeholders of the business to review the key business KPIs, at a level of detail appropriate to the business, and agree on forward plans.

A CPG company selling thousands of SKUs would typically present performance measures at a product class or sub-class level. A food processing company having few end items would review performance at the SKU level. A non-profit / association would review key operating variables against plan (membership growth/retention, conference registration, sponsorship sales, fundraising/development revenue, web visits/conversions, etc.).

KPI Example:

For many organizations where there are ongoing sales of products that must be made or procured, one helpful tool is the S&OP Waterfall Forecast and Sales KPI display, a stylized version shown here:

For the Product sub-class: Consumer Widgets (imported from China), representing a summation of the Consumer Widgets, the time to plan, make/procure, and have a widget available for sale is 3 months. So in March of this year, our current month, we have a current proposed forecast of 200, 130, 125, 125, 100 units for March through July. We need to understand a few things:

Since there is a three month delay from a month’s purchase order (PO) placement with suppliers in China until delivery to our customer-facing USA warehouse, the forecast made back on September 1st for delivery on December 1st of 265 units is what we will get (aka Frozen Forecast / what we should measure Forecast Performance against). The December forecast made on November 1st (for 275) will not change the 265 units originally planned/ordered, unless you take extraordinary actions to change the China suppliers’ POs for 265 made on 9/1. (and that will likely cost extra $$$$s).
So today (March 1st) is the last opportunity to change the forecast / PO being placed for JUNE 1st!
Our display above measures the Frozen Forecast used to procure product against the Actual Sales, measured in a 3 month rolling total. Our March KPI for a rolling 3 month KPI calculation would be to compare the Actual Sales (275 + 320 + 255 = 850) to the appropriate Frozen Forecast: ((265+290+230) – Actual Sales) / Actual Sales = 7.6 % forecast error shortfall. ( Which may have resulted in lost sales )
Remember: for the S&OP Review Meeting, if you have a great number of SKUs, the forecasts and other KPIs are reviewed at an agreed-to aggregate level, and the forecast analysts (and others) are responsible for “allocating” the forecast changes down to the individual SKUs / Suppliers / POs.

Other common KPIs used as part of an S&OP review might include:

In our example, another important KPI might be the ongoing review of and efforts to decrease the lead time of products (considering the tradeoffs of the various associated costs and benefits).

You would also likely have a related KPI measuring production/delivery to Frozen Forecast. In our example, you have to measure the actual delivery to the USA for December 1st against the December Frozen Forecast for the Consumer Widgets from China predicted on September 1st, adjusted for any special changes made to released POs.
KPI displays can be constructed that deliver additional measures of the business. For example: adding current stock levels and safety stock quantities to a display, you can calculate potential stockouts / lost sales and the ratio of sales to inventory value.

There are a number of other measures that would be part of the S&OP review, including key financial results.

There are also other KPIs that would be more operational (day-to-day, weekly).

A good example would be a “Daily Orders & Shipments” display. It would probably be at the same level of row detail as the S&OP displays (in our example above, by Product sub-class). Each row in the display would list orders and shipments for today and month-to-date in dollars and units compared to the month forecast. It could further break out the customer orders and order lines by whether they were shipped on-time and/or 100% complete. A separate display or report would provide detail down to SKUs where there has been under-performance.

Outside experts with S&OP creation and implementation experience can work with your stakeholder team to speed the design, process development and implementation of KPIs and a S&OP process customized for your organization.

The key values to the business of the S&OP process is the development of meaningful KPI measures of the business’ health, the discussion between the key stakeholders over past and current KPI results, and what can be done to continue improvements in all the operations of the business.

Charles Dietz, CIO, SMB Value Partners, Inc.

Be sure to see our wide-ranging SMB Value Partners blog posts, including: others in the S&OP Series, Blog Post#1 and Post#2

and related posts on "Beware What You Reward" Post#1 and Post#2

Also blogs on other topics in our "BLOG ARCHIVES by Month HERE”

Your COMMENTS and LIKES are always appreciated.

Sales & Operations Planning: Why Your Business Should Use It - S&OP Series - Post #2

9/24/2015

Blog post written by Jim Scarlata, COO, SMB Value Partners, Inc.

In the first post in the SMB Value Partners’ Series on S&OP,
I described the “what” of Sales and Operations Planning (S&OP), what it means and how it can be successfully deployed in any type or size of organization. Here in our second post, I’ll describe the “why you should care” about this important business discipline.

For most organizations the benefits clearly align to the firm’s financial goals and plans. In one relevant example from my personal experience, a large manufacturer focused its scrutiny on trade working capital (TWC) against financial goals. (TWC can be simply defined as the difference between current assets and current liabilities directly associated with everyday business operations).

Of course the level of finished goods and raw inventories significantly impacts this metric. In companies focused too stringently on inventory cost, reductions in inventory can negatively impact customer satisfaction (stock-outs, late or partial shipments). Many times firms under strong financial pressures are willing to accept these impacts in order to meet short-term (e.g. end of quarter or year) financial objectives. We at SMB Value Partners do not subscribe to this as an effective long-term strategy; if practiced for any significant periods of time it will greatly impact customer satisfaction, and can also increase competition for your customers’ business.

The more important reasons for implementing a rigorous S&OP discipline is quite simply to ensure customer satisfaction and make responsible business investments.
When properly done, S&OP allows a firm to meet and or exceed its financial goals and obligations (as described above); and
The company maximizes its supply chain and manufacturing efficiency to ensure that products are available in sufficient quantities to meet customer deliveries, on-time and 100% complete.

While leading the demand planning / forecasting function for former employers, I always had the above two points in mind when the forecasts were challenged by senior management. Experience showed that the quality of the forecasts and the overall S&OP process, especially when involving the proper company functional disciplines, positively affected both product inventories and resultant customer satisfaction.

In today’s marketplace, customers have many more options than in the past, and a firm that maintains a healthy S&OP process ensures meeting financial AND customer satisfaction goals. One way to assure this is to include questions related to these metrics in customer/client satisfaction surveys; e.g. “Company X always has the products I want when I need them” or “Company Y’s products are at the locations I buy from.” Examining changes in customer responses over time can identify problem areas before they occur or cause measurable damage.

Let SMB Value Partners help you examine your existing S&OP process and results, or help you set up a S&OP discipline for your business.

Jim Scarlata, COO, SMB Value Partners, Inc.

Click here to read the next post in the S&OP Series:
Part #3 - Key Performance Measures and Tools

or the first post of the Series: Part #1 - What is S&OP

See also the related Posts: Beware of What You Reward: Part-One
and Part-Two

Your COMMENTS and LIKES are always appreciated.

7 Reasons Warren Buffett Would Probably Use S&OP

9/15/2015

Blog post written by Jim Scarlata, COO, SMB Value Partners, Inc.

“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett

This certainly speaks to the importance of planning, doesn’t it? I’d like to speak to a business process that can yield significant value: S&OP. In this first post I’ll define, describe and explain it, and in the next post I’ll answer the “so what” you’ll probably be asking.

S&OP stands for Sales and Operations Planning, and it is a business process developed several years ago, now used by many organizations across many different industries, business types, and organization structures (including for-profit and non-profit entities).

At its basic function, the S&OP process allows an organization to:

Regularly review its consumer/client demand
Review performance against prior plan, understanding key misses
Construct short-term forecasts using historical sales as a basis
Review the short term (usually 3 and 6 month) production plans
Examine overall inventory levels and any backlogs of key products or SKUs (typically using an “A,B,C” designator based on volumes)
Agree upon customer lead times for key products
Set manufacturing staffing/production levels for the current period under review

You’ll note that while these S&OP functions may appear to be more relevant to SMB manufacturing and/or distribution companies, we find that savvy non-profits/associations utilize S&OP as part of their larger portfolio management processes. S&OP plans and measures the key inputs and outputs of the value creation process.

One of the key points we stress with our clients is that there is no one single “best” way to implement an S&OP process in their organization. Every organization will define and manage S&OP in a different manner. I learned this by personally managing the demand forecasting and S&OP processes at two different organizations.

In general, S&OP best practices include the following:

Retrieve relevant information:
1. Sales (sales, web hits, new memberships), and with Marketing (forecasts), and
2. Operations and other business functions (inventory creation/procurement, program execution, promotions, advertising, etc.), and
3. Analyze trends in support of the forecasts submitted during the current process
Review and agree upon the forecasts while revising inventory if needed
Align available organization capabilities (e.g. production, sourcing, ads, promotions, etc.) to meet the forecast
Review all decisions made to finalize the plan for implementation as part of the current review
Participation in the process requires the active participation of the key business managers and the related members of the senior leadership team. This is required as the process output and performance monitoring are key to the short-term success of the overall organization

Finally, the process cycle and planning horizon of S&OP is dependent on the specifics of the organization and industry. Short product life cycles, high demand environments and volatility require more frequent S&OP planning than steadily consumed products and services.

Our experience shows that at a minimum, a quarterly S&OP cycle would be relevant for a smaller organization with lower volatility, while monthly meetings are an absolute necessity for a higher volume, dynamic business.

The most important benefit of the S&OP process, however, is its ability to connect all company functions on the periodic basis of its comprehensive business review structure, and normally includes sales, marketing, membership, web/blog teams, engineering, manufacturing, finance, supply chain/sourcing and human resources. Just think of all those processes and connections that resulted in someone sitting in the shade under that tree, because that’s what it takes to plan and operate a business. Warren Buffett certainly knows the value of that process.

Well, that’s the short version of the “What” about S&OP. In my next post I’ll discuss the “Why” or “So What” about this business process. Feel free to contact SMB Value Partners with any questions you may have about implementing S&OP within your organization.

Jim Scarlata, COO, SMB Value Partners, Inc.

Click here to read the next post in the S&OP Bolg Series

See also the related Posts: Beware of What You Reward: Part-One
and Part-Two

Click here: see our other SMB Value Partners blog posts

Your COMMENTS and LIKES are always appreciated.

Lessons Learned from Donald Trump, Lesson-3 “Set the Standard”

9/14/2015

By Deb Dietz
SMB Value Partners

In the blog post: “Lessons Learned from Donald Trump – Lesson #1, we discussed the importance of business tempo.
In Lesson #2, the focus was being positive, and that we should discover and live our lives with purpose.

Our new lesson is to “Set the Standard”.

Consider Ralph Waldo Emerson: “Freedom is not the right to live as we please, but the right to find how we ought to live in order to fulfill our potential”.

We’ve learned the importance of being agile in the business world and being positive from the inside-out, but an organization’s leadership should be setting the standard of getting things done in a timely and positive manner. They are the ones who set the standards for performance and the methods used to achieve that performance.

Trump talks about how he attracts people.
He surrounds himself with others who have the same work ethic. He says that the people who work with him not only enjoy the daily challenges, but they set their own standards to meet those challenges, and those standards, and patterns of thinking, match his. They have a common ground objective of accomplishing more.

Think BIG.
Trump tells us that you need a combination of vision, courage, and discipline to realize the possibilities and that if you think too small, you might miss them. He encourages us to learn to think big. Are you thinking big? What standard would you like to be known for? Only you can set that standard for yourself. The best way to do a job is living by this standard; “Get in, get it done, get it done right, and get out”.

What do you have to offer?
What is your creative capital? What have you acquired in your experience that makes you valuable? Are you aware of your own potential? Will you be equipped to make a difference when the time comes for you to step forward? Start thinking along these lines and your worth will have already been multiplied!

How are you getting in, getting it done, getting it right, and getting out? Have you set your own standards? Have you acknowledged your own value? Have you remained positive from the insight out?

We welcome your thoughts and experiences in the Comments section below. Let us know how "Setting the Standard" has helped you head in the right direction.

Click to: Read Lesson #1 or Read Lesson #2, the first and second posts in this series. You can find our other blog posts on the SMB VALUE PARTNERS site.