Monthly Archives: September 2010

Integrating Finance to Achieve S&OP Success

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Sales and Operations Planning (S&OP) has become a more prominent process employed by world class organizations to drive improved collaboration, strategic decision making and bottom-line results.  Establishing collaboration between Sales and Operations is no easy task.  Functional objectives differ and incentives often pit functional leaders against one another.  Sales strives to maximize revenue.  Operations seeks to minimize costs and maximize production output.

What about Finance?  Does your Finance team create budgets in isolation or in concert with other functional leaders?

Finance should be a key player in the S&OP process.  Some suggest that the name S&OP ought to be changed to Integrated Business Planning to underscore the fact that S&OP is not limited to two functional groups.  Whatever name you choose, Finance should participate.  Finance brings these critical inputs to the process:

  1. Revenue Projections:  Unit projections must be converted to revenue projections.  Finance is in the best position to apply a reasonableness check on Sales and Operations plans.
  2. Cash Flow:  Demand and supply plans have a direct impact on cash flow.  Inventory, research and development, facilities and human resource plans will impact cash flow as well.  Finance must weigh-in on the impact of demand and supply plans.
  3. Cost and Margin Analysis:  Strategic decisions depend on quality information.  Finance should question assumptions for all major expenditures including raw material spend, human resources and facilities.  Pricing and promotions need not be exclusive to Marketing and Sales.  Finance should evaluate assumptions and risk.  Such inputs afford Finance a position of great influence into the S&OP decision making process.
  4. Budget Planning:  Too often annual operating plans are disconnected from the S&OP process.  Times are changing.  Increasingly, Finance participates within the S&OP process to produce an organization’s annual budget.  The benefits are increased accuracy, alignment within functional areas and buy-in across company leadership.

S&OP is more than just the S and the OP.  Be sure to include Finance in the process.

On a More Serious Note: Piracy at Sea and Supply Chain Risk

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While “International Talk Like a Pirate Day” is a light-hearted poke at the past, pirates are no longer a romantic notion to be celebrated.

Until a few years, most of us thought of piracy as a quaint problem from the distant past – a romantic time for most of us.  From a historical perspective, piracy in the USA is most associated with the period when Thomas Jefferson was sending American warships to the Barbary Coast to fight and payoff pirates that were disrupting American trade.

However, in the last ten years piracy – largely centered off the horn of Africa has again risen to the forefront – no longer a romantic notion of times past.  Today’s pirates were born of a vicious brew of our contemporary world – rising global trade, technological advancement, post-Cold War politics, poverty, violence and terrorism.

One may not consider it the foremost supply chain risk, but piracy endangers civilians, disrupts economies, encourages corruption, and could trigger an environmental disaster.    Acts of piracy — boarding a ship to commit theft or other crimes — totaled 2,463 incidents between 2000 and 2006 according to a report published by the RAND corporation. These trends are the result of a range of phenomena, including a surge in maritime traffic and a decline of coastal security.  The overall problem is almost certainly even greater than the figures suggest as researchers suspect nearly half of all piracy attacks are not reported, usually because of fears about subsequent investigation costs and increases to insurance premiums.  Pirate attacks have also risen steadily in 2009 and 2010 in spite of international efforts to protect shipping.

From a supply chain point of view, there are two key risks to manage. The most remote but most serious risk is the potential for a port or majoring shipping channel blockage due to the sinking of a ship or open armed conflict.  While this type of risk is not high, the consequences for companies that depend on specific suppliers or trade routes is huge.  The second type of risk – disruption of a specific shipment – must be considered in light of key resources with long-term lead-times and limited alternatives.  For these products, contingency plans must be considered.  Weathering supply chain risk – like managing piracy – is about understanding and tracking the fundamentals of your supply and demand chains and developing contingencies in your Sales and Operations (S&OP) plans for managing worst case events.

Oil Spills, S&OP and Chicken Boots

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“It’s all about getting more chicken boots…fast.”

Unexpected events can have a profound impact supply chains.  Take the BP gulf oil spill.  Nobody could have predicted this event, the length of time needed to stop the flow of oil or the impact on surrounding communities.  A disaster which continues to impact many thousands of lives.

 

A major US industrial goods company supplies a wide variety of products to meet numerous industrial needs.  I spoke with an executive at the company about the oil spill.  He said, “We supply hundreds of cleaning products.  None exemplifies the supply chain challenge more than chicken boots.”  “Chicken boots?”, I asked.  He replied, “chicken boots are the name we use to describe knee-high, yellow rubber boots.  For the gulf oil spill, the clean-up workers are provided chicken boots and rags.  They mop up the oil and at the end of the day, dispose of the chicken boots.  The next day, they do it again with new chicken boots.”  The demand for chicken boots went stratospheric. 

The immediate challenge was to make more boots.  Many more boots.  Overtime, raw material expedites, whatever necessary.  But one must ask, is that all we can do?  Are we relegated to simply reacting to life’s unexpected challenges?

Forecasters address such challenges by looking at many variables to make the most accurate future predictions.  Did they predict the need for chicken boots?  No way.  Missed it by a mile.  Why?  Because there was nothing in the past that would have suggested that an oil spill of this magnitude could persist for such a protracted period.

Is there something else we can do?

 
Sales and Operations Planning affords us an ability to look beyond forecasts.  A well-designed, effective S&OP process enables participants to view scenarios in advance and plot various courses of action.  S&OP creates an efficient collaborative environment for quickly maneuvering to meet changing business needs and opportunities.  Are raw material suppliers up to meeting the added demand?  How much can they expand supply before we need to introduce additional supply sources?  How much manufacturing capacity can we add in the short or long term?  What other resources may be impacted by a sudden demand shift?

Scenario and contingency planning enables a better ability to react quickly.  You never know what global event may impact the demand for your products.  Be prepared.  Do your homework.  Use S&OP to align functional areas, model scenarios and drive strategic decisions.