Sales and Operations Planning (S&OP) is a function that corporate executives often fail to recognize as a key contributor to success.   From a revenue perspective, an accurate S&OP plan allows for high levels of customer service.  When demand is predicted accurately, it can be shaped and met in a timely and efficient manner.  Of course, accurate forecasts help organizations avoid stock outs and lost sales.  The impact of an inaccurate S&OP plan on profit margins is also profound.  Raw materials and components are more cost-effectively acquired on the basis of advance planning instead of last minute, rush orders.

The impact of excellence in S&OP is profound.  In a number of cases, clients working in tandem with the Steelwedge team to develop, improve or automate their S&OP processes have seen increases in product margins of upwards of five percent and reductions in inventory levels of over fifteen percent.   In spite of such tangible benefits, many companies fail to prioritize this critical executive process.  Although no management function can be reduced to seven items or even seventeen items, there are certain basic S&OP improvement lessons learned that can be generalized across clients and industries.

Each of these steps is summarized below:

Each of these seven steps offers substantial opportunities for improvement.  In coming weeks we will discuss these steps in greater detail.  What barriers does your company face to adopting these steps?

Photo: Comparison of the ship sailed by Christopher Columbus with the giant ships sailed by Zheng  He in 1405 (source:Wkikipedia)

The world of global sourcing, manufacturing and distribution is rapidly turning upside down.  Just a short time ago many pundits relegated India as a place filled with IT genius and broken infrastructure totally inhospitable to manufacturing.  After all, China was the place for manufacturing.  However, with each passing day history is moving in full circle.

It was very precisely 606 years ago that Zheng He, representing the Ming Dynasty, made his first trading voyage from China to India. He visited Calcutta, Cuchin, Sri Lanka and other well know places during his journey, traveling in a fleet of ships in 1405 that dwarfed in both size and number the ships that Christopher Columbus later sailed in 1492.  With these enormous ships Zheng He established a brisk trade between India and China in a twenty-five year period.  At the time it was the world’s largest sea trade.

European ships would not surpass these enormous Chinese vessels in size, sophistication or capacity for another 400 years.   Zheng He also managed to clear the seas extending all the way to the Horn of Africa and Somalia of pirates that had long plagued traders.

Today, analysts predict that the volume of trade in manufactured goods between China and India will surpass that of any other global trade route by the year 2020.  And just a few months ago China surpassed every other country in the world other than the United States in terms of economic output.  Anyone intrigued by the world of maritime shipping is aware that the biggest “post-panamax” ships were recently built by Chinese shipyards and are now operated by Chinese shipping concerns.  Those in involved in global IT have no doubt about the growth trajectory in India

So what does this mean to planners?  Volcanoes, earthquakes, terrorism, tsunamis, inflationary energy prices and the like will continue to have a huge, unpredictable impact on global supply chains.  However, we also need to plan for the impact of rapidly accelerating changes in global patterns in consumer demand, sourcing, and transportation.

Just as harnessing technologies such as the Chinese compass and the Indian crucible steel production process were keys to business success in the 15^th century, it is becoming increasingly clear that in the 21^st century the capability to rapidly assimilate, interpret and leverage information is now a business imperative.  Understanding new scenarios, analyzing trade-offs, and integrating sales and operations plans (S&OP) have never been more important.

I’m going to be the guest for #SCMchat, hosted by Jeff Ashcroft  aka @SupplyChainNtwk. Here’s what Jeff has to say about it:

#SCMchat allows us to get to know SCM greats better & also get together to discuss cool SupplyChain and Logistics topics.

To chat, simply use the hashtag #SCMchat to be included in #SCMchat transcript. If you aren’t on Twitter, you can follow along using your browser to just listen! http://bit.ly/fJqqdf

Participants will have a chance to ask questions. The challenge will be keeping answers to 140 characters!

Do companies need to substantiate and quantify critical risk scenarios as part of their planning process?

Financial analysts evaluate return and earnings potential on a risk-adjusted basis. In other words, analysts incorporate an understanding of the volatility associated with returns when evaluating the underlying value of a business.

Today the only certainty is uncertainty.  How can one plan in a world seemingly dominated by unanticipated terrorist events, political upheaval in and around oil producing nations, natural disasters striking presumably well prepared, developed economies wreaking global havoc, and energy production disasters of all sorts?

What does this mean for planners? Validated and informed risk management and risk-based decision making is more important than ever.  Quantitative support and innovative solutions can help measure and estimate impacts; facilitate key business, financial and operational scenario management, and reduce the uncertainty attached to strategic growth, budgeting, change, and macroeconomic volatility.  In this environment sales and operations planning must truly be transformed into some sort of risk-adjusted integrated business planning scenarios (IBP).

What Will You Say When Shareholders Ask: “What Happened?”

Accurate quantification and assessment of risk is paramount to an organization’s success.  Executives need to ensure that their organizations are undertaking an efficient and effective process of quantifying risk.

Are key decisions made in the context of risk-adjusted scenarios?  Should we be doing some sort of actuarial analysis?

Is there an understanding of the full range of financial outcomes associated with a particular S&OP scenario?

Can we able to back up our scenarios with substantiated, sound, risk analysis?

Do we know how much risk and/or volatility can be sustained?

Does our organization have the right tools to navigate inevitable “Black Swan” events that will disrupt the best laid S&OP scenarios?

Are we confident that we have posted liabilities to match the risks our organization faces?

Who’s looking out for you?   In the coming months, we will explore this further.

The game’s goal is for an individual player to score the lowest forecast error for the year. A year-long round consists of 12 monthly “holes” that are scored during each forecasting cycle. Attractive prizes are awarded at the end of the game to those who have achieved the lowest scores (i.e., the most accurate forecasts) to reward participation and focus attention on the importance of minimizing forecast error.

Dr. Kahn stresses the benefits of translating statistical language into more understandable form. For instance, a forecast error of 15% does not readily convey if this error acceptable or not. However, when the same forecast is referred to as “par,” then everyone in the company including other department and management levels can readily interpret that error as being acceptable.

Monthly groupings of sales people into scrambles can further enhance the game by offering someone not doing very well year-to-date the chance to still win, and thus, stimulate players to continue their participation in the monthly forecasting effort.

Rules of the Game

True to the game of golf, Dr. Kahn uses the terms eagle, birdie, par and bogey to describe the possible scores for each hole or forecast period.  The terms describe a forecast’s proximity to actual sales where eagle is extremely close, if not perfect, birdie is very close, par is within an acceptable region of error and bogey is beyond an acceptable region of error.

The baseline forecasts provided by the forecaster serve as par and are typically based on a weighted mean absolute percent error (MAPE). The baseline is distributed to the sales force for adjustment wherein each sales person can accept the statistical forecast or make an adjustment up or down. A player could hold par simply by agreeing to the baseline. The benefit of this is 1) it forces a player to think twice about making adjustments, and 2) it builds credibility for the planner as he/she becomes the focal point of the forecasting process. Ultimately, a sales person should only adjust the baseline forecast if they can improve the number rather than out of a desire to create excess inventory or sandbag for the sake of quota.

The following is the scoring methodology. You can change the particulars to suit your company’s goals.

• Eagle = a score of one. Defined as a weighted MAPE of less than 2.5% and less than the given baseline forecast.
• Birdie = a score of two. Defined as a weighted MAPE of more than 2.5% but less than the given baseline forecast.
• Birdie = a score of three. This is defined as within 5% of the given baseline forecast’s weighted MAPE.
• Bogey = a score of four. This is defined as greater than 5% of the given baseline forecast’s weighted MAPE and less than 10% of the given baseline forecast’s weighted MAPE.
• Double Bogey = a score of five.  This is defined as greater than 10% of the given baseline forecast’s weighted MAPE and less than 20% of the given baseline forecast’s weighted MAPE.
• Triple Bogey = a score of five.  This is defined as greater than 20% of the given baseline forecast’s weighted MAPE.

Yearly awards can be given to the lowest overall score as well as second place, third place and honorable mentions. Forecasting Golf can also include “closest-to-the-pin” during the year (i.e., the person who had the lowest weighted MAPE for a month over the course of the year.)

Extra game components you may want to create could include scorecards and an overall game board. After the first year, handicaps could be considered to even the playing field for those having to forecast products that are highly volatile (e.g., a handicap could be easily calculated by using the standard deviation of actual sales.)

Read the original Journal of Business Forecasting article here.

But when the staff at London’s biggest department store was faced with a question from a man who was to later become President of the United States, they weren’t the least shocked. They could have balked, of course, when Ronald Reagan asked a salesman at Harrods if they sell elephants, but more surprised was Mr. Reagan himself at the salesman’s immediate response  – “Would that be Indian or African, sir?”

This anecdote wouldn’t have traveled the globe had Harrods replied with the more expected — “Sorry sir, we do not sell elephants.” The store no doubt never forecasted the demand for elephants but their planning provided for unexpected customer requests.

Last week, we hosted a webinar on the topic of “Incorporating Supply and Demand Uncertainty in Sales and Operations Planning” featuring Stanford University professor Blake Johnson. An internationally recognized expert in the field of supply chain risk, Blake explored how S&OP allows companies to balance supply chain trade-offs against the value of improved market responsiveness and customer service. Blake, like the adroit Harrods clerk, knows that planning for the unknown and unpredictable is an indispensable part of supply chain management, particularly in today’s uncertain climate.

The webinar was recorded and is available for on-demand playback.  Click here to learn more.