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University of Tennessee -- Previous Webcast Jan 22 -- Best Practices Leadership Forum-- Nov 27-- Part 2: S&OP Implementation: A Case Study Oct 30-- Part 1:S&OP Closing the Chasm Between Theory and Practice Previous Webcast July 31 -- Previous Webcast May 8 -- Previous Webcast April 3 -- Steelwedge Momentum: |
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| Sales & Operation Planning (S&OP): Improve On-Time Delivery, Reduce Inventory, Lower Manufacturing Costs |
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Ancient History (Simple Systems, Marginal Results) Over twenty years ago planning systems were much simpler than they are today, and there were fewer choices for manufacturers. There was Material Resource Planning (MRP) to control and document the flow of materials, and Capacity Resource Planning (CRP) to identify the labor and equipment resources necessary to support the MRP plan. In the late 1980’s AMR estimated that only 20% of MRP system implementations were delivering reduced material cost results for the companies that implemented them, and only 2% of those same companies were using CRP effectively. In short, they were not delivering bottom line results. Recent History (Better Systems, But Demand Still Hard to Predict) Fast forward twenty years, and today we have a number of much more sophisticated, more accurate, more demanding, and more diverse planning system options. Simple MRP and CRP have evolved into Finite Scheduling, Optimization, Advanced Planning, and Supply Chain Planning, extending outside the four walls of the factory and across the extended enterprise. Methodologies such as JIT/Kanban and Lean Manufacturing have evolved into systems and offer pull-based alternatives to traditional push-based planning systems. Regardless of your system of choice to control your manufacturing environment, all of these systems suffer similar problems when the demand signal is erratic. The inability for any plan to run its course with a consistent demand signal results in material shortages for some items with simultaneous excesses of other materials, expedited material costs, increased logistics costs, inefficient conversion rates resulting in increased labor, equipment and overhead costs, and reduced throughput resulting in poor customer service or lost sales opportunities. This complex manufacturing problem is actually very simple to diagnose. Achieving Predictable Demand If consistency of demand is required by essentially all planning systems in order to deliver bottom line cost savings, where’s the crystal ball? How can this problem be solved? We can’t run manufacturing against out-of-date demand simply to provide consistency. The result would be to produce the wrong products very efficiently, ending up with much a more expensive investment in excess finished products – still the wrong answer, and still no bottom line savings. The answer to the demand problem is not necessarily accurate demand, since that is very hard, if not impossible to achieve, and becomes harder (if that’s possible) the farther into the future it must be defined. The key is predictable demand. In other words, a demand signal that is close enough, given the adjustments and hedges employed, to last long enough for planning systems to operate effectively. S&OP for Comprehensive Demand Planning An effective S&OP process starts with a comprehensive definition of unconstrained demand. In other words, if we could sell everything our customers, and prospective customers want, and deliver it at their requested date, what would that number be? Depending on your industry, and the types of customers you have, that demand signal may be made up of many components. It may start with a statistical forecast, if your product life-cycles are sufficiently long. It may start as opportunity data in a customer relationship management system, such that opportunities that have reached a certain probability of capture, or maturity, represent a predictable component of demand. It may start as a bottoms-up sales forecast by sales representatives in each of your sales territories. It may come directly from your customers and distributors as a forecast or point-of-sale data. It may be adjusted by marketing events, promotions and advertising. And it may be affected by product supersession, or competitive and economic factors outside your company. Some or all of these sources will define unconstrained demand for most manufacturers. It is important to identify and quantify all of the demand sources, and employ a consistent process to determine the final, authorized number on at least a monthly basis. That is, the number that management will sign up to, and use as the basis for the manufacturing plan. However, the unconstrained plan is not the complete solution. By itself, it could change frequently, and result in the same problems discussed previously. The S&OP plan starts with the unconstrained demand, and compares it to the calculated and demonstrated capacity based on a comparison of last month’s o Rough Cut Capacity Plan (RCCP) data (calculated) and actual production results (demonstrated). It is also forward looking through enough periods to exceed the critical lead time horizon. It includes inventory position in this comparison, and determines whether the unconstrained plan can be met. If not, it identifies the bottlenecks that will prevent satisfying the complete demand, and does so far enough out into the future that corrective action can be initiated to remove the potential bottleneck before it occurs. An effective S&OP process goes a step farther than providing visibility. It identifies the net difference between the objective: meeting all unconstrained demand, and the current state: demonstrated production volume, and allows management to adopt a number of countermeasures to minimize costly short term changes in demand. As stated earlier, no one has a crystal ball, unless your customers always buy exactly what they tell you they will, exactly when they forecasted it. Measuring the difference between planned and actual results at all levels of the unconstrained demand process, RCCP, and the production process will identify gaps that can be addressed. Comparing actual to target inventory levels of products, strategic modules, and critical components provides and early warning of inconsistencies in supply and demand. Strategically placed, dynamically updated safety stock levels can be used to mitigate those gaps. Ultimately, S&OP performance measurement should focus on two areas:
The latter addresses the business process of collecting, analyzing, and interpreting demand data, and adjusting for errors resulting from issues like incomplete data, incorrect statistical models, bias, gaming, erroneous assumptions and/or erroneous external indicators. Improving the process over time reduces the gap that must be managed with adjustments and countermeasures. Both performance management objectives ultimately result in a more predictable demand signal. S&OP is Essential for On-Time Delivery, Reduced Inventory and Lower Manufacturing Costs Whether the economic direction for your industry is growing, or contracting, the greatest impact on bottom line net income is cost savings. If it’s growing, then you can contribute a small percentage of each additional dollar of new revenue to the bottom line through increased sales margin, if you can deliver on that additional demand. Even if your industry is headed into recession, the common denominator for effectively utilizing any manufacturing planning and control system is a consistent (predictable) demand signal which will enable you to effectively utilize your manufacturing system of choice, and reduce bottom line costs. S&OP is not a new concept. It has been around for more than twenty years, as have many of the early manufacturing planning systems. It has much more recently become recognized as the key contributor to predictable demand by leading manufacturing companies, consulting firms, and industry analysts. It has now become a priority for companies that wish to exceed their industry averages and become leaders in on-time delivery, reduced inventory, and reduced manufacturing costs. In short, those companies who will realize the bottom line ROI promised by every manufacturing system they have implemented are using S&OP to reach that goal. About the Author:
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STEELWEDGE SOFTWARE, Inc., the leading innovator in the field of Sales Planning and Performance Management. For more information about STEELWEDGE, please visit http://www.steelwedge.com/. Copyright 2008 STEELWEDGE SOFTWARE, Inc. All rights reserved.