Sales and operations planning implementation - ERP Tools

Sales and Operations Planning is implemented in three phases

  1. Developing the foundation
  2. Integrating and streamlining
  3. Competitive advantage

These three phases normally can be expected to take 12 to 18 months to complete.

Sales and operations planning implementation

Sales and operations planning implementation

Phase I

The fundamentals of Sales and Operations Planning include the integration of the functional views of the organization. This process determines product families and planning horizons. It also establishes the policies and procedures to institutionalize Sales and Operations Planning into the enterprise. The integration of the functional views of the enterprise can be a real challenge. From the demand planning perspective, the demands are seen in terms of units by part number and revenue. The supply planning function sees this demand as consuming capacity in terms of cash, hours, or other unit of measure required to provide the raw materials and resources needed to make the desired product. The financial planners see the organization strictly in terms of money. New product planners are concerned about scarce resources and timing for competing projects. The phase I scope of S&OP must be clearly defined by the senior management review process. If not, the logistics people can quickly become mired in the mechanics, details, and checklists to support this first phase.

Most standard ERP systems do not have an adequate Sales and Operations Planning capability. It is no wonder that developing a Sales and Operations Planning process rarely makes it onto the ERP project implementation schedule. Companies with a well developed S&OP process significantly reduce the cost of their ERP implementation because of the focus and definition S&OP brings to their organizations. Even though management cannot purchase software and hardware as the silver bullet for Sales and Operations Planning, the management team has a very important role in successfully establishing this process. In addition to providing focus and scope, their role includes facilitating continuous improvement in the utilization of the process. This means possessing patience and knowing that the S&OP process will not be perfect from the beginning. The benefit is in the process, not just in the results. Management should also make decisions for the organization using the information provided by the process and accept Sales and Operations Planning as an ongoing management development process.
The ability for the organization to integrate all functional areas into one enterprise-wide plan provides visibility for all managers on how their decisions impact the overall results and not just their own department.

At its very core, the Sales and Operations Planning process is the balance of supply and demand. The variables that must be considered in this balancing act are inventory, material supply constraints, management constraints, lead-time to the customer, actual demand from the customer, new product timing and volume, and the establishment of priorities for customers and products. Too many times the budgets are established based on a projected demand growth while the supply side of the equation lags behind.

Figure given below is the graphic representation of an imbalance between supply and demand.

An imbalance between the sales plan and production plan.

An imbalance between the sales plan and production plan.

Considering that personnel hires and other overhead expenses are committed based on the budgeted sales, the net result to the organization can be devastating. More people and expenses will be committed than can be supported by the expected level of production. The lead-time required to turn off these expenses can be too long to recover with a positive bottom line. In Figure seen below further detail behind the 15% growth can be seen. Part of the growth is expected to come from new product introduction, while the balance is expected from increased promotion of current products.

Imbalance detailed factors.

Imbalance detailed factors.

New product launches can have an enormous impact throughout an organization. The target market must first be identified. Promotion to that market must be timed such that demand for the product is experienced at approximately the same time as supply. If the product is sitting in inventory before the demand begins, this is a waste of the scarce cash resource.

Conversely, if demand begins before the product is available, customers may be lost. It is imperative in a new product launch that the marketing plans, development resources, and new product strategy are in alignment so that the risk is minimized.

Additional issues that must be addressed during the Sales and Operations Planning process for new products include the difficulty of forecasting the acceptance of this product in the market. Given that forecasts are at best an educated guess about the future and by their very definition they are wrong, forecasting new products can look like “Mission Impossible.” Traditionally the three rules of forecasts are:

  • Forecasts are never 100% correct.—This is the very nature of forecasts. Forecasts are at best a fuzzy glimpse of the future. Given that the future is subject to many unseen factors, the only thing that can be counted on with certainty is the forecast will change. The fact is that the forecast is not wrong; it is the assumptions supporting the forecasts that are wrong.
  • Forecasts become more inaccurate further in the future.—Think about attempting to project where you will be exactly 6 months, 3 hours, and 12 minutes from right now. Impossible, right? Now, where will you be 5 minutes from now? Is this more predictable? In the same way, forecasts that attempt to predict sales or other events months to years in the future are much less accurate than those predicting sales next week.
  • More detail gives less accuracy.—Given the fact the new products typically have longer lead-times than stock products and forecasts must be made for detailed part number configuration, it is no wonder that the new product introduction is such a challenge. To improve overall usability of a forecast it is preferable to forecast at the product family level.

The impact to the current product must also be addressed when a new product is introduced. Will this new product replace any current product? If the product does not replace a current product, will the introduction of this product affect other products, either positively or negatively? The company must take into consideration the possibility that the product will sell either significantly more or less than the forecasts. If the product sells significantly more, what is the contingency plan for the manufacturing facility and its suppliers to surge their capacity? How responsive can the supply chain be to this change? What is the impact of any outsourcing or third-world manufacturing strategy on this agility? While the move to a low labor cost environment may make sense when examining only product cost, the cost of not being able to respond more quickly to market demand must also be considered.

An extremely difficult transition is when a product starts to sell well. This is because the supply base typically specializes in either low volume(high-variety products that are built to order when customer requests them) or a high volume(low-variety production strategy that builds finished goods to stock). The low volume producer typically has machinery and facilities that have a wide range of capability, but are not efficient in producing large volumes of the same part. These companies tend to compete in the prototype market or small volume requirements. When the volumes increase such that their prices become uncompetitive, it is time to switch to a new supplier with high volume capability. When a product experiences rapid growth the enterprise can find itself in a very significant transition with a number of suppliers at the same time. All the challenges of a major transition happen at the same time that demand for the product is increasing. Without an adequate plan, success in the form of increased demand could actually kill the product if the transition to new suppliers cannot be done successfully!

Demand Planning

Demand planning is the main driver in Sales and Operations Planning. Management must determine the objectives, strategies, and expectations of a product as it moves through its product life cycle. The life cycle begins with an introduction, moves to the growth phase and then to a steady state, and finally progresses to the decline phase. A diversity of products is needed so that the company does not find itself in a major product-rebuilding situation. Marketing supports this management strategy with market information. This can include the history of the product; external factors that may affect the demand for the product; and overall product plans including the marketing, promotion, and pricing approach. Plans are only as good as their successful execution, so the sales area must be in alignment with the overall management and marketing strategy. This includes the possible use of distributors or the establishment of territories. Account plans for target customers are developed that focus on how the available product can be brought into alignment with the needs of the customer through the desired market channels.
Operationally this plan is further detailed in demand management.

How people are measured is how they will behave. The use of incentives to encourage the desired behavior from the salespeople is essential for overall success of the sales plan. Measurement systems are the most difficult to establish and maintain such that the desired behavior is encouraged. Sometimes what looks like a great idea is in fact absolutely the wrong thing to do. For example, if production is held to high efficiency as a measure, distribution is measured on the percentage of orders shipped per schedule, and sales is rewarded for revenue, the result is a dysfunctional company struggling to be competitive in the market. Inventory is high because manufacturing will tend to make large lot sizes of the easy-to-build products rather than what is actually sold. Distribution will favor small orders and may ship these at the expense of large orders since they take less time to pick. When the percentage is calculated, having all the small orders ship on time will skew the performance results in the desired manner. The company really wants the large orders or the best customers’ orders to ship on time since they are the highest revenue contributors. Sales will focus on selling the high revenue products regardless of what the resulting profitability is in order to make its quota. In fact, many times sales may discount the price in the rush to drive revenue and sell the company right out of business!

The sad fact is that these are typical measures used in many companies. Each functional area will focus on maximizing its measure without realizing the overall implication on the profitability of the firm. Other issues that arise that impede the demand planning process include an attitude within the organization that is not conducive to working together for the good of the company. The lack of inventory visibility through the supply chain masks the real demand from the production requirements. Shipping goals cause end-of-month, quarter,or year rushes at potentially significantly increased costs. Systems may not provide adequate visibility and information needed to make timely decisions. The most difficult issue to overcome is the lack of focus on Sales and Operations Planning as a key management process. Demand plans are essential because every business has a lead-time to react. Although the focus has been to reduce response time, there still is a certain amount of time required to order materials, deploy the internal and external capacity, and deliver the desired products to the customer.

Many make-to-order companies believe that they do not need to do forecasting. A common misconception is that forecasting is only needed for make-to-stock companies. Let us assume that the customer is not willing to wait for the company to build a facility, hire personnel, purchase equipment and materials, produce the product, and deliver. If this is the case, every company must include forecasting as part of its essential business process. Forecasts provide the lead-time required to accomplish these activities. The issue becomes what to forecast. This answer is very different for different companies and industry types. Remember the rules of forecasts. Forecasts are never exactly right but they are better than not planning ahead. Effective demand plans require a significant amount of hard work; timely reviews of actual experience against the forecast; inclusion of customer input, appropriate software support; and, most importantly, good judgment on how to react. Please notice that appropriate software is not the only requirement for effective demand plans regardless of what the software companies would have you to believe. Deciding what to forecast and how the forecast will be used is the first major hurdle. Then the hard work of organizing and analyzing the data to glean meaningful and relevant information can be done. This information is the real key to successful demand planning.

Supply Planning

On the other side of the balance beam from demand planning, supply planning defines the resources and strategies available to meet demand. These supply strategies must align the external suppliers and the internal facilities, labor, and materials to deliver the products that the customer demands. The supply planning process includes planning resources and eliminating undesired constraints. In addition, an overall plan must be developed to meet seasonal demand peaks in such a way that the company ensures the best financial results. The amount of desired flexibility is defined and integrated with the company’s market strategy.

If the company is competing in low-volume, high-variety products, its flexibility will focus on multiple-use machines capable of producing a wide breadth of products. If the company is competing in high-volume, low-variety products, its flexibility focus will be on the agile reaction to changes in volume by utilizing machines that have an extremely focused use. The benefit of the supply planning process is to ensure short-, medium-, and long-term resource requirements can be met with available or projected supply.

The three figures given below show different scenarios that a company may need to address.

Figure(a)Increasing demand.

Figure(a)Increasing demand.

Figure(b)Random demand spikes.

Figure(b)Random demand spikes.

Figure(c)Resource underload.

Figure(c)Resource underload.

Figure(a)shows a company that has increasing demands on its capacity. A decision must be made to either increase capacity, outsource the demands that exceed the available capacity, or reduce the load. When the decisions are made to reduce the load, the most profitable orders and customers should be retained. This is the real power behind the latest data analytics available in some ERP systems. Every customer order does not have the same value. It is important to understand the profitability of the customer and the channel when deciding which capacity to add.

Figure(b) shows a company that experiences spikes in demand. This is very common in a seasonal business or the company may have certain pricing policies that are causing this effect. There are two basic ways this situation can be addressed. One method is to build up the inventory to meet the surge in demand. This works very well for a make-to-stock or assemble-to-order company. The forecast is established for the products and then production can build inventory during the slow time to be sold during the surge periods. The difficulty with this strategy in a make-to-order company is that it rarely makes the same products over a period of time. Another choice is to flex the capacity to meet the surge. The difficulty with that strategy is the degree to which the facility can flex its capacity. Over the short term, 20% upside flexibility in a facility is not unrealistic through planned overtime. However, asking personnel to work extensive overtime for a long period normally serves to reduce productivity and quality.

A third choice is to outsource the amount of production that is required in excess of available internal capacity. This strategy is the most difficult to manage since there is not the same level of direct control over suppliers that is possible internally. In addition, what assurance is there that the supplier will have capacity just at the time that the requirement exits? Assuming also that the supplier cost is higher than internal production cost, the margins on these products will be lower. If the supplier cost is lower than the internal production cost, it does beg the question of why the part is produced inside at all! A fourth choice is to extend the committed lead-time to the customer. Extended lead-times provide an increased opportunity for the company to level the load within the facility. If the facility can really make the part in 3 days but quotes 6 weeks to the customer, there are 5 weeks over which the available work can be spread to meet the customer’s due date. The risk of this approach is that the factory may begin to believe that the lead-time to produce the part should be 6 weeks. This would release excess to the shop floor that must be managed and tracked. Spreading customer orders to smooth production can also be accomplished by reexamining pricing policies to determine if the spikes are directly a result of rewarding customers for taking large lots sizes all at once. Most customers would prefer to take small lots with more frequent deliveries rather than a single large lot. However, if taking the large lot has a significant cost advantage, the customer will order a large lot. By examining the assumptions behind the demand pattern, both supplier and customer can develop a win-win solution.

Figure(c)represents a company that should be aggressively moving any product that is produced outside the facility into the internal production facility. In addition, this enterprise should be actively looking for additional work. Given that the overhead cost is relatively fixed, the company can significantly drive profitability if volumes are increased. The pitfall that many managers fall into is to reduce the direct labor force in this situation in an attempt to reduce costs. This normally begins a downward spiral and poor financial results. The best answer is to aggressively market the company’s capability and price products to more fully utilize the available resources. Up to the point where additional resources need to be added, the incremental cost of that utilization is nominal. A close look must be taken at marginal pricing and marginal costs to determine what the real cost is of adding a product to the production schedule. This is one of the advantages of an integrated Sales and Operations Plan. The financial results of sales and operations decisions can be clearly seen and analyzed before decisions are made. This has been included in the MICSS. Without Sales and Operations Planning, it is rather like running a company blindfolded.

Financial Planning

When all is said and done, what matters to most companies are bottom-line results. Even nonprofit companies work toward operational surplus. Nonprofit is really a tax status and not a state of mind for these enterprises. Without financial surplus, the nonprofit organization cannot deliver its desired mission. Financial planning is where the business plan, the inventory plan, and the revenue, costs, and margins are brought into alignment. Financial planning must be based on current plans for proper financial projections of revenue and inventory. If the Sales and Operations Planning process is followed, there should be no surprises at the end of the year from a financial perspective. Since the final measure of a company’s effectiveness is financial, this integration of the Sales and Operations Plan is essential for all departments to improve their understanding of the financial impact to the enterprise from decisions made in their particular areas.

Financial planning allows decision making at the appropriate level in the company where demand and supply mismatches can be identified and resolved. The market implications, customer satisfaction, and long-term impacts to the product must all be considered. The integrated financial plan also helps ensure that the new product strategy is being followed and supported through enhanced visibility to the management team. Sales and Operations Planning provides alignment of operational plans with the business plan and the strategic direction of the company.

A demand manager leads the establishment of the Sales and Operations Planning process. Some companies have used the titles of Demand Coordinator, Sales and Operations Planning Manager, and Life Cycle Manager to name a few. This individual should understand the priorities and tradeoffs that are available to meet the needs of all functional areas. This individual is responsible for developing and managing a set of business rules for management approval. The demand manager is also responsible for scenario planning. This process is more than just “what if?” Scenario planning analyzes potential demand, supply, new product introduction, and financial scenarios for the business with the purpose of developing and reviewing possible alternatives. Well-defined scenario planning leads to improved understanding and decision making.

Senior Management Business Review

The monthly review by the senior management team should include a review of performance measures such as revenue, cost, customer service, sales plan performance, forecast accuracy, new product launch, and supply performance. From this review, action plans are developed for improvement. In addition, the assumptions behind the plan should be well defined and include internal and external assumptions. Any changes in these assumptions should be highlighted during the meeting. After this review, the key issues by customer, market segment, product family, or resource are identified and discussed; the review of multiple scenarios for the business is also conducted. Alternative plans, including the opportunities and risks associated with those alternatives,are also addressed. Decisions are made during this meeting to address the alternative opportunities and provide direction for all affected departments. The Sales and Operations Planning process brings customer demands, business plans, and the enterprise strategic thrust into alignment.

All these wonderful results sound very enticing, but the senior management review is not without its difficulty. Some problems that can be experienced include the perception that the Sales and Operations Planning process is a separate meeting and not the process by which the business is run. Frequent problems are that too much information is added to the meeting’s agenda, the meeting runs for hours, and the meeting becomes nonproductive. The meeting also drowns in data and starves for information. The senior management review should be exactly that—a review. Much of the work and analysis should be completed before the meeting. The converse can also be true; there is too little on the agenda for the meeting and no real discussion occurs during the senior management review. The Sales and Operations Planning process should be an opportunity for different functional areas to be heard and for plans to be made that will be actually implemented. Senior management will frequently not have the patience to let the process evolve to the level where adequate analysis is done and action-focused decisions can be made. Another problem is when the management team will not make a decision. There is a risk of analysis paralysis, where more and more data are being requested before a decision will be made. The most difficult area in the review process is the establishment of appropriate measures. Performance measures drive behavior so they must be selected carefully to support the strategic plan in an integrated fashion.


All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd DMCA.com Protection Status

ERP Tools Topics