Balancing Demand and Supply in S&OP: The Executive Nuts and Bolts
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This is the third article in my series on the Executives guide to S&OP. The goal of these first three articles is to provide a “primer” on the Executive S&OP Process. Prior to this article, I covered what you should expect out of S&OP (5 Outcomes) as well as what your role (Management and Participation) should be. Now it’s time to get into the details: What is at the core of making the process work?
ASCM (APICS) defines an effective S&OP process as:
“[S&OP] guides business decisions, provides key problem-solving strategies, gives executives greater control over the enterprise and drives overall business success.”
I have seen this definition working in practice in many organizations. Getting the process to this point in your organization, however, takes work. Work that is made easier if you start with the right fundamentals:
A single story for each family
Constraint-based S&OP families
Data Driven Presentations
Clear Accountability for each part of the plan
So, let’s get down to the nuts and bolts.
First, the sales/marketing presentation should be directly connected to the supply presentation for each family. This is sometimes called “A single version of the truth.” A quick check on this is to look at the structure of your Executive S&OP slide deck: Is it by function or by family?
A functionally structured presentation typically will have all the sales/marketing slides presented together, followed by all the production, supply, and inventory slides. In this format, sales present their “story” of the entire business, followed by the operation’s “story”.
In contrast, a FAMILY-based presentation covers all aspects of demand and supply, family by family. This simple change to the presentation provides the following benefits:
Forces definition of a “family” to be the same across the organization. While this may create conflict on how to define the family, doing this removes ambiguity and forces alignment between the plans.
Creates a linkage between sales/marketing initiatives and supply capability. A projected price increase that is expected to drive up short-term sales needs to be matched with increased output or anticipation inventory to fulfill demand.
Secondly, S&OP families should be determined by constraint. Think production line, assembly area, or specific supplier. Demand plans should be determined and set from an externally facing view, but they need to consolidate into an internally focused constraint-based view. This view is key to decision making in S&OP:
It validates current flow rate (capability) and alignment with demand levels.
Helps to identify when capability increases (investment) or decreases are required to meet the required flow rate.
Formalizes and communicates your buffer decisions (inventory, upside flex capacity, and/or backlog) to handle the variation or imbalances between demand and supply.
I will cover more on this in later articles however, your key takeaway should be if your Executive S&OP presentation doesn’t aggregate to a constraint-based view, you are missing out on decision-making clarity around capability.
Third, your S&OP presentation should be data-driven. The data needs to be clearly defined and understood by the key participants. Graphs can be used effectively once a process is in place and understood, but you should start with the numbers. This will highlight where there are disconnects and where the story doesn’t add up. A couple of guidelines.
Use the following data elements to put together a complete picture for each family
Bookings: incoming orders (actual and projected)
Backlog: open orders time-phased by the month you expect to ship them
Shipments: Shipments (actual and projected)
Production Receipts: (actual and project) In the case of buy-for-sale families this will be purchase orders.
Inventory: This is your finished goods inventory plan
Put the data together into a single presentation. We call this the 5-Section Sheet (because there are five sections). The math should add up for all of the data. For examples bookings minus shipments should end up in backlog or open orders. Production minus shipments should result in inventory. Validate this monthly.
Feed your S&OP presentation directly from your planning systems. Starting with collection of actual data monthly, you can validate that systems and processes line up with your view of the aggregate story. Linking the future plans from S&OP to your planning systems is also necessary but shouldn’t be the focus if you are just getting started.
Fourth: you should have clear accountability for each part of the family plan. This is where it pays to be specific. Let’s look at the data elements of an S&OP plan, that I identified in the previous section (bookings, backlog, shipments, production, inventory) to see where the accountability should lie. We will start with the easy ones: Bookings and Supply.
Bookings: Accountability for bookings (incoming orders) is clearly linked to sales or marketing. The demand generators of the business.
Shipments: The shipment plan is an output of the process. Sales is accountable for the unconstrained shipment plan; however, the final shipment plan needs to be supported both by bookings (sales) and production (operations). This is the constrained shipment plan, and you are accountable for signing off on this plan.
Production (supply): Accountability for production is operations. They are responsible for setting and delivering the production plan. This needs to link to the master schedule and material plan (supply chain).
Backlog and Inventory are both outputs of the plan. They are both strategic buffers between customer demand and supply capability. You should set a target for both of these, and use the process to monitor where you are at. I will cover this topic in more detail in future articles.
Getting to an effective S&OP process starts with the right fundamentals:
A single story for each family – link demand and supply
Getting these nuts-and-bolts details right, will put you on the path to greater control over your enterprise and driving overall business success.
About DBM Systems
DBM Systems Ltd. has been at the forefront of Sales and Operations Planning (S&OP) thinking since 1980. Their team of consultants are providing proven S&OP solutions for industry leaders across the world. DBM has helped hundreds of organizations achieve their objectives, and they’re ready to help you, too. Find out more at www.dbmsys.com.