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A full, printable PDF version of this article is available here. There is no doubt that we are facing a point in history where we have more volatile demand than normal. The global pandemic has impacted almost all sectors of the economy and disrupted demand patterns around the world. Most of the executives that I’ve been working with, or have spoken to, have said getting a good demand forecast for their business is their number one issue. They’re not just dealing with volatility, but also the uncertainty of future demand. The interesting thing is that our gut reaction to volatility and uncertainty is to look at our plans more often. This seems like a natural solution: we look at our order inflow, sales output, inventory, and production numbers daily, trying to gain insight from the day to day fluctuation so that we can correct our plan. If we just look at them more often and have better data, we will be able to react better. Real time planning. The problem with real time planning is that we are looking in the rear-view mirror. Just like in the 1976 film, The Gumball Rally, the rear-view mirror can become an obstacle if we want to move forward. Looking behind us means we are reacting to our current order position and dealing with our current inventory position, but by the time we have the data, the events have already happened. As one executive I spoke with recently said. “We look at the data and we have an ‘oh sh**’ moment! Then we redo the plan.” Planning looking in the rear-view mirror often turns into OS&P: Oh Sh**, and Planning. What we really want is good S&OP not good OS&P. It’s not about our ability to react, it’s about our ability to plan. That all starts with the demand plan. The planning horizon needs extend far enough that we can plan operations; it needs to cover our lead times. We can set the flow rate (production) or, in the case of buy for sale, we need to set the inventory levels to buffer us between supply chain lead-time and customer lead-time. We then need to trust the plan. Sales and Operations Planning (S&OP) will help you improve your demand planning AND ultimately run your business better. This is critical in times of volatility or uncertainty. You can be certain, however, that to get out of the OS&P trap your S&OP process must have the following characteristics: The process occurs monthly: This may seem counter intuitive, but most businesses have some amount of lead time to make or buy product. What we can ship today, is based on decisions we made a month ago or more. These may be finished goods, purchasing decisions, component purchases, or staffing decisions for line run rates. The process is done at the volume level: There are two types of uncertainty to demand forecasting: volume and mix. Volume is the aggregate quantity by family, and mix is the SKU or product mix within the family. You need to determine volume before mix. This may also be counter intuitive for some. If unsure, we have a tendency to ask for more and more detailed data from our customers to build a better demand plan. They are however, in much the same situation as we are, they don’t know. Asking for more detailed information may result in a more precise answer; however, precision isn’t the same as accuracy. Settle for the volume question first. It presents a single story of the business: There should be a clear linkage between demand and supply and your available levers or buffers to balance demand and supply. This is done at the family level. We use the 5-Section Sheet to present the story. The process drives accountability: For every S&OP family there should be clear accountability for each part of the plan and accountability for improvements to the plan. The family, demand streams and data should be structured and presented so it is clear who owns what part of the plan. This should be known and understood across the organization. The process is measurable: If it’s done right, you’ve established tolerance levels for bookings, shipments, and production. If the monthly results are out of tolerance for the previous month, there should be questions on assumptions that went into developing the plan. Changing how we plan will help to improve the process in the next cycle. Tracking your effectiveness over time is what will improve your demand forecast. It enables executive decision making: Finally, and most importantly, the process should give a clear picture of what’s going on family by family. It should enable your president, CEO, or division leader to make decisions, clearly presenting both operational and strategic trade offs. If it’s just a report-out, it’s not working. A good executive S&OP process will have all these characteristics. If it does, S&OP should be improving your demand plan. If it doesn’t, now is the time to get the process tuned up and break out of the OS&P cycle. Contact us to find out how. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

DBM Systems Ltd will begin May 2020 deploying a virtual approach to the S&OP Accelerator™ methodology. PRESS RELEASE – May 12, 2020 10:10 AM EDT KITCHENER, May 12, 2020 – Covid-19 has heightened uncertainty around the world. The disruption injected into the global supply chain means broken steady-state planning in almost every sector. Demand plans can no longer be relied upon. In this environment, companies need the executive discipline of S&OP more than ever. They must reset their sales and operation plans quickly to survive. To support rapid deployment of S&OP at this crucial time, DBM is launching The Virtual S&OP Accelerator™. Prior to the current crisis, DBM’s S&OP Accelerator™ has helped many companies implement effective S&OP processes. This proven rapid-deployment process relied on a mix of “high-touch” consulting, remote support, and robust tools to deliver results. DBM’s ability to continue to work this way, however, has changed. The social distancing necessary to limit the spread of this global pandemic has greatly reduced or eliminated travel and made in person meetings impossible. The Virtual S&OP Accelerator™ takes the entire Accelerator™ process on-line for full, remote deployment. By taking advantage of their proprietary technology and industry-standard tools, DBM is able to take the implementation process completely on-line. They are moving companies forward NOW to create planning cycles that may save their business. The Virtual S&OP Accelerator™ is built on DBM’s cloud-based Executive S&OP Tool. The Tool supports Executive S&OP decision making almost immediately, clearly presenting data in The 5-Section Sheet*. The Virtual S&OP Accelerator™ framework provides training, tools, and templates to enable the process in an event-driven framework. Industry standards, like MS Teams and SharePoint, facilitate collaboration and project management to keep the process on track. The benefits of The Virtual S&OP Accelerator™ are: Rapid deployment. DBM’s current methodology is already the fastest in the industry Faster results. A defined and proven process enabled by industry standard collaboration tools like MS Teams and SharePoint keeps you on track. Significantly reduced investment. Automated deployment, zero travel and focused events all yield improved efficiency. A more focused learning experience. On-line learning events are much smaller, available on your own schedule, and can be repeated if required. Feedback validates comprehension. A cloud-based platform for your S&OP process. The DBM Tool is an enterprise solution, purpose-built for Executive S&OP supporting decision-making across your organization. DBM is prepared to keep a safe distance and use The Virtual S&OP Accelerator to help clients establish a strong, repeatable monthly S&OP processes today, at a time when it is needed most. If you are thinking about improving your Executive S&OP process, DBM is the place to start. 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.

A full, printable PDF version of this article is available here. In my last article, I explained the need to synchronize the Master Schedule to the S&OP Supply Plan. The key is to derive the MS Flow Rate directly from the S&OP Supply plan. This is easier said than done. In most systems, MRP calculates the supply (released, firm and planned orders) for each SKU in the family based on the requirements (Shipment Plan) and projected inventory position compared to safety stock. In S&OP we manage the Shipment Plan and the Supply Plan, and the difference goes to inventory. In S&OP we use inventory as a buffer, while MRP always wants to hold inventory equal to the safety stock. The crux of the problem is that MRP does not use inventory as a buffer! A note on terminology. In S&OP we have a Shipment Plan, a Supply Plan, and an Inventory Plan. The shipment plan at the family level is represented in MRP as requirements for the individual SKUs in the family. The Supply Plan in S&OP is represented as released, firm and planned orders for the individual SKUs in MRP. This is important: S&OP Shipment Plan = The Sum of Customer Orders, Dependent Requirements and Forecast Requirements for the family SKUs in MRP S&OP Supply Plan = The Sum of Released, Firm and Planned Orders for the family SKUs in MRP Most ERP systems require manual intervention before MRP can produce a set of planned orders that match the S&OP Supply Plan. In the example shown below where we are comparing the two plans, you can see that the requirements in S&OP and MRP are the same, but the Master Schedule generated by MRP is not equal to the S&OP Supply Plan. This is because in S&OP we manage the Shipment Plan (requirements) and the Supply Plan, but MRP accepts the requirements and the inventory rules and then plans supply. In S&OP the difference goes to inventory, but in MRP the difference goes to supply, and typically they won’t match. MRP is a good tool, but at the master schedule level, it needs management to make sure that the sum of the master schedule equals the S&OP Supply Plan. When you look at the family S&OP example, you can see that a shipment plan and a supply plan have been developed for the family. The inventory plan is the result of the difference between shipment and supply. Inventory is being used as a buffer. We know MRP is going to net the on-hand inventory. It’s standard logic for MRP to project the “available” into the future, determine the point in time that it will be consumed, and then plan an order to replenish. Bleeding this on-hand inventory is a rule that MRP strictly follows. Comparison of S&OP Family Plan to MRP Plan Differences between S&OP Family Plan and the MRP Plan In this example, the MRP Requirements at the SKU level sum up to equal the family S&OP Shipment Plan, yet the MRP Master Schedule is generating a completely different plan than the S&OP Supply Plan, and this also results in a significant difference between the Inventory Plans. It’s a simple problem that is not widely understood. MRP is designed to net available inventory and maintain safety stock, and therefore without intervention, these two plans will never equal. Fixing this problem will be the subject of my next article. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

For a full, printable PDF version of the article, click here. The last article in this series dealt with the relationship between fixed and variable cost. Some of the key points from that article were: “Contribution Margin” is the difference between revenue and variable cost. The “Contribution Margin” should be managed at the “Family” level of the S&OP plan. Fixed costs do not change within their “Relevant Range” The “Relevant Range” is determined by the maximum output capability at a given fixed cost level. Fixed costs are variable at some time in the future. The key is the horizon. Fixed costs should be managed at the “Site” level of the S&OP plan. We can not project profit without combining fixed costs and volume. Looking back, there was a lot in that article. Looking forward, I am going to look at some of the major cost elements and outline how I fit them into the model. In this article I am going to look at labour cost. Let’s start with some controversy. Labour is a fixed cost. My industrial engineering training was based on the premise that direct labour was a variable cost. We focused on calculating and improving the time it took to make a unit and then multiplied that time by the labour rate to calculate the direct labour cost of the unit. The assumption was that this cost varied directly with output and when workers were not making units, they were not getting paid. A long time ago, this approach may have had merit, and maybe there are some remote examples where it still does but I have not seen one for a long time. Let’s look at why it does not make sense to treat labour as a variable cost: Today’s workforce is more skilled and there is a significant investment required to develop these skills. Most organizations do not want to lose skilled workers when there is a short-term shortage of direct work to be done. Adding new direct employees adds cost before they become productive. This added cost does not fit the variable cost characteristics In most economies there are significant costs associated with laying off or terminating workers. A large portion of the work done in today’s factory is “Indirect”. Equipment maintenance, quality management, material handling, supervision, training, scheduling and planning are all Indirect. The ratio of indirect to direct labour has continued to increase reducing the importance of the pure “Direct” labour content. Many people in today's factory will be doing both direct and indirect work, making it difficult and irrelevant to account for the direct time as the person will be paid either way. Batch sizes are much smaller. As a result, workers work on many different parts through the day. In many cases it just is not practical to track the actual labour by item. In my experience, the factory head count does not change within a time horizon. This horizon is at least a month, and typically three or more months. Changes in the size of the workforce must be planned well in advance and this should be a function of the S&OP process. When we look at this headcount, we don’t need to distinguish between direct and indirect labour. The total head count of the site should be considered in this cost pool and the cost pool should be treated as a fixed cost. Except there is a twist. Overtime is variable and can be added or subtracted with relatively short notice. I have wrestled with the overtime issue for a while now and I believe the best way to deal with it is to treat it as a fixed cost with a very short horizon for change. My reasons include: It is difficult to account for the additional overtime at the “Family” level in S&OP. While it may be possible to directly relate a portion of overtime to a specific family, we need to determine if that additional cost belongs to that family, or to another family produced on standard time. There is no good answer to this question, which I believe supports treating it as a fixed cost. Many plants (sites) use overtime as part of their standard capability. Using overtime as part of the standard output capability makes it easier to reduce the labour cost without reducing headcount. Eliminating the planned overtime reduces the period labour cost without impacting headcount. My premise is that labour costs should be treated as a period cost and not based on the planned output of units. The planned output must fit within the capability, the “Relevant Range”. Let’s look at an example comparing the two approaches. The following chart represents the capability calculation for a family/site in growth mode. To meet an unexpected increase in demand, the plant is adding headcount as fast as possible. The basic Head Count parameters for this organization are: Each Employee can produce 10 equivalent units per month. 10% upside flexibility in output is available using overtime. It takes 3 months to train a new employee. (no output for 3 months) The plant can absorb a maximum of 3 new employees per month. The starting headcount is 100 employees. Let’s look at the highlights of this plan: They are increasing their headcount at three people per month, the maximum number of new people the plant can absorb. This is shown in row 1 of the chart. The effective headcount is increasing at the same rate but with a three-month lag. Notice that the 3 people added in M2 are effective in M4. This is shown in row 2. In months M7 through M11 the capability is constrained by equipment. This constraint is removed (new equipment) in M12. As a result, they cannot use all the available overtime in M7 through M11. There scheduled production over the 12 months totals 13,550 vs. a planned capability of 14,245. There are several reasons why there is a 695-unit difference but all we need to know is that there is a difference. Now let’s compare the labour cost projections using variable standard cost data and fixed period cost data. Treating labour as a variable cost: The standard cost is $400 per unit. Multiplying this by the scheduled production gives us the “Labour cost based on Standard Cost” row in the model. This totals to $5,420,000. Treating labour as a fixed cost: The cost of a person is $4000 per period. Multiplying this by the headcount for the period gives us the base labour cost for the period. This totals to $5,592,000. The overtime headcount required to meet the plan must be added to the period cost. The overtime is at time and a half. The total of the Overtime cost for the 12 months is 838,800. The total period based fixed labour cost is the sum of these two values or $6,430,000. The difference between the two approaches is $1,010,800 for the year. This is a substantial variance and the period-based cost is the right one. The main drivers for the difference include: The first three months of a new person are paid for but not productive. There are periods where the “Labour OT % planned for period” is negative. Negative overtime is impossible, but this number represents labour that will be paid but not be utilized in the period. The overtime rate is 50% higher than the standard rate and the standard cost does not account for this. This would show up as an unfavorable rate variance after the fact. By treating labour as a period (fixed) cost we can address the issues related to the productivity lag after hiring, under-utilized labour and overtime rates. Unless you are able to directly flex your workforce with the planned activity, you should consider labour a fixed cost. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

To download a full, printable PDF version of the article, click here. In this, the second article in the “S&OP and the Financial Plan” Series, I will review the relationship between Revenue, Variable Costs, Fixed Costs and Contribution and show how combining the S&OP plan with this data gives us the tools to synchronize our financial projections with the S&OP plan. This is not a “Supply Chain” article and I would appreciate you sharing it with your financial associates and have them forward their feedback to me on LinkedIn. The difference between revenue and profit is cost, but what costs? The key points I want to cover in this article regarding costs and S&OP include: Unit Costs (standard cost, average cost or any other fully loaded cost applied to a specific SKU) are misleading. Costs should be classified as Variable and Fixed Costs, where Variable costs can be directly linked to the SKU, but fixed costs cannot. Volume can vary within a range (the Relevant Range) for a given level of fixed cost All Fixed costs are variable. The question is when. With S&OP we can address the timing required to change fixed costs and address the impact of volume. Without this it is very difficult to understand the impact of Fixed Costs on profit. In this article I hope to show you that linking Cost to S&OP is an excellent way to project future profit. But before we can understand how to link costs to S&OP, we need to dig a bit deeper into what makes up cost and what needs to be considered as we look at costs and their impact on profitability. Traditionally, in the manufacturing environment, cost was looked at as the sum of the: Material, Labour and Overhead costs associated with producing the product. The material cost was based on the cost of procuring the materials, the labour cost was calculated based on standard production times and labour rates and the overhead costs were applied to the product based on a cost driver, typically direct labour as it was arithmetically the easiest. The relationship between the Overhead Costs (primarily fixed) and the driver is sensitive to volume and is usually set once per year based on a budgeted volume. The result of this exercise was a “Unit Cost” (often referred to as the standard or average cost). Differences between earned costs and actual expenditures were charged to variance accounts and operations typically had to explain unfavorable variances. These variances were not predictable and had a significant “Surprise” impact on Profit. Sound familiar? This costing approach provided misleading information, sub-optimal metrics and resulted in some poor decisions. In my early days in manufacturing I became an expert at manipulating the cost system to make my numbers look good. While I may have looked good, this wasn’t in the best interest of the business – but you get the performance that you measure for, don’t you? I am not going to cover the issues with unit cost in this article, but they are well addressed by Debra Smith and Chad Smith in their book “Demand Driven Performance – Using Smart Metrics". Standard or Unit Cost is not linked to volume. The name “Unit Cost” implies this is the cost of a unit and clearly suggests that volume is not a factor. However, if you dig deeper in the product costing system you are likely to find that a large portion of the “Unit Cost” is really based on an allocation of Fixed Costs. Before we go any further, we need to understand some terms: Variable Cost, Fixed Cost, Contribution Margin and Relevant Range. A variable cost is directly related to rises and falls in volume. Volume is the only cost driver for variable costs. The variable cost per unit does not change with the volume of units produced. The cost of material is a classic example of a variable cost. We can track variable cost at the Family/Site level in S&OP. Labour on the other hand is probably not variable, but that’s a topic for a future article. A fixed cost is a cost that remains constant regardless of changes in volume. If you produce twice as many units, the fixed cost per unit is cut in half. The fixed cost per unit is a function of the total fixed cost and the volume of units produced. Property taxes on a building would be an example of a fixed cost. Fixed costs are typically not directly linked to specific SKUs, but more commonly driven at the “Site Level”. The same facility could make many different product families using the same fixed cost elements. Allocating these fixed costs to specific SKUs just doesn’t make sense. Contribution Margin is the difference between revenue and variable cost. This is different than Gross Margin, which is the difference between revenue and unit cost, where the unit cost includes variable cost and allocated fixed costs. Because it is valid to calculate revenue and variable cost at the unit level, it is also valid to calculate contribution margin at the unit level. Gross margin at the unit level is misleading as it does not account for volume fluctuation and the use of erroneous cost drivers. Relevant Range, this next definition is taken directly from Debra and Chad’s book: “The Relevant Range is the range of activity within which the assumptions about variable and fixed costs are valid. It is also associated with time. The time-frame of the relevant range of volume is determined by the time it will take to step into or out of a fixed cost.” Looking at the following diagram the following points apply: The revenue and the variable costs increase linearly with volume. The difference between the revenue line and the variable line is the total contribution to fixed cost and profit. The fixed cost line is constant. The total cost line has the same slope as the variable cost line but starts at the fixed cost line. The Break-even is the point where the Revenue Line crosses the total cost line. You don’t start making profit until you cross the break-even point. The Relevant Range line represents the maximum output that can be achieved based on the current capability. Beyond this this point the Fixed Cost and volume assumptions are longer valid and the model does not apply. For many of you this pre-amble was just a rehash of the costing fundamentals you already understand. However, it was necessary to review this before explaining how S&OP brings in the missing elements needed to project profit. The problem with models like the one shown above is that they are static. By linking this model to S&OP we can see, by month for future months the impact of volume, fixed cost changes and capability changes, which gives us the ability to project contribution and profit by future month and update the model in the monthly S&OP cycle. S&OP provides the missing data required: Future volume levels. The S&OP volumes can be directly converted to Revenue and Variable cost at the family level. With this data we can recalculate the contribution margin by family every S&OP cycle. The Relevant Range. The Supply Plan capability defined for future months sets the maximum output for the family. Think of this as the Relevant Range by family by month. The volume can not exceed the capability or top of the relevant range. Timing for future fixed cost changes. The capability for future periods can be changed during the S&OP cycle if there are plans to increase or decrease the capability. These planned increases or decreases in capability will be directly linked to changes in the total fixed cost for the future periods and must be planned well in advance of the period. S&OP is the forum for changing future capabilities. With S&OP we can take the static cost model, apply it to the plan by month and get a realistic projection of contribution and profit. The following two graphs show the relationship between the S&OP plan and the Contribution Fixed Cost and Profit Plan. S&OP units with volume and capability and the resulting Contribution, Fixed Cost and Profit. This S&OP model has a monthly presentation of the fixed cost model, thus providing insight into the impact of the S&OP plan on future profits. This is a powerful view showing the real impact of the S&OP plan on the future profitability of the site. The graph to the left, shows the available Capability of the site (the shaded area) compared to the S&OP volume plan moving forward (blue line). The Capability had a direct relationship to the Relevant Range for Fixed Costs. The Volume Plan will directly relate to Revenue, Variable Cost and Contribution. Notice that the plan is to increase Capability in future months. This increase will come at a cost and that cost will be an increase in Fixed Costs. At right, the graph shows the fixed cost, contribution, and subsequent profit resulting from the S&OP plan. Hopefully you can see where I am going with the financial linkages to S&OP. If you do this right, S&OP will become the driver for financial planning within your organization. The model is simplistic and in future articles I intend to flush it out. Some of the issues we need to explore include: What costs are Variable and what costs are Fixed? Be prepared for some surprises here. How do we find the Variable and Fixed costs in the ERP system? What view of lower level costs should be used to determine the correct variable and fixed costs at the end item level? How do we determine future capability and fixed cost changes? What should the presentation look like? Hint here – it does not look like a 5-Section Sheet! What costs should be inventoried and what costs should be expensed. Lots to cover but we are on our way to building a strong financial model. As I mentioned at the beginning of the article, I would really appreciate feedback from your financial associates. Chances are that I will barbeque a few sacred cows in this series and I look forward to some controversy along the way. To read further, or to gain a better understanding of the material referenced from Deborah and Chad Smith’s “Demand Driven Performance - Using Smart Metrics”, follow the link in the image to purchase the book on Amazon. For more information on Duncan's S&OP philosophy, strategies, and implementation, read his book, "Sales and Operations Planning - How to Run a Process Everyone Understands". At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF is available here. If you follow our newsletter and have read our writing on the 5-Section Sheet, you will know that it is at the core of our S&OP implementation. It helps leave us with a simple equation. If we can arrive at our booking and shipment volumes, we can then analyze the backlog and inventory to produce an S&OP Supply Plan. Think of the S&OP Supply Plan as a gift to the Master Scheduler. It’s a clear and concise statement of planned volume for a family. It is essentially saying, “Here is the Supply Plan, we all agree, now go build it!”. It can’t get any better than that. The alternative is having information coming in from several sources. This can bring a level of uncertainty, and with the Master Scheduler juggling the inputs, problems can arise if it’s not done right. While the S&OP Supply Plan states the volume, it does not determine the mix. The mix question is left to be worked out in the details of the Master Schedule. The S&OP Supply Plan shown in the 5 Section Sheet is a clear statement of the mission. The Master Scheduler can see the objective clearly, and they can set up the build plan to match the volume. This doesn’t mean that the Operation will hit the desired output, but the volume is synchronized to the S&OP Supply Plan, and any variance to the plan will translate into meaningful feedback. For further review on the 5-Section Sheet click here. The gift - is having the volume decided. The goal is for the Master Schedule to drive the MRP system to the same set of numbers as the S&OP plan. In this way, one plan runs the business, a single source, and it’s a plan that all the stakeholders have bought into. The Master Schedule then takes the S&OP Supply Plan at the family level and breaks it down to the specific SKU’s that will be built (the mix) to hit the planned volume. The Master Schedule is often referred to as the build plan for independent demand items. It’s a blend of planned orders, work orders (schedules), purchase orders, and firm-planned orders for these independent demand items. The Master Schedule drives the MRP system and subsequently the Supply Chain. Again, the key is that the S&OP Supply Plan sets the flow rate, and the Master Schedule must run to this rate. Matching flow rates is crucial because if they don’t match, then the S&OP exercise is futile. In my years of experience, it is all too common to find that the Master Schedule bears no resemblance to the S&OP plan, and as a result, it undermines the S&OP objective. The underlying goal of DBM is to solve this problem. Do you know if your S&OP Supply Plan is synchronized with the Master Schedule in your system? The S&OP plan is presented in a monthly bucket, and so the first step is to establish a flow rate by day, and then convert it into weeks for the Master Schedule. If the two sets of numbers do not match, then synchronization is not present, and it must be fixed first before you can do any other Master Scheduling work. How do you check if the two are synchronized? Each S&OP period has a start and end date based on the S&OP calendar. In this example, we are using a 4-4-5 period structure, so the Master Schedule weeks match perfectly with the S&OP periods. If your operation uses a calendar period for S&OP, there is a bit more effort to deal with the overlap of Master Schedule weeks into multiple S&OP periods, but the same synchronization logic applies. The following diagram shows each Master Schedule week, alongside the S&OP periods for May and June. Start by identifying the working days for each week in the S&OP period. The total number for the S&OP period will match the sum of the weekly total for each Master Schedule week in the period. The objective is to match on the number of working days for both the S&OP and the Master Schedule. The next step is to calculate the S&OP Flow Rate Per Day. This must be based on the available working days in the period. Note: May 27 is Memorial Day, so it is not an available working day. Then multiply the Flow Rate Per Day against the number of Master Schedule days per week. This needs to be done for each week of the S&OP period to arrive at the Master Schedule Flow Rate Per Week. Hitting a steady flow rate per day and week at the Master Schedule item level will smooth out the supply chain. 3. Compare the calculated Master Schedule Flow Rate Per Week against the actual Master Schedule in the ERP system. To do this, it will be necessary to extract the various order types from MRP (typically the planned order file) for end-items in the family (by S&OP family code). Then sort by due date and sum up the quantity for each MS week. 1st week will include the past due. If past due is an issue, it may show a large overload in the first period, producing a front-end loaded Master Schedule. This is an issue that will need to be fixed. Consider weeks to be 7 days. This will capture any orders that are scheduled on weekends. Each week has a start and end date to establish an extract. Ensure that the 1st and last MS week are split to correct S&OP period. Statutory holidays are normally not included in available days. The Master Schedule must align to the S&OP Flow Rate. If the ERP system schedule matches weekly Master Schedule Rate for each week of the period, then you are in sync. If it does not, then you need to fix the Master Schedule to bring it into sync. Stay tuned, I will cover some techniques to do this in future articles Notes, not detailed in this article: The items (SKU’s) that form the family in S&OP must be the same items that formulate the Master Schedule and means to group these items in the ERP system for data extract requires a field or flag identified as a S&OP Family Code. Additionally, if you are using Planning BOM's then the Planning BOM Item is one of the items in the family. Some SKU’s within a family may require greater capacity and will run to a different flow rate per week, but the calculation performed in this way will average out. This article is based on syncing S&OP in an MRP environment, but for other planning logic such as TPS or DDMRP, we would sync the S&OP to the Average Daily Usage (ADU). How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF is available here. If you follow any of the work/writing that we do on S&OP, you will quickly realize that we believe data to be an important part of the S&OP process. At the center of our philosophy on S&OP is the 5-Section Sheet. This sheet is a family view that connects demand with supply AND covers the buffers or levers that you must manage the business. These being inventory, backlog and flex capacity. The 5-Section sheet presents the story for the family. By being able to view all of this information at together, you have an actionable plan. You can read more about the 5-Section Sheet in Duncan’s article “Getting to the Story” or pick up his book: Sales and Operations Planning How to Run an S&OP Process Everyone Understands. Sometimes however data, or numbers, can make it difficult to see the story. This doesn’t mean the data is not important, however for some of us, it is hard to “feel” what is happening if the data is overwhelming. As a result, people push for graphical representations or dashboards for S&OP. But what is the right way to do this? Too often, graphs are over-simplified or over-complicated and the understanding of what you are presenting is lost. The graphical view still needs to answer the fundamental questions you should look for out of S&OP. These are: What happened in the past? Did we do what we said we wanted to do? What has changed in our plan going forward? What are the risks in the plan? Are we tracking to our objectives (budget, backlog targets)? Do we have a viable plan (i.e.. are demand and supply balanced)? Is our process in control? To understand this, let’s start with the 5-Section Sheet below: I’m not going to go into the details the data presented here (check out the links above if you are interested in digging into this), but by understanding the data in this presentation you can answer these six questions. I’ve worked with many executives over the years, and once they know how to read this, they are able to quickly get a handle on what is happening in the business. Now consider one section of the 5-Section Sheet in a graphical view to see how it helps answer these questions. The section we will consider is the Shipment Plan. This is a good place to start because shipments usually represent the section of the plan that directly links to revenue. Often this is the focus of the S&OP process, so not a bad place to start. The graph is shown below, with the data pulled directly from the 5-Section Sheet. First, look at general format for the graph. It contains both historical and planned or “forecasted” information. The S&OP month we are in is April. The months from September to March (shaded in grey) are the last six months of history. Months April through March going forward are forecasted. History allows me to validate what has happened. The forecast is in units. This is important because it allows me to balance the data to supply and inventory. I’m not showing it here, but I use the same format for the other sections of the 5-Section Sheet (bookings, supply, backlog, and inventory). Secondly look at some of the data elements. To do this I’ve stripped out a portion of the data to make it easier to see. The green solid line represents the actual historical shipments (grey area) and the current planned shipments for the April S&OP plan. Once again, this answers how did we do, and what do we plan to do going forward. The red dashed lines represent a fixed tolerance level (in this case plus or minus 15%) from the previous plan (S&OP plan for March). By showing this data on the graph I can see: Am I in control? Out of the past six months, only once (September) have I been able to call shipments within a +/- 15% tolerance. Four out of the six month’s we have under forecasted our shipments. Working on removing a bias and improving the forecast accuracy should be an objective for this family. How much volatility have I put into the plan? In last month’s S&OP meeting we had a spike in May, which has now shifted out to June. We would need to look at the supply and inventory graphs to get a full picture of the impact of this; however there is a question as to what is driving this volatility two months out. How confident am I in the plan going forward, based on our plan accuracy in the past? What level of risk do I assign to the plan based on this information? The pink bars represent the aged backlog by promise date. Seeing the aged backlog against the shipping plan allows me to assess the risk in meeting the shipping plan or potentially impacting my lead-time market strategy. From the graph, I can see that there were some open orders that should’ve shipped in March that are past due. These plus the backlog for April equal the shipment plan for that month. By knowing the desired backlog profile and customer expected lead-time, I can gauge the risk on pushing out customer lead-times or being able to meet my shipment plan. A couple examples would be: If the customer expected lead-time for this product is 4 weeks, I am not calling for a high enough shipment plan. My first two months are filled with open orders (the pink bars match the green line). I’m at risk of not meeting expected lead times. If this family has some book and ship demand, our shipping plan is too low. There is no room in month one (once we factor in the past due orders) between the open orders and the shipping plan. This won’t allow for drop-in orders. Now let’s go back to the full graph and include the budget. The green shaded area represents the budget. This is the dollar-ized budget converted to units for the family. Is our plan tracking to the budget set for the year. This allows us to see if we are tracking close to our desired targets for the family. We can also see that we don’t have a budget established for the next fiscal year, which starts in October. To assess the viability of the plan you need all five sections of the 5-Section Sheet. By graphing the other sections of the sheet, you can create a complete picture for the family on one slide. By using the same format across all 5-Sections you can get to the complete story. The math in the 5-Section sheet ensures that you have a balanced plan. If the plan is unbalanced, the math will not work. Being able to view it graphically often helps the story come out clearer for all involved in your S&OP process. If you are going to simplify your message, make sure you can still answer the six fundamental questions, and you will be well on your way to having an effective S&OP process. If you have questions on how to do this don’t hesitate to reach out. Appendix The 5-Section Sheet is our standard method of assembling and presenting the S&OP family data. For an in depth understanding of the 5-Section Sheet please refer to the book Sales and Operations Planning; How to Run an S&OP Process Everyone Understands. This book covers the mechanics of the 5-Section Sheet in detail. Learn more about how you can use the 5-Section Sheet through the DBM S&OP Tool to implement a sustainable S&OP. How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF is available here Should my S&OP families be setup as market-based or constraint-based? This is a question that I get asked quite often, and the answer always is: S&OP families should be constraint based but with the ability to segment demand by demand streams. If this goes against how you’ve always considered your S&OP families, I urge you to read on. Let’s start with a little S&OP background. S&OP is a process that provides management the ability to strategically direct its business to achieve competitive advantage on a continuous basis. The S&OP process is performed monthly at the family level and brings together all functional & strategic plans. The S&OP process reconciles supply, demand, and new product plans. S&OP is at the heart of the planning process. The monthly S&OP process is at the inflection point between strategy and execution which means you are establishing and monitoring short term objectives while setting and tracking your longer-term objectives. At the same time, you are establishing a plan that crosses functional silos in an organization (sales, operations, finance, and engineering) that don’t always speak a common language. Getting the right view of your S&OP families is the most important structural starting point for S&OP. To get a complete view of the business you are balancing the different viewpoints or perspectives of the stakeholders. The sales or customer viewpoint may be by product use or type, while manufacturing may view the products by production line or facility. Accounting may look at products on a cost basis or by margin. Finding a common language isn’t always easy. The right S&OP families, at the right level of granularity, support efficiency of reporting, and should drive accountability in your organization for actions and results. You only have one to two hours each month to cover the entire business with executives – so you need to make it count. If it is too detailed, you won’t get them involved. Not detailed enough and you won’t uncover issues. Remember, S&OP sets the operating parameters within which you execute; it is not the execution process itself. I stated that you should setup your family by Constraints, but let’s take a second to understand the difference between a Market and Constraint view. The table below gives some examples of how you might take an external view (Market), or internal view (Constraint). There are other examples that could be used but these will suffice to help you understand the difference. The “Market View” is important because demand is influenced by how you go to market. Some of your demand may be driven by events (projects) while the rest comes from smaller more predictable orders. You may run promotions via a specific channel that will drive demand events. You may have a different channel strategy in different geographies, that requires tracking of channel inventory. Your strategy may involve different lead times for standard versus make to order products. All these required segmentation by market. One of the first places to start is by segmenting abnormal (project) demand from normal (flow) demand. If you are interested in this, you can read more here. Ultimately you need to be able to segment your demand to address the following: Improve Demand Planning – using the correct demand planning technique by demand stream (opportunity management for projects, versus statistical forecasting for flow) Drive specific go-to-market strategies and track results. Accountability – who is responsible for different demand streams (geographies, customers). All of this work at the demand level only applies to part of the S&OP picture. We can do all kinds of great work to develop a really accurate demand plan but if we are unable to align our supply strategy and capability we will not be able to effectively meet demand. To do this we must look at our business by constraint. If You Can’t Build it You Can’t Sell It! If you are going to sell something you have to be able produce it or procure it (in the case of buyouts) when the customer wants it. This may be stating the obvious, but your ability to do this is determined by constraints. A constraint may be defined by a production line, assembly cell or plant. The constraint also may be material based, machine throughput, or labour. In the case of buyouts, it may mean considering the capability of your specific supplier. Changing your supply level, or capability, typically means changing your constraints. Determining whether this is necessary requires aggregating the demand plan and viewing it in aggregate by the constraint. There are several options to change your supply capability. Typically, options that can be executed with a short lead-time are only sustainable over a short term, while options that are more sustainable require a longer lead-time to address. Short term demand increases can often be covered by overtime, buffer capacity, or material buffers. In most cases you will only be able to do so for a limited amount of time as this causes stress on your people, machines, or supply chain. If there is more lead-time given on demand shifts, they can be met through hiring or finding secondary sources. These actions may require at least 3 to 6 months to fully execute, once you factor in training, or supplier certification. Capital investment, such as adding a production line usually requires more than six months of lead-time. Communicating the need for these decisions should be one of the objectives of S&OP. Viewing your family plans by constraints will give clarity to some of these decisions. When you are unable to change your constraints by increasing capability, your S&OP process should highlight the trade-offs that might be required to meet demand. There are three levers available to you to address a demand and supply imbalance: Backlog, Inventory and Flex Capacity. Because each of these levers has a cost, knowing when to deploy one of these options is the strategic advantage of a good S&OP process. Backlog Lever: There are two options with backlog. Extending your lead-time on new orders and increasing your future backlog or allocating inventory/production and allowing some backlog to go past due. The obvious cost to this may be service levels, and the impact of this will depend on your business or competitive position in the marketplace. Inventory Lever: Allowing finished goods inventory to flex up and down can help buffer against short term imbalances. In most seasonal business, building an inventory buffer ahead of the season helps to balance the capacity requirements. You may also reduce your finished goods inventory below planned levels. This may also include flexing down channel inventory. Costs of using inventory as a buffer include carry cost, capital cost, and potentially service levels. Upside Flex Capacity: Running planned production at less than full capacity allows for short-term increases in production. This is possible only if your material plans are based on your upside flexibility, or if the flexing of production is planned outside of your material lead-time. The cost of this lever is holding unused capacity, and carrying buffer inventory. Once again S&OP at the constraint level allows you to see when one or more of these levers must be pulled. I’ve focused primarily on demand imbalances where demand is greater than supply capability. For many of the companies that we are working with, this is the situation that they are in right now. However, the view by constraint is also valuable when demand is less than your capability. Seeing your S&OP demand plans against an aged backlog targets, inventory targets, and a known capability line will also show what levers should be pulled in order to free up resources. Making it Work I’ve covered a lot of ground in this article but wanted to give you some idea on how to work between demand stream data (Market View) and your constraint-based family. The following diagram covers how this view is used in the S&OP process. Demand is captured and planned at the demand stream level (blue boxes). Track bookings, shipments and backlog by demand stream. Use the demand stream view in the Pre-S&OP Demand Meeting to develop the unconstrained demand plan. Consolidate demand by S&OP family (constraint based) for your Pre-S&OP Operations meeting. Use the Pre-S&OP Operations meeting to constrain demand (if required). Look at the overall shipping plan, aged backlog, capability, inventory targets and planned inventory to develop the supply plan. Balancing decisions should be identified and if possible, finalized in the Pre S&OP Meeting. This may require looking at both demand streams as well as consolidated demand. Report at the Executive S&OP Meeting by constraint-based families using the 5-Section Sheet. Following this approach will allow you to move from an unconstrained shipping plan to a constrained and balanced S&OP plan. It will also highlight what levers you need to pull in order to achieve this objective. How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF of this article is available here. S&OP is all about “Units”… or is it? Linking the S&OP plan to the financial plan opens a whole new set of management opportunities and at the end of the day the Revenue Plan is important to management, isn’t it? The S&OP family plan must be stated in units rather than Revenue. Only three sections of the 5-Section Sheet can be stated in units and revenue: Bookings, Shipments and Backlog. It does not make sense to look at the Supply (Production) plan or Inventory plan in terms of Revenue dollars1,2. While all five sections of the 5-Section Sheet must be in common units it is possible, in fact desirable, to develop a view of the first three sections in revenue dollars as well. This is the first step in developing a complete linkage between S&OP and the financial plan. In this article I will focus on how to convert the Shipment plan into revenue dollars. Similar logic can also be applied to the Bookings plan and the Backlog plan. These conversions should be done at the demand stream level. I have used two demand streams in this article: Flow Demand and Abnormal Demand1,3. The Flow Demand Plan is based on historical data and the Abnormal Demand Plan is based on specific opportunities typically taken from an opportunity management or CRM tool. Flow Demand Let’s look at Flow Demand first. The following chart shows the future plan for Flow Demand: In this chart we see the total shipment plan is 1,000 units per month for the next 12 months, with M1 being the first month of the plan. This total is made of the aged backlog, (open customer orders bucketed by promise date) and the forecast shipments. Notice in the first period, M1, there is no forecast as the total shipment plan is made up by customer orders in the backlog. The simplest approach to converting this “Units” plan to “Revenue” is to multiply it by an Average Unit Price or AUP. If we used at AUP of $200, then the “Revenue” plan derived from this “Units” plan would look like this: The 1,000 units per month translates to $200,000 worth of shipments per month using the AUP across the board. While this approach is simple, we actually have better information about the backlog. The backlog is made up of actual customer orders which all have specific pricing and values. Using the actual “Revenue” plan for the backlog improves the quality of the translation. In the following example, the forecast portion of the plan has been converted using the AUP of $200 and the aged backlog is stated at actual value: Notice that the AUP in M1of $235 is higher than cumulative AUP of $200. This may be due to mix shifts within the family or some aberrations in pricing. We see a similar phenomenon in M2 where the AUP of $199 is less than $200. In addition to the variables in M1, M2 is also impacted by the blend of the backlog at actual pricing and forecast at the global AUP of $200. The other factor that could affect this conversion is a planned price increase in the future. If we need to plan for a price increase then we would need to state the forecast AUP by month. In the following example, the AUP has been increased to $220 in month 6 (M6) reflecting planned 10% price increase. We now have a good conversion of the Flow demand stream from “Units” to Revenue”. Using actual backlog pricing and forecasting future changes to the AUP significantly improves the quality of the conversion from “Units” to “Revenue”. Abnormal Demand The shipment plan for abnormal demand is developed by summarizing individual opportunities and the abnormal demand backlog. The following chart shows a simplified example of future opportunities for a family. For Opportunity 2, the quantity of the opportunity if it is won is 6000 units. These 6000 units would have a total price of $900,000 based on how it is bid or intended to be bid. The forecast probability of winning the opportunity is 80% and the expected ship dates are half in Month 6 and half in month 7. As a result, we see a shipment forecast for this opportunity of 2400 units in month 6, which is half of 80% of the 6000 units. The other half going into month 7. Totaling this data by month and adding the backlog we can generate the shipment plan for Abnormal demand in units. To convert this demand stream into revenue we must take the backlog at actual price and the forecast portion would be based on the value of each individual opportunity multiplied by its probability. The next chart shows what this shipment plan would look like using this approach. I have only gone out 8 months with this chart as there is no demand past month 8. Combine Flow and Abnormal Demand Now all that remains is to combine the Flow and Abnormal Demand stream results. In the following diagram, the Flow Demand and Abnormal Demand stream forecasts have been combined with the total backlog resulting in the total shipment plan in Units for this family. The total Shipments for the 12-month period are 22,250 units. Applying a standard AUP across the board would give us a total value of $4,450,000. On the other hand, if we look at the financial plan using the revenue numbers calculated at the demand stream level, we get the following results: In this case the total revenue plan comes out to $4,258,000. This is a difference of $192,000, or 4.3% which for most financial executives is too much. Let’s summarize what we just did: 1. We converted the shipment forecast from Units to Revenue at the demand stream level. For Flow demand we used the AUP and the future expected AUP to do this. For Abnormal demand we used the forecast opportunity value for each unique opportunity and applied probability percentage. 2. We added and converted the backlog, (open customer orders) based on the actual price for each of the orders in the backlog for each demand stream. 3. We summarized these financial numbers to develop the financial view of the shipment plan going forward. The S&OP shipment plan should represent the Units that you expect to ship. If it does, you can use this logic to develop the equivalent revenue plan. You may take a more conservative revenue plan to “The Street” but this is what you really expect based on your S&OP plan. Appendix The 5-Section Sheet is our standard method of assembling and presenting the S&OP family data. For an in depth understanding of the 5-Section Sheet please refer to the book Sales and Operations Planning; How to Run an S&OP Process Everyone Understands. This book covers the mechanics of the 5-Section Sheet in detail. The book also covers the concept of demand streams and the differences between flow and abnormal demand. Learn more about how you can use the 5-Section Sheet through the DBM S&OP Tool to implement a sustainable S&OP. Our article, Are 2 Demand Streams Better Than 1?, provides an overview of the difference between Flow and Abnormal demand. #SOP #DuncanMcLeod #Financiallinkage #SOPProcess #SOPFinancialReconciliation How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF of this article is available here. S&OP is a monthly management process. It provides a link between strategy and execution that engages senior management in a tangible way to make decisions in order to balance company goals and direction with sales and operational capability. Getting to a level of maturity where this can happen is a tall order. Once you are there, S&OP will deliver bottom line results, but it takes time. Before you get results however you need to be able to measure your progress. Measuring Success on the Journey There are three levels of measurements you should use to track your progress towards S&OP maturity: Process, Effectiveness, and Results. While it is important to know the results you are looking for, if this is your only measurement of progress it can be frustrating. Let’s look briefly at these measurements in reverse order: Results impact the bottom line. This is specifically referring to the ROI that management is looking for when starting an S&OP implementation or improvement project. These could be operational results like reduced inventory, improved on-time delivery, or reduced stock outs. Strategic results may be to increase market share or improve new product introduction process. Financial results might be to improve margins or reduce expedited freight charges. These are the level 3 measurements.​ Before you get to results however, your S&OP process needs to be effective. Over time, the monthly S&OP process should yield more accurate plans. In our previous article: “If You Can’t Measure it, You Can’t Manage it”, it covers how you should measure the accuracy of your Booking, Shipping, and Supply plans over time. Measuring whether each of these plans is in or out of tolerance will provide an indication of how you are improving over time, identify where you need to focus improvements, and ultimately help you manage risks and set operational parameters. These are level 2 measurements. Even before a process can become effective though, it needs to become ingrained in your organization. Vince Lombardi has been quoted saying “Practice does not make perfect. Only perfect practice make perfect.” It speaks to the need to do the right things over and over again to drive the right improvements that ultimately lead to success. When it comes to S&OP you have built-in repetition in the monthly cycles, but you want to make sure you are doing the right things every month. To do this you need to measure the Process. This is the first level of measurement. Process Measurements We use two primary process measurements: The S&OP Assessment and the Meeting Scorecard. The S&OP Assessment is similar to a school report card. It is a broad-based evaluation of alignment of people and process. The challenge with the Assessment is that change can happen slowly. The Assessment measures the results of these changes, not the small steps that you took to make the change happen. Similar to a report card, it gives you your final mark which is the result of your success (or failure) on assignments, tests, and quizzes. Enter the Meeting Scorecard If The Assessment is your report card, The Meeting Scorecard is the grade on your monthly assignment. It is a good measuring stick to determine if the basic S&OP process is taking hold within your organization. At the core of the monthly S&OP cycle is the monthly meeting structure. In the standard process there are four meetings that happen: Pre S&OP Demand Meeting Pre S&OP Supply Meeting Pre S&OP Meeting Executive S&OP Meeting Every company will have some variation of this meeting structure. Some companies may require multiple demand meetings aligned with geographic sales territories. Others will have multiple supply meetings for different world areas. Requirements will be determined based on your product families, supply points, demand streams and accountabilities. Implementing a Meeting Scorecard Start by documenting the process. Documentation should include: Participants: This should not only who should be part of the meeting, but most importantly who owns the meeting. Ownership should be part of a larger RACI (Responsible, Accountable, Consulted, and Informed) structure for your S&OP process. Focus on the ‘R’ and the ‘A’ to start. Inputs and Outputs: What are the expected outcomes of the meeting, and what data/inputs should be prepared in advance. For example the output of the demand meeting should be the unconstrained bookings and shipping forecast as well as the documentation of future risks or opportunities that could impact the demand plan. Schedule: When in the month should the meeting happen. Have a schedule laid out for at least six months in the future so as to optimize attendance. Participation This is a measure of whether the required people are engaged. Getting buy-in of the people is really the first step to making the process work. Consistent participation in the process is a good sign that the cultural change is happening and will ingrain S&OP into your regular management cycle. Two things to consider: level of participation and scope of participation. Is the person accountable for this step of the process (e.g. demand plan) at the meeting? Are the key participants there? Set a simple participation percentage level that scores red, yellow, or green. A good starting point is below. Data Data is critical to establishing credibility for the process. It allows you to measure your performance and give you tangible targets for the future. Some important points on data: Data should be supplied by family. Data should provide a holistic view of the family. It should include bookings, shipments, backlog, supply (production) and inventory. Data should support analysis of past performance. Data should provide a view of the future plans including changes from the future plans. Most importantly data should be provided ahead of the meeting. This allows the participants to come prepared to the meeting. Expectations should be that participants have reviewed the data ahead of time. This will make the meetings more effective and significantly reduce the amount of time required in the meeting. A good starting point for measuring this is as follows: Schedule Measuring the schedule refers the regularity of the meeting cycle. For S&OP to become embedded in your management cycle the meetings should run consistently every month. The meeting scorecard should evaluate whether or not the meetings happen, and whether they happen as scheduled. If the meeting is constantly moving around it is a sign that it is not a priority for the management team. A simple red, yellow, green measurement is as follows: It’s worth noting that you can allow the meeting schedule to change. As a rule of thumb if it is moved within the month you should consider it as a reactionary move (yellow). The green measurement should be reserved for meetings that happen as per the schedule or with advance notice. If you are going to change the schedule, I typically like to see this happen at least one month prior Score the process monthly. Provide the scorecard as part of your KPI slides in your monthly S&OP deck. A simple chart like the one below shows each of the meetings and how they scored for the last month. The meetings highlighted on this scorecard should match to the meetings documented as part of your standard process. Our tool uses a single colour to represent the “aggregate” score for that meeting in the previous cycle. The default scoring is to the “lowest” number. Remember we are looking to identify areas for improvement, so being overly optimistic can hide where there may be issues. The chart below shows an example of the monthly measurement: Some notes on the example chart: The Middle East/Africa (MEA) demand meeting scored red because the data was unavailable for the meeting, despite the fact that most of the participants were at the meeting and it happened as scheduled. North America was yellow because the meeting owner of the meeting was not present. The Pre-S&OP meeting didn’t happen this month, and the data was summarized by the S&OP coordinator for the Executive S&OP meeting. Track your progress over time. Including a simple chart like the one below in your monthly executive deck is an easy way to track progress over time. It helps identify what areas of the process are “hot spots” as well as where you should be celebrating success. Some issues may be an anomaly (happening only once), but consistent issues over time identify areas that need to be addressed. Most importantly it provides and objective way to gauge adoption of the process within the organization. In the example chart it can be seen that the MEA demand meeting issue in June is not part of a regular trend. It may not warrant further focus. The North American demand meeting issues have been happening for four months, and represent a trend. Also of concern is the Executive S&OP meeting, as it hasn’t consistently hit green. Finally, use the scorecard to focus on the root cause on ‘red’ or ‘yellow” measurements. Because you are measuring against your documented process and RACI, you can determine where accountabilities or process might not be aligned. In the company example above a dig into the root cause of the yellow and red cycles yielded the following: There was a lack of clarity for the North American Sales Manager on his role in the S&OP process. As a result it wasn’t a priority in his monthly schedule. Addressing this fell to the VP of sales. Digging into the root cause for the Executive S&OP meeting identified that data was consistently not available ahead of the meeting. The root cause was the timing of the meeting in that it fell the day after the Pre S&OP meeting. There was not enough time to reflect the output of the Pre S&OP meeting in the data for the Executive meeting. By changing the timing of the Pre S&OP meeting they were able to address this issue. The S&OP Meeting Scorecard is just one example of a process measurement. I’ve been able to use this effectively with multiple companies to help them focus improvements that led to a more effective S&OP process. It’s not hard, but making sure you are doing the right things right is the only way to ensure success. #Measurement #SOPProcess How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

A printable PDF of this article is available here. It’s not sold until the consumer buys it! Shipments into the outbound supply chain that build inventory do not represent real demand unless they are sold through to a customer. If consumers don’t consume, there will be no need to replenish the supply chain there may even be returns from the channel resulting in negative sales. With outbound supply chains where you are insulated from consumer demand by distributors and retailers, many of our clients find it difficult to sense actual consumer demand. This is typical of the “Big Box Store” supply chains but exists whenever there is channel inventory between you and the end consumer. I first heard the term “Consumption Model” from Mark Ortiz at Lamplight. While the concept is not new I really liked the name Lamplight had given it. Other labels such as “Sell Through” or “Sales In/Sales Out” really don’t create the image that the prime demand driver is the end consumer’s consumption. Thanks Mark. Modeling demand based on forecasted and actual consumer demand, is becoming a standard demand planning approach for suppliers selling through an outbound supply chain. Let’s look at the following illustration: Goods are shipped from the supplier’s factory to the two Big Box warehouses or distribution centers. These goods may be stocked at the distribution centers or simply cross-docked and shipped to the appropriate stores. Typically goods will not be transferred between distribution centers or stores (this is not the case in the automotive dealership supply chain where dealers often access and sell other dealers’ inventory.) To plan the demand on the factory, we need to look at the forecasted consumer demand, the inventory in the stores and the inventory in the distribution centers as all of these can impact the demand on the factory. The “Consumption Model” is designed to address this outbound supply chain planning. In this article I will briefly review the following key elements of this model: Planning/forecasting consumer demand Planning/forecasting channel inventory Integrating this data into a factory demand plan Planning and Forecasting Consumer Demand The availability of Point Of Sale or POS data is a requirement for using the Consumption Model. The retailers provide their suppliers with consumption data on a regular basis expecting them to use it to plan their production. End consumer demand is pure demand. It is not distorted by the non-consumption (inventory) based supply chain activities that drive the “Bull Whip”. Typical forecasting algorithms tend to be more applicable to end-consumer demand than they are to demand plans deeper in the supply chain. As a result, historical POS demand is often a good starting point for forecasting future consumer consumption. In addition, there are a number of extrinsic factors that may be used modify forecasts based on historical demand some of which include: In-store product placement. The amount and position of product in the store has an impact on consumption, hence the desire for premium shelf space. If the placement has changed significantly year over year, then the historical data should be adjusted accordingly. In-store promotions. Pricing and special product placements will drive demand. If there is a change in the promotion program year over year the demand plan should be adjusted accordingly. Catalog/Flier positioning. Back in the ‘70’s my uncle explained to me the difference between front cover, back cover, inside front cover, inside back cover and buried in the book. The impact of the catalog on consumer sales declined in that order. His key objective was to get placed on one of the high visibility pages. If catalog placement changes it will impact the sales plan. Environmental conditions – rain snow etc. Consumers tend to buy snow blowers when there is a lot of snow. The channel may stock up in anticipation of the upcoming season, but if the seasonal conditions are abnormal, then consumer demand will be abnormal. Unfortunately you often don’t find out until it is too late to adjust the supply plan. Leading indicators such as housing starts or building permits. Housing starts are an example of leading indicator where future demand for building components will affected by increases or decrease in housing starts. There are many leading indicators and the onus is on you as the supplier to determine which ones impact the consumption of your product. A basic premise of the Consumption Model is that the forecast for consumer consumption will be more accurate than the forecast for the demand that the retailer places on their supplier. The first step in applying the Consumption Model is to validate that this premise is true for you. To do this you want to monitor the accuracy of your POS forecast to actual POS demand. Even more importantly, the drivers that increase sales are at the retail level. This highlights the need for good communication with the retailer. The selling job for the supplier is really based on working with the retailer to improve presentation of the product to the consumer. The following chart is a simple example of a POS forecast for a product family with a high degree of seasonality. Sales are driven by summer weather. The retailers give prime shelf space during the season and pull the product off the shelves in the winter. Planning and Forecasting Channel Inventory The out-bound supply chain has inventory in multiple places: stores, distribution centers, and in-transit between the distribution centers and the stores. Changes in these inventory levels will impact demand on the supplier. For example, a seasonal product may not be in the stores in the off-season. As the season approaches, the distribution centers would be stocked and then stock would be moved to the stores to set the shelves for the season. The demand on the supplier will happen in advance of consumer demand and the quantity required to initially fill the shelves will usually be much larger than the consumption in the first period. In order to calculate the demand on the supplier we must look at the retailers’ inventory plans as well as the POS forecast. The method of forecasting the retailers’ inventory plans is beyond the scope of this article and they will be different for different channels. Suffice to say you need to work out a way to forecast future channel inventories as part of the Consumption Model. The following chart (with fictitious example data) represents the inventory forecast for the channel and the same product family “X”. In this case there were three variables considered in developing the inventory plan: The stock required to fill the shelves in the stores. In this example, stocking the shelves in all the stores takes 20,000 units. The stores will start to bleed off this inventory as the end of season approaches. The stock required to prime the Distribution Centers. The distribution centers plan to carry some safety stock or back up inventory going into the season. They will start to bleed this off as they pass the high point of the season. The in-transit stock required between the Distribution Centers and the stores. This is a function of the replenishment cycle for the stores. In this example I have just plugged a number. The number we are really interested in is the Inventory Build/Shrink. Increases to channel inventory will increase demand on the supplier and decreases (shrinkage) will reduce demand.​ Developing the Suppliers demand Plan based on the POS and Inventory Forecast The demand on the supplier is a combination of the POS demand and the Inventory Build/Shrink. The following chart shows this relationship for the POS and Inventory plans outlined earlier. Graphing the POS forecast and the demand plan for the supplier highlights the difference between the two. As we would expect, the demand on the supplier leads the POS demand. Consumers can’t consume until the product is on the shelf. We can also see a large demand spike in the supplier demand plan as the shelves are stocked and a sharp drop off as the channel burns off inventory at the end of the season. Developing the supplier demand plan without using the consumption model has a number of issues or risks including: The demand on the supplier includes actual consumption as well as changes in the inventory plan. While the actual consumption (POS) may be fairly predictable year over year, the inventory plans typically are not. Looking at supplier demand data only, it is impossible to separate the impact of consumer consumption and inventory changes. Inventory changes especially when a product is not sold throughout the year can create spikes in supplier demand. These are difficult to see without using the consumption model. The POS data supplied by the channel typically includes sales and inventory data. With this data it is possible to monitor performance to plan and adjust based on which of the two variables has changed. Talking to suppliers, I often hear how unpredictable and random their actual demand is in this supply chain model. Looking at their historical demand, these concerns are often valid. However, looking at their customers POS data, it is usually very predictable. In fact, it is often more difficult to forecast the channel inventory changes than it is the consumer consumption. If you are selling through an outbound supply chain and have access to POS data then you should look into using the Consumption Model for planning this type of demand. As you gain experience you will enhance the model to deal with nuances such as: promotions, changes to the planograms, and adding or deleting stores and distribution centers from the channel. DBM’s Three-step Plan for Consumption Model Implementation Here are the three steps to getting started with the Consumption Model: Step 1: Validate that consumer demand can be forecast more accurately than demand on the supplier. Start by using basic forecasting techniques and POS data to forecast future demand. Measure the forecast accuracy and compare it to the accuracy of the forecast for demand on the supplier. It may take a few iterations to determine the best forecasting technique here but there is lots of literature out there to help you with this step. Ultimately you want to share this plan with the retailer to make sure you are both on the same page. Step 2: Determine a mechanism to forecast changes to the channel inventory. This takes some work and some knowledge about how the retailer manages their supply chain. The POS forecast will be a primary input in this part of the model so it is important that the retailer and the supplier are using the same POS forecast. You will only be able to manage this plan in the areas where data is provided. For example, if the retailer does not provide Distribution Center inventory data, then you will have to assume that this inventory is steady state and does not impact demand. This assumption may not be valid but it is the best you can do without actual inventory data. Step 3: Develop a model to calculate the supplier demand based on the POS forecast and the channel inventory forecast. You will want to check the accuracy of this forecast to the forecast based on historical shipments from the supplier. Assuming the retailer is providing you with good and timely data, I would be very surprised if this approach was not more accurate than simply basing future supplier demand on historical supplier shipments. Try it out and contact us if you have any questions! A printable PDF of this article is available here. #Forecasting #DemandPlanning How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.

Things change. We all know this. Our kids get older, we get older. We start our morning with coffee, then we are told we need to cut back on coffee. So we start our morning without coffee. Change is not always our choice, sometimes it is imposed on us. This observation leads me to the question: How do we plan for change without over-reacting? When it comes to S&OP, we strive for consistency in how we deal with change. But how do we put this into practice? For example, each month you run your S&OP process. You have a sales pre-S&OP meeting. In this meeting, sales and marketing look at both your customer forecasts and your marketing plans, and come up with a demand forecast. This forecast is reviewed by operations, who put together a production plan to meet the demand. Then, in the executive S&OP, you finalize the plan, and agree on the sales and production levels going forward. The plan may go out for 12 months but, at the very least, you are focusing over the next three months. Finally, you align your production resources and suppliers with this plan by updating the master schedule and material planning. Another job well-done. You think about having a coffee after all. Then the month begins. The day after the S&OP meeting (or maybe the week after), the emails and phone calls begin. “Sales look a little soft,” someone says. “Our order inflow rate doesn’t match the forecast,” someone else notices. “I think we should reduce daily production levels due to the lower sales,” you hear in a voice mail message. “Call the suppliers to get them to reduce next week’s shipments.” “We need to reduce a shift next week," you read in an e-mail. At the end of this barrage you are calling suppliers to defer some shipments so that you are not left with excess inventory. You’ve made the right decisions based on what’s truly happening. You know you did. Or did you? The month continues. Orders start to come in much stronger. The good news is that it looks like you will make the sales forecast for the month. The bad news is that you’ve already reduced your production levels and supply pipeline, based on the lower levels. To make the sales you will need to run overtime. This means you have to call those same suppliers again, and this time get them to expedite the shipments that you just deferred. Everyone works hard and you pull it off and make your numbers. Maybe a coffee and a doughnut. In your next S&OP meeting, you review your last month’s performance. Both sales and production come in very close to your original call for month. It looks like the process is working well. Everyone wipes the sweat from their brow—another month on target! However, think about what it took for you to make the numbers! You had to run overtime after removing shifts from the schedule. This hurts your production efficiency. You “jerked” your suppliers around by sending mixed signals to them in the month. It took a lot of your resources to pull off a plan that you had already laid out. You ask yourself: How do we stop doing this? The answer comes from farming. You plow. Old McDedman had a farm For those of you who aren’t aware, a plow is a tool used to turn soil upside down. You pull it with a tractor, and it has blades that cut into the ground and flip the soil to one side, burying the growth that is on top. Because it can only turn the soil one way (in North America anyway), in order to plow a field you need to start in the middle of the field and work to the outside edges. A point of pride for a farmer is to see how straight they can plow and plant their fields. When I was a kid growing up, it was a favorite past time of my father’s to drive us through the countryside to compare crops and, yes, to look at how straight the neighboring farmers plowed their fields. You may be wondering how all this relates to S&OP. If you’ve never had the pleasure of trying to plow a field (knowing that all of your neighbors will be assessing your handiwork), that is a fair question. The answer is that meeting the challenges of plowing a field are very similar to meeting the challenges of S&OP changes. It’s a matter of perspective, and of keeping your eye on your target at all times. You need a target In order to plow straight down the field you need to have a visual target at the end of the field. A tree, or a post, something that you can see. When my dad first taught me, it was the big maple tree at the far end of the field. Once you pick your starting point at one end of the field, you set the tractor towards the tree and keep driving straight toward it. You ignore the slight dips in the field, the distractions of other trees—you keep to your course. It’s important that the tree is visible the whole length of the field. If the field had a hill in the middle, where you would be unable to see the target, you may need to set a medium distance target. Some farmers put a stake in the ground in the middle of the field until they can see the tree. S&OP is about setting targets that you can keep your eye on. In the absence of S&OP, we only have annual targets or quarterly targets to go by. When these are the only targets we have, by the time we get there and assess our performance, it is already too late to make adjustments. The monthly target is the best one to focus on because at the end of each month you assess your performance and make adjustments for the next month. S&OP is an iterative process each month. Set the target and stick to it. Just as the tree needs to be big enough to see, the same set of targets in S&OP need to be visible to everyone. You need agreement on the targets in order to align the plans to meet them. Beware the front of the tractor A field is never flat. You drive your tractor slowly across an uneven surface. At a slow speed the tendency is to start looking over the front of the tractor, and reacting to the hill or knoll that is right in front of you. Then you begin to overreact and steer left, and right, to account for the changes in terrain. At the end of the field, you are staring up at the tree you set as your marker, but when you turn around and look at your work, the furrows snake across the field instead of line up in a nice straight line. It takes discipline to keep your focus on the tree, and ignore the other obstacles vying for your attention. This potential loss of focus is the scenario I presented at the beginning of the article. With S&OP we make it to the monthly numbers, but the process to get there is not pretty. Unlike farming though, the result of us reacting to the changes right in front of us may not be immediately obvious. They often take the shape of: High expedited freight charges Purchase order revisions Labor inefficiency Lower fixed cost absorption Higher inventory Keeping the lines straight So how do we avoid overreacting to the changes? Here is a list of four points to help you stay the course with S&OP: The reality is that no plan is perfect. Changes will happen. How we react to those changes is what separates the straight lines from the crooked ones. And now, I’m going for my green tea. What, did no one ever tell you about substitutions? Green tea for coffee is perfectly acceptable. Just ask me. Remember: straight lines. People are watching, so give them something good to look at. This article was first published in 2008 in the DBMExecutive. You can download that version here. It was also published in the March/April 2011 Edition of The APICS Magazine. #SOPProcess #DougDedman #SOPTargets How effective is your S&OP? Evaluate your process and get recommendations. At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools needed to run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.