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This journal article follows up on my April 2016 article If You Can’t Measure It, You Can’t Manage it! In that article I reviewed the mechanics of setting tolerances and measuring performance to plan for the Booking Plan, Shipment Plan and Supply Plan. Using these measurements as a starting point, I will go through the importance of accuracy rather than precision and then take a quick look at the impact of variations that are within tolerance I have written this article as a story drawing on two of the principle characters from my book “Sales and Operations Planning – How to Run an S&OP Process that Everyone Understands”. Jim, the CEO of ToyAuto, is currently implementing S&OP. Doug the consultant is coaching him on his journey. This story takes place in Jim’s office. Jim’s son Billy makes a cameo appearance. Hope you enjoy it as much as I enjoyed spending time with these characters again. Duncan For a printable version of this document: click here Scene: Jim’s Office. Jim and Doug are sitting at a table and reviewing his monthly S&OP plan. Jim – Doug you said we need to get the plan roughly accurate rather than precisely wrong. I’m not sure I get the difference between accurate and precise. Doug – Your son Billy still plays hockey doesn’t he? Jim – Not just play, he eats, drinks and sleeps hockey. Doug – Well let’s use a hockey analogy then. The net is 4 feet high and 6 feet wide, measured on the inside of the pipes by the way. The posts are 2 and 3/8 inches in diameter. Jim – OK, if you say so. Doug – Let’s say Billy is practicing his shot. If he continuously rings the puck of the left post we would say he is precise, he always puts the shot in the same place, even though he doesn’t score. On the other hand if he puts the puck anywhere inside for the 4 x 6 foot area that is the net we would say he is accurate, he scores. Jim – That makes sense. The net is a way bigger than the post but you don’t score hitting the post over and over again. You gotta put it in the net. Doug – Right. As long as you hit the net you score. The size of the net represents the tolerance from center point. Of course the goalie adds a bit of a challenge but let’s keep it simple. Jim – OK so how does this apply to forecast accuracy? Doug – If we set an upper and lower tolerance for the forecast, and if the actual results are within this tolerance, then the forecast is accurate, we score. Remember we are talking about the family forecast in monthly buckets, not the weekly SKU forecast. This reduces a lot of the noise in the plan. Jim – Yeah, Tom Wallace and Bob Stahl nailed that one in their S&OP How-to-Handbook. It is amazing how much time we used to spend in their Suicide Quadrant. So how do we set the tolerances? Doug – My method is not very sophisticated but experience has shown it works. I take the comparison of the forecast one month prior to the actual results for the last 12 months. I then eliminate the highest point of error (1 of 12 for the 12 months in the year) and set the tolerance equal to the next biggest error. Jim – Huh? Doug – (opening up his laptop) Let’s look at an example. The following chart actually has 2 years of data, which is a luxury we don’t usually get. Notice that in the first year there is one point with an error of -24% and then in the second year there is a point with an error of 20%. If we drop these two points all of the rest of the data falls within plus or minus 17%. I like round numbers so let’s call this plus or minus 20%. Jim – OK, but it looks pretty crude. Doug – It is but there really isn’t a better way to do it. You are lucky if you have 12 data points when you start out, hardly statistically significant. Jim – OK I buy that, but you know some of components have three month’s lead-time. We need to know the error based on the forecast three months ago, not one month. Doug – Yes, if you have a long lead time, you need to calculate your tolerance for month 2 based on the forecast 2 months prior and for month 3 based on the forecast 3 months prior. You would then need to map this against the cumulative lead-time profile for the family and calculate your future flexibility per month. For now let’s keep it simple and deal with the one month error, once we get that working we can add some complexity. Jim – For sure. So what’s next? Doug – (opening another worksheet) Look at this family graph for bookings. The grey area is history and the white area to the right is the plan going forward. In the history section the actual results are compared to the upper and lower tolerances based on the plan set one month prior. In the future section the upper and lower control limits are based on the last plan. Jim – So we have been in tolerance so far although it looks like we were right on the limit in December. Going forward the changes to the plan are in tolerance except for September. Doug – Right and we have a lot of time to prepare for that. Jim – So if we are between the red lines we are accurate. Not necessarily precise or on the center line, but accurate. Doug – You got it. Jim – But plus or minus 20% on bookings seems like a lot. Doug – It is what it is. Maybe there are things that can be done to improve the accuracy but today you need to run your process based on demonstrated capability. That’s where the buffers come in. Jim – Do you mean the buffers we have talked about, backlog, inventory and upside capacity flexibility? Doug – Exactly. Let me walk you through a real life example. I will simplify some of the variables to make the point clearer. Company X has a build to order family. The market expected lead-time, and in this case their open backlog, is 4 weeks. This means any new order would be promised for week 5. Their process time through the plant is 2 weeks. The lead-time for components is 6 weeks resulting in a total cumulative lead-time of 8 weeks. They have a policy of allowing two Saturdays of overtime per month and keep an extra 2 days of component inventory to support this overtime should they need it. Jim – OK, let me write this down. Doug – Now let’s say the average flow rate per S&OP period (4 weeks) is 100 units. Ideally, for this family, they would book 100 units per month; build 100 units per month and ship 100 units per month. However, we have a plus or minus 20% tolerance on bookings. What would happen if they booked at the high side of the tolerance – 120 units? Jim – OK, I've got that as well. Now, let me see... Their month one production and shipping plan won’t change as they will be building the backlog that they have already committed to. In month 2, where the month 1 bookings are being promised to ship, they could increase production by 2 days. Let’s see. If there are 20 days in a month, two extra days would be 10%. They could get an additional 10 units out in month 2. They would still be 10 units short though. Doug – And where would those 10 units go? Jim – Right! They would be added to the backlog. The backlog would get an extra 10 units or 2 days. They would go from a four week lead-time to a four week and 2 day lead-time. That’s such a small bump nobody would even see it happen. Hmmm….there is no big issue going to the top of the tolerance if you have the buffers set up to deal with it. Doug – Right. Now what if the opposite happened and they booked on the low side of the limit. Jim – Let’s see. The plan is 100 but they book 20% under, that would be 80 units. They could take Friday’s off for a month, but that is an expensive alternative….or, or they could pull that backlog ahead. They have 4 weeks of backlog, they are producing about 25 per week (100/4), about 5 per day, so they would need to pull 4 days of backlog ahead to maintain the production plan. If the customers won’t take these units then they would go into finished goods inventory for about a week. Probably not a big deal, you wouldn’t notice the impact of the 20% under booking. Doug – There you go. The buffers are based on the tolerance and if you set them right and stay within tolerance things run pretty smooth. Of course we have simplified this example but if you work through the details the logic works. It is just math. Jim – Yeah I can see some issues with bias if the error goes the same a few months in a row , that probably increases the buffers, and we talked about the accuracy two, three and four months out for families with a longer cumulative lead-time. There are details to work out for each family but I get it. Hmmm…say what happens in that one month per year when we are out of tolerance? Doug – Yeah things don’t always run smooth. That is when you have to pull out the stops. It could mean asking for extra overtime, expediting components, even airfreight and potentially extending lead-times beyond where you would like them to be. The key is that this should be the exception, not the rule. Jim – Yeah for us that reaction is our norm not the exception. Let me recap the steps and make sure I didn’t miss anything: Doug – You’ve got the basics. Jim – It seems too simple Doug – It is just math. In reality it may be a bit more complicated than the example we used but the math doesn’t change. Jim – Well let’s get on with it! 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.

In this article, I explain an effective technique for shaping demand. This technique can be applied in environments where prices are bid for each job or project. We have found that most organizations have some of this type of demand for most of their S&OP families. I originally published this article in May 2012 under the title; The "Bid Model": A Demand Shaping Tool. Enjoy! I don’t believe demand planning is a passive part of the S&OP process. Back in the good old days, we called it forecasting and then built our plan based on the forecast. Over the years, we tried all kinds of different forecasting methods: intrinsic, extrinsic, multiple statistical models, expert opinion and ‘gut feel’. The developers of forecasting tools made millions of complex statistical models. Some of us in Operations even felt we knew better, so we took it upon ourselves to adjust the forecast. We all accepted that the forecast, by definition, was wrong and that’s life. Well, we live and learn. Today, it’s called the Demand Plan, not a forecast, and the difference is not subtle. A demand plan is executed and a forecast is watched. In today’s S&OP process, Sales needs to do more than develop the Demand Plan - they need to execute it. They need to be able to increase or decrease it. Essentially, they need to ‘shape’ it. Lead-time and pricing are two common demand shaping tools. Lead-time variation usually results from poor demand management. If demand comes in over plan, the backlog increases, increasing the lead-time to customers. Customers who don`t like the extended lead-times take their business elsewhere, thus reducing (or shaping) the demand. Extending lead-times reduces demand but at what cost? In most cases, pricing is a better tool and hence, we get the “Bid Model”. The “Bid Model” is an effective demand shaping technique that works if you have pricing flexibility. This is the case on “one off” jobs or projects that must be costed and bid. Also, large orders often get special discounts. The same may be true from large customers. In all of these cases, pricing is a variable and it can be used for demand shaping with the objective of maximizing margin while meeting the Demand Plan. The “Bid Model” uses the relationship between price and the probability of winning the order to calculate a series of probable margins. Everything being equal, the optimal bid would generate the highest probable margin, but more on that later. Let’s look at how to build the model step-by-step. The "Bid Model": Step by Step 1. Clearly define the scope and cost for the bid. Typically, this is done by an estimating group and at this stage the cost may or may not be shared with Sales. In this example, the cost has been estimated at $60. 2. Develop the price/win probability relationship. This should be done by Sales. Give them a list of price points and have them fill in the win probabilities. The following table shows the values used in the example: The values for win probability are listed on the right hand axis in the following graph. As the bid price increases, the probability of winning the order decreases. 3. Calculate the margin and probable margin for each bid price. The margin is simply the price less the cost for each price point. The probable margin is the margin multiplied by the win probability. The following table shows the values for this example: When we add this data to the graph, we see the relationship between probable margin and bid price. All things being equal, the optimal bid is defined as the price that generates the highest probable margin. 4. Shape demand by shifting the bid to the right or left of optimal. Increasing the bid price will reduce demand and also the probability margin. However, if you do win the bid, the margin will be greater. Likewise, reducing the bid price increases demand. In this case, if you win the bid, you will have less than optimal margins. Obviously, there is a price floor you wouldn’t go below. It Works! The “Bid Model” is an effective tool for managing demand shaping with price variation. Here are a couple of examples where it was used. One job shop I worked with used a version of the “Bid Model”. They shared the North American market with four or five major competitors. Most of the competitors had a similar cost structure and product offering. This company calculated bid prices by applying a multiplier to their cost workup. If their backlog was growing (and their lead-times extending), they increased the multiplier, throttling demand but increasing margin. If their backlog was too short, they reduced it to attract more business. Their management reviewed and updated the target multiplier as part of their planning process. It worked. In another case, a company that used the “Bid Model” was completely overloaded. They had the opportunity to bid on a large project but their General Manager was anxious to reduce demand and balance his resources. Rather than pass on the opportunity, they moved the multiplier from an optimal value of 2.5 to a bid value of 4.0, fully expecting to lose the bid. They won it. Demand was still too high but the increased margins helped ease the pain. Take Away Points 1. The S&OP Demand Plan is not a passive forecast. The company’s resources have been committed based on this demand plan. It is up to the owners to make it happen. Coming in too high or too low is bad news! 2. There are many tools to shape demand. Pricing, lead-time management, allocation, promotions and advertising are just some of these tools. 3. In the quote or bid environment, pricing can be an effective way to shape demand. 4. The “Bid Model” is an effective tool to formalize the pricing process and demand shaping in this environment. Don’t just forecast your demand. Manage it. #DemandPlanning #DuncanMcLeod #Forecasting #SOP #SOPBookings 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.

Do you have one set of numbers or one demand stream feeding your S&OP family? If you answered yes, then you are probably in the majority. However, to improve the quality of your demand planning and to get the most out of the “S” in S&OP, you usually have to split your demand plan into multiple demand streams. These demand streams may require different planning approaches and they will typically have different people responsible and accountable for them. In this article, I am going to cover one of the common reasons to split demand into streams – separating abnormal and normal demand. You may refer to normal demand as run rate demand, flow demand, regular demand, steady-state demand, MRO demand etc. This type of demand is typically forecasted or planned using historical data with a management adjustment. Abnormal demand is the spikes in the demand that are driven by large orders. These spikes may be caused by large customer projects, opening of new distribution points in the outbound supply chain or large export orders. This type of demand is typically planned using an opportunity management tool or a CRM system. Typical forecasting systems use historical data and then apply an algorithm to this data to project future demand. Over the years, a number of different algorithms have been developed and some forecasting tools will actually test multiple algorithms and then select the best one to project future demand. Some of the tools include filters that remove spikes or abnormal demand out of the historical data. This improves the future projections for the normal demand but it also assumes there will be no spikes in the future. These spikes need to be planned for but historical data is not very useful in this case. We need to track the opportunities and predict timing and win probability. Splitting the family demand into these two demand streams, and then using the appropriate forecasting method for each may provide the best opportunity for improving the accuracy of your demand plans. Look at the following historical booking data for a typical S&OP family: In this case, the average bookings were 55 per month with a standard deviation of 23 units and a coefficient of variation of 42%. If you are not big on statistics, those numbers mean that the historical demand has a lot of variation from average. Sometimes, the best way to see this is just looking at the graph. Now, what if we dig into the historical demand and look at the distribution of order size? This graph shows a breakdown of the orders booked for items in this family, showing the total quantity booked by different order sizes. For the above graph: This data shows that a large portion of the quantity booked was on orders for five units or less. It also shows that three orders that were larger than 10 units accounted for 23% of the bookings. Let’s consider those three orders as abnormal demand and revisit the historical data after eliminating these orders. With abnormal demand removed, the new average is 43 units a month with a standard deviation of five units and a coefficient of variation of 12%. This is a much tighter distribution and probably a good indicator of future normal demand. It is unlikely that the three large orders that totaled 150 units could have been predicted using history. The opportunities that resulted in these orders should have been tracked as opportunities and managed by the appropriate people in Sales. In fact, they probably would have had to manage more than three opportunities, as it is unusual to win them all. The following diagram is a simple example of an opportunity management tool: There is a lot more to opportunity tracking than shown on this sheet but that’s a topic for another article. For demand planning, the objective is to boil this data down into a sensible demand plan. With experience, you will learn how to manage the opportunities and the probabilities and summarize the data into a booking and shipment plan. Let’s assume you accept the premise that there may be value in splitting normal and abnormal demand into two separate demand streams. So, where do you start? Step 1: Analyze Your Historical Order Size Go through the last year or two of bookings for the family and analyze the total quantity booked for different order sizes. If you get a graph looking like the first Order Size/Quantity Relationship one, you have abnormal demand. In this case, decide what order size represents abnormal demand and plan on having two demand streams. The graph on the right shows a family that does not have abnormal demand. In this case, you would probably not set up a separate demand stream for abnormal demand or implement an opportunity tracking process. Step 2: Develop the Planning Process for Normal Demand If Step 1 indicated that there was abnormal demand, the next step would be to filter this abnormal demand from the historical data. This filtered data would be the input to your history-based forecasting algorithm or tool. As part of your demand planning process you should be prepared to apply a management override to the results, as there are things the algorithm will not consider. Some of these things are market conditions like the price of oil, for example. Other examples are demand shaping events, promotions and price increases. The person accountable for this demand stream should make the call on this adjustment. Step 3: Implement an Opportunity Tracking Process for Abnormal Demand You only want to track abnormal demand in this process. These would be opportunities greater than the threshold you set in Step 1. If you track smaller opportunities, you will be double planning some of the demand, as these small opportunities are covered in the normal demand stream. If the threshold is too small, you will have a lot of opportunities to track. Step 4: Assign Responsibility and Accountability for Each of the Demand Streams Remember from your RACI training, the responsible person does the work and the accountable person signs off on it. The responsibility of preparing the data usually belongs with a demand planner but the accountability belongs with Sales. This is where the rubber meets the road for the “S” in S&OP. Obviously, you will need to measure results by demand stream in order to manage the responsibilities and accountabilities. If you suspect that abnormal demand is impacting your demand planning process I encourage you to go through this exercise for one of your S&OP families. As always, feel free to contact me if you have any questions or want to discuss any of the points in this article at dmcleod@dbmsys.com. This post was originally published in the DBMExecutive on March 11, 2015. You can download the original PDF here. #DemandPlanning #DuncanMcLeod #Forecasting #Measurement #SOP #SOPBookings 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.

I originally wrote this article under the title: Are You Ready for the Recovery? Using S&OP to take advantage of the economic environment in March of 2010. If you recall, this was just two years after the economic crisis of 2008 and companies were still grappling with forecast uncertainty along with unpredictability within their supply chain. The article outlines 4 specific areas that should be reviewed as part of your S&OP process. Doing these will both improve forecasts, and reduce supply chain uncertainty. Although our overall economic situation has changed, the need to respond to market changes is as real today as it was then. Enjoy! I’m an economist. Well, at least I studied to be one. There are some interesting challenges in the study of economics. First, it’s about predicting future behavior. We use models to explain the past, but we are really trying to develop one that allows us to look ahead. Secondly, economic predictions are made in an extremely complex environment. The “Economic Crisis” of the past two years is a prime example. Events in one part of the world have far-reaching impact in other parts of the world. Finally, the act of making economic predictions can influence the results themselves. A poor economic prediction affects consumer confidence, which can lead to less spending and increase our aversion to risk. The truth is that economists, like the rest of us, don’t really know what is going to happen in the future. According to the predictions, we are either at the beginning of the upturn, on a temporary upturn awaiting a second drop, not at the bottom yet, or we are well into the recovery. Take your pick. Despite the uncertainty, there is one thing that all economists agree on: the economy will improve. The cyclical nature of economics shows that every downturn is followed by an upturn. While we may all want to know when the upturn will happen, the real question is: Are you ready for it? S&OP = Preparation We can’t control the timing of economic change, but we can make sure we are prepared for it. I believe a good S&OP process is fundamental to being prepared for uncertainty because it’s forward looking. It’s about coming up with a single “story” (if you’re not sure what I mean by that you should read Duncan’s article) for our future demand and supply plans. In the process, you come to agreements on the risks and tradeoffs that are inherent in the future plans. We don’t know what exactly is happening, but we rely on the key players in S&OP: Sales, Operations, Supply Chain, Engineering, and Finance to develop a single set of plans that we can execute. Almost as important, it allows us to measure our performance against those plans and make adjustments as we go into the next month. Positioning for Success Over the past 18 months, many organizations have become internally focused. They’ve had to reduce resources, shut down or mothball production lines and plants, reduce inventory and re-negotiate contracts with suppliers. In survival mode, we “batten down the hatches”. Now is a good time to take a look around, evaluate where you are and make sure you’re prepared for the future. Here are four areas that I believe you should focus on to make sure you’re positioned to take advantage of the upturn. 1. Re-evaluate your suppliers. Over the past several months, your suppliers have been in the same situation as you have. They’ve reduced capacity and inventory levels. They’ve had to look for new customers to offset the reduced sales volumes from their current customers. If you assume that your suppliers have the same capability of responding to your demand as they did only six months ago, you may be very mistaken. The best way to evaluate your suppliers is to communicate with them. If possible, you should evaluate the financial health of your suppliers. Losing a critical supplier due to bankruptcy can shut down your entire organization. Pay close attention to profitability and cash flow. Present supplier risks as part of your S&OP meeting. Any forward looking plans that have significant changes in volume levels should include some level of analysis on supplier capability. Having the internal capability to deliver a plan, without suppliers that can meet your volume levels will not work. Now is not the time to keep your critical suppliers at arm’s length. Where it makes sense, share the plans developed in your S&OP meeting with your suppliers. The more information you can share with them about what you think is going to happen, the better off you will be. Communication is a two-way street. If you provide information to them, they will reciprocate. 2. Understand what it will take to increase or reactivate mothballed capacity. During the downturn, many companies have shutdown production lines or entire plants. Depending on how long they have been shut down, restarting will require extra maintenance, rehiring, and re-priming of the supply chain. Having a good understanding of how long it will take to make this happen is important. This information then should be shared across the organization to ensure that everyone understands what the constraints are to increasing supply. Use this information to develop short and long term plans. In the following example it will take three months to get the mothballed capacity back and running. If the decision is made in May to increase capacity, adding back the full 500 units of production will not happen until August. An alternate plan, using overtime, decreases the gap between the forecast and production capability. Understanding the time constraints, capabilities and costs will all be factors in deciding what action to take. Communicate the constraints and costs of reactivating capacity as part of your S&OP family presentation. Use S&OP to monitor performance against your future plans, in order to evaluate both demand expectations and supply capability. 3. Identify and monitor the leading indicators for demand changes. These indicators may be extrinsic, intrinsic or both. Extrinsic indicators are more valuable if they are tied closely to your industry. For example, housing starts will be more applicable for someone selling air conditioning units or closet storage units. Don’t ignore hard sources of data that may be available. If you distribute your data through retailers such as Home Depot or Lowe's, point of sale (POS) data may show information earlier than looking at the forecast provided directly from the retailer. Another example of this would be inventory levels in the outgoing supply chain. If inventory levels of distributors are declining, this may be a sign that future demand levels will increase to refill the pipeline. Monitor your booking and backlog levels as early internal indicators of demand shifts. This should happen as part of your S&OP process. An increase in bookings and/or backlog is an indicator that business is picking up. Comparing the overall backlog level to a target level for each S&OP family will help you monitor the health of that business. In some cases you may even be able to monitor future quote levels. The level of quoting activity is often a leading indicator of
 bookings. 4. Identify forecasting biases. It’s true that all forecasts have a certain degree of inaccuracy. They are, after all, predictions of events that have not yet happened. There are two parts to the inaccuracy: bias and variability. Variability refers to the normal uncertainty or fluctuation in the forecast. Bias refers to the tendency for the sales forecast to be either understated or overstated. You first need to address the reasons for bias and then plan for the variability. In a positive economic environment, forecasts are typically understated. Conversely, when business is on the decline the tendency is to over-forecast. Why? The full reasons behind this are probably worth another article, but simply put, on the upturn, Sales feels it’s better to under promise and over deliver, and on the downturn they are reluctant to present a real picture of what is going to happen. The measurements and closed loop nature of S&OP will help you determine and address any forecast bias in your organization. As part of the process you should: a. Separate the bookings and shipments forecasts. You can then assign responsibility of the bookings forecast to Sales. Shipments are the shared responsibility of Production and Sales. b. Assign accountability for the forecast. c. Measure forecast accuracy. Compare the actual demand for a period with the forecasted demand. Establish tolerance levels for accuracy. If the forecast is out of tolerance you should address it in the next step. d. Determine reasons for inaccuracy. Look at how the forecast is generated. Is it a specific region that is causing the problem? Is the historical information overstating the forecast? e. Address the reasons for inaccuracy. Don’t expect perfection. Remember an unbiased forecast is one where the variance is just as likely to be overstated as it is to be understated. When a bias exists for a period of time, we start to second guess the forecast. Operations will base their operating plans on the discounted forecast, and when Sales sees an upturn in business, it is not believed. This may jeopardize the speed in which we respond to changes in demand. The bottom line is that it ends up costing us in expedites or lost sales as we scramble to catch up. Address the bias now to position your organization to respond proactively. The future is uncertain. It always will be. The best way to face this is to be prepared. You can accomplish this by looking at your internal and external constraints (capacity, suppliers) and developing a good understanding across the organization of what these are. Use your S&OP process to improve your forecast and build trust across your organization. You can’t control the future, but you can be ready for it. #DougDedman #DemandPlanning #SupplyChain #SOPProcess #Forecasting 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.

Here are two of the most frequent S&OP questions that I am asked: From the S&OP team: How do we get senior management, especially our CEO, involved in the S&OP process? From the CEO: What should my role be in the S&OP process? It should be obvious that you need to answer the second question first. In this article, I will share my opinions on the CEO role and how you should approach the S&OP process. As CEO, you need to hold your team accountable and make the tie breaking decisions. To do this, you need to understand the numbers and then get past the numbers to “The Story”. I will shed some light on understanding the numbers and getting to “The Story”. Holding people accountable and making decisions is why you get to be CEO. Definitions For the purpose of this article, I am going to assume you are using some version of the standard 5-Section S&OP sheet. You may have a slightly different format but you should be able to relate to the one below. Definitions of the terms vary from organization to organization so I need to document the ones I will be using in this article. Bookings are customer orders taken during the period. The bookings for a month would be the sum of all of the customer orders received, regardless of planned ship date. Shipments are all of the shipments during the period. This term can get fuzzy as we look at inter-company shipments, progress billings and FOB points. For the sake of simplicity in this article I am going to assume shipments and billings are the same and that this transaction occurs when material leaves the finished goods inventory linked to the production facility. Backlog are all of the open customer orders for the family. This would include past due and future orders. Bookings increase the backlog and shipments decrease it. Aged Backlog are the open customer orders placed in their planned shipping period. Production is the total finished product produced for a family in a period. Inventory is the finished goods inventory for the family at the end of the period. Getting to “The Story” Take a look at the S&OP 5-Section sheet again. There are more than 250 numbers on this family presentation. That’s a lot of numbers. How do you quickly work through all these numbers and get to “The Story”? I am going to outline my approach, not to suggest it is the only approach, but it works for me. So here it is step by step: 1. Validate the numbers. Having been fooled by Excel magic in the past, I do checks to make sure people are paying attention to the data. Checking won’t prove that the data is right but it will uncover some of the common problems: a) Take the actual opening backlog, add the bookings and subtract the shipments. Check the result against the closing backlog. In this case, the December closing backlog was 150, the January bookings were 460 and the January shipments were 410. The resulting backlog should be 200, and it is. The numbers check but you would be amazed how often they don’t. Make sure your team understands you check them and you expect them to cross-check. b) Do the same for inventory. The opening inventory (previous month’s closing inventory), plus production, minus shipments should equal the closing inventory. In this case, the December closing or January opening inventory was 50 units, production was 410 and shipments were 410 so the ending inventory should be 50. It is, and the numbers tie out. 2. Check last month’s performance to plan. The grey column (in The 5 Section Sheet) represents the month just closed. The previous S&OP represents the previous month’s plan for that month. The current S&OP represents the actual results. Compare the plan to the actual and see how you did. For example: a) Bookings were planned at 410 and they came in at 460. This is a 50 unit variation or more than 10%. If the booking tolerance for this family is +/- 10%, then the bookings for this family are out of tolerance. I would expect answers. Looking at the past, it looks like the actual bookings have been higher than the call for the last four months. Hold that thought. b) Shipments were planned at 420 units and the actual shipments were 410. Not a big miss, but 30 units in the backlog went past due and the bookings were strong. That’s another thought to hold on to. c) The backlog was planned at 140 and actually came in at 200. You can probably see where the 140 was higher than target because of production constraints. In fact, the target is actually to get the backlog down to 100 units. It went the wrong way. There could be customer service and lead-time issues on the horizon. (Some people will add a row for the target backlog.) c) Production was planned at 400 units and the actual was 410. Not a big variance and probably not an issue. d) Inventory was planned at 60 units and came in at 50. The financial people may say this is good but the targeted inventory is 100 units. For four months in a row, the inventory has come in low. 3. Look at the changes to the future plan. Compare the previous S&OP to the current S&OP from Month 1 (February in this case) out into the future. a) The February bookings have been turned up from 410 to 430 and the March bookings have been turned up from 500 to 540. The demand owners are getting more bullish, probably based on the last four months history of under calling demand. b) The February shipments have been held constant and the March shipments have been reduced by 10 units. The shipments start to catch up to the bookings from April onward. c) The backlog continues to grow into April and then comes down but never to the target of 100. d) Production has been turned up slightly in February, (usually not a good idea to change Month 1 as it is probably locked in. In this case the change of 5 units is eraser dust). It has been turned up for most of the rest of the year as well. e) Inventory has been adjusted to come back close to plan in April. 4. Look for “The Story”. In this case it is pretty straight forward. a) We have been booking over plan for the last four months and we have been slow to react to the sales increase. b) As a result, the backlog has increased and the finished goods inventory has fallen below target. c) We are probably experiencing service issues in this family. d) The production response to the demand change is lagging behind sales due to current output constraints and the responsiveness of the supply chain. e) In total we are 100 and 50 units behind. The backlog has increased by 100 units over target and the finished goods inventory is 50 units below target for a total of 150 units. This is roughly one to two weeks at current output rates. 5. Ask the hard questions. a) To Sales: Are we still under calling the bookings? We have under called the plan for four months in a row. Is the plan going forward pessimistic? If so, what is the upside that we may be faced with? b) To Production: What would we have to do to bring the backlog back down to 100 units by April? This would mean adding 130 units to production assuming we hold the same booking plan. If the booking plan is increased again next month, when could we respond to the change? What are the constraints and what are the options? 6. Make the decisions. The S&OP data is only a portion of what goes into making decisions but it does at least give some hard facts. Here is what this CEO is faced with: Do I increase output to bleed off backlog and put myself in a better position for demand increases? If I do, and the demand falls off, I will end up with inventory and I will need to turn off capacity. If I don’t and the demand increases I will get further behind and risk serious service issues. Making Decisions The numbers can’t make the decision but they are a big help. In this case, production should be throttled up to at least re-balance the inventory and backlog. Based on the history of under calling sales, I would be inclined to error on the high side of production and be prepared to adjust it down next month. Each family will have a different story every month. However, if you follow these steps to interpreting the data and getting to “The Story” and then combine “The Story” with your intuition, you will make better decisions. This post was originally published in the DBMExecutive on March 17, 2010. You can download the original PDF here. #ExecutiveEngagement #SOP #Backlog #SOPBookings 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.

View this article as a PDF here. Is your S&OP process working? In this article, I will cover three basic measurements that will answer this question: Bookings Performance, Shipment Performance and Supply Performance. I refer to them as the three S&OP Effectiveness Measurements. As each month is closed, you get a chance to compare the actual performance during that month to the plan that was created in the previous month. If the actual was within the tolerance bandwidth of the plan it was a good month. If it was outside the bandwidth then it was not a good month. The chart below is an example of a summary presentation of S&OP effectiveness. If a cell is green, the actual results were within tolerance for that month and a red cell means they were not. For example, the bookings for Family 1 were outside of the tolerance range in January, February, March, June and August. They were within tolerance the other seven months. Family 2 was not reported until March and Family 3 was not reported until April. This chart gives a summarized visual overview of how well the S&OP process is running. It should be covered at the beginning of every Executive S&OP Meeting. There is also a story to be found by tracking the trend of a specific measurement within a family. In the following graph, you can see the booking results for a family. The grey area on the left half of the chart is history and the white area to the right is the future plan. The red lines represent the previous month plan plus and minus the tolerance, which in this case, is 20%. The blue line represents the actual results in the grey section and represents the new plan in the white section. When the blue line goes outside of the red lines, the process is out of tolerance. You can see that the results were out of tolerance in March, June and November (these results will show as red cells on the summary chart). You can also see that the future plan is going out of tolerance in June. Notice that the tolerance bandwidth opens up in the future, as this family has more planning flexibility beyond the first two future months. This example is also indicating a bias in the future plan. In general, all of the months are higher in the new plan than they were in the old plan. The next graph shows the same presentation with the addition of a trend line for the new plan. Bias can have a cumulative effect on the supply chain but that is a topic for another article. So, now we have the question of how to establish tolerance levels. Obviously, the wider the tolerance bandwidth, the easier it will be to stay in tolerance. In the field of Statistical Process Control (SPC), the upper and lower control limits (the red lines) are determined based on the demonstrated capability of the process. While there is a standard SPC logic to calculate the control limits, I just use a rough rule of thumb for setting the tolerance based on one failure in the last 12 months. In the previous example, we had a demonstrated performance of three failures in the last 12 months. This would indicate that the tolerances are too tight based on the existing capabilities. If we open the tolerance up to plus or minus 25% there would have only been one failure. The next graph shows this: Now we only have one failure or out of tolerance condition (June) in the past 12 months. Plus or minus 25% is closer to our real capability of forecasting bookings one month in the future. To address this increase in tolerance you will need to adjust your supply chain strategy. You might decide to increase your buffer inventory or extend your lead-times when you have higher than expected booking months. The tolerances are real and you have to plan for this variability. To change the tolerances you have to change the process. If you develop better planning processes and demonstrate tighter results, then you will be able to tighten the tolerances. They are what they are until you improve, so plan for variability. If your S&OP process is mature and you have addressed the tolerance issues, the summary chart should look something like this: Here is a quick review: Set initial tolerances. The tolerances for bookings are usually greater than the tolerances for shipments, which in turn are greater than the tolerances for supply or production. Measure actual bookings, shipments and supply (production) against the tolerances and graph the results. Display the results in a summary chart with red and green cells like I’ve shown you. After 12 months, rework the tolerances based on the last 12 months of demonstrated performance. If you improve the process, you should be able to tighten the tolerance but until then, you need to plan for the demonstrated variability. This will give you a good starting point for measuring if your S&OP process is working. Give it a try and contact us, if you have any questions. This article was originally published April 22, 2016 in the DBMExecutive Newsletter. #EffectivenessMeasurement #Measurement #SOPBookings #SOP #SOPKPI 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.

When we talk about S&OP, we talk about managing the business. We forecast bookings and shipments and put a production plan in place to meet these forecasts. The difference between the shipment plan and the production or delivery plan is inventory. The difference between the booking plan and the shipment plan is backlog. Both of these are strategic “levers” that can be used to manage the business. Inventory is a lever in S&OP to balance demand and supply. We can plan a level of inventory to meet a desired service level. We can flex the level of inventory up and down to buffer ourselves from fluctuating demand and maintain a level production plan. We can increase inventory in anticipation of plant shut downs. We can measure the results of our inventory reduction plans in S&OP and balance this against our customer service metrics by family. As a lever to run the business, inventory is pretty well understood. Backlog is also a lever to run the business. The challenge is that this lever is not often as well understood as inventory. The main reason for this is that most S&OP processes start from Operations then move into Sales. Operations understands inventory because it’s tangible and easily measured. When we have too much, our financial measurements show it. The level of backlog is important because it impacts production efficiency, supply chain inventory, and customer service levels. If your backlog is too high, it will have a negative impact on customer lead-times. Incoming orders must be promised further out in the future because you have too much demand to meet with current production. In this situation, companies typically also experience operational inefficiency as they try to reshuffle orders trying to meet customer demands. As priorities change on the orders, your supply chain struggles to keep up with the shifting demand. Conversely, if the backlog is too low, Operations is looking for orders to build. Lines are run at less than optimal levels and typically are flexed up and down based on incoming orders. The supply chain has to react to fluctuating production levels. But how much backlog do we need? How much is too much or not enough? The answer to these questions is: It depends. Now before you stop reading further, I will spend the balance of this article answering this question. The answer will still be “it depends”, but you will understand what it depends on, and how to calculate an appropriate backlog level for your business. First, let’s start with some definitions for clarity in understanding this topic. Total Backlog is all open customer orders that are in your system. This includes both past due and future dated orders. For S&OP purposes, it’s important to see the total backlog as well as the time-phased backlog. Time-phased backlog is a view of the open orders in the month in which they’re due. There are three different types of backlog: Past Due Backlog: Sometimes we call the overdue customer orders “bad backlog”. These are orders that you should have shipped the previous month but didn’t. Current Backlog: For the purposes of S&OP these are customer orders that you can ship in the current month. These are all orders dated in the current month PLUS the overdue orders from the previous month(s). All of these orders can be shipped in the current month. Future Backlog: These are orders that customers want out in future months beyond the current month. The Current Backlog ratio is the critical one for S&OP. It’s the level of shippable orders in the current month that will impact your service levels and shipping performance. The level of current backlog that you require depends on three factors: The mix between Make to Stock (MTS), Assemble to Order (ATS) and Build to Order (BTO) in the S&OP family. The mix I expressed as a percentage of the total sales for the family. I usually start by looking at the last 12 months of history to determine the percentages. Remember, you may not have all types of products in a family. The market lead-times for each product type. Think of these as the external lead-times for the family. How soon after the receipt of an order can the customer expect the items to ship? You should have this documented in S&OP as part of the family characteristics. The total monthly demand for the product. In this case, demand refers to shipments and not bookings. Once again, you can get an average monthly demand number by looking at the last 12 months of history. Using these factors, you can calculate a target backlog level. Let’s work through an example. The family we are looking at has average monthly sales of 12,000 units. The family has all three types of products in it: MTS, ATO and MTO. We analyzed historical demand and determined that MTS items accounted for 30% of sales, ATO is 20% and MTO is 50%. From our marketing literature, we were able to get the published lead-times for these types of items: MTS – 1 day, ATO – 7 days, MTO – 35 days. Using this data we can calculate the average monthly demand for each type. I’ve summarized this below: The next step is to determine the shipment rate per day. To do this, I’ve assumed an average of 22 shipping days per month. The daily shipping rate times the market lead-time will give me the target backlog. I’ve extended the table to show this: There is a catch. You may have noticed that the MTO items have a lead-time longer than a month. This means that all of this backlog should not be required in the current month. Theoretically, we should have some of the demand for the following month already sold coming into this month. The amount would be the difference between the 22 shipping days and the 35 days of lead-time or 13 days of shipments. By expressing the ratio of shipping days to lead-time for items with lead-times longer than one month, we can do this calculation. Putting it all together, we get the following table: For this family, our target backlog quantity is 6,928 units or 58% of the monthly planned shipments. An important note on this target: It is better to set it as a ratio or percentage rather than a specific number. The reason for this is that the ratio depends on the mix between the different types of products (MTS, ATO, MTO) and will stay the same as long as the mix is relatively stable. The level of backlog will change depending on the level of demand for the family. If our S&OP shipment plan is going up to 14,000 units for the next month, we should have 58% of the month already sold. This would equate to a backlog of 8,120 items. This is your target current backlog. Compare your starting current backlog for the month with this number. If your current backlog is much lower than this, you have a higher risk of not hitting the 14,000 units in shipments. If it’s much higher, you may over ship in the month or extend lead-times. To visually depict this as part of your S&OP presentation set +/- ‘X’ percentage tolerance on the target. If the actual is outside this tolerance, flag the current backlog number as red. Your shipment plan is at risk. Using this methodology, you can set the target backlog percentage for each family. To start, do the analysis to determine the mix of product types in each family and gather the customer promised lead-times. Once you’ve calculated this, look at how your results match. Does a red measurement result in a missed shipping plan? Once you’ve set the target, you should recalculate it at least quarterly to account for mix changes between MTS, ATO, and MTO items. This is especially effective if you are introducing new products into a family. Aim to keep your backlog within the target range and you will increase your ability to meet the shipping plan and keep your customer happy. So the answer to how much backlog is still “it depends”, but now you know what it depends on. This post was originally published in DBMExecutive on December 8, 2011. The PDF version of the DBMExecutive here. To learn more about managing backlog, view the video Bookings, Backlog and S&OP on YouTube. #Backlog #SOP #DemandPlanning #SOPKPI #SOPBookings #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.

“Our President does not have time for S&OP so we are doing it without him. What do you think?” A common statement combined with a silly question. You already know the answer. Without the commitment of your senior executive, the S&OP process will fail. At the very best, you will end up with an Operations or Sales centric process that is not S&OP. The most important word in Sales and Operations Planning is “AND”, and the only person who can put the “AND” between Sales and Operations is the executive to whom both report. Once you accept the fact that the senior executive needs to be committed, you are ready to face the real questions: How and why not? The major reasons senior executives are not committed to the S&OP process are that they don’t understand the value, they don’t understand their role in the process and they don’t understand the example that they set. Let’s look at a story of a fictitious president, Tom, who is characteristic of a number of executives whom we have worked with over the years. Tom paid lip service to S&OP; a checklist item that he wanted the organization to address. Through the first six months of the S&OP project, Tom attended two Executive S&OP meetings. There always seemed to be something else competing for his time. His team worked hard but they were getting nowhere. The VP of Operations dominated the meetings and the rest of the management team were spectators. One of my associates involved in the project recognized the problem. He said: “Tom, consider this your trip to the Principal’s Office. Your poor attendance record is derailing the S&OP project. I know the meetings aren’t that effective yet, but if you don’t show up, they aren’t going to get any better. There were some important decisions bypassed in the last meeting because you weren’t there. If you want to make S&OP work you need to show up. If not, scrap it now and stop wasting everyone’s time.” “I didn’t realize my attendance was that important.” The next meeting was a watershed. There was a major decision to be made about prebuilding inventory for the busy season. Building the inventory would mean missing the quarter end inventory targets. Not building the inventory would mean not being able to meet the forecast demand in the busy season. Sales wanted the inventory, Materials didn’t. Tom saw that it was his call. Tom saw that he was the only one who could make the final call. He finally understood why he had to be there. Six months later, I attended one of Tom’s Executive S&OP meetings. The meeting took 90 minutes, everyone was prepared, they never lost focus, they made critical decisions and everyone left the room understanding the plan. I congratulated Tom on the effectiveness of the meeting and the process leading up to it. He responded: “I would never have believed I could manage this business in 90 minutes a month. If everybody does their role, I only have a few decisions to make and they are all packaged for me in one meeting. It’s the most important meeting I have.” Of course Tom works more than 90 minutes a month, but spending an effective 90 minutes in his Executive S&OP meeting eliminated numerous ad hoc planning meetings that used to happen through the month. The Keys to Executive Engagement So what are the keys to getting the Toms of the world engaged? Here are a few tips we have learned through the years: 1. Make sure the CEO understands his or her role in the S&OP process. He/she must support the process and hold people accountable for doing the grunt work and also make the important decisions when there are differing opinions about the direction. 2. Manage the expectations. S&OP does not start out as a perfect process. The early meetings will be painful and the CEO needs to accept that. Copping out at this time could deflate the morale of the team. If the Executive S&OP meeting is not meaningful in three or four months, you need to re-evaluate your approach, as executives have limited patience. 3. Use an outside party (probably a consultant) as an advisor to the CEO. This is a new role for the CEO, and for many, it’s hard to accept training from his/her staff. For many of the staff, it is hard to give constructive input to the CEO. This is one of the key roles of an outside consultant. 4. Make sure the Executive S&OP meeting is efficient. Some of the common traps that will turn off the CEO include: a) Not having the presentation ready ahead of time. Most CEOs like to have the data at least a day in advance so they can review it and prepare their questions. b) Having erroneous data. The numbers have to make sense. The owners need to be able to support their numbers. This is the function of the pre-S&OP meeting. It’s a dress rehearsal intended to make sure the stories are aligned and valid. c) Too much detail. We call it ‘getting in the weeds’. You went through a lot of data to prepare for the Executive S&OP meeting and must resist the temptation to show it all. d) Getting side tracked. The Executive S&OP meeting is one of the few meetings where the management team gets together. People are tempted to bring up their burning issues even if they don’t apply to S&OP. Should we lease that new office space downtown? Which logo do you like better? S&OP Coordinator, step in please! e) Forgetting the decisions made as a result of the CEO’s presence. It’s good to start the meeting with a list of the decisions made last month. This review will reinforce the importance of the meeting. So here’s the deal. You want your CEO’s support? Make it worth his or her while. If it’s valuable, they, like Tom, will come to depend on the S&OP process. This post was originally published in the DBMExecutive on December 8, 2011. You can download the original PDF here. #SOP #ExecutiveEngagement 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.