The American Production and Inventory Control Society (APICS) defines Sale and Operations Planning (S&OP) as the “function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan. One of its primary purposes is to establish production rates that will achieve management’s objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the workforce relatively stable. It must extend through a planning horizon sufficient to plan the labor, equipment, facilities, material, and finances required to accomplish the production plan. As this plan affects many company functions, it is normally prepared with information from marketing, manufacturing, engineering, finance, materials, etc.”[1]
Sales and Operations Planning has also been described as “a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations”[2].
In more simplified terms Sales and Operations Planning can be described as – STATE WHAT YOU ARE GOING TO SELL AND MAKE WHAT YOU STATE YOUR ARE GOING TO SELL. It really doesn’t have to be more complicated than that.
The benefits of S&OP are well documented and proven over time. The successful S&OP cycle will lead directly to improved customer service, reduced inventory levels, and increase the profitability of the business. And, most importantly, a well run S&OP will allow the business to quickly adapt and change to current market conditions – which is absolutely critical in today’s every growing world economy. So, why are some companies struggling to see the results?
It is my contention that most companies that fail or struggle with S&OP do so because of lack of management and leadership – in specific top tier executives do not buy into the process.
Top managers have a very difficult time of letting go of their ego’s and the notion that the direction of the business can be reduced to a succinct two hour monthly Executive Review meeting is hard for them to fathom.
How many of you are conducting a Pre-S&OP meeting? Unless your company has thousands of SKU’s (stock keeping units), there is no reason to conduct a Pre-S& OP meeting and the only reason they exist is because the top managers are “guarding” their numbers and don’t trust the capable people they have working underneath them. In short, the executives haven’t bought into the S&OP process and are more concerned with maintaining face with other executives rather than leading and directing the company to a more profitable state.
There is one top executive that every successful S&OP process must have buy-in from and, no it’s not the COO (Chief Operations Manger), nor is it the CEO (Chief Executive Officer) or President, nor is it the Board of Directors, it is the CFO (Chief Financial Officer).
All managers are judged by numbers of some sort. The CFO and other finance managers and the numbers they present greatly affect the management and direction of the business. All too often though, the finance team has their own unique set of numbers that are inconsistent with the numbers the operations team and sales/marketing team are working with. Having more than one set of numbers leads to very large disconnects – especially when presenting to the CEO/President or Board of Directors and cause severe disruption to the day-to-day operations of the business when other managers are brought in to “defend” their numbers.
Listed below are the reasons why the finance department must fully buy-in to achieve a highly successful S&OP process:
• Financial Integration. One of the many great outputs of the monthly S&OP cycle is the emergence of gaps between supply and demand and the ability for the management team to derive solutions to close the gaps. Executives and managers need to know the financial impact of decisions they are making to close the gaps between supply and demand. Often times, this creates financial variances that can easily and concisely be explained to top management and other major stockholders. It will no longer be a surprise that the month-end numbers differ from expected and can easily be explained or better yet curtailed before they happen.
• Financial Forecasts. The typical time horizon for a flourishing S&OP process in 15 to 18 months. Once the finance team fully accepts the output from each S&OP cycle, the quarterly financial forecast and the annual operating plan (AOP) or budget become an easily obtainable objective rather than mad diatribes and extended working hours. How many companies needlessly carry a staff just for the AOP/budgeting process alone or disrupt the flow of operations by tasking managers to obtain a separate set of AOP/budget numbers? Don’t you think those resources could be used more efficiently elsewhere?
• Inventory Levels. Agreeing upon one set of numbers is critical in determining the inventory levels a business decides to move forward with. It is imperative that managers know the financial impact of carrying fifteen days, thirty days, forty-five days etc… worth of inventory and the associated trade off in customer expectations, satisfaction and retention.
Reaching a consensus on a single set of numbers will allocate critical resources (including people, equipment, materials, money and time) to best serve and satisfy customers in a profitable way. Without garnering top executive level buy-in – especially the finance department -S&OP process is set-up to fail or at the very least run dysfunctional.
References
1. ^ Dougherty, J.R., “Getting Started With SaleS&OPerations Planning”
2. ^ Wallace, Tom, author of textbooks on Sales and Operations Planning
By: Paul Fischer
Posts Tagged ‘World Economy’
Financial Executives and Sales and Operations Planning Process
February 2nd, 2010Financial Planning Fees and Expenses – What You Don’t Know Can Hurt You
January 30th, 2010
The last few years have shown us there is little the individual investor can control in the financial world. The economy and financial markets swoon and sway with little predictability. And yet, the one part of the financial world that is in complete control of the individual investor, fees and expenses, garners little attention.
The cost of investments and guidance represent a huge opportunity for consumers. Disregarding the issue can be hazardous to your bottom line. For example, a difference of.25% (yes, that’s one quarter of one percent) in annual expenses on a portfolio can mean the difference between over $100,000 staying in your pocket or ending up in the pocket of someone else. (Based on a $100,000 initial investment and an 8% average annual return over 30 years). Even for the very wealthy that kind of money demands attention.
The fact that these costs are anything but transparent only exacerbates the problem. Most investors are surprised to find that the money they are losing doesn’t even show up on their statements. While most everyone will drive further down the road to save a couple of cents per gallon of gas most aren’t even aware of the money leaking from their future. So, the decision to take control of this part of your portfolio certainly appears to be an easy one. Identifying opportunities and implementing changes can be a little more difficult.
Investors should begin by asking themselves how much they know about what they are currently being charged. Most likely charges are not going to appear in one convenient place. Fees and expenses are usually layered and it is important to remember that nothing is free and everyone will need to get their fair share of compensation. The key word is fair. What is fair? If you are paying more than 1.25% of your net worth per year you are paying too much. The professional you choose to work with should certainly be compensated for their time and expertise. The firm they work for will take a portion of this compensation for the services they offer. Finally, any kind of managed or packaged investment will likely be compensated for time, management and administrative expenses. Mutual funds and annuities are excellent examples of these types of investments.
How do you find out what these costs are? The easiest way is to ask your financial advisor. It should be noted that any advisor that provides anything but a simple, straightforward answer to this question is throwing you a huge red flag. Either they don’t know or they don’t want you to know. In either case you need to start shopping for a new relationship. Focusing on the cost of guidance often overshadows a very important part of the discussion. What are you getting for the money? It is often lost on consumers that their financial life involves much more than simply their investment accounts.
A quality advisor is going to be able to help with issues such as taxes, healthcare choices, employer benefits, estate planning and even household budgeting. The one thing you should not get for your money is conflict of interest. Over 90% of all financial advisors pay is strictly incidental to the implementation of advice or purchase of an investment. Even more concerning are the recommendation of proprietary investments by such advisors. Should you encounter a scenario such as this again, it is probably time to start looking for a new relationship.
So the next time you look at your statement, watch the news or read the paper and feel powerless remember the one area of the financial world you can control. What you pay for investments and guidance is, indeed, the elephant in the room.
By: Adam L. Young