With the NFL season kicking off, we’re again reminded of how different people can look at the same set of data and come away with widely varying interpretations of the “truth.” Much of it depends on what you prioritize.
Some coaches have high expectations for their top draft choices based on their scores at the NFL Combine or other tests. They look at physical exams, times in the 40-yard dash, and scores in the vertical jump, standing long jump, bench press and other workouts, and determine that a particular player is a “can’t miss” prospect. Others base most of their evaluation on what the player’s stats were in college, what he does in organized team activities, and how his numbers shake out in training camp and pre-season games.
Of course, all of this information is being rolled up by the sportswriters (not to mention bookies) to predict which teams will win their divisions, squeak into the playoffs as wild cards and ultimately take the grand prize—a Super Bowl championship.
Sound familiar? It should. Because if you substitute inventory, manufacturing, sales figures and other business metrics for 40 speed, tackles, quarterback ratings, yards per carry, etc., your team plays the same game.
Each week, various department heads look at the data rolling in to make decisions that can have long-ranging effects on business. Even though they examine the same facts and figures, they often have different views of what the “truth” is—with the result that meetings that should have the team coming to a consensus on matching demand with supply instead have them arguing like a bunch of crazed fans trying to convince each other who was the greatest quarterback of all time.
Unlike the NFL, however, there is a methodology that Tier 2 distribution-intensive companies can use to eliminate guesswork and opinions to come to one version of the truth—sales and operations planning (S&OP).
S&OP goes beyond demand planning to encompass inventory, sales forecasting and manufacturing production/purchasing on a dynamic basis, enabling the organization to manage the complex process of matching demand and supply down to the individual item level, ensuring the flow of material through the supply chain meets the demand.
Done correctly, it is also connected with the financial plan so leadership not only understands how the enterprise is performing relative to the financial plan, but also the financial impact of a decision before it’s made. Further, it connects you to your supplier to streamline your order process and their production process, making them more efficient and likely reducing your cost per unit by becoming more predictable.
Both Sides of the Ball: Inventory and Margin
A good S&OP process primarily impacts inventory turns and margins. It manages production, inventory and sales based on actual marketplace activities (rather than guessing) to keep inventory levels flowing through the supply chain. Inventory doesn’t grow too high, thus draining cash flow, or too low, which can create out-of-stock situations that lower enterprise profitability and customer satisfaction. Most importantly, S&OP does it on a SKU-by-SKU basis as opposed to by inventory group, further refining inventory management. In fact, the more SKUs you have to manage, the more effective the solution is.
At the same time, S&OP helps Tier 2 distribution-intensive companies boost margins by providing week-by-week insight into market trends, with more depth and better ability to drill down into data. This insight shows organizations where adjustments need to be made to increase sales, such as where prices can be increased to take advantage of better-than-expected demand, the impact of pricing events on SKU performance and more.
A Better Game Plan
In his book, Make the Numbers, Don’t Chase the Numbers, author and supply chain expert Mark Payne says the SKU level is the level that matters when adjusting future demand and supply activity to maximize profitability. By instituting a way to engage sales, marketing, supply chain and manufacturing leaders at the SKU level, organizations can keep SKUs in balance to avoid the highs and lows that eat into profitability and disrupt operations.
One way to achieve that is to develop a forward-looking game board—projected out for a predetermined number of weeks based on financial plan requirements—that shows how each SKU is tracking to projections on a week-to-week basis. It is similar to how NFL coaches determine which plays to run depending on the situation and field position.
With this game board, each SKU is assigned numbers that represent the minimum and maximum allowable weeks on hand for inventory. The game board also shows the actuals for that week and their impact on succeeding weeks. As long as the weeks of on-hand inventory remain within the allowable range, no action is required. If they stray outside the range, however, the team is alerted, allowing management by exception.
“Management” doesn’t necessarily mean take action, but maybe consider action. For example, if one week sales fall below projections, the game board reordering might be adjusted to ensure the maximum allowable weeks of on-hand inventory is in the range for the future. Sales, however, might know that a snowstorm that blanketed the East Coast caused an unusual drop that week; they might recommend waiting to see if the next week balances the inventory.
In another case, suppose a particular SKU’s sales, which are higher than projected for two consecutive weeks, puts the business at risk of being out of stock in four more weeks. By seeing it ahead of time, purchasing can order more and notify manufacturing to adjust the production schedule to avoid a possible out-of-stock period. Ordering is done enough in advance to allow the manufacturer to plan properly. Marketing can also feature an alternative SKU—and avoid sale prices on the SKU in question—to help manage inventory.
Like NFL managers relying on stats to make in-game decisions, business executives can use an S&OP game board to obtain a clear picture of what is happening now and consider the various outcomes that may result. Those insights can help them know when to stick to the book and when to deviate to give themselves the best chance of securing a victory.
Bringing Home the Prize
Whether football or business, the trouble with data is that it’s often subjective. One person’s valuable information may be another’s trivia. S&OP seeks to remove the subjectivity in data analysis to arrive at a single version of the truth by prioritizing information ahead of time and providing parameters with which everyone can agree.
Doug Braun is the chief executive officer of IBS, a leader in distribution resource management software, providing applications for the wholesale, distribution and manufacturer/distributor markets. He translates business needs into products that solve customer supply chain problems. He can be contacted at firstname.lastname@example.org.