With the NFL season kicking off this month, we’re once again reminded how different people can look at the same set of information and come away with widely varying interpretations of the “truth.” Much of it depends on what you prioritize.
Some coaches will have high expectations for their high draft choices based on their scores at the NFL Combine or other tests. They’ll look at their times in the 40-yard dash, their scores in the vertical jump, standing long jump, bench press and other workouts, and their physical examinations and make a determination that a particular player is a “can’t miss” prospect. Others give less attention to those raw numbers and instead base most of their evaluation on what the player’s stats were in college, what he does in organized team activities (OTAs) 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 the bookies) to predict which teams will win their divisions, which will squeak into the playoffs as wildcards, and which will 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, weightlifting poundage, tackles, quarterback ratings, yards per carry, etc. your team is playing the same game.
Each week various department heads look at the data rolling in to make decisions that can have long-ranging effects on the business. Yet even though they’re examining 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 to ever play the game.
Unlike the NFL, however, there is a methodology that Tier 2 distribution-intensive companies can use to eliminate the guesswork and opinions in order to come to a single version of the truth—sales and operation planning (S&OP).
S&OP goes beyond simple 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 at the hip with the financial plan so leadership not only understands how the enterprise is performing relative to the financial plan but also comprehends the financial impact of a decision before that decision is made. And 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 two areas: inventory turns and margins. It provides a way of managing production, inventory and sales based on actual marketplace activities rather than “best guesses” 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, it provides the means to do that on a SKU by SKU basis rather than inventory groups or families, 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 the data than an Access database or Excel spreadsheet. This insight shows organizations where pricing and other adjustments need to be made to increase sales of slow-movers, where prices can be increased to take advantage of better-than expected demand, the impact of pricing events on SKU performance and other outcomes.
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 it comes to adjusting future demand and supply activity in order to maximize profitability. By instituting a simple way to engage sales, marketing, supply chain and manufacturing leaders at the SKU level, organizations can keep SKUs in balance in order to avoid the highs and lows that eat into profitability and disrupt operations.
One way to accomplish that is to develop a forward-looking game board that shows at a glance how each SKU is tracking to projections on a week-to-week basis – projected out for a predetermined number of weeks based on the requirements of the financial plan. It is similar to how NFL coaches will game plan in advance, determining which plays to run depending on the situation and the position on the field.
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 the impact those actuals have on succeeding weeks.
As long as the weeks on hand inventory remains 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 an action needs to be taken. It merely means action needs to be considered.
For example, if sales for one week fall below projections, the game board reordering might be adjusted to ensure the maximum allowable weeks 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 may recommend waiting to see if the following week (or two weeks) brings inventory back into balance.
In another case, suppose sales of a particular SKU that 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 make a decision to order more and notify manufacturing to make adjustments to the production schedule to either avoid a possible out of stock period. The ordering is done far enough in advance to allow the manufacturer to plan properly. Marketing can also contribute by featuring an alternative SKU—and avoiding sale prices on the SKU in question, helping the organization manage its inventory.
Like NFL managers relying on stats and tendencies gathered over dozens of games to make in-game decisions, business executives can use an S&OP game board to provide them with a clear picture of what is happening now, and consider the various outcomes that may result. Those insights will help them know when to “stick to the book” and when to deviate from it in order to give themselves the best chance of securing a victory.
Bringing home the prize
Whether you’re talking about football or business, the trouble with data is that it’s often subjective. One person’s valuable information – especially if it protects their interests – may be another’s trivia.
S&OP seeks to remove the subjectivity in data analysis in order to arrive at a single version of the truth by prioritizing information ahead of time, and providing parameters with which everyone involved can agree. That type of detailed information allows managers to make better demand and supply decisions as a group, giving them the fuel they need to secure the week-by-week victories that lead to winning the big prize, often a 15 percent to 30 percent reduction in on-hand inventory with better customer satisfaction at a lower cost per unit.
Doug Braun is the Chief Executive Officer of IBS, a world leader in distribution resource management software, providing ERP and WMS business applications for the wholesale, distribution and manufacturer/distributor markets. Braun is responsible for translating business needs into products that solve customer supply chain problems. He can be contacted at email@example.com.