S&OP is Not a Supply Chain Process!

So says Peter Skurla, the man credited with coining the phrase “Sales & Operations Planning” and a principal at Oliver Wight, the consulting organization most strongly associated with expertise in S&OP.  Over my years of covering supply chain management, several companies have told me how helpful “Ollie Wight” has been in helping them get to a better S&OP process.

In a conversation with Peter, he made the point that if you want to have supply chain, sales and marketing, finance, new product development, and executive management integrally involved, S&OP must be viewed as one of the primary processes used to run the business, not just the supply chain!  In fact, in well-run organizations, long-term strategic planning and S&OP become more important than budgeting.  The budgeting process becomes something of a “non-event.”

In a well-run executive meeting, chaired by the CEO or a General Manager, the issues of how supply gets balanced with demand over the next 90 days barely comes up at all.  Those issues are hammered out by middle managers in the steps leading up to the executive meeting.  Those steps include the product portfolio review (for new product introductions), the demand review, the supply review, and an integrated reconciliation meeting (where finance participates and adds the financial implications to supply/demand balancing decisions).

What’s discussed in the executive meeting are issues like whether the company will meet “its commitment to the street” and whether there are gaps between the strategic goals of the company and what is actually occurring.  The job of the key managers that participate in the integrated reconciliation meeting is to elevate only key issues to top management, ideally just three or four a month.  For each issue, two or three alternatives are presented, the pros and cons of each are analyzed, and the financial impacts of those alternatives (over a short, medium and long term horizon) are examined and a recommendation is made.  The CEO should walk out of this two to four hour meeting with a forward-looking and updated Profit and Loss, Cash Flow and Balance Sheet.  There should also be an updated calendar of key events, with the responsibility for each event assigned to a particular person.

It takes time to get to an efficient S&OP process and an executive meeting where only strategic decisions are addressed.  It can be a three year journey that involves the changing of job descriptions (often in the sales organization – “the job of a salesman is not to take orders but to sell the goods an organization has committed to make”), a rethinking of incentives, and the need for the CEO to take certain key executives behind closed doors and let them know they need to collaborate with the S&OP team or else.  In the early months, decisions that should be made by middle managers will often get elevated to the executive meeting.  But in time, middle managers will avoid elevating issues that really should be resolved among themselves.   

Here are some key takeaways from Peter:

1. Sales and marketing should be responsible for the demand plan.  The chasm between sales and marketing can be as wide as the gap between marketing or sales and operations.  In general, and particularly in consumer goods companies, a marketing executive should have final responsibility for the demand plan because pricing, promotion, channel, and placement decisions factor so heavily into demand planning.  Because marketing is most comfortable doing planning at the product family level, forecasters from the supply chain organization that can provide historical forecasts at the SKU level need to be co-located with sales and marketing.
2.  The supply chain organization likes to point its finger at sales and marketing and say “If you gave us a better forecast, we could run a better supply chain.”  There will always be forecast error.  If the best a particular company can achieve is a forecast with 40 percent error, then sales and marketing should be held accountable if there is a 60 percent forecast error.  In turn, the supply chain needs to build a flexible, agile supply chain that can adjust to a 40 percent error rate.
3. All processes include people and supporting tools.  Poorly run S&OP processes rarely break down because of poor supporting tools.  Peter has seen very strong S&OP processes that mainly use Excel and PowerPoint.  The key is that processes not be bureaucratic, but that they are documented, and that accountability is placed on a particular person at every step and sub-step.

While I generally think that many problems addressed by consultants could be addressed more effectively by the company itself, I’m a firm believer that if a company has a poor S&OP process, they should seek outside help.