Why is S&OP important in 2014 and beyond?
February 19th, 2014 3:51 pm Category: Supply Chain Optimization, by: Karen Bird
The economy has been slow to recover after the Great Recession of 2008, however, many economists believe that 2014 and 2015 will be strong years for the US and Global economies. How accurate will your forecasting model be in projecting the supply needed from your business? Since forecasting models typically use two to three years of history (actual sales) to predict the future and we are coming out of a down economy and heading towards positive growth, the standard forecasting models will not predict the future very well. This is where human intelligence and companies with a formal Sales and Operations Planning (S&OP) process have an advantage.
A formal S&OP process gives companies a monthly opportunity for their Sales and Operations teams to come together and review the data, latest intelligence from the field and make the best decisions possible for the company. In addition, a formal S&OP process gives the business a forum each month to challenge the current execution plan and either reconfirm or adjust the plan to meet the strategic goals of the company. A monthly review of key forecasting metrics can provide the Sales team with valuable feedback regarding the forecast.
Read the Profit Point S&OP Research Report
A study by the Aberdeen Group shows that greater than 60% of Best-In-Class companies view a formal S&OP process as a strategic priority for their organization and that Best-In-Class companies hold an 18 point advantage in forecast accuracy. According to an AMR Research study from 2008, companies that are best at demand forecasting average:
- 15% less inventory
- 17% higher perfect order fulfillment
- 35% shorter cash-to-cash cycle times
- 1/10 the stock-outs of their peers
How does a formal S&OP process help to deliver these benefits? It is a combination of getting the right people together to make the right decisions at the right time. A few years ago, Thomas Wallace, author of Sales and Operations Planning: How-To Handbook initiated a project to study the experiences of companies using Executive S&OP very well. The companies in the Best Practices Project cited similar hard benefits listed above but they also said “the soft benefits are equal in importance, or perhaps greater, than the hard benefits”. The soft benefits most often cited were:
- Enhanced Teamwork
- Embedded Communications
- Better Decisions
- Better Financial Plans
- More Focused Accountability
- Greater Control
- A Window Into The Future
A well run S&OP process will put a spotlight on problem areas or gaps in your business 18 – 24 months in the future. This allows the team to collectively see a potential problem or upside opportunity and produce scenarios to help the company to react to them in a timely and efficient manner.