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Process Mapping – If you can’t describe what you’re doing, you don’t know what you’re doing
March 21, 2024
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April 3, 2024
7 people around a table with a brown paper on it.
Process Mapping – If you can’t describe what you’re doing, you don’t know what you’re doing
March 21, 2024
Lean is Doing Less more Often
April 3, 2024
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Sales and Operations Planning is Balancing Complex with Complicated

a diagram showing teh steps of S&OP

A Balancing Act

The balancing of supply and demand in the near term (3-18 months) is the tasks we assign to the Sales and Operations Planning process, or S&OP. We forecast sales and determine our capacity and resource needs to deliver against this demand. We aggregate the detailed views and go from an unconstrained view (what is possible) to a constrained view (what is likely and feasible). This appears a lot simpler than it is. Even in advanced organisations you will never see a steady state or ‘balance’. We should see it more like rebalancing an ever-fluctuating state.

I want to make the case that S&OP is hard, and that it will continue to remain so because there is inequity in the equation of supply and demand.

 

Why Focus on S&OP?

First, why is S&OP an important process? Supply chains – the network of parties and steps between your company and its suppliers to produce and distribute your product to the final customer and consumer – are sometimes seen as non-strategic cost centres that need to be managed.

The best companies in the world have realised that your supply chain is a valuable differentiator that drives your competitive advantage: you build supply chain capability to be better at meeting the requirements of your customer than your competitor. Your competitive advantage could be shorter lead times, more choice or customisable options, higher quality finished product or components/ingredients, and a lower price or otherwise more favourable terms. Note that there is strongtension between these factors.

Specifically, strong Supply Chain Integration processes result in an organisation that is sustainably better at the following company performance measures:

  • Higher DIFOTIS – Delivered In Full, On Time, In Spec
  • Lower Inventory and therefore better gearing
  • Shorter Cash Conversion Cycle
  • Higher Revenue, Volume & Margin
  • Higher RONA – Return on Net Assets

So, what is difficult about S&OP? Most would mention the traditional organisational matters of side-effects of (sales) incentive programmes, biases of opinion over data, and cross-functional rivalry between sales and operations. But there is a fundamental process design issue that makes S&OP difficult that is not often highlighted.

The central challenge with S&OP, is that we’re trying to balance two challenges, one is complex and the other is complicated. This fundamental process disign issue is the crux of the challlange in S&OP. We wrote about complicated versus complex in an earlier post. To recap, complicated problems or challenges are hard to solve, but you can follow processes, methods, rules, and algorithms to address them. Complex problems involve too many unknowns and too many interrelated factors to reduce to rules and processes. There’s no algorithm that will tell you how to respond to complex challenges.* The way to deal with a complex problem is to monitor, adjust, and evaluate, that is, practice PDCA.

 

It is Complicated

Which side of S&OP is complex and which one complicated? Capacities, resource levels, material supply – the supply side is ruled by… well, rules. Through modelling you can fairly accurately predict what the supply numbers are in the 3-18 months horizon. It is not easy, but a good model will give you an accurate prediction. It is complicated.

 

As well as Complex

In contrast, demand, the sales side of the S&OP equation, is a complex challenge. Consumer behaviour, competitor activity, world events, environmental factors such as weather and disease. These are all hard to predict. Sales forecast accuracy is often not high, and that can be explained: forecasting is hard. Niels Bohr, the Nobel laureate in Physics and father of the atomic model, famously said, “Prediction is very difficult, especially if it’s about the future!”. We need to be accepting, forgiving maybe even, that sales forecasting is hard. Always try to improve your sales forecasting, but accept that this is a complex challenge. Finetune through monitoring, adjusting, and evaluations.

Don’t be forgiving about forecast bias though – when you are consistently under or over forecasting. This indicates that you are not learning from the forecast to actual cycle.

There are complex elements on the supply side that can make S&OP even more difficult.For example, primary producers are reliant on weather and disease, which are not entiry predictable.

What are the consequences or take-aways from the complex versus complicated insight?

 

Don’t Make it Personal

Even in advanced organisations we see operations taking potshots at sales for not accurately forecasting or for failing to deliver against their sales plan. The ramifications of having to fulfil uncertain forecasts amidst fluctuating sales, whether they exceed or fall short of expectations, create instability that operations must accommodate. For example, early in my career, I had a operations manager whose favourite saying about Sales was: “They can always sell what we can’t make!”

And Sales complaining that deliveries are late and shelves are empty fits in the same category. Yes it’s lost revenue but blame will not result in a better process.

These potshots are not helpful and only perpetuate the ‘us versus them’ culture. S&OP requires a transparent, collaborative, and integrated approach, which is the result of:

  • Knowledge sharing that is both captured in a formal process and is part of the culture of an organisation. The type of knowledge shared is about current customer requirements and market trends, and equally about evolving trends on the supply, capacity, resource, and labour side.
  • Work that is organised around the value stream, the core horizontal processes from the supplier’s supplier to the customer’s customer. These run across the business and across functional silos of an organisation.
  • Transparent, well-defined, and shared performance measures between the organisational functions that measure business success and drive individual accountability for the shared work processes.

 

(*Again, thanks to MIT Sloan, The Critical Difference Between Complex and Complicated, 2017).

About the author: Geerten Lengkeek is the Managing Director of Productivity People