In the context of a distribution-intensive operation, the difficulty of getting one version of the truth is a major stumbling block. Suppliers experience an ongoing ebb and flow of goods in stock, goods in production and goods in transit. Distributors are stuck in the middle, constantly struggling to connect the dots and reconcile their financial plans.
The fact is, you may have an S&OP problem if you are experiencing:
- Communication disconnects due to varying functional versions of data.
- Difficulty connecting your business strategy to your operational planning.
- Difficulty turning your business strategy into an effective action plan.
- Fill rates not improving even after specific initiatives take place.
- Declining margins and declining revenue.
- Declining customer satisfaction, leading to a loss of customers.
Clearly, the way out is to devise a functioning S&OP system, where demand and supply are balanced, thereby enabling the financial plan. As the supply rate balances the demand rate, inventory turns faster. Customers begin getting what they want - when they want it - increasing revenues. Working capital gets put to better use. Margins increase. And the business grows along with shareholder value.
Right processes, the right tools
To accomplish a compelling S&OP solution you will need to consider two key ingredients which are firstly, an effective operations process and secondly, the right technology for the job.
Your process needs to work on a level that matters i.e. SKU level to turn strategy into results. Consider constructing a "gameboard" for a number of SKUs as a test. Each week, gather your sales, marketing, supply chain and manufacturing partners together to match demand with supply, attempting to balance SKUs between 'Maximum Weeks on Hand" and ''Minimum Weeks on Hand". This will allow you to focus on exceptions at the SKU level.
As SKUs breach their Weeks on Hand Maximum/Minimum thresholds, you clearly know the reasons and can then make decisions on possible resolutions for out-of-bounds instances. As the weeks progress, inventory numbers can be updated to maintain a balance. Consider the following formula in determining next week's inventory number:
Inventory - sales + production/purchase =
next week's inventory number
Remember, for continuous improvement, simply focus on exception management.
With your team all on the same page, you can next focus on selecting an application to support your process across the combined demand, supply, production, inventory and financial gameplan.
You will need a system powerful enough to provide you with drill down analysis, dynamically by segmentation, into forecasting and historical data. You will want to analyse SKUs by geography, margin, company or business unit and product family, then cross-reference them against monthly, quarterly and yearly financials to arrive at one set of numbers.
As a collaborative platform, your choice must offer one version of truth. That is, everyone, including marketing, sales and supply chain partners, should all be able to access the same information to arrive at the same conclusions.
Partner selection and eventual solution
Choosing a capable deployment partner will be critical to your success. Their familiarity with the distribution business will accelerate any S&OP deployment. A track record in your specific vertical market segment will also add value and facilitate implementation.
Once you have selected a partner, the transition moving forward should emphasize process before technology. Getting the stakeholders involved early will create buy-in and raise potential champions for your cause.
Next, develop a financial baseline, setting financial goals and identifying the potential risks. Then, model your process using the SKU gameboard suggested above for a few key SKUs and train the team on it. Measure your outcomes against your goals and discuss what you learned as a team. This will create believers and produce momentum in your program moving forward.
In the long run, your ability to balance supply and demand in the context of your financials will improve with a functional S&OP system in place. The improved collaboration will provide you with a single version of truth, improving decisions in all areas of your business.
The end result will be a market-driven system that maximises your opportunity, mitigates risk and enables market to market demand orchestration for improved, long-term financial performance.
Ramna Viswanathan is a Senior Business Consultant for International Business Systems.
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