S&OP-process: death by details
Last week I met with a customer to discuss his S&OP process, which he felt was underperforming. He still believed it to be useful, but the process was struggling to get off the ground and he couldn’t pinpoint the reason why. Much to our surprise we had identified the root of the problem within just 2 minutes, which is why I’m keen to share our discussion here.
My first question was about the company’s S&OP planning horizon. The answer: approximately three months. I then wanted to know the extent to which the sales volumes could be influenced within those three months. Hardly at all, apparently. Demand could be increased or reduced somewhat through promotional activities, for example, but generally that meant customers would move their volumes forwards or backwards rather than actually changing them.
It also emerged that it was not really feasible to alter the capacity or influence the production costs within the given time frame. Employee overtime could be arranged in the short term, although that was subject to strict regulations. And with such a short planning horizon, the conversion costs were also completely fixed. I enquired whether anything could be done on the purchasing side. But the purchasing contracts were fixed so the only thing the customer could do was call off more or less than agreed. For many of the contracts, this too meant that the volumes were merely shifted forwards or backwards because they could no longer be amended.
‘So ultimately, you all attend a meeting about something that you can no longer influence,’ I concluded. ‘Maybe you should extend the planning horizon.’ That was a good point, the customer agreed, but he had already tried that. ‘The problem is that we don’t have all the details yet.’ ‘Details?’ I asked. ‘Yes, we need all the details before we can input planning information in our system.’ I asked the customer whether Sales also made plans based on a horizon longer than three months, such as with regard to portfolio changes. They did. The same was true for Production and Purchasing.
‘Wouldn’t it be useful to look at whether those plans are aligned with each other?’ I wanted to know. ‘Definitely,’ said the customer, ‘But our system…’. I interrupted him: ‘Forget about your system for a minute! Do you think that Production and Purchasing could be interested in using the sales plans as the basis for their own planning?’ Most likely, thought the customer. ‘Would they really need the detailed product mix to be able to plan their capacity and sign framework agreements, or would volumes alone be enough?’ I persisted. ‘Good question,’ he replied, ‘But that would depend on the horizon.’
I congratulated him: ‘Well done, you’ve just solved your own problem!’ ‘Solved it?’ he exclaimed. ‘Yes, we’ve just discovered that the quest for detailed information which nobody needs is what’s killing your S&OP process.’
This discussion demonstrates a broader problem with S&OP implementations. In many cases, people confuse accuracy with details, and forget to consider which decisions need to be made within which time frame, and which information is required. So is the solution always that simple? Of course not. That always depends on the specific needs, but as soon as you’ve identified the root of the problem, you’re often already 90 percent of the way there. In the case of S&OP, the final 10 percent tends to be a matter of mindset. Even though your system says otherwise and people may initially struggle to accept the idea: more details are rarely the solution!
Hans van der Drift, partner at Involvation