Financial Executives and Sales and Operations Planning Process

The American Production and Inventory Control Society (APICS) defines Sale and Operations Planning (S&OP) as the "function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan. One of its primary purposes is to establish production rates that will achieve management's objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the workforce relatively stable. It must extend through a planning horizon sufficient to plan the labor, equipment, facilities, material, and finances required to accomplish the production plan. As this plan affects many company functions, it is normally prepared with information from marketing, manufacturing, engineering, finance, materials, etc."[1]

Sales and Operations Planning has also been described as "a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations"[2].

In more simplified terms Sales and Operations Planning can be described as - STATE WHAT YOU ARE GOING TO SELL AND MAKE WHAT YOU STATE YOUR ARE GOING TO SELL. It really doesn't have to be more complicated than that.

The benefits of S&OP are well documented and proven over time.

The successful S&OP cycle will lead directly to improved customer service, reduced inventory levels, and increase the profitability of the business. And, most importantly, a well run S&OP will allow the business to quickly adapt and change to current market conditions - which is absolutely critical in today's every growing world economy. So, why are some companies struggling to see the results?

It is my contention that most companies that fail or struggle with S&OP do so because of lack of management and leadership - in specific top tier executives do not buy into the process.

Top managers have a very difficult time of letting go of their ego's and the notion that the direction of the business can be reduced to a succinct two hour monthly Executive Review meeting is hard for them to fathom.
How many of you are conducting a Pre-S&OP meeting? Unless your company has thousands of SKU's (stock keeping units), there is no reason to conduct a Pre-S& OP meeting and the only reason they exist is because the top managers are "guarding" their numbers and don't trust the capable people they have working underneath them. In short, the executives haven't bought into the S&OP process and are more concerned with maintaining face with other executives rather than leading and directing the company to a more profitable state.

There is one top executive that every successful S&OP process must have buy-in from and, no it's not the COO (Chief Operations Manger), nor is it the CEO (Chief Executive Officer) or President, nor is it the Board of Directors, it is the CFO (Chief Financial Officer).

All managers are judged by numbers of some sort. The CFO and other finance managers and the numbers they present greatly affect the management and direction of the business. All too often though, the finance team has their own unique set of numbers that are inconsistent with the numbers the operations team and sales/marketing team are working with. Having more than one set of numbers leads to very large disconnects - especially when presenting to the CEO/President or Board of Directors and cause severe disruption to the day-to-day operations of the business when other managers are brought in to "defend" their numbers.

Listed below are the reasons why the finance department must fully buy-in to achieve a highly successful S&OP process:

o Financial Integration. One of the many great outputs of the monthly S&OP cycle is the emergence of gaps between supply and demand and the ability for the management team to derive solutions to close the gaps. Executives and managers need to know the financial impact of decisions they are making to close the gaps between supply and demand. Often times, this creates financial variances that can easily and concisely be explained to top management and other major stockholders. It will no longer be a surprise that the month-end numbers differ from expected and can easily be explained or better yet curtailed before they happen.

o Financial Forecasts. The typical time horizon for a flourishing S&OP process in 15 to 18 months. Once the finance team fully accepts the output from each S&OP cycle, the quarterly financial forecast and the annual operating plan (AOP) or budget become an easily obtainable objective rather than mad diatribes and extended working hours. How many companies needlessly carry a staff just for the AOP/budgeting process alone or disrupt the flow of operations by tasking managers to obtain a separate set of AOP/budget numbers? Don't you think those resources could be used more efficiently elsewhere?

o Inventory Levels. Agreeing upon one set of numbers is critical in determining the inventory levels a business decides to move forward with. It is imperative that managers know the financial impact of carrying fifteen days, thirty days, forty-five days etc... worth of inventory and the associated trade off in customer expectations, satisfaction and retention.

Reaching a consensus on a single set of numbers will allocate critical resources (including people, equipment, materials, money and time) to best serve and satisfy customers in a profitable way. Without garnering top executive level buy-in - especially the finance department -S&OP process is set-up to fail or at the very least run dysfunctional.

Reference
o Inventory Levels. Agreeing upon one set of numbers is critical in determining the inventory levels a business decides to move forward with. It is imperative that managers know the financial impact of carrying fifteen days, thirty days, forty-five days etc... worth of inventory and the associated trade off in customer expectations, satisfaction and retention.

o Inventory Levels. Agreeing upon one set of numbers is critical in determining the inventory levels a business decides to move forward with. It is imperative that managers know the financial impact of carrying fifteen days, thirty days, forty-five days etc... worth of inventory and the associated trade off in customer expectations, satisfaction and retention.