This article is taken from the book, Practical Guide to Sales & Operations Planning (S&OP/IBP). It’s currently available at a special introductory price. Get a copy here before the price increases.

Collaboration and involvement from people outside of one’s own role become very important in the complex dance of business operations, especially when it comes to Sales and Operations Planning (S&OP).

Imagine that a carefully thought-out forecast fails because important details about a last-minute marketing strategy are not shared, or a new product fails to launch because they did not have a piece of information from sourcing. These mistakes often happen when people and groups work alone, and it shows how important it is to have a structured way of coordinating across functions.

“Real-life problems often make it hard to work together smoothly”

Even though every company always says it is important to break down functional silos and build up communication, real-life problems often make it hard to work together smoothly. This realization shows how important it is for companies to have a structured way of achieving this cross-functional alignment.

When functions work together, each one affects the other, kind of like seeing all the puzzles put together instead of just a piece. This synergy could show up as a huge sale, less product that does not sell quickly, or the ability to find new synergies to cut costs. Without good communication and participation, a process that starts without involving other departments can end up putting extra work on them, which can lead to extra costs and missed chances.

Effective collaboration and cross-functional involvement are key to the success of mature Sales and Operations Planning (S&OP) processes. A mature process creates a unified way for the company to communicate better and reach its goals.

What Exactly Does Strong Teamwork Look Like?

• S&OP Goals Are in Line with Each Other: To work together well, everyone needs to be on the same page about the S&OP goals. To be committed to a cross-functional method, the functions that are taking part must give up old ways of doing things and trust that the S&OP process will bring benefits. This connection makes sure that everyone is working toward the same goal, which brings together and makes sense of different business functions.
• Supporting Mindsets and Behaviors: Adopting mindsets and behaviors that fully support the stated process is a key trait for high-performing cross-functional S&OP teams. To do this, silos need to be broken down, and a setting needs to be created where people from, say, the Commercial and Supply Chain or Finance see themselves as equal partners. Adopting a helpful attitude and working together makes S&OP stronger, letting ideas and suggestions from different departments fit together easily.
• Active Participation: Active participation is a must in an S&OP process that works. True alignment makes sure that all activities are focused on the company’s main goals and are coordinated between different functional areas. If all stakeholders are not involved, there could be differences in the amount, mix, location, or timing of products, which could hurt total performance.

Collaboration in mature S&OP processes is more than just working together; it includes having the same goals and having an organizational mindset that values working together to achieve those goals. Businesses can get the most out of S&OP by making sure everyone is on the same page, encouraging helpful thoughts and actions, and encouraging active involvement. This will increase efficiency, flexibility, and long-term success.

How do I Get Functions to Start Working Together?

To get people from different departments to work together and be involved in Sales and Operations Planning (S&OP), you need a plan that considers differences in culture, skills, and communication. To help foster this collaboration, here are seven steps you can take:

• Cultural Brokers and Change Catalysts: Recognize people in the company who are great at making connections between areas. These “cultural brokers” or “change catalysts” can help teams work together better by working with people from different backgrounds, stepping into different roles, and making links.
• Upskill for Cross-Silo Success: Give functional leaders on diverse teams training and mentoring programs to help them get better at their jobs. Training can teach people how to ask open-ended, fair questions, think about other points of view, and see things in a bigger picture.
• Encourage Communication to Build Trust: To build trust among cross-functional teams, encourage open communication. Promoting open communication helps team members who do not know each other well get over trust problems that come up because they do not know each other well.
• Set Up More Structure: Even though it may seem like speed is important, structure is actually very important for cross-functional teams to work well. Set clear jobs, goals, and responsibilities to make it possible for people to work together. Using a structured method helps S&OP become more mature.
• Use Meaningful Metrics: Connect the changing performance of your team to the goals and key performance indicators (KPIs) of your company. Set clear, cross-functional goals and measurements that are in line with the organization’s objectives. This makes sure that the team’s work helps the project succeed as a whole.
• Acknowledge and Reward Success: Use KPIs to track and acknowledge growth and success. Leaders should praise individuals or groups for doing a great job, and stress how important cross-functional collaboration is, and how it can help the company.
• Choose the Right Technology: Spend money on teamwork and communication tools that make it easy for teams from different departments to work together. To improve communication and teamwork, use tools like screen sharing, video chat, and process management apps.

By following these steps, companies can create a setting where people can work together in the S&OP process, which will lead to better communication, trust, and organized teamwork between different departments. This method helps make S&OP more mature and increases the success of the company.

Conclusion

In S&OP, cross-functional collaboration is not just about sharing wins; it is a strategic must to see how actions affect the whole picture. It requires removing barriers to create an environment where departments are not only contributors but also active participants in the organization’s success.

IBF’s new book Practical Guide to Sales & Operations Planning is a fantastic resource to learn best practices in S&OP and IBP from world-leading planning experts. You’ll learn how to start an S&OP/IBP process, progress it along the maturity curve, and use it to drive effective decision making that has a direct impact on KPIs like inventory turns, forecast accuracy, cash flow, customer service and more

This article is taken from the book, Practical Guide to Sales & Operations Planning (S&OP/IBP). It’s currently available at a special introductory price. Get a copy here before the price increases.

As companies advance in their S&OP journey, the depth and breadth of planning expand, necessitating greater involvement from finance professionals. Finance expertise becomes indispensable as it adds nuanced insights beyond mere numerical analysis to the S&OP framework.

This integration fortifies businesses, enhancing their adaptability in today’s dynamic market landscape. Integrating finance into S&OP transforms the process from an ancillary function to a pivotal component of organizational strategy. Managers gain visibility into real costs, steering decisions towards tangible outcomes rather than theoretical conjectures. From procurement to production scheduling and marketing strategies, finance-informed decisions align with overarching business objectives and financial plans.

“Finance transforms S&OP from an ancillary function to a pivotal component of organizational strategy”

Excluding finance from S&OP, planning is limited to input-output dynamics, overlooking crucial aspects of business operations. Finance’s involvement is essential for a holistic understanding of the business ecosystem, as it ensures that decisions are based on financial realities. Collaboration between S&OP and finance bridges gaps in comprehending interdepartmental synergies, facilitating informed decision-making.

A synchronized approach that seamlessly integrates forward-looking sales and operations plans with financial considerations is essential for effective budgeting. This alignment ensures that planning decisions directly impact financial outcomes, fostering organizational coherence and fiscal responsibility. By fostering collaboration between finance and S&OP stakeholders, businesses cultivate a comprehensive understanding of operations, enabling informed cost management decisions essential for sustained growth and profitability.

Benefits of Integration

It’s important to know how to talk about business in the Executive S&OP step by turning plans for numbers into plans for money. Executives decide what to do based on how the results will affect the organization’s health and its bottom line. They talk about EBITDA, P&L, and cash flow, not estimate error, units, and capacity. When Finance and S&OP work together, you can talk to leaders in their own language and make sure that everyone has a better understanding of the plans.

1.Alignment with Financial Goals: Finance being a part of the S&OP process makes sure that decisions made by the business are in line with its overall financial goals. When financial factors are taken into account in strategic planning, the S&OP process becomes a unified force that drives the company’s goals.

“Finance’s role in S&OP gives it a strategic view”

2. Strategic View: Finance’s role in S&OP gives it a strategic view by consistently predicting key business drivers, using predictive analytics, and incorporating up-to-date sales data. By adding financial information, the organization’s strategic path, risk assessment, and upcoming opportunities can be shown more accurately.

3. Collaboration: S&OP is naturally a process that involves people from different departments, and adding Finance breaks down silos and encourages people to work together. Different departments can make choices that are in line with bigger financial goals if they work together. Finance helps make it easier for people from different departments to work together and takes budget limits into account when making long-term plans.

4. Flexibility: A flexible financial plan is important in today’s fast-paced business world where market conditions, customer tastes, and world events are always changing. Adding Finance to S&OP, which focuses on ongoing planning and rolling forecasts, helps businesses respond quickly to changing conditions by making sure that monthly predictions are in line with financial plans.

“When Finance is added to S&OP, it makes the whole company take the same approach”

5. Unity Across the Enterprise: When Finance is added to the S&OP process, it makes the whole company take the same approach. By making a monthly Profit and Loss (P&L) and rolling forecast, businesses can better understand the factors and drivers that affect different areas. This breaks down barriers and promotes a more unified work culture. Long-term resilience in the face of uncertainty is helped by this unified method.

How to Integrate Finance Into S&OP

• Monetizing S&OP Plans: The first step towards integration is to monetize S&OP plans. This involves translating plans into financial terms and ensuring that all participating S&OP functional leaders have monetized plans to run their respective areas effectively.
• Alignment of S&OP Design with Financial Management: It is very important that the S&OP design is in line with how the business handles and reports its finances. This alignment ensures the easy addition of financial factors to the S&OP structure.
• Speaking the Same Language: The S&OP structure needs to be able to communicate with the finance team. We must change S&OP measures from volumes to values, inventory to working capital, and resource use to return on assets in order to achieve this.
• Finance-Led Variance Discussions: Finance can be very helpful when it comes to leading budget difference conversations, asking important questions, and speaking up when needed. This collaborative approach ensures the consideration of financial concerns during decision-making.
• Joint Objectives for Financial and Operational Departments: Setting shared goals for the finance and operations teams gives them a direction to follow, makes their goals more aligned, and encourages them to work together.

Conclusion

Including Finance in the S&OP process is not only the right thing to do; it is also a must for businesses that want to do well in today’s business world. For organizations striving for excellence, transitioning from understanding how to get finance in S&OP to effectively leveraging this partnership for strategic success is critical. By harnessing the synergies between finance and S&OP, organizations can achieve greater agility, profitability, and long-term resilience. This is an important step on the S&OP maturity journey.

BF’s new book Practical Guide to Sales & Operations Planning is a fantastic resource to learn best practices in S&OP and IBP from world-leading planning experts. You’ll learn how to start an S&OP/IBP process, progress it along the maturity curve, and use it to drive effective decision making that has a direct impact on KPIs like inventory turns, forecast accuracy, cash flow, customer service and more

This article is taken from the book, Practical Guide to Sales & Operations Planning (S&OP/IBP). It’s currently available at a special introductory price. Get a copy here before the price increases.

Sales and Operations Planning (S&OP) stands as a cornerstone in the realm of Supply Chain Planning, serving as the nerve center that aligns diverse planning activities within an organization. The true potential of S&OP, however, blossoms in a mature implementation, offering a myriad of benefits that significantly elevate organizational performance.

Here are the top ten advantages intrinsic to a mature S&OP process, providing compelling reasons for any organization to embrace this transformative approach.

10) Builds Collaboration: A mature S&OP process acts as a catalyst, fostering cross-functional collaboration by dismantling silos and overcoming functional barriers. The convergence of stakeholders from sales, operations, finance, and other areas not only breaks down informational silos but also establishes a foundation for increased trust and accountability.

9) Builds Consensus: Achieving a unified vision becomes a reality with S&OP, as it ensures everyone operates from the same plan, aligning day-to-day operations with overarching business strategies. This unity reduces errors, facilitates plan reconciliation, and enhances adaptability when faced with unforeseen challenges.

8) Becomes More Agile: Contrary to the misconception that S&OP hampers agility, a mature process promotes collaboration and consensus as keystones to agility. With streamlined planning, organizations are better positioned to execute swiftly, plan buffers effectively, and strategize mitigation strategies with coherence.

7) Improved Visibility and Transparency: A mature S&OP process offers a comprehensive view of the entire business landscape, providing a forum for open discussions, conflict resolution, and informed decision-making. This enhanced visibility minimizes uncertainties and sets the stage for transparent communication across all levels of the organization.

6) Forecast and Plan Improvement: Beyond mere forecasting, a mature S&OP process elevates all planning facets, minimizing bias and incorporating diverse insights. The outcome is a set of plans that are not only more accurate but also more relevant and meaningful to all functions within the organization.

5) Resource Optimization: At its core, a mature S&OP process becomes a cost-saving engine for the company. By intelligently streamlining operations and optimizing resources, organizations enhance efficiency, eliminate bottlenecks, and fortify their supply chain, production, and logistics processes.

4) Better Customer Service: Beyond on-time, in-full (OTIF) metrics, a mature S&OP process contributes to top-line growth and revenue improvement. It enables organizations to understand customer demand intricately, leading to optimized inventory levels, timely product delivery, and enhanced customer satisfaction and loyalty.

3) Enhance Decision-Making: One of the hallmarks of a mature S&OP process is its ability to enhance decision-making. By providing a holistic view of the business, S&OP empowers organizations to assess different scenarios, evaluate risks, and develop informed contingency plans that align with their strategic objectives.

2) Higher Profitability: The ultimate goal for most organizations is maximizing shareholder value, and a mature S&OP process is the key to achieving this. It contributes to increased operating margins, enhanced capital efficiency, and sustained revenue growth, making it a cornerstone for higher profitability.

1) Competitive Advantage: In today’s dynamic business landscape, S&OP is not just a choice; it is a competitive imperative. Organizations that embrace a mature S&OP process gain a significant advantage by being more agile, responsive to market changes, and differentiated from their competitors. It is not merely a process; it’s a strategic advantage that propels companies toward long-term success.

Clearly, Sales and Operations Planning (S&OP) is not just a functional process but a strategic lever for organizational excellence. A mature S&OP process weaves collaboration, transparency, and agility into the fabric of an organization, providing a robust framework for sustained growth and competitive differentiation. If you have not started the S&OP journey, you are not just falling behind; you are falling behind a competition (that has most likely already read this book and has already embraced the transformative power of S&OP).

IBF’s new book Practical Guide to Sales & Operations Planning is a fantastic resource to learn best practices in S&OP and IBP from world-leading planning experts. You’ll learn how to start an S&OP/IBP process, progress it along the maturity curve, and use it to drive effective decision making that has a direct impact on KPIs like inventory turns, forecast accuracy, cash flow, customer service and more

In the ever-changing world of Sales and Operations Planning (S&OP), getting everyone to agree on a decision is important but hard to do. It means putting together different, and sometimes conflicting, goals and points of view into a single plan.

Consensus building helps teams and organizations work together, come up with new ideas, and be more aligned, but it can be challenging because different functions and personalities have different goals and points of view. But with the right plans, it is possible to get through the messiness of consensus building and make decisions that have wide support, leading to better strategies and company success.

The Challenge of Consensus in S&OP

There are several reasons why it’s challenging to reach agreement in S&OP. There are different priorities because each area (sales, operations, finance, etc.) has its own goals and ways of measuring success. Complex sets of data from many different sources underpin S&OP decisions, making them difficult to understand clearly. Market conditions, customer needs, and supply chain factors are constantly changing, necessitating constant adjustments and reevaluations. Furthermore, it’s important to remember that S&OP involves people, each with their own unique set of limitations, issues, perspectives, and prejudices.

This can sometimes make driving consensus and decision-making within S&OP feel like a battlefield, where each party is trying to gain ground and defeat the opposing viewpoint. In these negotiations, individuals tend to see the process as a scale, believing that by piling more reasons and facts on theirside, they can tip the balance in their favor.

However, in this warlike mentality, people search for flaws in others and arguments to bolster their own positions. Consequently, rejecting even a small idea can justify dismissing all of them, turning negotiations into a series of attacks and defenses rather than a constructive give-and-take. This adversarial mindset makes reaching a consensus challenging.

Insights to Consider

Reflecting on my experiences (and with the help of a recent book I read by Adam Grant, Think Again), I’ve found that the power of rethinking and embracing the possibility of being wrong are crucial elements in driving consensus in decision-making. Encouraging healthy differences and fostering open communication can lead to better decisions, innovative ideas, and stronger relationships. In S&OP, the harmonization of diverse opinions and objectives is crucial for achieving unified decisions.

By promoting an environment where team members feel comfortable expressing their views and challenging assumptions, we can create a culture of productive debate that enriches the decision-making process.

One of the key perspectives to consider in S&OP is collaboration, consensus, and transparency, which can mean the importance of intellectual humility and being open to new information. Encouraging team members to question their beliefs and consider alternative viewpoints can lead to more robust and flexible planning. Recognizing the limits of our knowledge and being open to new ideas helps avoid the pitfalls of overconfidence and confirmation bias, making teams more receptive to data-driven insights and collaborative solutions. By prioritizing learning and evolution over correctness, we can foster continuous improvement and adaptation in the S&OP process.

Regularly seeking and integrating feedback into planning cycles, promoting respectful discussions, and encouraging diverse perspectives can lead to valuable insights and drive consensus through mutual understanding. Embracing a mindset of continuous testing and adjustment can transform forecasts and plans into dynamic hypotheses that evolve with new data and insights, ultimately leading to more effective and resilient S&OP practices.

Applying Lessons to S&OP

Driving consensus in S&OP decision making can be challenging, but by applying these ten strategies, you can facilitate more effective and inclusive processes:

1. 1. Check Your Own Biases at the Door: Embrace the possibility of being wrong and maintain a desire to find the truth. By doubting your own judgment and remaining curious, you can adapt to new information and foster a more open-minded approach to decision-making. Clinging to outdated beliefs and opinions can be detrimental, and accepting the possibility of being wrong can be liberating. There is an importance to being willing to question and revise our thoughts, much like scientists who constantly test and refine their hypotheses.
2. Establish Clear Objectives and Guidelines: Clearly define the problem or decision at hand, outline the objectives, and ensure everyone understands the purpose and desired outcomes. Adopting a scientific mindset, where curiosity and evidence guide our thinking rather than intuition and tradition, can help us navigate complex and uncertain environments more effectively.
3. Foster Open Communication: Encourage open and honest communication among team members, creating psychological safety or a safe space where individuals feel comfortable sharing their opinions, taking risks, expressing ideas and concerns, speaking up with questions,
   and admitting mistakes—all without fear of judgment or retaliation.
4. Encourage Diverse Perspectives: Actively seek out and consider different viewpoints,
   experiences, and expertise within the group. This diversity of thought can lead to more
   innovative and well-rounded decisions, helping to identify potential blind spots and challenges.
5. Facilitate Constructive Debate: Healthy debate is critical for reaching consensus. Encourage team members to challenge assumptions, question ideas, and explore alternative solutions while ensuring discussions remain focused on issues and avoid personal attacks. Consider the importance of cognitive flexibility and the ability to switch between different modes of thinking. This includes knowing when to rely on intuition and when to seek out more data and analysis.
6. 6. Build on Common Ground: Identify areas of agreement early in the discussion, and build on these commonalities. Highlighting shared goals and values creates a foundation for collaboration and helps bridge differences.
7. 7. Seek Input and Ask Questions: Regularly check in with team members to gauge their comfort levels and gather feedback. Ensuring everyone stays engaged and promptly addressing any concerns reinforces a sense of ownership and collective responsibility.
8. Practice Flexibility and Compromise: Consensus often requires compromise. Encourage team members to be flexible and willing to adjust their positions for the greater good, finding solutions that, while not perfect for everyone, are acceptable and beneficial for the group as a whole.
9. Summarize and Confirm Agreements: Periodically summarize key points of agreement and areas that still need resolution to keep everyone on the same page. After reaching a decision, validate the agreement and delineate the subsequent steps for execution.
10. Follow Up and Reflect: After a decision has been made, follow up with the team to evaluate the outcome and gather feedback on the process. Reflecting on what worked well and what could be improved helps refine your approach to consensus-building for future decisions.

Conclusion

Driving consensus in Sales and Operations Planning (S&OP) is inherently challenging but crucial for organizational success. The process is often complicated by varying priorities, complex data sets, and the inherent biases of the individuals involved. However, by applying structure and these key insights, it is possible to foster a culture of intellectual humility, continuous learning, and collaborative problem
solving.

Embracing these principles can lead to more effective and aligned S&OP processes, ultimately enhancing the organization’s agility and responsiveness in a dynamic business environment. Creating an environment where team members feel comfortable expressing their views and challenging assumptions can lead to more robust and flexible planning, helping to avoid overconfidence and confirmation bias. Continuous learning and adaptation, prioritized over simply being right, drive ongoing improvement in the S&OP process.

IBF’s new book Practical Guide to Sales & Operations Planning is a fantastic resource to learn best practices in S&OP and IBP from world-leading planning experts. You’ll learn how to start an S&OP/IBP process, progress it along the maturity curve, and use it to drive effective decision making that has a direct impact on KPIs like inventory turns, forecast accuracy, cash flow, customer service and more.

“What can be measured, can be managed.” This statement is certainly accurate with respect to the real value and purpose of using KPIs, or key performance indicators, as essential tools for measuring, monitoring, and managing process performance.

KPIs serve as benchmarks for identifying opportunities for optimization and innovation. They are of great use in decision-making, and are good instruments for creating accountability by setting clear expectations for execution. These indicators are mostly used to measure and evaluate performance against specific objectives or goals. For example, it is common for companies to establish KPIs as quantitative measurements of performance—to assess how well the organization is meeting its yearly objectives.

Even so, it is important to note that KPIs are not only limited to quantitative applications, as they can also be used to communicate good stories. Diligently analyzing and interpreting these indicators, far beyond comparing them to a target, enables the discovery of what they are truly communicating. By learning how to interpret KPIs, past events can be better understood and used as valuable evidence to predict trends, propose impactful business actions, and effectively communicate them across the organization.

Additionally, integrating and effectively managing KPI indicators through financial statements results, provides organizations greater visibility and improved decision-making processes that support their financial health, and enhance their ability to sustain long-term growth and profitability. For example, integrating Sales and Operations Planning (S&OP) KPI metrics, such as forecast accuracy, inventory turns, customer service level, supply chain costs, and working capital ratios, among others, to the Income Statement and Balance Sheet, allows businesses to achieve greater operational efficiency and financial results, which by effect, lead to sustained competitiveness and increased market value.

LINKING KPIS TO THE INCOME STATEMENT

The income statement is an essential financial statement that provides insights into a company’s economic position, profitability, and efficiency in generating revenues and managing expenses.

Income statement figures can reflect actions taken by demand and supply planning to make a positive impact on revenue, generate cost savings across various areas of the business, increase profitability, and optimize costs—such as selling and marketing costs.

Linking S&OP KPIs to the income statement, facilitates a direct understanding of how operational performance impacts financial results, and establishes clear correlations between them, thus leading corporations to strengthen their ability to make informed decisions that drive profitability and sustainable development.

From a revenue perspective, accurate forecasting ensures that the right products are available to meet customer demand, hence preventing lost sales opportunities. Higher customer service levels also drive repeated business, further boosting revenue. As such, improvements in forecast accuracy and customer service levels contribute to positively impacting the top line.

From the Cost of Goods Sold (COGS) viewpoint, effective inventory management reduces carrying costs associated with excess inventory, and minimizes the risk of obsolescence—resulting in lower COGS. Moreover, effective supply chain management facilitates negotiating better prices with suppliers, reducing procurement costs, and optimizing resource utilization. Overall, these cost-saving strategies directly impact the bottom line of the income statement by reducing operating expenses and consequently improving profitability.

The combined effect of higher revenue and reduced costs leads to improved gross margins. Gross margin improvement is a key indicator of the company’s operational efficiency and profitability, benefiting the income statement by impacting the company’s bottom line, while enhancing profitability and shareholder value.

LINKAGE TO THE BALANCE SHEET

The balance sheet is another essential financial statement used by organizations to provide a clear picture of the company’s financial position at a specific point in time. It presents the company’s assets, liabilities, and shareholders’ equity. While balance sheet items are not typically considered KPIs themselves, certain financial ratios and metrics derived from the balance sheet can serve as metrics to assess the company’s financial health and performance.

A typical indicator measured on the balance sheet is the efficiency of working capital management. Efficient planning techniques directly impact working capital management by optimizing the weight between current assets and liabilities. For example, improving forecast accuracy and inventory management reduces the need for excess working capital tied up in inventory. This by result liberates cash that can be used for other operational needs or investments, and at the same time, improves liquidity and financial stability, ensuring that the organization can meet its short-term obligations and/or invest in other significant growth opportunities. Another efficient planning technique is tighter accounts receivable management resulting from improved customer service levels that by effect can reduce the Days Sales Outstanding (DSO), further improving working capital efficiency.

Other S&OP KPIs such as inventory turns and inventory levels can directly influence the balance sheet as well. Higher inventory turnover ratios imply efficient inventory management practices, that lead to lower inventory levels, reduced excess inventory, and minimized carrying costs. Further, optimizing inventory levels reduces the risk of inventory write-downs and obsolescence, which can impact the company’s financial health and asset valuation. These reductions also free up cash for additional investment, and could even lead to debt reduction. Improved financial performance resulting from effective planning practices can positively impact debt management, enhancing profitability and liquidity for better debt management, reducing interest expenses and financial risk.

In summary, a strong balance sheet with healthy ratios, such as higher profitability and better liquidity ratios resulting from improved working capital management, can enhance the company’s creditworthiness, access to capital, and reduce its reliance on debt financing.

REPORTING KPI RESULTS TO EXECUTIVE LEVEL TEAM

Executives are mostly interested in the company’s financial health and sustaining its long-term growth and profitability. As such, KPIs play a crucial role in driving financial performance and aligning operational activities and efforts with strategic goals and objectives, ensuring that everyone is working towards the same outcomes.
The linking and analysis of KPIs to the company’s financial results is not fully successful until information is effectively reported to the Executive Level Team (ELT), as actions and important decisions need to be made accordingly. Reporting KPIs to Executives in a frequent manner can serve as the basis for productive discussions and collaboration among Executives, as this encourages dialogue around strategic planning, performance trends, challenges and opportunities, and enables informed decision-making.

When communicating and reporting KPIs to the ELT, it is of great importance to determine clearly what each KPI measures and why it is important for the business. It is also crucial to consider setting clear communication and presentation goals where relevant and meaningful information is presented to ensure that Executives have a comprehensive understanding of the organization’s performance and strategic direction.

When presenting KPIs, it is best to present them in a visually concise, focused, appealing, and easy-to-understand format via charts, graphs, and dashboards to illustrate trends, comparisons, and key insights. Including contextual information and analysis alongside may allow Executives to better interpret the data accurately. When deemed necessary, identify key findings and insights derived from the KPIs and highlight actionable steps or strategic decisions that need to be taken based on the results. Monitoring progress against KPIs over time is fundamental to track changes in performance, evaluate the effectiveness of strategies implemented, and determine the need to adjust KPIs or initiatives as necessary.

CONCLUSION

In conclusion, in today’s dynamic marketplace, it is vital for any organization in search of fostering a holistic approach to performance management, to be able to translate operational efficiencies into financial successes. As such, aligning a company’s operational KPIs with its financial statements can be of great help in support of this goal. The benefits of linking operational KPIs to the income statement and the balance sheet can be substantial, as they can drive organizations to better understand the financial implications of their performance metrics and make better-informed decisions to drive revenue growth, improve profitability, and achieve strategic objectives.

Regardless of the disruptions that COVID created, the pandemic was a blessing in disguise for the supply chain discipline, and particularly for S&OP. 

The best way to appreciate something is to realize the impact of its absence or malfunction. COVID made us all acutely aware of the importance of all aspects of the supply chain. Schoolchildren, in their remote classes, were taught about the need to balance supply and demand, and saw first-hand what happens when it goes wrong. The toilet paper hoarding frenzy made the public aware of core supply chain concept: the bullwhip effect.

The increased awareness that COVID created represents a renaissance for the supply chain field. It is up to the professionals in this field to maintain this momentum and continuously drive supply chain advancements.

This is helping not only to bring more people to the field but also to start paving elevated career paths for them. Other than the global increased awareness of the importance of the supply chain, below are the major changes driven by COVID:

1) Ad Hoc Cross-Functional Training

The major disruptions created an unusual phenomenon of ad hoc cross functional training that exists to this day. By training, I mean genuine professional curiosity for the various functions to learn about cross-functional constraints and how everything is interrelated.

It all started with the various segments of the business catching up on the intricacies of the supply chain. For many, Supply Chain Management was limited to order entry. Suddenly, concepts like lead time, forecast accuracy, inventory allocation, and distribution requirement planning started to be understood.

Also, financial acumen increased amongst S&OP participants as expediting and transportation costs in general reached a record high. The danger of not delivering client needs became another key theme. Post COVID, we are seeing an ongoing, stronger collaboration amongst S&OP cross-functional participants in S&OP.

2) Enhanced Process Maturity

In addition to the increased supply chain awareness that COVID created, risk mitigation became a key focus. Concepts that were previously unique to vanguard S&OP processes at the highest maturity level are starting to be embraced by less mature planning organizations.

The quality of the output might not be optimal but companies nonetheless are increasingly attempting to stress test their assumptions and conduct scenario planning to better mitigate risks.

3) Broadened Internal Planning Scope

The classic hierarchy amongst the various planning horizons has flattened. The pandemic forced a realization that Master Scheduling, Material Requirement Planning, Rough-Cut Capacity Planning, and Capacity Requirement Planning necessitate a stronger symbiotic relationship with S&OP. With that, the internal scope of the planning processes has broadened.

4) Broadened External Planning Scope

Many companies realized that agile planning necessitates extending the planning scope outside the walls of the organization. This mindset can be seen in practice with enhanced collaboration with key vendors (CPFR) and by increasingly leveraging outside data sources and research.

While I hope we never have to face a pandemic like COVID-19, as an S&OP practitioner and supply chain professional I hope we don’t lose the momentum these two fields are currently enjoying so we can face any future black swan events with more grace and agility than 2020.

To learn the fundamentals and best practices of S&OP/IBP, join us in Chicago from June 12-14 for the biggest conference of its kind. With several workshop sessions, networking, and panel discussions it is where you’ll make S&OP a reality in your organization or elevate an existing process. Click here for more details.

I recently read Bob Stahl’s newest book, Sales and Operations Planning – An Executive Update, and I came away with a different perspective on a long-time problem; how to get consensus on a challenging forecast.  

Over the course of my long career, I have been part of, or facilitated, more than a thousand consensus meetings. And while most of these sessions generated little to no organizational tension, there have been times when it has been particularly difficult getting different parties (Sales, Marketing, Finance) to agree on a forecast. Under normal circumstances, early in the year and new product forecasts tend to cause the most tension because of the significant commercial ambitions loaded into these plans.

However, even these plans are often malleable with sufficient supporting data and conversation. The most difficult consensus challenges are always those forecasts that are most speculative, with little supporting data or with the greatest uncertainty.

Finding Consensus During Demand Chaos

COVID created forecasting chaos for many organizations. Tension increased during consensus meetings, especially during the early phases of the pandemic when, as an example, the fortunes of different product families were trending in opposite directions. Demand felt out of control.

“It was as if the pandemic froze us into inaction.”

The once-in-a-lifetime disruption confronting all of us made it hard to arrive at a forecast that everyone could agree on, despite having considerable supporting data. And for those product families for which orders and POS activity were down, arriving at consensus often seemed more difficult. No one wanted to “give-up” on the forecast so early in the year – especially given the unknown nature of consumer behavior in disruptive times. It was as if the pandemic froze us into inaction.

How I Handled Disagreements During COVID & What I’d Do Differently

When I was faced with the inability to arrive at consensus for many of the declining categories, I found myself proposing a simple approach that short-armed the forecast. I suggested looking at only at the next two to three months—acknowledging the reality of a short-term decline–while also holding the outermost forecast range to prior expectations.

We then provided a growth ramp back to the original forecast. It was a cheat of sorts. We did not “put the moose on the table” as Bob Stahl might have suggested but the short arming allowed us to move forward, effectively kicking the can down the road to the next month when better or more confirming information might be available.

While this tactic felt right in the moment, it also tossed out the window some time-honored S&OP concepts regarding managing the depth of horizon of a forecast. And while it is hard to call this approach a mistake, as we were in dark and unknown waters at the time, in hindsight it would have been better to press the issue more—to lean less on the crutch of uncertainty and rather push each member of the consensus group for their best (in this case, lowest) call.

“Start with a plan that everyone can roughly agree on, and then further challenge the assumptions.”

Instead, we did not so much collaborate on a plan; it was more like we ducked for cover. Which brings me to Bob’s book, in which he makes a pragmatic point that really resonated with me: Start with a plan that everyone can roughly agree on, and then further challenge the assumptions of that plan to get further clarity.

The ‘Greatest Common Denominator” Approach to Planning

Think of this as almost a “greatest common denominator” approach to planning. Effectively, the consensus facilitator starts by asking everyone their estimate and supporting data before trying to seek agreement. For example, in the face of double-digit declines ask, “Does everyone agree the forecast should come down for the year ?” Then follow that up by asking, “By how much, and how would you pace the decline?” By asking relatively open ended questions all voices and opinions are heard, and the range of perceived opportunities are dimensioned.

After reading Bob’s book, it became apparent to me that by putting in a short arm “device” we avoided much in the way of thoughtful conversation. We did not seek common ground. I know this because nearly everyone walked out of the consensus meeting thinking that the forecast should have been lower. We did not reach consensus – we only postponed the hard decision by four or five months when we finally made the hard calls needed to reset the forecast lower.

Some Conflict is Normal is S&OP – Embrace It

Most long-term S&OP practitioners know all too well that at least some level of tension, conflict, and disagreement are normal in consensus meetings. In fact, some disagreement within the S&OP process is to be expected and perhaps even encouraged. No one wants an S&OP plan put together via groupthink and without some rigor of organizational tension applied. Unfortunately, in the midst of COVID, we avoided this tension.

“No one wants an S&OP plan put together via groupthink.”

One of the most important lessons to come out of the COVID crisis (and Bob’s book) is to solicit more opinions and points of view as a way to put more voices into the forecasting process before trying to arrive at an agreed number. Let the opinions of the consensus team come out and bloom to see if there is a unifying or common perspective before trying to narrow the forecast. Disagreements over outcomes earlier in the pandemic would have helped avoid “chasing the forecast down” phenomena that ultimately occurred.

If history offers a lesson, avoiding tension is, well, wrong. If we believe disruption will become more common place, this is a lesson worth learning.

To get up to speed with the fundamentals of S&OP and IBP, join IBF for our 2- or 3-day Boot Camp in Miami, from Feb 6-8. You’ll receive training in best practices from leading experts, designed to make these processes a reality in your organization. Super Early Bird Pricing is open now. Details and registration.

In today’s rapidly evolving business landscape, in which companies are facing an unprecedented level of complexity and uncertainty, Sales and Operations Planning (S&OP) is undeniably having a moment. For organizations facing global supply chain disruptions, market volatility, changing consumer preferences, and rapid technological change, S&OP deployments have emerged as the critical strategic process experiencing a surge in demand.

The Fundamentals of S&OP

Progressing from a strictly manufacturing-based, supply chain-oriented business process in the 1980s, today’s more mature S&OP process boasts an end-to-end, cross-functional program that better aligns a company’s sales and marketing efforts with its operational capabilities. The current iteration of S&OP incorporates technology gains (AI/ML) with a more inclusive and collaborative approach that brings together all relevant departments within an organization, including Sales, Marketing, Finance, Operations, and Supply Chain Management.

The goal of S&OP is to create a unified plan that integrates demand forecasting, inventory management, production scheduling, and financial planning to ensure that a company can meet customer demand, optimize its operational efficiency, and maintain a long-term financial view beyond a given fiscal year.

S&OP Addresses the Challenges of Today’s Business Environment

Several factors contribute to the challenges many businesses face today. These challenges illustrate a persistent, recurring theme, with increasing magnitude and frequency. So, what are the most common issues, and how can S&OP address them?

More Complexity in Supply Chains

As companies continue to expand globally and source materials from various regions, supply chains have grown increasingly more complex. Managing these intricate global supply chain networks more nimbly means that an organization’s best bet is to develop and deploy more advanced planning capabilities, i.e., effective S&OP processes.

Supply Chain Disruptions

The COVID-19 pandemic highlighted the inherent vulnerabilities in global supply chains. Companies suddenly had to navigate sudden disruptions, shortages, and delays in production and transportation. Natural disasters, geopolitical tensions, and other unexpected disruptions can also severely impact the efficiency and reliability of these supply chains. S&OP provides a proven framework to assess and mitigate these risks by 1) proactively enabling better long-term visibility into supply chain dynamics, and 2) evaluating alternate scenarios to mitigate potential disruptions.

Sales vs. Consumer Expectations

Consumer preferences are evolving at an unprecedented pace, driven by technological advances and changing societal values. Today’s customers expect quick and accurate responses to their demand. Companies must be more agile in first adapting their product offerings, and then intentionally rolling out new products to best meet these shifting demands. S&OP allows organizations to more quickly adjust their production and distribution strategies based on changing consumer behavior.

Data and Analytics

The advent of advanced technologies such as data analytics, artificial intelligence, and machine learning has given businesses crucial tools to gain deeper insights into their operations and market trends. Today’s S&OP integrates these tools into its framework, giving enterprises the capability to quickly analyse vast amounts of data, enhance demand forecasting accuracy, optimize inventory levels, and align production with actual customer needs.

Global Competition

As markets become more interconnected, companies are facing stiffer competition from both domestic and international players. Optimizing the balance between supply and demand through S&OP can provide a competitive edge by reducing costs and improving customer satisfaction.

Financial Pressures

Efficient resource allocation is a crucial advantage within a volatile economic environment. Mature S&OP programs integrate financial planning into the operational decision-making process, enabling companies to allocate resources more effectively and manage working capital efficiently.

Benefits of S&OP

It’s not just today’s business challenges driving the surging demand for S&OP.  Industry analysts, consultancies, and trade associations, among others, are promoting its value by sharing success stories while highlighting the tangible benefits gained in S&OP deployments:

1. Improved Forecast Accuracy: S&OP enhances demand forecasting accuracy by leveraging data-driven insights with real-time analytics, leading to better predictive – rather than reactive – planning and reduced risk of inventory imbalances.

2. Enhanced Collaboration: Formerly a sticking point in previous S&OP iterations, today’s S&OP breaks down silos between departments, fostering cross-functional collaboration and alignment around ONE unified plan.

3. Optimized Inventory Management: By aligning production and distribution with actual demand, companies can maintain right-sized inventory levels which reduce carrying costs and the risk of obsolescence.

4. Flexible Response: S&OP provides companies the agility in a timeframe needed to respond quickly to unexpected market changes, minimizing disruptions and capturing opportunities.

5. Strategic Decision-Making: With a complete view of operations and sales, executives can make more informed, strategic decisions that consider both short- and long-term goals.

Implementing S&OP isn’t without its challenges. However, rising demand demonstrates that companies are recognizing S&OP is more than just a business process. It’s a strategic enabler that empowers businesses to navigate uncertainty with the agility to make well-informed, timely decisions. The ability to align sales and operations, optimize resources, and respond to market dynamics is no longer a luxury but a necessity for success in today’s business landscape. As technology continues to advance and markets evolve, the importance of S&OP is likely to increase, cementing its role as a cornerstone of a modern business strategy.

To get up to speed with the fundamentals of S&OP and IBP, join IBF for our 2- or 3-day Boot Camp in Miami, from Feb 6-8. You’ll receive training in best practices from leading experts, designed to make these processes a reality in your organization. Super Early Bird Pricing is open now. Details and registration.

It is that time of year when leadership starts talking about strategy. The result will be very nice-looking slides that will be discussed in every town hall for the next month. When you are looking at the presentation, two questions will go through your mind.

First, how relevant are these initiatives to the company? You’ll have your own thoughts the direction the company wants to go in and wonder how serious the enterprise is about it. You’ve seen before how leaderships fails to follow through on their  own guidelines or change direction for some reason or another, making it hard for people on the ground to understand what the priorities are.

The second question that arises is: What’s my role in this in strategy? This is where you try to understand the impact it will have in your area and what will be required of you to support these strategic objectives Translating impactful PowerPoint slides to what we actually do day-to-day is easier said than done.

COVID showed business leaders the importance of Supply Chain Management so there is usually a section that links the overarching business plan to this area in a way that helps everyone involved in the process. As planning professionals, this is where we should focus our attention and seek to understand not what good enterprise strategy looks like but what good supply chain strategy looks like.

The Link Between Business Strategy & Supply Chain

“Plans are worthless, but planning is everything”, said Dwight D. Eisenhower. What we do as Demand Planners will invariably fail to reflect reality perfectly but are nevertheless valuable—indeed critical— to responding to demand and changing marketplace dynamics.

During the strategy ideation stage, the main question that the planning organization needs to answer is how to create value—value for the customer, employees, and even for our suppliers. If this is done successfully, it will set your company apart from the rest. I will not delve into the details of how this is done, rather I will provide an example of how to link this into the value chain.

Supply chain is a pilar that supports some of the core business objectives. How does your company’s strategy allow you to compete in it’s chosen market? And what supply chain model will support it most effectively? Supply chain can create value for our customers either through consistent and reliable delivery, truly short lead times, or great pricing. It is important that we choose the supply chain model that best aligns with the value creation strategy. Some examples of these are if we produce to a forecast, make to stock, only manufacturing when an order is received, or even only start designing the product once the order is confirmed. The following is a real-life example.

Real Life Example of a Planning Model

This happened during my first experience working in supply chain as a Master Scheduler. I worked for a factory that produced brass goods and had a wide assortment of products that kept growing over time. The main idea was to be able to manufacture these products in a reasonable amount of time and with an optimized amount of working capital. So, the model we used was Late Configuration. The company offered a wide variety of finished goods but with a lot of commonalities at the component and subassembly level.

The intent of the Late Configuration model was to wait and produce at the latest point of differentiation possible. To accomplish this, for example, you create buffers before a color change, or before you assemble the product and add a different option like another handle or trim. This allows you to absorb some of the demand variability of the finish goods in a subassembly that is common to several products, thus smoothing some of the variation by netting out puts and takes in the ordering pattern across different SKUs.

At the same time, it lets you reduce lead time as you are not starting productions from scratch and it has an inventory benefit as well, since the valuation of a semi-finished product is less than the finish goods and has a lower storage cost.

Finally, the supply signals were based on a pull system, using Kanban. This meant that if there was no demand, production would not be trigged and inventory would be kept at a component level. Components were acquired based on a forecast due to the long lead times, being sourced from Asia. This meant that if demand dropped after you filled the pipeline of semifinished products, all the excess inventory would be accumulated at the component level, which costs less and is cheaper to store. Obviously, the tradeoff is that you need to flex capacity. Adjusting staffing was the main way to change the output.

Real Strategy Vs Pie in the Sky

At the end, any strategy that you choose will be different depending on how you are creating value for the stakeholders in your business. But there is a sure way to identify a real strategy versus a wish list. Look at the tradeoffs. If you see a statement where the organization wants to provide an elevated level of service with little to no inventory, long lead times from suppliers and at a low cost, then this might be a clue. The classic tradeoff example that comes to mind when discussing this topic is about three attributes in a product or process. You can be fast, good, or cheap—but you can only pick two. This helps clarify supply chain decisions in a quite a straightforward way.

If you consider the Late Configuration example from the previous section, the model helped you reduce inventory, align production to demand, and have a reasonable lead time. But if demand changed a lot, you would have idle resources at the shop floor, creating additional costs or manufacturing variances to the financial plan. Another strategy for the company in question would be to produce all the finished goods assortment per the forecast. This could optimize manufacturing costs, reduce set ups, and slightly reduce lead time but will increase inventory and storage costs due to the complexity in product mix.

Going From Strategy to Execution 

“Culture eats strategy for breakfast”, said Peter Drucker. This highlights that while strategy is critical, it requires buy in and support from the whole organization to bring it to life. Since Management by Objectives was introduced in the 1950’s, the intention of closing the gap between what needs to be done and what is executed has been a very intensive journey. The combination of academic research and practical approaches has yielded a few frameworks that we can use. The main idea behind these concepts is that metrics drive behaviors and these in turn create a culture of execution in the company.

So, the next logical step is to go from top-level guiding principles to long term objectives, zoom into what the annual operating plan will look like and, finally, link this to Key Performance Indicators (KPIs). This is a straightforward process, and there are several methodologies available, like the Hoshin Kanri matrix if you are a fan of the Toyota Production System, or a balanced score card if you prefer classical methods.

The important aspect is to understand which part of the high-level objectives your area will have a real impact on. Then the priority is to cascade the measurements that are important for the organization in general into specific metrics that your department will own and deliver. In my experience, this is a terrific opportunity to spend some time together with your team (offsite to avoid distractions) and talk about how the supply chain organization creates a positive impact in the company and how we can measure it. At the same time, you can combine this with some team building activities to create relationships conducive to the development of a high-performance team.

A widely used method to define and deploy objectives is SMART Goals (Specific, Measurable, Attainable, Relevant and Time-bound). A recent trend, which is now one of my favorites, is FAST Goals (Frequently-discussed, Ambitious, Specific and Transparent), created by Don Sull from MIT. The main components of the former are intensive communication and stretch targets; both are key factors in developing the necessary culture. I will go back to my own experience to explain how this works in practice.

Several years ago, I was hired for a turnaround role as a Supply Chain Manager for a manufacturing site. The challenge was to increase the service level. The metric we had in place was on-time in-full (OTIF). After getting my head round their process, two things became clear. First, the bottleneck was at the finished goods warehouse. Second, Production was focusing on their own efficiency metrics. From an operations perspective, we had to add an additional shift and create Standard Operating Procedures (SOPs) to remove the constraint; this was very straightforward. However, from a scheduling perspective, we had to implement a daily cadence to discuss production deviations from the plan and understand the root causes. At the same time, we published the metric all over the plant, including the cafeteria.

At first, it was hard to stomach lunch while looking at an extremely low fill rate (OTIF). However, it generated a lot of internal discussion and a noticeably clear sense of priority. This created a tense but positive environment that supported the daily scheduling meeting and finally the process enabled the team to change the priority to mix over volume and hitting committed dates versus reducing the amount of set ups at the plant. After a few weeks of this, the metric started taking off and since it was very visible all over the plant, it generated a positive feedback loop that helped gather engagement from everyone and changed a very defeatist environment into one where everyone wanted to participate and contribute.

This allowed us to move the meeting cadence from daily to weekly and it became part of the operational review and culture of the plant. From this example you can see the importance of frequent communication and how a prominent level of transparency around metrics helps link the strategy directly into the culture of the organization.

One last word of caution when deploying FAST Goals: It is extremely critical that when reviewing stretch targets that there is a range in place and that the incentive plans for leaders are set up in tiers, so you can recognize ‘good’ and really reward the achievement of ambitious goals.

The Framework in a Nutshell

• Identify the role that Supply Chain plays in the bigger picture and make sure that the model fits the strategy.
• Call out the tradeoffs in the supply chain strategy to clearly define priorities.
• Cascade the business strategy all the way down to metrics that will define what success looks like. This will generate visibility of the impact that supply chain has in the organization.
• Make sure that there is frequent discussion around the metrics and the current performance of the team. Recognize ‘good’ but really reward excellence.
• Make sure that these processes are incorporated into the culture of your team; this will enable the creation of a high-performance organization.

Next time you are sitting in the strategy town hall, make sure that you apply some of these ideas. This will change your perception of these meetings from pretty slides with all power and no point (pun intended) into meaningful ways to make a difference in your organization.

This article first appeared in the winter 2022 issue of the Journal of Business Forecasting. To access the Journal, become an IBF member and get it delivered to your door every quarter, along with a host of memberships benefits including discounted conferences and training, exclusive workshops, and access to the entire IBF knowledge library. 

I was recently laid off along with some other very talented employees. Like many people in my situation, my departure was not performance based; it was simply an outcome of business results not meeting expectations. My former employer expanded during COVID expecting the prior year’s record growth to continue. I was hired (along with others) as departments were expanded to handle the additional growth during these go-go times only to find that as the fiscal year progressed sales did not materialize,  and demand dropped to pre-Covid levels.

After working through the grief associated with a job loss, I began to reflect and notice many headlines and stories of organizations struggling with excess inventory having over projected their demand in reaction to the COVID frenzy for inventory. There are seemingly weekly news stories of one retailer or another offering steep discounts to sell through older excess inventory. I get emails daily from premium clothing companies offering 50-70% discounts on assorted apparel. Recently, Funko, a toy company, decided to landfill $30 million in toys. In mid COVID, we heard stories about Peloton over estimating demand as “work from home” brought on other nesting behavior and a forward buying pattern on their exercise equipment. Nike and Adidas are still struggling with their tremendous accumulation of inventory. It seems like many businesses are struggling with excess finished goods or raw material inventory levels, while sales are falling short of projected demand growth.

I consulted with my friend and mentor Pat Bower to get his thoughts on what was happening. Pat offered the following, “the simplest of inventory equations is on-hand inventory minus demand to arrive at some requirement for purchase or production – unfortunately most organizations expected the COVID spiked demand to be permanent and increased their forecasts, which in turn increased their inventories.

As supply chain issues began to diminish over the last six months, many organizations are now realizing this mistake, and lowering their forecasts. We now are being snapped by the end of the bullwhip where we have diminished demand slowly consuming excess inventory. The sad part of this equation is that organizations hired people, like you, based on the increased forecasts. It is one thing to carry excess inventory, it is completely different to impact people’s lives and professional standing.”

Organizations hired people based on the increased forecasts

Pat’s words made my job loss less painful. It did make me wonder about my own planning behaviors during COVID and what I could have done differently. After chatting with several colleagues and considering my own actions, I came up with a few changes I think might help others when the next disruption happens. I share these below:

Actively Manage Lead Times

During my conversations with Pat Bower he offered that “many planners did not track the ever-changing lead-times so when the transportation times gradually declined on the back end of the COVID disruption, most planners were slow to react. Nearly every disruptive event alters lead times, so it is prudent to constantly monitor this critical supply chain parameter”.

Pat noted that many folks have written or talked about lead-times during COVID to explain what happened, yet few have talked about what should have been done. Best practice suggests that lead-times need to be re-evaluated and updated routinely to maintain proper data integrity in your MRP planning system.

It is very clear to me that during a disruption, lead-times should be tracked and adjusted rigorously. Regularly updating lead-times enhances an MRP’s ability to calculate realistic planning schedules, projected inventory levels, and future delivery requirements to maintain service and inventory balances. As the COVID backlog started to clear at the Port of LA, planners should have correspondingly tapered down lead-times. We all collectively underreacted to these improvements – this was an important learning for me.

Rationalizing Demand Surges

Receiving large orders that exceed projections is exciting; however, it is crucial to consider their impact on future demand. Treating them with optimism is natural but if COVID taught us anything, skepticism is essential. For example, if Peloton’s leadership approached their COVID induced demand surge with skepticism, perhaps they would have considered demand was being “pulled forward” from the future due to the extraordinary circumstances and adjusted their future forecasts accordingly to account for the accelerated demand – but they didn’t. Peloton’s CEO John Foley said during a call with shareholders, “It is clear that we underestimated the reopening impact on our company and the overall industry”. In January Peloton reported pausing production of new bikes as warehouses were filled with excess inventory.

If Peloton approached COVID induced demand with skepticism, they might have known demand was being pulled forward

During post Covid discussions with colleagues it became obvious that we experienced a few different types of demand surges. As an example (unlike Peloton), we experienced some noticeable increases in demand (both quantities and frequency) for some product families that were experiencing raw material shortages and increasing backorders. During our demand and supply review meetings we discussed the likelihood that the demand surge might be caused by the bullwhip effect – but, in the end, we still held our higher, less rational forecast levels. Eventually, many of these bullwhip orders were cancelled, depressing sales, and bloating our inventory. We believed the story we told ourselves of increasing demand. Unfortunately, when demand dropped post COVID, our financial plan took the hit.

In both examples, it was a challenge to fully understand what was driving the surging demand. Was it pent up demand, was it bullwhip, was it changes in the market, was it overall material availability? What impact should the changing demand patterns have on forecasts? Do we forecast the growing trend or account for other variables?

We read the demand signals incorrectly and overestimated future demand and over ordered materials

The demand surges created a lot of changes that we didn’t fully understand. The stepped-up volume was not because we were different, offering a better product, or were more cost competitive. It may have been because we had product on-hand, or that customers were trying to hoard available inventory. In each example we read the demand signals incorrectly and overestimated future demand and over ordered materials. We could have done better at evaluating what was driving the increased demand. We failed to rationalize or contextualize demand surges.

Customer Inventory

One of the most important learnings was something Pat said, “most companies failed to even ask the question about how much inventory a customer was carrying, yet it was the first thing I did. I built models to track customer inventory to see if they were hoarding”.

I realized we didn’t check our top customers’ inventory levels as we should have. COVID changed many demand patterns making it even more important to check customer inventory levels to help explain changing or surging ordering patterns. Pat mentioned that at the start of COVID Amazon began to noticeably increase order sizes, in some cases quadrupling their normal order quantities. He began to question the increased order volume and did an analysis to evaluate Amazon’s likely inventory position.

Amazon began increasing order sizes, in some cases quadrupling their normal quantities

Since they have POS consumption data, they were able to estimate inventory levels. The analysis did not support Amazon’s increased order volume, and to prevent hoarding, his company worked with Amazon to reduce their orders. This simple step maintained the supply and inventory balance, avoided disruptive inventory builds, and protected other customers. Checking customer inventory levels made a difference and was a missing element of my analysis.

Inflection points

Many businesses ignored the early signs of softening demand as sales began to miss inflated forecasts as COVID was winding down, influenced by the positive bias that the strong, year-over-year sales growth would continue without understanding what exactly had inflated them. Businesses were slow to react and even loaded the early misses back into future months believing the record sales growth trends would continue.

Having been a part of many of these conversations in demand review consensus meetings, I can attest to the difficulty they present. Forecast reductions are difficult for business leaders to admit to – no one likes a negative Nelly. Increasing a forecast doesn’t generate the same hard questions and actions like dropping a forecast might  Lowering a forecast will meet with far more resistance.

Forecast reductions are difficult for business leaders to admit to

However, to prevent overplanning and excess inventory we need to be intellectually honest and provide equal scrutiny to both raising and lowering of forecasts. Further, and collectively, we could have done a much better job estimating where we were in the disruption cycle; if we knew we were in a recovery phase we would have made decisions to not build inventory, or to lower forecasts earlier. During disruptions, short term information is better than long term information and should be leveraged to make better short-term decisions that would have prevented spreading an increase in volume over a longer horizon. This is the long way to say that a down period should have created a reduction to the forecast. It did not. Lesson learned.

Final Reflection

A few thoughts immediately come to mind. First, not understanding demand surges (during a disruption or otherwise) is just negligent supply chain behavior. Second, having happy ears may be good interpersonally, but not when supply chain planning – it is best to be “Joe Friday” of Dragnet fame and be about just the facts. Third, visibility into a customer’s inventory tells you what they are doing. During disruptive times, your customer may be hoarding and that could be creating a false demand signal.    Understanding their inventory may be instructive on managing your supply chain in a more stable fashion.

COVID was disruptive, but the abandonment of best practices was also evident. I am temporarily out of a job as a result. Lesson learned for me – and hopefully my journey has been instructive.