After more than 20 years working in the planning area and more than 10 years in S&OP, I came to the conclusion that implementing, sustaining and evolving an S&OP process depends on 8 key factors that must be applied and reviewed frequently.

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1. Don’t Neglect Medium-Term Planning

Even in the face of this global crisis we are experiencing due to the COVID pandemic, we need to maintain medium-term planning because, eventually, the new volumes will settle and we will return to good forecast accuracy. It is a mistake to abandon medium-term planning to focus only on the very short term. This planning mindset must always be present in the S&OP process, even with all the difficulties of forecasting.

2. Modify Your Language For Each Function

 One of the most challenging pillars of S&OP is the integration of people and functions. To be successful, it is necessary to adapt how we communicate depending on which individual or function we’re talking to. This is necessary to integrating everybody into the S&OP process. With the Finance function, we talk about numbers, values ​​and results. With the Sales team, we talk about customers, regions and channels. With Operations we speak at the SKU level, about plants, warehouses, production lines and so on. We modify our language and show all stakeholders the importance of their participation in the S&OP process.

3. Use Benchmarking

Benchmarking remains one of the best options for learning from the mistakes and successes of other professionals who have been where you are now. It allows us to know what good looks like and what to aim for, in terms of how we set up the different elements of our S&OP and KPIs. Check out IBF’s benchmarking research.

4. Tie S&OP To Strategy 

The S&OP process cannot be half-hearted where we seek only to deliver some of the basics. The S&OP process needs to be strategically linked to enterprise-wide strategy and play a strong role in solving the chronic problems of the business. To make sure S&OP is serving the goals of the business, measure its performance each month through KPIs such as working capital, inventory turns, service level, costs, etc.

5. Meetings Are For Decision Making

Through my experience at S&OP consulting firm U.M Consultoria, one of the main reasons for the S&OP process to die or stagnate is the lack of decision-making in the meeting. In these cases, participants cling to the past, invest a lot of time in autopsies of what went wrong and too late to change, and neglect to look ahead and make the best decisions at that time.

When faced with this situation, the recommendation is to stay on track by reviewing the meeting agenda, making clear the purpose of the meeting and the inputs, discussions and decisions that need to be taken, then sharing them with stakeholders.

 6. Continuous Improvement

The concept of continuous improvement has been a cornerstone of S&OP since its inception. Acting to improve poor performance is an obligation of the S&OP team. When we talk about improving the S&OP process itself, we need to have a roadmap to reach the next level of maturity.

There are different S&OP maturity stages that bring different benefits to the company. Every year we need to reflect on what we’ve achieved and update this plan for the coming year. With this, we will continue to evolve in accordance with best practices. IBF has a great S&OP maturity model which assess your maturity level with recommendations to improve.

7. Partnership with Customers and Suppliers

I consider this secondary a consideration because first we need to understand our limitations, bottlenecks, response time, and the size of our problem.

After that, we look for opportunities to improve our constraints in the supply chain through the CPFR methodology (Collaborative Planning & Forecasting Replenishment) where we share insight with our partners and together we validate forecasts, production plans, shipments, etc. The benefits are reduction of logistical costs, improvement in service, and reduced inventory.

And lastly, the most important element,

8. Focus on Results

Another factor in the failure of an S&OP process and any other initiative is not bringing positive results for the business. If S&OP is not perceived to be linked to real business improvements, it will be seen as a cost and will likely to be discontinued by senior management. We absolutely must ensure that everything we do serves to improve the KPIs mentioned above – every meeting must facilitate the decision making that will add value to the company.

As mentioned above, I highly recommend taking IBF’s S&OP Maturity Self Assessment to understand where you are at in your S&OP evolution, and to get valuable resources to help your progress. It is free to use.

Unidentified and untreated outliers can generate false expectations for business, causing future disruptions, excess stock and loss of market opportunities. Appropriate action is critical for the accuracy of future forecasts.

An important factor in dealing with outliers is that the statistical models used in sales forecasting use history to project the future, so an unrecognized and untreated data point will generate unreliable predictions for decision making. Faced with this, we need to understand why these outliers occurred and adjust the data accordingly. This process of identifying and dealing with outliers needs to be monthly and in the most serious way possible. The involvement of the commercial team is essential in this process. But first let’s look at what outliers are.

What Are Outliers?

Outliers are unusual behaviors, usually called “points outside the curve”. In statistics, an outlier is an aberrant value or atypical value, an observation that presents a great deviation from the standard or that is inconsistent. The existence of outliers typically implies losses in the interpretation of results which can lead to false conclusions about the data, which in our case would be an inaccurate sales forecast.

These points outside the curve can deviate upwards (from the upper limit) or downwards (from the lower limit).

Here is an example:

Outliers are deviations from the statistical norm.

How Are Outliers Generated?

In demand planning, outliers are non-standard behaviors, they come from some specific actions. The most common are:

New Customers: Outliers can happen when the commercial team is able to land new customers, particularly large ones like chains or wholesalers.

Forced Sale: The most common cause of outliers is due to shelf life whereby the company decides to sell its products at a lower market price, preferring to sell at cost than pay the costs relating to disposal of the stock and thus making a loss.

Stockouts: Sometimes, for different reasons, there are disruptions in supply meaning we cannot get the product to the customer. This causes a downward outlier. Disruptions typically occur because of increase in sales, breakdown of production equipment, delay in imports, lack of raw materials, etc.

Advance Sale: There may be anticipation of customer orders when an increase in price, a shortage of some product, or even a potential natural disaster (snowstorms, hurricanes etc.) are signaled. In cases like these, customers or end consumers may stockpile your products.

Other Events: Other events may occur, such as new competitors entering the market, speculation, promotions, customer birthdays etc.

The important thing is to identify the outliers and their cause so they can then be treated.

How To Identify Outliers

There are different ways to identify outliers, the simplest ones are:

1. Graph Analysis

Analyze the data in graphs as shown in the figure above. To facilitate the identification of outliers graphically, it helps to plot the data on a dashboard so the data can be seen in different hierarchies and granularity e.g. region, product family, managers, channels, and SKU. Doing this is useful because, many times, when we look at the total number, we may not be able to identify the outlier. This is because if it has low volume, it will be lost in the rest of the data. But when we go down a level in the hierarchy, we can begin to identify them.

Sales within the normal range.

Selected family chart – Outlier Identified In May

Sales breaking the upper limit.

2. Table Analysis

Another way to identify outliers is through tables, using a percentage as a comparison. This analysis needs to be done monthly. In the following example, we have  normal behavior for item 1 from January to May. In June, however, when we updated the standard deviation, we identified a data point 62.5% above normal, which is definitely an anomaly and needs to be understood and addressed.

Item 3, on the other hand, signaled a drop of 11.4%. Such a drop is just a warning to keep an eye on it, as it is too low a deviation to invest time in investigating further.

Each business and each SKU will have its own percentage limit guardrail. This variation limit may vary depending on the item’s added value, ABC classification, margin, strategy, etc.

3. Statistical Analysis

The most complex (and most reliable) way to identify an outlier is through statistical methods. The most common methods are Interquartile Range and Regular Z-Score.

How To Treat Outliers

After identifying the outliers, it is necessary to understand why it happened, which means talking to Sales. The reasons must be registered so that in the future, if it occurs again, it can be treated in the best way.

The way we treat outliers varies according to the reason:

Base Exclusion: Only volumes resulting from typing errors/order input should be excluded from the base, or cases that will never be repeated. Otherwise, it must be treated within the base.

New Customers: As previously mentioned, a new customer needs a minimum order amount. Depending on the Sales’ expectation, the customer can order for up to 3 months. After confirming with Sales that the customer has purchased for 3 months, we treat the outlier by diluting the total incoming volume by 3.

Forced Sale: Considering that the sale was forced (sold at cost to avoid a loss) due to shelf life and the customer took advantage of the low acquisition cost opportunity to make a promotion, this additional volume purchased by the customer should be excluded from the base, as it would only happen again if the same process is repeated, which is unlikely.

 Stockouts: In cases of stockouts where there was an order for a product but no inventory to provide it, actual sales differ to demand. Therefore we want to include the order volume in our future forecasts to maintain accuracy as this is what represents true demand.

Advance Sale: In cases where it was identified that sales were anticipated, the treatment of outliers is similar to new customers, the only difference being the horizon in which the volume is diluted forward, for example 3 months, 6 months, etc.

Other approaches: There are cases where customers deviate from buying their usual amount to lower their inventories, for example, then the following month they buy additional volume. In this case, the volume should be diluted backwards, in the months when the customer didn’t buy their normal volume.

In my previous article entitled ‘How to guide for S&OP Kick Off’, we approached the roles and responsibilities within the S&OP process and the importance of each member knowing what they need to do at each step. To assist and facilitate this task, we recommend the use of the RACI Matrix to quickly identify the roles and responsibilities of each individual/team in the S&OP process.

The matrix should be used by anyone implementing S&OP to understand the S&OP structure, hierarchy and responsibilities.

RACI Matrix

The RACI Matrix is a powerful tool to assist in the identification of roles and assigning of cross-functional responsibilities to a project deliverable or activity. Click the link below to download the Excel document.

RACI represents:  R – Responsibility, A – Accountable, C – Consulted, and I – Informed

Snapshot of the RACI S&OP Roles and Responsibilities Matrix

DOWNLOAD RACI ROLES & RESPONSIBILITES MATRIX

RACI Definitions:

Responsibility = person or role responsible for ensuring that the task is completed

Accountable = person or role responsible for actually doing or completing the task

Consulted = person or role whose subject matter expertise is required in order to complete the task

Informed = person or role that needs to be kept informed of the status of the task, and informed when complete

After defining the participants and their responsibilities within the S&OP process it is necessary to communicate this to all stakeholders and deliver training (if required) to ensure each individual is capable of fulfilling their role.

This is a simple thing that goes a long way to getting S&OP off the ground and ensuring it is sustainable and manageable with the right participants, oversight and sponsorship. The next step is to develop an audit process to ensure that the RACI Matrix definitions are being followed for continuous improvement – more on that next time.

In the previous article we talked about the essential requirements for people and processes to ensure successful S&OP. In this second part, we will talk about the initial business decisions that must take place before the implementation process begins.

Understanding The Business

Rather than implementing a methodology that involves a cycle of meetings with key people, S&OP leaders and their teams need to understand the business they are in, and understand their products, competitors and trends. Benchmarking data is highly valuable when it comes to staying current with how your products and processes should be performing. [Ed: IBF members get access to world-leading S&OP,  forecasting and planning benchmark data.]

I have seen poorly-aligned S&OP processes that have not only failed to deliver wide strategic goals, but cost the company a lot of money in the process

Strategic Planning

A mature S&OP process supports the delivery of the strategic plan. With this in mind, it is necessary that S&OP’s objectives are 100% aligned with the business strategy. I have seen poorly-aligned S&OP processes that have not only failed to deliver wide strategic goals, but cost the company a lot of money in the process. I was recently in a situation where a new S&OP team at a midsize company was focused on reducing inventory without analyzing the risk of stockouts on the business. This was a major problem because the company’s strategy was to grow exponentially in almost all product categories. All teams were working towards this goal (including Marketing who were pushing the products aggressively) apart from S&OP. With the strategic misalignment of the S&OP team, many products were unavailable, causing a non-recoverable loss to the business that year.

Swot Analysis

The S&OP team needs to be clear about the Swot analysis of the business that will be covered in the S&OP process, primarily to tackle the Opportunities and improve the Weaknesses. One recommendation is to have a discussion with key managers to raise these already-known opportunities and pain points and prioritize those to be helped by the S&OP process. With this clarity and prioritization, results from the S&OP will happen faster.

Planning Horizon

This planning horizon depends on the type of business but as we are talking about an immature S&OP process, the shorter the planning planing horizon the better – when we start out, we want the process to be manageable and that means not looking too far ahead. Some businesses, however, do not allow for a short planning horizon – you’ll need to decide on what is most appropriate at the outset.

Set up KPIs so you can monitor how the implementation process is evolving and make any necessary adjustments

Key Performance Indicators

Another point that often ends up being an afterthought are key performance indicators. It is important that these are defined and set up so you can monitor how the implementation process is evolving. This way we can see if we’re on track and make any necessary adjustments. 

You should measure the performance of the following:

Strategies: Service Level (OTIF) , Working Capital, Growth Revenue, Margin, P&L. (Measure by Region, sales channel, product categories, etc.)

Sales: MAPE (Mean absolute percentage error) or Sales Forecast Accuracy, Bias. (Measure by Region, sales channel, product categories, etc.)

Operations: Accuracy of plans: production, materials, transfer of products to warehouses, revenues.

Inventories: Inventory days, inventory turn, inventory health.

Projections: Storage, % use of head count, % use of the industrial park.

S&OP Maturity: If the company already has an S&OP initiative in place, the recommendation is to measure the current maturity of the S&OP process using a maturity model. 

Everything you are planning needs to be measured so that adjustments are made exactly where you need them. If the company does not have a KPI process in place, the recommendation is to carry out performance measurements afterwards. This way you can identify what level of maturity the team has managed to achieve, and put together a plan for further improvement.

The purpose of this article is to make clear the essential requirements for sustainable S&OP process implementation. S&OP implementation has a high failure rate, with most initiatives not actually delivering any value and doing nothing to improve the balance between demand and supply. Using this S&OP kick-off guide, the chances of failure are much reduced, increasing your chances of leveraging S&OP as a growth driver that provides a real competitive edge.

Often the S&OP Process implementation initiative is carried out in a poorly structured way, especially when the implementation decision is made from the bottom up without executive sponsorship. The managers involved in this type of implementation end up not following the methodology completely, leaving out the essential pillars that are required to sustain the process. This means creating more work further down the line, day-to-day difficulties in the S&OP process, and, sometimes, damaging the credibility of the process which can result it its death. Haste and lack of capacity building are usually the key factors in the demise of the S&OP. S&OP is like building a house – it needs a strong foundation, and if the proper work is not carried out at the beginning, problems down the line can cause irrevocable damage. Here are some helpful pointers that will guide a successful S&OP, regardless of whether it is a top down or bottom up initiative.

Sponsor: This is the person who will provide the necessary support before, during and after the implementation of the S&OP process. This person must have great influence within the company, have knowledge of the process, and be able to carry out all the necessary alignments and approvals with the main managers. This person needs the necessary position and communication skills to open doors that may have been locked for years.  

S&OP in the hierarchy: Normally the S&OP area is created within the Supply Chain, however, when the process leaves stage 1 maturity it is important that the S&OP area reports to a neutral entity (free of department specific interests) in the company, for example: Finance or a senior executive. S&OP and its management need to maintain the collective interest with focus on the best result for the overall business.  

S&OP Leader: This person needs to have solid experience and knowledge in Supply Chain, as they will lead a wide range of different activities. In addition to the experience and technical expertise in the field, the S&OP leader will need to have great energy and discipline to meet the schedule, and a willingness to move people around and change processes to ensure integration. Ability to communicate at different levels is necessary.. Involvement of the human resources area is critical at this stage to find the right candidate. When choosing the right person for S&OP Leader, a junior profile will not cut it.

S&OP Team: As we are dealing with a total integration process, we absolutely must involve all areas, even if we have to demand it. An S&OP Committee is recommended for the initial phase, with all parties committing to collaboration and support of the implementation project. Choosing the right people and their backups is key to starting the process as well as maintaining it later on.

Roles and Responsibilities: Each S&OP member must have a clear role and defined responsibilities within the S&OP process. They need to be trained to contribute properly in the process – both inside and outside meetings – as facilitators and process owners. I recommend you use a matrix of responsibilities, train those involved and record all activities.

S&OP Meetings: All meetings must have: an objective, a duration, participants, inputs, discussions, outputs, attendance list, and a list of required actions. Participants at each meeting will need to be trained to ensure an effective meeting.

Meeting Schedule: All S&OP monthly and weekly cycle meetings need to be set in advance. In order for people to attend the meetings, invitations need to be sent as soon as possible. One recommendation is to keep the invitations sent for the next 3 months of meetings. It is necessary to pay attention to special dates like holidays and events that could affect attendance.

Documentation: The S&OP process must be formalized through documents like process flowcharts, procedures and operational instructions to ensure the decentralization of information and the survival of the process when a team member leaves. The is important in assisting standardization and proper management of S&OP documents. One of the most important documents is the S&OP policy which details S&OPs’ involvement in the business. In addition to containing all the requirements to establish and maintain the process, this document codifies the agreements and hierarchy of decision-making. It is a living document that must be kept up-to-date by the managers of the S&OP process.

Process Auditing: After a few monthly S&OP cycles, an S&OP audit process has to be defined to ensure that everything that was planned has been implemented in practice. This must be carried out by an independent team, who will have to be trained in S&OP to audit the process. In some companies this department already exists.

[Ed: These are the essential criteria for successful S&OP, that will both facilitate its implementation and sustainability. Only 1/3 of S&OP initiatives end up actually adding any value –  make sure you lay the appropriate foundations to ensure yours is a real growth driver.]