Meanwhile, the operations and logistics people are responsible for the costs of making, moving, and storing products. They also understand that variations in your supply chain flow cost money because you need to pay for the space and the people to meet your peak demand, even if you aren’t using that space and those people the rest of the time. Operations people want to make and store only as many products as are needed to keep manufacturing and logistics costs low.
This trade-off between sales and operations can lead to major conflicts in a company. In many cases, a sales department creates an unrealistic forecast, and the operations department is blamed for having too much inventory. In other cases, the sales department can’t meet its revenue targets because the operations team was too conservative in its production planning.
A common solution for this problem is a process called Sales and Operations Planning (S&OP), which forces the sales and operations teams to coordinate and agree on their goals and targets.
S&OP usually starts with a sales forecast for a certain planning horizon. The sales team might estimate that it could sell 1,000 widgets per month for the next 12 months, for example. This forecast is called an unconstrained forecast because it’s based on a best-case scenario.
S&OP
S&OP may sound simple, but many companies struggle to make it work. Larry Lapide of MIT is one of the leading experts on S&OP. In his article “Sales and Operations Planning Part I: The Process” in The Journal of Business Forecasting, Dr. Lapide says that these factors are required for S&OP success:
Ongoing, routine S&OP meetings
Structured meeting agendas
Pre-work to support meeting inputs
Cross-functional participation
Participants empowered to make decisions
An unbiased, responsible organization that can run a disciplined process
Internal collaborative process leading to consensus and accountability
An unbiased baseline forecast to start the process
Joint supply and demand planning to ensure balance
Support from an integrated supply-demand planning technology
External inputs to the process
To read more about the S&OP process, visit http://ctl.mit.edu/sites/ctl.mit.edu/files/library/public/article_jbf_soplanningi_lapide.pdf.
When the forecast has been established, the operations team decides whether the numbers are reasonable and what it would take to manufacture that many products. In some cases, operations may not have the staffing, the equipment, or the raw materials to make all the widgets that are called for in the unconstrained forecast. In that case, the operations team would ask the sales team to reduce its forecast based on all the constraints that have been identified. Alternatively, the operations team may need to make changes or investments that will enable them to meet the sales forecast.
S&OP is an iterative process that needs to be repeated so that the constrained sales forecast and the manufacturing production plan stay in sync. In many cases, the S&OP process involves senior executives from a company to ensure that trade-offs are understood and aligned with the corporate strategy.
Fundamentally, S&OP is about sharing information and getting people to agree on a plan. Several software companies offer S&OP tools to help the sales and operations teams automate workflows and streamline the process.
Customer versus supplier
Each company in a supply chain has an effect on all the others. If your company surprises one of your suppliers with a big order, that order is likely to create problems — and cost the supplier money. But if your supplier has a pretty good idea of what you’re going to buy and when you’re going to buy it, the supplier can plan in such a way to meet your needs while keeping its own inventory and transportation costs low. In other words, everyone wins when supply chain partners collaborate and share information.
One way for supply chain partners to help one another is through a process called collaborative planning, forecasting, and replenishment (CPFR). In the CPFR process, companies share information about how much they expect their customers to buy and how much inventory they have on hand so that they can help each other achieve high service levels with lower amounts of inventory. You can download a good overview of CPFR at https://bit.ly/3lv9Tnu.
Engineering versus procurement
Engineering teams are always looking for ways to innovate, make changes, and improve products. For their innovation processes to work well, engineers often develop relationships with suppliers that can be flexible and collaborative, but this flexibility and the time invested in understanding the engineers’ needs have a cost. Typically, the suppliers that are best at innovating and collaborating are the most expensive. Meanwhile, the procurement team is always looking for ways to get products that meet the minimum specifications at the most favorable price. The lowest prices typically come from suppliers that produce at the minimum quality level with highly standardized systems and processes. The conflicting goals between engineering and procurement can lead to tension within a company.
One of the best ways to manage this tension is to create cross-functional product teams. Engaging procurement professionals during the design phase of a product can help you ensure that you’re considering the costs of each step in a product’s life cycle. Likewise, engaging engineering teams throughout the procurement process can help you ensure that lower-cost options that meet the needs of your company and your customers are properly vetted.
Another way to manage the trade-off between engineering and purchasing is to use a design-build strategy. With design-build, a single contract is awarded to a supplier that both designs and makes a product. That way, the designer has an incentive to keep manufacturing costs low, and the manufacturer has an incentive to pursue innovative design options.
Inventory versus customer service
Inventory costs money because it ties up working capital, eats up labor and real estate, and depreciates quickly. Many supply chain professionals and business analysts will even tell you that inventory is the enemy. You may wonder why everyone doesn’t eliminate all inventory. Wouldn’t supply chain management be a whole lot easier if you didn’t have to deal with warehouses, distribution centers, and stock rooms?
That approach has one major problem: Companies make money by selling products to their customers, and if they have no product to sell, they earn no revenue. When you think about what customers value — what they’re willing to pay for — the product itself is only part of the equation. You have to consider, for example, whether