Sales and operations planning (S&OP) is often seen as a process to balance supply with expected demand. Yet the true value of S&OP is in delivering profit and loss results, and value to your customers. This blog helps supply chain leaders switch their S&OP focus to customer value and business objectives beyond supply chain.
Redefining the goal of S&OP does not mean abandoning an organization’s focus on operational efficiency and key performance indicators (KPIs), it is simply a stop on the journey to realizing the true value of S&OP. Having the customer as your “North Star,” guiding your journey, means moving away from being internally focused to being externally focused and measuring the things that bring value to your customers (See Figure 1).
The goal of delivering customer value via S&OP is hindered by the perception that the process is owned by supply chain and participation is largely from supply chain. Redefining the process depends on cross-functional participation and demonstrating the value of S&OP beyond supply chain. Other challenges include shifting the mindset of the supply chain (and wider organization) to be “outside-in” (for example, focus on delivering customer value as opposed to internal efficiencies) and linking high-level business objectives, customer objectives and granular supply chain metrics.
Consider the following scenario on the importance of aligning business and customer objectives, and how S&OP can deliver both:
The supply chain planning leader was sitting in the CSCO’s office. He was called there to explain why inventory levels are high and what supply chain and S&OP must do differently to prevent spiraling inventory costs. High levels of on-hand inventory were due to several key customers, prioritizing service as the No. 1 objective to support revenue growth. As a result, the supply chain planning leader deemed it necessary to increase safety stock levels to protect customer service. However, the CEO’s top priority this year is cost reduction, and anything derailing that goal got the highest degree of executive scrutiny.
At this stage, it is time to:
- Align the goals of the business to those of its key customers
- Redefine the goal of the S&OP process and associated metrics to deliver customer value
Key Elements to Make Change and Transition Successful
One key aspect of shifting the S&OP focus to customer value is for supply chain leaders to narrate a compelling change story:
- To raise the perceived value of S&OP, start by describing the benefits enhanced S&OP maturity brings to the wider business. For example, don’t speak to the sales organization about the importance of inventory and plan attainment. Instead, demonstrate how S&OP can support delivery of revenue growth, profit enhancement and customer service (See Figure 2). Share what it would mean to your business if this process aligned the stakeholders and participants to a common outcome in terms of revenue growth, profitability, cash flow, inventory and working capital. Focus on the benefits of having predictable financials and alignment to business strategy and goals as well as the value being delivered to the customer.
To link S&OP to overall business objectives, you must determine what is important to your executive leadership team. Is it revenue growth, inventory reduction, service levels, lead times or supply chain cost? Use these questions to help you identify your objectives:
- How does the organization define success in terms of business performance and how does that compare to what matters to its customers? Are they aligned?
- What are the key supply chain metrics that are tracked vs. what would need to be tracked as the focus of the S&OP meetings evolve?
- Which supply chain KPIs indicate the supply chain is aligned with the business and customer objectives? These metrics must be end-to-end supply chain metrics in order for them to be linked to the customer.
- Is the business able to create a reliable financial forecast from the outputs of the S&OP process through the end of the financial year (and beyond)? If value is not the focus of S&OP, the process is often not integrated with financial planning. As part of the process evolution and overall change management, plan the integration between financial and supply chain planning. As this integration occurs, the outputs of the S&OP process can directly indicate if the organization is on track to achieve its business and financial objectives.
- What are the key criteria influencing the company’s decision making? Is it customer value? Is it cost reduction? As outlined previously, understanding this is critical in implementing a suite of KPIs that:
- Reflect the mindset of the organization
- Are complementary for both internal functions and external business partners
- Are set at the appropriate level based on the strategy that’s been set
As the S&OP process evolves, linking business and operational metrics through the S&OP process becomes a leading indicator that the executive leadership team can use to help gauge progress toward customer-focused metrics. If this task is executed effectively you will have a suite of value-based metrics that span both the end-to-end value chain (including what is important to the customer), but also provides vertical integration throughout the organization.
Senior Director Analyst,
Gartner Supply Chain