95% of initiatives to implement S&OP fail within 3 years. In the remaining 5% of cases, it takes an average of 10 years for organizations to fully master the process.
Why is it so difficult to implement S&OP?
In the article I wrote for “Puls Biznesu”, I highlighted the benefits of implementing the Sales & Operations Planning process. I also mentioned mistakes made during the implementation. However, I didn’t share the ways to overcome them.
In this article, I will discuss 7 common problems with the S&OP implementation. I will also reveal how to deal with them (to the extent possible).
LACK OF MANAGEMENT’S COMMITMENT TO IMPLEMENT S&OP
Quite often, the implementation of S&OP starts (and ends) with declarations made by members of the management board in the organization. The biggest challenge in implementing Sales & Operations Planning is therefore to keep the most important decision-makers engaged.
What might prevent board members from getting involved in the process?
Most often, it is about the lack of the results required from their point of view. They expect:
- information provided in the appropriate form and soon enough to make it possible to make decisions
- the presentation of plans in the form of scenarios to assess the risks associated with the activities considered
- or translating the proposed plans into the company’s financial results.
The result of S&OP should be decision-making by the entire organization based on relevant information. All processes that don’t make it possible to transition from data to information with a direct impact on business are doomed to inevitable, though slow oblivion.
Therefore, to implement S&OP, you must first determine what the most important stakeholders expect from the process. Otherwise, it is extremely difficult to provide what they need.
OVERLOOKING KEY DEPARTMENTS IN SALES & OPERATIONS PLANNING
The overriding goal of S&OP is the interaction of all departments in the organization. However, research by the Supply Chain Insights Institute shows that, in fact, most companies fail to get all departments committed.
In one-third of enterprises, the finance department is not involved in decision-making at all. In almost half of the organizations, the sales department doesn’t actively participate in the S&OP process.
On the other hand, in organizations where the above-mentioned departments participate in the Sales & Operations Planning process, there is usually no healthy balance when making decisions. The results of the study conducted by the Supply Chain Insights Institute show it clearly.
When asked “Who makes most of the key decisions in the S&OP process”, the respondents from several hundred companies surveyed indicated that it is the sales department.
Why does it happen? Usually, the problem is that those responsible for a particular business area don’t perceive the S&OP process as particularly relevant.
The sales department is able to tell the most about the turnover potential expressed per customer. In Supply Chain and Logistics, the demand expressed in pieces is the most important. In turn, it’s operating profit (net margin or other measures) that may draw the interest of the representatives of the finance department.
If during the Sales & Operations Planning meetings only plans expressed in sales values are discussed, it is no wonder this department is the most involved and influential.
For the S&OP process to really work, it’s crucial not only to lead to a situation in which everyone works on one set of data. It is equally important to create personalized views for the same plan for everyone.
A GREATER FOCUS ON SYSTEMS INSTEAD OF THE S&OP PROCESS ITSELF
The tools used in the S&OP process are important. The possibilities of presenting plans mentioned above, as well as their versioning and creating several (or a dozen) scenarios simultaneously are difficult to achieve when working only in Excel.
Therefore, choosing a system tailored to the needs of your company is a task of itself. I have already written more about this in the article: How to choose a supply chain planning system?
Nevertheless, to implement S&OP successfully, you should be careful not to fall into the trap of being fascinated with technology. The most important thing is to discipline the participants and the routine of conducting the planning process itself.
In the first S&OP implementation that I conducted, we only used tools created within the team. Excel for calculations and information presentation. Access to store multiple data series.
The result was good enough to take off and start making operational decisions that are logical from the point of view of the entire business.
If you are still starting your adventure with the S&OP process, remember that the most important thing is to get everyone involved in the process. If you implement the system and don’t implement the process, you won’t achieve anything at all.
Therefore, when implementing the S&OP process, a project manager should pay attention to the left side of the chart below… not on the right as, unfortunately, it often happens (estimates based on my own experience).
In practice, however, it is often the other way round. Recently, I heard (again) from the CEO of a Retail company that “We will go the simplest possible way and implement a system that will let us start the process later.”
Well, at the beginning of the next year, we are going to discuss how to implement S&OP again. My experience tells me, however, that it will be a lot more work for me than if the company started with the process, not with the system.
PLANNING BASED ON STATICAL DATA ONLY
Another common mistake when introducing the Sales & Operations Planning process is focusing on the use of plans based solely on statistical forecasts.
Personally, I am a fan of statistical methods and the quantitative approach in business. However, my experience has taught me that you cannot always plan based on hard data.
While still a student, I had the opportunity to do internships in one of the largest FMCG companies in the world. At that time, the organization was struggling with a slow but continuous decline in sales of instant soups.
For several months, no one was able to find out why. Analyzes based on hard data didn’t explain the reason for the negative trend and forecasts based on historical data only indicated that it would continue in the future.
Only qualitative market research (the so-called focus groups) made it possible to understand the situation. The decrease in sales was related to the negative perceptions of consumers when faced with the new type of closure.
The string you pull out when opening the soup package was attached so firmly that when tearing it, most of the customers spilled the contents. So they didn’t purchase again, and the more types of soups contained the new closure…
As the aforementioned story shows, the lack of use of qualitative knowledge (expert or customer knowledge) is a serious limitation. Building plans based solely on historical data is like driving a car by looking in the rearview mirror.
The use of modern data analysis techniques and the inclusion of unstructured data collected, for example from social media, in the process helps improve the quality of the planning process.
However, it is still insufficient. Sticking to the analogy of the S&OP and driving a car — using the latest statistics and data science is like looking from side to side.
However, in order to run the S&OP process (or drive a car), you need to look not only back and around you. You also need to know where you want to go and what the road ahead looks like.
NO DOCUMENTATION OF S&OP PLANNING DECISIONS
How to learn from mistakes? First, by admitting to ourselves that we are making mistakes. How not to blame yourself for previous decisions? First of all, by remembering exactly why you made these particular decisions.
Many companies implement S&OP using expert knowledge, but the decisions made and assumptions leading to their making are not documented. There is an excessive emphasis put on the concept of the so-called one plan.
These companies will eventually find themselves in 95% of failures mentioned in the introduction, because the S&OP process has a positive effect on the organization only if, when creating the plans:
- you require writing down the assumptions when making the changes
- you write down who, when, and at what level entered the values
- you are working at a level that is important to the user
- you keep versions of all participants in the process
- you count and present the result of all versions
Perhaps the sales department is able to present its expectations towards demand only at the level of a group of products per month and not of a single product per week. In this case, keep both the original forecasts and the plans after the adjustments of the sales department.
However, make sure that the system you are using lets you break down adjustments to the level necessary from an operational planning perspective in the supply chain.
Typically, this type of functionality involves dividing the new plan proportionally to the previous system forecast available at lower planning levels. As a result, it is possible to calculate the accuracy of the plans broken down into:
- clean system forecast
- plans after Supply Chain adjustments
- final plans approved by the Management Board
- plans after adjustments of the Sales\Marketing department
Thanks to such documentation of the plans created, you can demand the individual responsibility of the process participants. You can require them to learn from their mistakes so that they don’t make them in the future repeatedly. You can run an unbiased S&OP process.
AN EXCESSIVE COMPLICATION OF THE DEMAND FORECAST PROCESS
Take into account the previously described versions of the plans. However, you must be careful not to make another mistake that is excessively expanding the entire planning process.
The second category of S&OP processes doomed to oblivion (apart from not business-related processes) includes excessively complicated processes.
First of all, in the first months of work, it is best to follow the “keep it simple” principle and use the so-called incremental approach. Only as the awareness of the participants grows, we can add further elements and measures supporting decision-making.
In my career, I have seen companies literally paralyzed by the excess of “information” used in the S&OP process. Sometimes less really is more. Especially if you are still learning.
Therefore, when implementing S&OP, I advise everyone choosing only a few metrics (a few, not more than you can count on one hand). Also, use a few versions of the demand plans (a few, not more than two) and then start the process.
The most frequently used measures include: the demand forecast accuracy, demand forecast bias, the production or distribution plans accuracy, the service level or product availability, the inventory turnover.
On the other hand, the most frequently compared versions of forecasts are the system forecast and the forecast adjusted by the planning department (or the Supply Chain department in smaller organizations).
If you are able to conduct S&OP meetings on a regular basis with the real involvement of all departments, this is all you need at the beginning.
SALES & OPERATIONS PLANNING FOR THE BUDGET
Finally, the most common mistake of running the supply and demand planning process, i.e. planning exactly for the budget. In other words, only dividing the budget into periods (months, weeks) and levels (products, customers) which the budget doesn’t take into account.
Of course, the S&OP process should be closely related to strategic planning and budgeting in the organization. However, it should not be just a detail of it.
There are a few things the representatives of all departments in the organization should agree on as part of S&OP meetings. They include the way to achieve the desired value of sales, production, and distribution within a specified time.
However, if the desired level is not achievable, it is necessary to mindfully review the plans, and shift between products or periods.
If the participants of the process do not have sufficient authority (or courage) to make such decisions, we are not dealing with a real S&OP process but a shell process.
No business value is created in these types of processes. It is also possible to fully automate such processes without losing any quality and gaining a lot of time saved on idle discussions.
Remember, a valuable S&OP meeting is not a discussion but a decision meeting.
IS IT POSSIBLE NOT TO MAKE MISTAKES? OR WHAT’S NEXT?
Now that you know what mistakes most often appear in the implementation of S&OP, you’re guaranteed success, right? Or not really? Of course, the latter.
Unfortunately, even knowing common mistakes doesn’t guarantee you won’t have to deal with them. However, knowing how to deal with these situations will increase your chances of success.
To implement S&OP, a change in the work culture in the entire organization, not only in the Supply Chain, is needed. Therefore, I recommend to all those who start this type of adventure to think it over:
Business is just like life. It is worth trying. Even if it means making mistakes and struggling with barriers. This is the only way to develop.
— J.K. Rowling
If you want more examples of how to implement S&OP or discuss the implementation challenges described in more detail in the article, write to me directly or leave a comment.
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See you soon! in another article on Logistics Simply.