Despite a slumping economy and some tough competition from low-cost overseas competitors, my company Fochrest Test, a maker of digital test and measurement equipment for communications, electronics, and defense industries, has not only survived but thrived the last three years. In 2005 we aggressively embraced lean manufacturing concepts, and have been diligent about making the physical and philosophical changes within our operations. What’s resulted is a production capability at our three plants and extending out to suppliers that approaches world-class, relying on pull-based processes and a workforce that constantly seeks to minimize wastes (inventory, time, costs, etc.). We continue to get better as our employees uncover new ways to grow and improve.
Fochrest’s challenge, though, is a dramatic misalignment of sales and marketing with our production and supply chain. Our outdated sales and operations planning (S&OP) forecasts fail to capture the changing conditions in our facilities or with our suppliers (continuing to assume mountains of available inventory) and inaccurately assesses our volatile customer market (looking more than three months out is illogical in our industry). I want to better connect our new lean capability with our market — we’re agile and able to produce to a true customer pull — but this requires getting our sales and marketing processes and our S&OP in step with the pull-based mentality of production and the supply chain.
Sales is still locked into a push-based planning system designed around separate demand and supply plans and relying on unreliable, batch-build statistical models. By the time stale S&OP numbers come to production, sales staff and customers have already revised them (and we often find SKUs in the schedule that we no longer produce). In addition, we frequently force our S&OP process outward to our customers, tying them into long-term orders and off-the-shelf solutions and discouraging product customizations or new product ideas.
Fochrest could be selling and making so much more, all the while improving customer satisfaction and our revenues and margins. Our sales and marketing leadership is aware of the limitations of their current S&OP processes, but unsure how to change to an integrated demand and supply model that will allow us to rapidly see what’s really happening in our market and supply chain and more profitably satisfy customers. Where do we begin?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Tom Wallace
The good news is that you’ve implemented Lean Manufacturing. The bad news is that what you’re calling Sales & Operations Planning a) is not working, and b) is not even Sales & Operations Planning (S&OP).
You’re not doing S&OP because that process:
- Is executive-driven.
- Operates primarily at a volume level, not mix.
- Represents a medium- to long-term planning process that sets the conditions for success (so that when you’re close in and fighting the daily battles, you have a much better chance of winning). Most effective S&OP processes go out 18 or more months into the future.
- Identifies both units and dollars for financial planning and to support simulation.
- Is demand-driven: one of S&OP’s jobs is to balance (align) demand and supply.
What you’re presenting seems to be none of the above. You’re not doing S&OP. You’re flogging the wrong horse.
Where to start? First, recognize that you’re not Toyota. Toyota is not lean throughout all its operations: once the vehicles roll off the assembly line, the pull system goes away. Rather, Toyota pushes completed vehicles into an inventory of around $3 billion — the inventory of finished vehicles at the dealers. This insulates Toyota manufacturing from the ups and downs that we consumers create in the marketplace.
Second, be aware that most highly successful users of Lean Manufacturing also do a first-rate job with S&OP. That’s because they’re like you. They’re not shipping to a group of happy, contented, rich Toyota dealers — who tend not to make waves. They’re shipping to the likes of GE, Wal-Mart, Boeing, Motorola and so on, who want their stuff now! and don’t care about your problems. Sound familiar?
Third, understand that the forecasting job for the sales people is to do the very best they can in projecting future demand. They should not have to worry about push vs. pull, batch build, or other supply issues. What they do care about are lead times to customers, because as the lead times get shorter they can sell more product. You didn’t say what’s happened to your lead times since you implemented Lean. If they haven’t gone down a lot, then you didn’t implement Lean properly.
Fourth, rather than grumping about Sales, S&OP, forecasts and on and on, get your head into Postponement. This wonderful process enables companies to postpone finishing the product until after the customer order is received and then to finish and ship quick! (Think Dell Computer.) This enables higher customer service, virtually no finished goods inventories, very short lead times, and can eliminate the need for forecasting at a detailed, SKU level. All of this makes for very happy sales people — and happy finance and top management. They’ll think you’re a genius.
Fifth, recognize that you don’t know squat about S&OP. Your company is not doing it, and will never do it well until you and your colleagues learn what it is and what it isn’t. There are plenty of places to go to learn about what it is, the benefits it provides, and how to implement it successfully. Avoid reinventing the wheel.
Tom Wallace is a writer and educator specializing in Sales & Operations Planning. He is a distinguished fellow of Ohio State University's Center for Operational Excellence, and currently writes and speaks in conjunction with the Institute of Business Forecasting. He is the author of 12 books, including Sales & Operations Planning: The Executive's Guide and Sales & Operations Planning: The How-To Handbook (3rd Edition). Tom can be reached at tom@tfwallace.com or via his company’s web site: (www.tfwallace.com).
By Randy Littleson
Fochrest is not alone. Many companies are dealing with the same market forces as you are and struggling with the major implications that has on manufacturing and supply-chain operations.
Demand volatility has become the biggest area of concern to many manufacturers since the inability to respond quickly and profitably to your customers means the loss of revenue and market share to more nimble and increasingly aggressive global competitors.
One of the first realizations that you need to come to grips with is that you can’t plan the customer. You need to be able to respond to the customer by increasing your ability to sense, shape, and profitably respond to demand. Like you, many manufacturers are finding that the reliance on backward-looking statistical forecasts is increasingly putting their businesses at risk. As such, they are replacing that with a more collaborative model where they work directly with their biggest customers to develop a more accurate and timely understanding of their demand requirements.
This more accurate view of demand is then brought into the S&OP process where it is more tightly aligned with supply to gain an understanding of capabilities and misalignments. This, too, is a major change as historically demand and supply have been owned and managed by two distinctly different organizations. We’re seeing more and more companies breaking down these walls and putting processes in place that ensure that all the right stakeholders are able to see a complete, accurate, and timely view of the demand and supply situation.
With this in hand, companies are leveraging tools that foster rapid scenario creation and evaluation to develop, share, and discuss a variety of likely scenarios and their impact. This is critical because companies are recognizing that no plan is going to be flawless, so there’s a premium placed on the ability to quickly evaluate various options as a team, understand the impact of any option becoming reality, and proactively discuss response actions should one of those options materialize.
The other best practice that many companies are focused on is that of profitability, or, more broadly speaking, the financial implications of their actions. Unfortunately, most S&OP processes today are blind to profitability, yet that is one of the single most important metrics to any company. More and more companies are putting tools into the hands of their key stakeholders that elevate awareness to the financial implications of all decisions with a greater awareness to the impact on profitability. So as a team works together to evaluate likely scenarios, team members are able to see a scorecard depicting the impact on key performance indicators (KPI) for each scenario they evaluate. This integration of scenario management and scorecarding provides a critical predictive capability that ensures the team is aware of the impact of their decisions on the metrics defined by executive management.
Getting ahead of the market forces exerting pressures on the business starts with the realization that you can’t plan the customer. With that awareness, you can then set out to put the processes and supporting tools in place to ensure that the business is able to rapidly and profitably respond to changing market conditions, which in turn can provide competitive advantages both in customer service and operations performance.
Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the leader in Response Management for operations performance. Randy can be reached at rlittleson@kinaxis.com.
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