Sales and operations alignment. It is the promise. For many this seems like an old horse to ride. It is tough because operations and commercial teams are not naturally aligned, and the implementation of an S&OP process is not a quick fix.
The processes of S&OP are now over 35 years in evolution. In many ways they are quite different, and in many they are the same. Let me explain.
What Is Different?
They are different because in today's organization, there is not one S&OP process. Instead there are usually four to six. Each needs to be developed and refined.
Organizations are also more complex. With the evolution of global organizations, decision processes are more matrixed and the processes of planning are more complex.
The technological challenges are also greater. The average company has three to five ERP systems, and the data for S&OP comes from an average of 15 systems. There is a growing need for a visualization layer across the matrixed organization and the many technologies that need to support the S&OP process.
These are the new challenges.
What Is the Same?
The challenges for S&OP are steeped in organizational alignment and culture. The best S&OP processes are aligned and balanced with clear goals. This is more difficult that it seems. As can be seen in Figure 1, 68% of processes are out of balance. When a process is balanced the drivers of go-t0-market plans are aligned with the goals of the operations. When there is balance, S&OP improves the potential of the organization to perform on the Effective Frontier—to balance growth, profitability, cycles and complexity.
The organization is not naturally aligned to the same goal. As shown in Figure 2, the greatest gaps in the organization are between operations and sales. The processes of S&OP can improve alignment.
This happens more quickly if the process meets three conditions:
- The S&OP process should report to the profit center manager.
- The focus needs to be on driving a balanced portfolio of metrics that goes across the organization. Team members need to be held equally accountable for growth, inventory, profitability, customer service, and forecast accuracy. The process needs to be very disciplined.
- S&OP planning needs to be tied to execution. Reliable processes build trust. This happens through the development of playbooks and weekly reviews of the S&OP plan with corrections based on the playbooks. (Planning should not be confused with execution.)
Why It Matters
Today, most companies are struggling with the ability to improve operating margins and reduce inventory levels. One in nine companies are stuck at this intersection, and as can be seen in Figure 3, more companies have seen a deterioration in inventory performance rather than driven improvement.
An effective S&OP process improves alignment between sales and operations. (To understand how we measure alignment, and the impact of alignment from S&OP maturity, reference our report on Supply Chain Alignment.) Based on the work we've been doing on the Supply Chain Index, and gauging supply chain improvement, we wanted to understand how improvement in alignment improved inventory turns. To do the analysis, we cross-tabbed multiple studies that we completed in 2013 and 2014 and then enriched the data with our financial ratio data base. The goal was to track the impact of improvements in alignment on financial ratios. We find that improvement in alignment can drive up to a 10% improvement in inventory turns; whereas the lack of alignment can result in a negative impact on inventory turns of 2%.
Balance drives alignment. Alignment drives balance sheet improvement. Keep riding the horse....
It is morning in London, and I spent the week with a client working on the implementation of the SAP IBP technology built on HANA. It is great to see this product being used by clients.
Next week I will be in Stockholm discussing European clients' progress on the Effective Frontier at the Optilon Conference. With only two weeks left before the Supply Chain Insights Global Summit, the team is hard at work on putting the finishing touches on new research and insights for the Supply Chain Innovator. Join us at the conference to hear us launch The 15 Supply Chains to Admire. This analysis is based on both performance and improvement of companies within their peer group on growth, Return on Invested Capital (ROIC), Operating Margin and Inventory Turns. It will conclude a two-year research project. If you cannot make the summit, join us through the live stream via our ustream broadcast.
I hope to see you in my travels.