For many business organizations, internal departments working independently of one another is the norm. This norm creates siloed day-to-day functions and rigid disconnects in processes. This is especially true when it comes to sales and operations planning (S&OP). Low-maturity organizations allow budgets to dictate operational planning, and medium-maturity organizations focus on reconciling the difference between sales and operations. However, with today's unpredictable global supply chains, leaders must integrate financial planning with sales and operations. This is done through planning processes by aligning the input and assumptions early on and layering financial risks and opportunities on top of the sales and operational outcomes.
An example business scenario
An example of this siloed disconnect is a company that produced a specialized variety of deli meats. One of the products was targeted to a distinct demographic. The primary demand for this product was in major U.S. metropolitan areas. It was a very complicated and costly product to produce. Some of the issues with this particular deli product included:
● A high cost of production prone to production issues
● Despite the low margin and low sales volume, the food company had to produce large batches of the deli meat
● The meat could not be cooked or produced with other products, resulting in the slowing of production of other products
● More excessive inventory than demand required during the production process
Month after month, the food company witnessed these ongoing issues that created a domino effect and impacted other areas of business like:
● Late deliveries
● Lost profits
● Delays in the production of other products
● Overall downtime
● Customer service repercussions
As a result, the company halted production of the particular deli meat product. The production problems were seemingly resolved. What happened then dumbfounded the company's leadership: sales across the board for all of their other products in those metropolitan areas began to decline.
To figure out why this happened, the company conducted a market research study. The results of the study found that the one specialized deli product was a widely recognized and trusted product. After the product was removed from the marketplace, consumers turned to other deli meat companies and abandoned the food company entirely as customer loyalty disappeared. As a result of this newly gathered information, the food processing company began to produce and sell the discontinued product again, but this time with a well-developed strategy involving every department in the sales and operating processes.
This gap still exists for many manufacturers at present
Sales and operation planning is all about collaboration, though that collaboration is often muddled. Collaboration between whom exactly? It was originally thought that sales collaboration should be between sales forecasting, operations planning, and procurement planning teams, which was admittedly a fair start. However, companies began to realize that the collaboration also needs to include the organization with the complete ecosystem including key trade partners throughout the whole process.
However, many companies are simply not good at collaboration — or don’t have the tools needed to support collaboration, both internally and with external partners. As a result, a siloed environment is still true for a vast majority of manufacturers today, including small, medium, and large companies. Disconnections within the supply chain are due to the utilization of outdated systems that are not viable for today's market. The isolation of critical teams that need to have constant, fluid communication with one another as well as engage with outside teams that make up the entire ecosystem leads to various difficult issues.
Imagine minimizing those gaps
Imagine minimizing the impact of those gaps and determining the business impact of supply chain decisions early in the planning process at all levels of planning: from strategic, to tactical, through execution. Imagine having the ability to make decisions with everyone from all groups using the same business language to level out understanding and any potential communication barriers. Manufacturing organizations need the ability of cross-functional decision-making for seamless operations.
Finance vs. operations
Today, business departments still experience in-group and out-group mentalities–or an us vs. them frame of mind. These are cross-functional groups still working in siloed environments.
What needs to happen is a marriage of the metrics that measure supply chain effectiveness and the business metrics, specifically, those that measure financial success. Forecast accuracy, service levels, inventory turns and resource utilization are just a few of the parameters by which operational and supply chain performance are measured. But what if those metrics were analyzed in conjunction with working capital, profits, costs, and revenue? And, what if their impact in relation to each other was evaluated and compared?
Many manufacturers still use methods of decision-making of the past, utilizing a disconnected model. In most cases, this model excludes any decision-making processes from the finance team, and the rare instances in which they do, it is usually an annual static budget input. Today, budget and financial planning needs to be fluid with daily changes throughout operations, therefore the information that is used both operationally and financially need constant analysis.
The two groups of finance and operations
For many organizations, finance and operations continue to speak different languages. Operating viewpoints without input from finance leads to disconnected and siloed information, leading to disconnected horizons and disjointed planning. The languages are as different as the viewpoints. When supply chain people speak of operational plans, they talk of service levels, inventory coverage and resource utilization. The finance team speaks about revenue, adherence to budgets and the overall impact to cash flow. When the subject of capacity management arises, the supply chain team talks about production attainment and schedule adherence while the finance team talks about the costs of the equipment.
Finance planning: The solution
The solution is to provide and analyze the critical financial metrics and evaluate the impact of the operational decisions on those metrics and vice versa. This needs to be done throughout the entire supply chain planning process so decisions can be made in respect to the impact on both the operations and financial parts of the business with the goal of an efficient running supply chain that is profitable. This involves providing financial KPIs throughout the S&OP processes so decisions can be based equally on financial and supply chain metrics.
How is this accomplished?
There are multiple components that need to be working to get a connected supply chain that is adaptive and agile. Three elements need to be aligned: people, processes, and systems need to be operating in unison. To achieve this, all operational groups of the organization need to be planning on the same page and have the same overall business outcomes and goals. It starts with finance and operations along with all other groups and key partners from their external ecosystem, suppliers and customers, operating on the same time horizon. Realizing there are multiple levels of planning that look at different time horizons, meaning that when developing a strategic plan, all parties are looking at the same length of the horizon. The same is true for the tactical and execution levels. If all players are planning with different time parameters, be prepared for complications and problems.
The next piece of the puzzle is that the planning models of each organizational group must also include the same components. If a manufacturer uses contract manufacturing, then that component needs to be included in all of the group's plans. Growth models, product additions and subtractions all need to be in everyone's plan. If product development is planning on introducing new products, that needs to be in both operations and finances plans. Potential profits, product cannibalization, distribution, and production costs for example, all need to be considered by all groups.
Finally, the most important is the alignment of metrics. First and foremost, a list of key metrics important to the performance of each department and the organization needs to be determined and observed and studied by each group, starting with the conflicting objectives that might be in countersink to the others. Operating, planning, and managing the same set of plans, business models, and metrics throughout all levels of the organization and business partners ensures that the supply chain will remain connected.
Aligning the disconnect between people, process and systems
When the concept of S&OP originated roughly 30 years ago, the primary goal was to break the silos between the groups of an organization. Originally, the focus was those groups that directly impacted the planning of the primary pieces of the supply chain. Over the years however, this methodology has evolved, and the realization is still setting that it is not just the groups involved in the operational side of the business that have conflicting objectives that need to be connected. Rather, it is the entire organization that experiences these conflicting objectives. All people in the organization need to be connected and empowered to have input in the plans that drive the organization.
The way to connect and empower is with a process that uses real time data to deliver intelligence into those plans, and intelligence is needed to manage the physical and digital supply chains simultaneously. This process, primarily S&OP, should evolve into an organization mindset which even supersedes any given process.
Finally, technology needs to be introduced into the mix with systems that can help make an organization more agile in its ability to plan rather than react to the business issues within an organization and those things that impact their trading partners. Aligning the people with the process along with the right systems eliminates the silos and removes the disconnect.
The goal is to be an adaptive enterprise and to have a robust, agile and connected supply chain to enable that enterprise. Supply chain costs up and downstream are one of the biggest profit killers to any organization. Companies that manufacture products have to manage with low margins. The slightest kink in the supply chain can destroy profits. The companies that will succeed and absorb the pressures of the markets of today need to be adaptive with a connected supply chain void of any siloed data or communications. To do this, manufacturers need to connect the people, the processes, and the systems. Every piece of the business entity needs to be on the same page and the financial goals of the organization need to be included in all areas of the plan to truly be adaptable.