Quantifiable Benefits of S&OP: Improved Service Levels
- Doug Dedman
- Sep 4, 2024
- 3 min read
Welcome back to our series on quantifying the benefits of Sales and Operations Planning (S&OP). In this series, we are examining the tangible benefits that S&OP can bring to your organization. Our goal is to help you understand how S&OP delivers these benefits and to provide a method for calculating the return on investment (ROI) from implementing S&OP.
If you haven’t already, go back and take a look at the first post in this series, click the link here. In that post, we discussed how S&OP is linked to various business outcomes and introduced an expected improvement table from Tom Wallace, author of the "Sales and Operations Planning: How to Handbook." This table provides a range of potential benefits, including high, low, and expected values, which we will use to guide our analysis of each benefit.
Today, we turn our focus to improving on-time delivery to customers, in other words, enhancing service levels. We’ll explore what benefits you can expect from S&OP in this area and how to calculate these benefits effectively. Tom’s table suggests a range of improvement in service levels from 10% to 40%, which can seem quite broad. For example, if your current service level is 98%, a 40% improvement may not be practical, so we’ll approach this calculation with a more nuanced perspective. We'll also combine the concepts of improved service levels and reduced lead times into a single analysis to provide a comprehensive view.
Understanding Service Levels and Lead Times
Service level metrics typically include On Time In Full (OTIF), Request Date Service Level (RDSL), and Promise Date Service Level (PDSL). Regardless of which metric you use, it’s crucial to understand how it’s calculated, ensure consistency, and measure it both in aggregate and by S&OP family. This approach provides a solid baseline for evaluating improvements.
How S&OP Enhances Service Levels:
Granular Analysis: S&OP breaks down your business into product families, making it easier to manage and tie actions to results. This granularity helps in setting and monitoring realistic operating parameters.
Defined Operating Parameters: S&OP involves defining key parameters such as customer expected lead times, market lead times, fulfillment strategies, and scheduling zones. Properly defined parameters are essential for setting realistic targets and ensuring adherence to them.
Performance Measurement: S&OP should include regular performance reviews compared to targets. Monthly tracking allows you to adjust targets or address execution issues to meet desired service levels.
How S&OP Enhances Reducing Lead Times:
For make-to-order (MTO) or engineer-to-order (ETO) businesses, reducing lead times involves managing backlog effectively. Establish realistic lead times for each product family and monitor backlog levels monthly. S&OP helps by providing visibility into bookings, shipments, and backlog, enabling you to adjust output or incoming orders to achieve desired lead times.
Calculating the Payback (Example)
Improving Service Levels:
To quantify the benefits of improved service levels, use the following approach:
Determine the Baseline: For instance, if your current service level is 97.5% and your target is 99%, calculate the expected improvement.
Estimate Sales Impact: Based on sales team input, a 0.5% improvement in service levels might result in a 2% increase in sales. For $100 million in sales, a 1.5% improvement could yield $6 million in additional sales. With a 40% gross margin, this translates to a $3.6 million benefit.
Account for Costs: Consider any costs associated with improving service levels, such as increased inventory or additional capacity. Factor these into your calculations to get a net benefit.
Reducing Lead Times:
For lead-time reduction, calculate the expected sales increase or lost sales avoidance based on lead-time improvements. Collaborate with your sales team to establish metrics and targets for this calculation.
Phasing Savings Over Time
Typically, the benefits of S&OP are phased over three years to account for the time required to implement the process and realize the full benefits. A common approach is to allocate 20% of the benefits in the first year, 80% in the second year, and 100% in the third year. Adjust these percentages based on your specific implementation timeline.
Conclusion
While the analysis of improved service levels and reduced lead times may not alone justify S&OP for your organization, it provides a valuable starting point for understanding the quantifiable returns achievable through S&OP. Stay tuned for future posts as we continue to explore additional significant benefits of S&OP.
If you're wondering where you can start realizing the benefits of S&OP for your organization, I highly recommend taking our S&OP Clarity Compass. This free scorecard only takes 3 minutes to complete and provides you with a personalized report and recommendations for improving your process.
At DBM Systems, our consultants have over 20 years of experience providing S&OP leadership to businesses worldwide. We equip teams with coaching and the tools to quickly start and sustainably run an effective S&OP process. Learn about our process and unlock the power of S&OP in your organization.