Welcome to our series on quantifying the benefits of S&OP. If your organization already has an S&OP process in place and you want to improve it or you currently don't have a process and are looking at implementing one, it is helpful to understand what the benefits or returns that your company should expect from S&OP. In this series, I will spend some time going through some of the quantifiable benefits of S&OP to help you calculate the return for your organization.
Most, if not all, of the executives that I've worked with, would say that the soft benefits, the ones not necessarily quantifiable for ROI, are much greater than the hard benefits when it comes to S&OP. What are these soft benefits: better communication, clearer decision making, improved accountability, more effective meetings, and strategic clarity. These are all incredibly important and can be tied to an effective S&OP process, however, the non-quantifiable results don’t help when you need to put a business case together to justify any investment required to implement a new process, to do that you need numbers.
So, what are the hard benefits of S&OP? While not an exhaustive list, you can expect S&OP to address the following areas:
On the sales or demand side:
Poor Service Levels, or OTD
Past due backlog
Growing Lead times
For Logistics:
Expedited freight (both incoming and outgoing)
Reducing excess inventory
Finally, for operations:
Improving plant efficiency
Reducing manufacturing downtime
S&OP on its own doesn’t yield these benefits. The process must be linked to your other planning processes. However, S&OP provides the framework to manage the business to yield these benefits.
Now, this S&OP framework is important to achieving any of these returns because a good process will help you do three things.
First, improve the predictability of demand. S&OP provides accountability for the demand plan. Tying the demand plans to a constraint-based family, and segmenting demand by demand type will provide the level of connectedness and granularity to measure where demand challenges exist clearly. Applying the right forecasting, or demand management methodology to each demand type provides the best chance of getting a meaningful forecast. Accountability and measurement will drive improvement.
Secondly, better predictability of supply. This starts with establishing accountability and using the process to set a supply plan that is within your constraints. This means you define your constraints and communicate them across the organization. Measuring your actual performance against the plan at a monthly level by family and requiring root cause analysis on the reasons why the performance was not in tolerance will drive improvements.
Finally, better buffer planning. Formalizing and documenting the “strategy” or operating parameters for a family is an important part of the S&OP process. This includes the three important buffers or levers that you have to manage the variation between demand and supply. Lead time, Inventory, and up-side flexibility are these three buffers. This starts with formalizing the targets for each family and communicating across the organization. Then using the process to monitor, manage, and adjust as required will drive more coordinated decisions.
These three outcomes from S&OP will provide the outline to achieve these benefits.
What is the return you can expect? Tom Wallace, one of the pioneers of S&OP did a study a while back on what should you expect for a return from S&OP. Most other studies that have been done since have focused on many of the same return areas: Improving service levels or lead times, reducing (or right sizing) inventory, reducing manufacturing downtime, improving operational efficiency, and finally reducing expedited freight. The benefits range all the way from low single digits up to 70%. The benefit and focus will depend on your operating environment and specific situation.
In the next four parts of this series, we’ll dig into each of these benefits and how they might apply to you. I will define the measurement, talk about how S&OP will help you realize the expected return, connect the dots if you will, and finally take you through an example of how you can calculate the ROI for that measurement.
To make the numbers work and easily follow in this series, I’m going to round them to even percentages. I generally like to be conservative with the numbers but have found these to be a good starting place.
Hopefully, this article provides you a good starting point for linking the quantifiable returns you can achieve through S&OP. Stay tuned for the next articles to dig further into each of these returns.
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.