Demand-Driven Operations Planning Part 1

S&OP versus Demand-Driven Operations Planning has been an on-going debate for a while now.  As time goes by, all practices evolve.  This post will discuss the debate further.

The mistake made by many sales planners is to use the financial plan to drive forecast decisions and not customer input.  The planning functions are often not linked to inventory targets and that creates fulfillment havoc.  The planning function is often planning in a vacuum.  Additionally, in execution, scheduling is focused on asset utilization not customer needs.  New product introductions are also not often connected to the production cycle.  With this situation schedulers are regularly adjusting the schedule to meet inventory and emergency customer needs or supply problems.

Determining how to use MRP II to meet customer demand within a reasonable lead-time while maintaining the finished goods inventory within control targets was once thought to be a rational process.  It had the elements of a Sales and Operations Planning process and based on “Orlicky’s MRP,” an S&OP process, is an integrated business management process through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization.  Whether it is a universally accepted or used process is not certain, but it appeared to be the only way to solve the customer service organization’s problems meeting customer needs and inventory targets.

In one instance, the planner had interface responsibility with customers for mostly individual custom designed units, of one and two units to no more than 10 like built units.

At that time, there were a half dozen to 10 base units needing customization to meet customer needs.  The forecasters had their work cutout for them to determine how many of the base units to schedule and how many of the major components would be required to meet each customer’s needs.  These base units were very expensive and weren’t sure how many management would allow to be produced and potentially in inventory.  The material planners had to determine how many base units to produce at the subsidiaries and the purchasers had to determine how many parts the suppliers should produce to support the plan without going over inventory targets.

These customer needs for products within a reasonable lead-time and maintaining of inventory targets led to creating the details of an S&OP process for the division.  To begin this process it is necessary to get over the silos that to date kept the organization from resolving these opportunities.  The various organizations needed to get aligned and stop second-guessing each other.

It was common practice in this organization, as it is in many organizations without an S&OP process, to have the product planners create a forecast separate from customer inputs.  The financial plans often drive forecast decisions not customer inputs and the planning functions are not linked to inventory targets creating havoc.  The planning function is often planning in a vacuum.  Additionally, on the execution side, scheduling is focusing on asset utilization, not actual customer needs.  Furthermore, new product introductions are not connected to the production cycle.  Additionally, the schedulers are regularly adjusting the schedule to meet inventory and emergency customer needs or supply problems.

S&OP has to begin with a single, unconstrained consensus demand plan covering the customer base and financial business plan.  This plan should be developed and agreed upon with every forecast cycle.  It has input from all the planning and scheduling functions and then is approved at the appropriate management level empowering all functions to proceed based on the plan.

Each forecasting period, normally monthly, is driven by a look back at the actual demand versus forecast measure and a dialogue between the organizations responsible prior to finalizing the expected demand for the period.  This is the important first breaking of a silo.  The sales and marketing organization is trying to hit a financial target and an inflated sales plan is often the result.

The reality review with the production/planning group will reach a realistic production and inventory plan.  In this collaboration between these two groups a plan is reached that both groups can stand behind and support to executive management.  S&OP begins with a single, unconstrained consensus demand plan covering the customer base and financial business plan and there is no better way to achieve this than by achieving an agreed to plan between production planning and sales and marketing.  The planning organization then takes the initial demand forecast plan and gathers information from the other constituencies.

If the planning group tries to develop a plan without input from the various functions they may overestimate the production needs or expedite when not needed or the wrong product and cause confusion in the supply chain.  We’ve already touched on one, often overlooked, the new product development function that may be ready to introduce a new product or a change to one of the current products that will affect the overall plan.  The supply organization assesses the demand plan using this information and gives overall input as to potential issues.  

They must evaluate any constraints for changes required and agree on available supply capacity and reach a consensus agreement on constraints and solutions.  This could change the capacity or the customer expectation for a particular configuration.  The other is supply analysis of parts delivery and parts manufacturing.  This must be included to ensure there are parts either scheduled to be produced or received from suppliers.  By including these partners in the development of the plan they become aware of the plan and drive toward supporting the plan.

Implementing these processes is critical for production planning to attain inventory targets and in turn accurate financial results. Involvement and buy-in of top management for the process will assure success.  This is true of all changes. 

There is more to come.  This is only the first part of a series.  Stay tuned.

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