“Our S&OP clients often don't have a good handle on balancing supply and demand ("the story-of-the-business) until they get the right S&OP process in place. However, when they do, the S&OP process surfaces the important questions. All of those questions and their subsequent decisions benefit from a Net-Landed-Profit approach.”
- Marshall L. Henley (https://www.linkedin.com/in/marshallhenley/),President of Beza Performance (http://bezaperformance.com/)
Why Add Profit into S&OP
Whether formal or not, every organization has a Sales & Operations Planning (S&OP) (https://en.wikipedia.org/wiki/Sales_and_operations_planning) program in place. S&OP is important for creating the story-of-the-business, the operational details in satisfying demand of specific units of products. “What worked” for S&OP is stretched to the limits today because of supply chain risk disruptions that resulted in significant resource constraints, capacity shortages and inflationary cost increases. These problems manifest themselves as significant internal stress and as conflict between sales, supply chain operations and procurement.
This is driving the need for S&OP to:
“Create a proactive story-of-the-business in terms of back logs, delayed service levels and sacrificed customer satisfaction”
Why doesn’t the current S&OP process of “what worked” mitigate or eliminate today’s supply chain problems? It’s simple, they are not incorporating profits into the calculation. Profits allow companies to attack resources constraints, expand capacity and reduce the impact of inflation.
“For example, if the shipment plan is constrained (as is generally the case), the Pre-S&OP Meeting and subsequent Executive S&OP meeting will call for decisions on who will get served and by when, rather than just letting systems (such as ERP) or processes (such as a FIFO) determine the answer,” said Henley. “Knowing profit by SKU, profit by customer, and profit-by-SKU-by-customer provides unmatched decision criteria as the organization ponders the next 12 months or more.”
How to incorporate Profit into S&OP
- Create a proactive story-of-the-business that is fully supported and owned by the most senior executives
- Create a story-of-the-business that is not based solely on historical considerations. These historical considerations often lead to missed financial objectives and growing shareholder pressures. It must be based on a foundation of increasing profitable performance.
- Use of precise analytics for decisions on “Who, What and Why” that provide actionable visibility on profit contributions by Channel, Customer and Product performance.
- Use profit measurement that go beyond standard cost accounting measurements. Net Landed Revenue (includes discounts, promotions), Net Landed Cost to Serve (includes Supply Chain costs from supplier to customer) and Net Landed Profits provide the missing ingredient. (click here for video on Supply Chain financials) (https://youtu.be/-kQsRId-3jI)
The COVID pandemic is the biggest challenge of our times. Some organizations will stick to the same story-of-the business. Some will innovate to profit. Will your company take its S&OP decisions to the next level?
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All the best,
Richard Sharpe (https://www.linkedin.com/in/richardhsharpe/ )
CEO – Competitive Insights