Implementing an S&OP process is not effortless. It requires energy, discipline and tenacity. The company must dedicate resources and people to make it a success. The teams involved from all functional areas of the company will spend hours of their time designing the process, putting it in place, and, of course, maintaining it.
There is no reward without effort, just as there is no company that does not expect results. But we can only claim to have achieved results when we actually see that something has changed for the better.
But how will we know if our S&OP project is achieving results?
Let’s take a practical example. If you go running for 5 minutes on one day a month, you are probably not the ideal candidate to run a marathon. However, if you go running for an hour 3 times a week, you could possibly consider running a marathon in the not-too-distant future. And if you do take part in a marathon and make it to the finish line, you can say that you have indeed achieved a result.
The same is true for the results of an S&OP process. If you are disciplined in repeating the same process on a monthly basis, practising and improving it month on month, it will be easier to achieve your projected results.
What results can we expect from an S&OP process?
A good result means that you can demonstrate your ability to deliver value to your customers by supplying them with the right products and services. But when you also deliver the right product in the right quantity at the right time, then you get happy, loyal customers.
Within an S&OP process, a good result means that you’re able to identify what you can improve on and what adds value … whether it be tangible or intangible.
An intangible ‘good’ brings a benefit, but it’s not easily quantifiable. It’s not a material ‘good’ that we can place in our warehouse. It’s not easily convertible to euros, nor can it even be seen, touched or felt.
All companies have intangible assets. A brand, the organisation’s in-depth knowledge of a particular subject or the talent of people and teams are all intangible assets.
Imagine the brand power of big companies – Coca Cola, Apple – or the deep knowledge of those big pharmaceutical companies that saved the world from the COVID virus – or all companies that have huge human capital.
Well, in an S&OP process, some of the results we obtain are intangible. For instance, improved teamwork and communication. S&OP enables access to data and information and allows for more transparent channels of communication, which facilitates learning within the company. In this way, better decisions are made and leadership at all levels is fostered and encouraged.
A result is tangible when it is quantifiable, for example, a net annual increase in turnover, a percentage of savings in a certain functional area or process, a specific one-off revenue item, or a direct impact on the company’s bottom line.
Results must be measured. It is the way to make them visible and to demonstrate them. Then, when we actually demonstrate them, we get the team’s attention, and, if they are good or very good, we get real devotees to our S&OP project.
How to measure results: the main KPIs in the S&OP process
If we want to measure results, our first step is to define our KPIs.
A KPI is a performance measure that allows us to quantify whether the actions we are carrying out within a business process are effective, and whether we are obtaining the expected results.
For example, if our goal is to increase our service levels, we can spend time and effort on improving our warehouse logistics operations, but if we do not have the right products in sufficient quantities and ‘on time’, we will hardly be able to improve our service. Thus, our objective should not only measure the processing time of an order in the warehouse, but also the number of emergencies in a given period, our suppliers’ on-time delivery performance (OTIF) and the level of accuracy of our forecasts (Forecast accuracy).
Ideally, during the implementation of an S&OP process, we will design a control tower of our main KPIs that will allow us to associate a performance indicator with each activity we perform. To do so, we will carefully choose those KPIs that are reasonable and possible, as not all objectives and activities can be measured.
What strategy should we follow to define our KPIs?
The main objective when defining our KPI control tower is to enable us to perform the following activities:
- Monitoring the evolution of the KPI through observation and data collection, always following the same standard of measurement.
- Checking whether we are deviating from our objectives. Then we can identify what the causes are, what needs more attention, and what adjustments the process needs to bring us back into line with the plan.
- Leading the organisation towards a common goal, facilitating the leadership and motivation of the people who are part of it.
There are different approaches to deciding which are the best KPIs, but broadly speaking we should be able to identify and measure:
- How our customers see us.
- What we must be best at.
- How we can create value.
- How our shareholder partners see us.
A good way to do this is to associate a KPI for each phase of the S&OP that aims to measure the benefit and the expected outcome.
Main KPIs for the product catalogue review
During our product portfolio review process we might establish that we want to increase sales and reduce the rate of obsolete items. Therefore, we should improve the success of our promotions, the time to market, the life cycle management of the items. So our KPIs could be Reduction of Obsoletes, Planned Promotion Volume vs Actual Promotion Volume, Planned Sales of New Items vs Actual Sales of New Items, Percentage of Total Inventory According to Life Cycle.
Key KPIs for demand review
During our demand review process, we might ascertain that we want to increase sales and increase the customer retention rate. Therefore, we should improve our service level, reduce our customer lead times, reduce the number of breakages. So, our KPIs could be Average Customer Lead Time, Backorders, Number of Repeat Purchases, Number of Customer Incidents.
Main KPIs for inventory and supply review
During the inventory and supply review process, we will be interested in knowing our inventory levels, breakage frequency, OTIF (a KPI to measure our suppliers’ ability to commit), and CVP (a KPI to measure our suppliers’ percentage of compliance).
Main KPIs for the meeting prior to the monthly executive meeting
Prior to the monthly executive meeting, the key team leaders should meet to assess whether the plan at S&OP level has any limitations, opportunities or risks. The outcome of this meeting should be an agenda which includes every item that will be discussed during the monthly executive meeting on which decisions will be taken at the highest level.
This ‘pre-meeting’ is one where we can evaluate different scenarios, assess which decisions should be escalated to the executive meeting, identify financial risks – such as insufficient cash flow – and confirm key KPIs.
It is at this point that we take a holistic view of the process KPIs, and compare them to the company’s financial targets to confirm whether our plan is delivering the expected results.
Main KPIs monthly executive meeting
At the end of the monthly S&OP process we will present the KPIs that allow us to evaluate the current state of the company. The main objectives of this session are to make decisions at company level and to approve the S&OP plan. Some of the KPIs that can be evaluated are market share, geographic expansion, company growth and capacity utilisation.
Good practice in defining KPIs
Finally, keep in mind that sometimes selecting the right KPIs can be a bit tricky. Opting for the easiest and quickest solution is a good starting point. Just because you measure a lot, you are not going to get better results. It is perhaps better to have a few KPIs that provide relevant data rather than many that do not provide meaningful information on how you are executing your S&OP process.
Here are some ideas to help you decide:
- Don’t go for trial and error. Decide on the KPI and stick to it as far as possible.
- Define KPIs that you can easily measure and that do not impact on operational processes negatively.
- Communicate KPIs effectively. Your team needs to know what will be measured, why and for what purpose.
- Focus the KPI on positive motivation. Try to align personal incentives and company incentives.
- Align your KPIs to your company strategy. If your strategy is customer confidence, you will need high inventory levels. Whereas, if your strategy is based on operational excellence, you will look for cost efficiency.
- Use KBIs, Key Behavioural Indicators, to measure your intangible results such as engagement in your S&OP process, level of cooperation and collaboration.
Conclusion: The future of business is digital transformation and collaboration
In today’s highly disruptive environment, constant change is the norm. Companies face challenges such as climate change, high energy prices, more demanding customers, and talent shortages.
This permanent state of business hyper-alertness requires constant transformation and reinvention.
Implementing an S&OP process is a project whose objective must be to obtain benefits, improvements and results, but it is also a project of change, and one that seeks to sustain change. Companies evolve, but your people must evolve too.
An S&OP project facilitates this transformation process, and technology is its greatest ally. What machines can do, let machines do. And let your teams devote their time and effort into creating, improving and growing the company. This is the only way to get real results.