Sales & Operations Planning A Better Plan to Help Power Profits

by Ramna Viswanathan

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A better way of hitting the numbers: PDCA It’s quarterly budget review time, and once again, corporate executives are struggling to determine future projections. That is, they guess within conservative estimates what the company’s future earnings [EBITDA] will be based on some set of averages drawn from their category and a handful of historical reports – then wait for the results to come in. The projections may be very close. Yet, each quarter, the same process is followed, and each subsequent quarter, the desire to close the variance persists. In light of this repeated drama, the fair question to ask is: why? Why do so many companies find it difficult to square actual performance with quarterly projections? Could it be that there is an inherent disconnect between operational realities and future forecasts that no discernable mechanism can overcome? Could it be that the planning process itself lacks rigor?

It’s not about “what happened” Think about it. How can you reach a level of granularity on future plans, when all you have at your disposal is historical data? It’s like running through a forest backwards. You can’t see where you’re going. Unforeseen products, unforeseen customers, and competitors soon enter the picture, and the budgets you set at higher aggregate levels begin to diverge from reality the moment actual sales hit. Adding to the chaos are very short product and market life-cycles. Opportunities in a global marketplace, driven by near real-time communications and ever-more-capable technology, can open and shut in a matter of weeks. A deal can come in that is much larger or smaller than anticipated, and the actual numbers would not have been accounted for by the quarterly projection. To put it bluntly, using backward-looking tools to make forward-looking plans simply doesn’t make sense. Business does not occur in a vacuum, which is why current business intelligence, analytics and reporting, and enterprise resource planning tools – or worse yet, budgeting spreadsheets – remain irrelevant to the process. None of these address the immediate realities you need to support a financial and operational plan, and maintain continuous improvement. They don’t tell you which customers are going to buy what, so that you can actually supply enough goods to meet the demand, and stay on course toward achieving your stated objectives.

It’s not about “the financials” The current processes in many companies consists of analyzing spreadsheets, comparing the numbers, doing the math, then finalizing the forecast, without ever drilling down to the foundation of the plan. The focus is on volumes, instead of sales in relation to actual cost (financial information instead of operational reality).

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Customers, products, orders. This is where the real business is happening, and unless you can connect what’s actually happening to a forward-looking operational plan, the financials will never align. And, without a mechanism to keep the numbers aligned, you will very likely veer off track, and fast.

Getting “up to speed” can help To their credit, some companies hold monthly meetings to review their operational status, gauging supply and demand in an attempt to keep their plans on course. But even in the span of a month, what’s happening today can be totally irrelevant within a week. Volatility in product mixes or sales volume can run forecasts off course in short order. By next month’s meeting, when the numbers come in, knee-jerk reactions can ensue in marketing or at the warehouse, throwing the entire operational plan off kilter, with unintended, far-reaching consequences attached. Responding to every demand change is too much to ask. Better to monitor progress based on exceptions and thresholds, then make the minor adjustments as the plan moves forward.

Injecting process and discipline through “PDCA” Fortunately, process and discipline are accessible to any organization willing to subscribe to them. Unlike the latest business school fads or executive best sellers, process and discipline have endured the test of time. They represent the very conventional approach that real-world business experience has teased out over decades, to align financial plans with operational realities and better master the presiding business condition. In other words, unless you develop a sound Sales and Operations Planning (S&OP) process based on a “Plan, Do, Check and Act” (PDCA) methodology, your struggle to meet projections will continue to persist. It seems almost too simple, quite possibly because the idea has been around since the 1600s, when Francis Bacon introduced his scientific methodology of hypothesize, experiment and evaluate. Plan (hypothesize), Do (experiment) and Check (evaluate), followed by Act (adjust), can drive a business continually nearer to perfection, by repeatedly measuring its performance and promptly flagging any deviations in course. It is, in effect, the antithesis of “analysis by paralysis.” Rather than stoking a plan until it seems right, building S&OP around PDCA encourages working a plan in iterative steps, getting the small moves right en route to the larger accomplishment.

Greater frequency yields greater results Rest assured, surprises will continue to crop up. But, if you engage the PDCA principles on a weekly basis, as opposed to yearly, quarterly or monthly, you will gain the insights necessary to react to change with comparative lightning speed. Your S&OP will begin to reflect more of reality, as forecasts more often

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come closer to target. Frequent contact with your PDCA dashboard will tip you off to market variations more nearly as they happen. You will be less likely to be surprised. You will far more likely be prepared. Your changes in course will be much smaller. And your response to situations will be far more appropriate.

Putting it all together How does this all come together in the context of setting a quarterly projection? First, stop relying on backward-looking tools to frame your business plan. Make your best financial projection moving forward, and resolve to institute S&OP based on the PDCA process. Take your most recent forecast as a starting point and begin adjusting for minor improvements. Focus what really matters. Base your S&OP on sales and cost of goods sold to the SKU level (the lowest level used in operations), and meet weekly to review your progress. As variations come up, and they most certainly will, determine the root causes and address them directly. Operational reality is all about routines and stability. Soon root causes can be pinned to just a few key areas, which can be worked on one at a time in the principles of continuous improvement. Your diligence and detail in driving S&OP through PDCA will quickly, over time, restore stability in your performance, and boost confidence in your ability to respond appropriately and swiftly to the seemingly “random” market influences that used to derail your progress in the past. If something unexpected happens, such as a giant contract falling your way, or a disaster wiping out a large shipment of much needed supplies, relax. You have a plan in place. Account for it in your PDCA process by analyzing the root cause, doing what you can to amend it, and staying on course. For as plodding as PDCA may seem on the surface, it is your fastest and best answer to market volatility, bar none.

Do what works Contrary to conventional thinking, sometimes the most unconventional wisdom can be found in consistently doing what has worked well in the past. In other words, stick to your plan. New opportunities that present themselves should be viewed in the same light as disruptions. Building S&OP around a PDCA process represents a proven way to align financial goals with operational reality. It is not rocket science. When you devise a plan, work it, track it and refine it, you become more organizationally stable, more competitive, less fearful and in control. If you are having difficulty meeting your financial projections, perhaps it’s time you get back to the basics. By monitoring what is happening today, you can predict with greater reliability what may happen tomorrow, and prevent the past from leading you astray.

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About IBS: International Business Systems (IBS) is a leading global integrated ERP and supply chain distribution software solution provider. For over 35 years, we have helped customers such as Galexis, Sigma, Rexel, Maxell, GE Lighting, Marangoni, WORLDPAC, MacFarlane Group, Scholastic Editions, Fidelitone, Totes Isotoner, Volvo, Goodyear, Skil, Oriola, Inotech and many more, streamline, automate and accelerate their distribution network processes, and drive profitability and efficiency. For more information, please visit www.ibs.net The materials contained in this document are summary in nature, subject to change and intended for general information only. For updates of this information, please

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