If you ask planners what needs to be improved, the most common answer is that the reliability of the demand forecast must be improved. Unfortunately, that is actually an illusion.
Living with uncertainty
Not that an organization should always work on improving its forecast, but an error margin is inherent in a forecast. Hundred percent security does not exist. It concerns an organization, and in particular planners, with this uncertainty.
The volatility of customers and the inevitable delay in the chain [bullwhip] is the daily challenge for every Sales and Operations Planning. The planners have to learn to deal with this uncertainty and use techniques such as risk management to deal with deviations. Because too often poor prognoses are shifted to the environmental factors and too little account is taken of one’s own prediction blindness.
Science as a basis
A Sales and Operations Planning team is mainly responsible for mapping and forecasting the quantitative and qualitative objectives of the organization. This extends from purchasing policy to financial results. That immediately outlines the importance of a well-functioning S_OP.
But how is it proven that the forecast is also credible? What degree of certainty and especially which uncertainties are associated with it. A good separation of facts, figures and assumptions is essential because otherwise the prediction will fall victim to a Yes / No game. Whose blue eyes are believed. The use of a scientific approach and the scientific method offers a solution.
Objectivity and timeliness.
It is important that a forecast is fed by objective and timely data. A prediction is only as good as the foundation on which it is based. Based on this, an S&OP team can make estimates with a specification of the “expected error”. The organization must determine in advance which margin of error is accepted. Remember that 40% margins are not uncommon. That you don’t think you can predict demand with 95% certainty. If that is the case, your question is very stable. In all other cases, S_OP should continuously seek improvement of the forecast by examining the uncertainty margin.
An often seen error within S_OP is that results are passed on or projected to future forecasts. An example;
Turnover in Q1 turned out to be 10 million lower than forecast. The team is transferring the next quarter budget with this 10 million. As a result, the entire budget is much lower. The mistake here is that the Q1 result is not representative of the coming quarters. Each forecast must be determined on its own merits and according to a consistent method.
Another common mistake is adding the disappointing result to the next period. This means that the next period has to perform excessively to absorb Q1. The organization will then be able to end with a significant loss at the end of Q4. Consistency in the prediction mode is essential. Adjustments will only be made if the up-to-date information gives cause to do so. Not the results of previous quarters. The deficit must be made up through risk management. It examines where the risk lies and how it can be limited. [customer, product, predictability, organization etc]
10 principles for a good S_OP
- A good S_OP requires direct involvement and support from executive management. S_OP has a central function in achieving organizational goals. From purchasing to Sales.
- S_OP is a decision-making process that aligns supply and demand on an aggregated level, operational planning with financial planning, and connects strategic planning with day-to-day sales and operations, influencing tactical and operational management of the business. company by management.
- The S_OP planning cycle is monthly, with provision for mid-period revisions when major changes occur.
- S_OP is an aggregated planning tool. It focuses on total volumes, and only rarely does individual issues such as individual products, stock keeping units and customer orders are considered.
- The volume plan that is approved in the S&OP meeting guides the plans and schedules for further detailing such as product mix. That is why a tight coordination between executive volume planning and other planning is essential within the agreed Planning Time Fence, within which the individual product requirements must be known.
- S_OP functions along multiple lines or within a matrix to support supply, demand, finance and logistics. There should be a close alignment between the operational plans and the financial plans through appropriate measurement conversions such as currency or volume units.
- S_OP is a cross-functional collaboration. In any case, it concerns Sales & Marketing, Operations, Supply Chain, Product development, Finance and Purchasing.
- Due to the nature of his work and the broad impact, this can lead to disagreements between the various departments of the company. An organization will therefore have to learn to deal with these differences openly and constructively.
- It puts the spotlight on accountability. The sales plans and operational plans in S & _OP require commitment by Sales / Marketing and by Operations / Supply Chain respectively to realize those plans.
- Product groups (families) in S_OP are based on how the market views them. The company must have the right prerequisites to make any translation into meaningful groups for Operations and Supply Chain.