EXPERT INSIGHT – The Business Value of Sales, Inventory & Operations Planning
In this Expert Insight, TriVista’s Supply Chain Practice Leader, Shelby Miller discusses the positive impact improved Sales, Inventory & Operations Planning (SIOP) processes can have on a business, and how SIOP provides a competitive advantage. He’ll discuss the real business value of SIOP, common symptoms of a defective planning process, and critical success factors needed for SIOP to succeed. Whether you’re a CEO, VP of Operations, or Director of Procurement and Sourcing, this paper will help you frame your thoughts on SIOP and provide valuable insights as you consider improving your processes.
Shelby brings more than 20 years of global leadership experience and possesses a broad industry background with a track record of excelling in a variety of manufacturing and distribution environments. Shelby has extensive expertise in all aspects of supply chain management. He brings both real-world experience and a sincere passion in seeing his companies succeed by assessing their current performance and designing improvement programs that deliver world-class results.
What is the overall goal of SIOP and what business value does it provide?
The overall goal of SIOP is to connect the sales side of the business (generating product demand) to the supply side of the business (fulfilling that demand) so that they are continually synchronized.
This planning process enables the sales side to develop a realistic, achievable forecast by knowing what the supply side is capable of producing and in what time frame. Likewise, the supply side knows what sales is trying to achieve and enables them to plan and align their resources to support the anticipated demand. If achieved, this coordination will in turn facilitate excellent service and proactive communications – internally among departments, and externally with both customers and suppliers.
Although there are numerous benefits, the following four business improvements are typical of what we see in organizations once they’ve successfully implemented and embraced a robust SIOP process:
Reduction in Supply Chain Costs
Supply chain cost reductions can be achieved in multiple areas of a business with proper SIOP, but we consistently see reductions in material and freight costs, labor productivity improvements, and fixed cost optimization.
We frequently hear from suppliers that product cost is determined in part by the behavior of their customer. The more predictable the customer, the better pricing they’ll receive. So if a customer calls with an urgent order, they’re going to pay a premium. On the other hand, when there’s advance notice and consistent order information provided by the customer, this improves the supplier’s ability to forecast, making their life easier, and allowing the supplier to pass along resulting savings to their customer.
This all seems fairly intuitive, but you’d be surprised how many companies are operating in an “urgent” environment and continually paying avoidable premiums because they are lacking proper planning processes and systems.
Improved Customer Experience
The old adage “The Customer is King” still holds true and SIOP can have a tremendous impact on a customer’s experience. Consistently providing excellent service goes a long way – from increasing customer retention and sales volume, to the added benefit of additional business through customer referrals.
Service levels are optimized through improved on-time delivery (OTD). This is achieved by having the right inventory in stock at the right time to fulfill orders based on customers’ expectations. Sounds simple, but with an increasingly global marketplace, paired with more demanding customers and ever-increasing competition, being able to maintain that balance is difficult.
With this in mind, it becomes imperative that organizations improve the customer experience wherever possible, and a world class SIOP process helps organizations achieve this. Why focus efforts on new customer acquisition, when retaining current customers has so many benefits? SIOP helps to ensure you are keeping existing customers happy, and provides visibility and inventory balance to support new customers. It’s really a win-win scenario that limits trade-offs and allows the organization to grow in a much more controlled fashion.
Reduction in Excess Inventory
Raw materials, work in process, and finished goods inventory can all be optimized through SIOP, resulting in a substantial decrease in carrying costs. Lean has become a fairly standard term on the shop floor, but applying similar Lean and Six Sigma tools and methodologies throughout the entire Supply Chain creates additional business value.
Through accurate data, consistent processes, and proven algorithms within an established SIOP system, inventory can be optimized to support service level targets – instead of relying on outdated forecasts and tribal knowledge.
Improved Business Agility
Being able to quickly seize a sales opportunity or respond quickly to a downturn is a significant competitive business advantage. Operational agility, made possible by efficient and effective SIOP, allows a company to capitalize on unexpected customer and market conditions.
For example, when inventory levels are not optimized there may be too little inventory on hand. Should a sales opportunity from an existing or prospective customer present itself, lack of sufficient inventory will not only result in lost sales today, but risks losing the customer to a competitor, thus eliminating opportunity for future sales or even potential referrals.
What are some common symptoms you see in companies lacking an effective SIOP process?
Simply put, in organizations lacking good SIOP processes we see an imbalance between supply and demand. This can create numerous problems, but commonly surfaces in two areas – excess inventory and poor delivery performance, both of which result in operating cost increases.
When inventory doesn’t sell, or becomes a “slow mover”, it ties up cash and eventually may lead to price markdowns, liquidation promotions, and complete inventory write-offs when no longer saleable. If excess inventory is prevalent or continues to creep upwards, then most likely there’s an inadequate or non-existent SIOP process in place.
Poor On-Time Delivery
Low OTD performance is a tell-tale sign of a defective SIOP process. When inventory is out of balance and there’s not enough to fulfill demand – this is a clear sign of an ineffective process.
These problems only increase as organizations become more global. The supply side becomes more complex when external parties and processes are involved in the fulfillment of customer demand. When suppliers are widely distributed, timely and accurate feedback loops to and from the sales team are amplified, leaving more room for error and hiccups which can ultimately lead to customer dissatisfaction.
What is needed for SIOP to succeed?
Through first-hand experiences we’ve learned that SIOP success is dependent on incorporating these four elements into a company’s demand planning processes:
ELEMENT 1: Cultural Alignment & Leadership Buy-In
An organization’s cultural perspective plays a key role in ongoing SIOP success. It’s important the organization is actually in alignment. What we find is that creating the SIOP process – going through the quantitative analysis, creating systems, incorporating technology – all of that is great. But if there isn’t an adoption from the entire business – the leadership team and the users – then the process won’t work.
While this is the fundamental element to a successful SIOP process – it’s also the most challenging. Commonly we observe the mindset of “if we’re succeeding at some level, why do we need to change our process?” Or we often hear “it’s the sales team’s job to sell – not to communicate what they think they’re going to sell.” When this occurs it becomes the burden of the supply side to figure out how to deliver on the promises made by the sales team, lacking the collaboration needed to achieve successful SIOP.
Therefore, it takes alignment from the leadership team to get the cross functional team rallied around the idea of an improved SIOP process – this is a key first step to improving performance.
ELEMENT 2: Key Disciplines
The most critical discipline needed is business acumen – really understanding the business levers and cost pockets. Focusing on inventory and productivity is good – but it’s not enough. Seeing and understanding the business as a whole – its capabilities, strengths and weaknesses, including the financial aspects are really important in achieving supply chain agility.
The second discipline is developing the ability to bridge the gap between the supply and demand side, and creating one collaborative team instead of “Silo” departments – it’s a really unique skill-set but absolutely necessary to be effective at SIOP.
Third is the discipline of critical thinking which is essential to understanding and acting upon behaviors. It’s important to look beyond how quickly inventory turns or just measuring revenue cycle times. Instead look for patterns, causes, symptoms and trends as these activities will provide clarity and bring about the best solutions.
The last key discipline is being a systems thinker. Think about the system as a whole. It’s not an activity in and of itself, instead it’s a series of activities that make up the system. Regardless of which ERP system is used, good process is necessary in achieving good outcomes.
ELEMENT 3: Data & Analytics
Core to any successful SIOP process is data. Accurate, relevant and timely data enables decision making that balances customer expectations with the achievement of financial objectives. Although SIOP can be a manual process, the amount of data and variables are typically best supported by an enterprise system with built-in analytics ensuring accuracy and efficiency.
That said, you don’t need to be a Fortune 500 company to have the right data and systems. In fact, we work regularly with companies that range from $30M to $600M in revenue and provide varying levels of support depending on their specific needs and capabilities.
ELEMENT 4: Patience & Hard work
Think of this like a diet. Just as you wouldn’t realistically expect to achieve weight loss goals in one day, nor should you expect to implement a fully optimized SIOP process within days. Yet, many times we find that unrealistic expectations take hold and the new process is abandoned prematurely.
As with any successful diet if you cheat or miss a step, you just need to get back on track. These hiccups are to be expected and can be overcome through learning and implementing sound principles that are executed on a consistent basis.
Sometimes an effective SIOP process involves making changes to the structure of an organization, creating new systems, modifying behaviors and implementing process changes. These changes typically require a period of adjustment, which is completely natural.
Generally speaking a mature SIOP process takes six to nine months to become effective, consistently producing positive results and running like a well-oiled machine. Remember that establishing and sustaining the required changes is a gradual process.
Implementing a successful SIOP process requires patience, time, and dedication. Just as with any successful diet, you must consistently execute necessary steps in a timely fashion within a realistic timeframe to achieve positive, long lasting results that create real business value and provide a competitive edge.