Creating the SOP Vision

You walk out of a meeting shaking your head. What happened? We agreed last month on what we were going to do and now no one agrees. We were going to improve our service to our customers and now everyone is unhappy - customers, marketing/sales, and manufacturing.

The process that is intended to help close the gap between Marketing and Manufacturing is Sales and Operations Planning (S&OP). This process attempts to balance demand and supply, but in many cases remains very much "we vs. they" both from Manufacturing’s or Marketing’s viewpoint.

Much of the time, this frustration is caused because Marketing/Sales and Manufacturing have a different vision of how to improve. Marketing’s vision is a factory that can respond to every customer’s need. Manufacturing’s vision is to have an accurate forecast so that the product the customer wants can be produced within the current supply base lead-time. Which vision is correct? Neither!

We begin with the assumption (as reality reinforces) we will have neither a forecast that is 100% accurate nor a totally flexible factory and supply chain. Because of these realistic assumptions, we need to develop an agreed-to business Operating Vision. This vision is used to guide how customers’ needs will be met.

To fully benefit from the S&OP process can be a challenge. The effectiveness of the process hinges on common agreement to inventory levels, flexibility, and response requirements. The following steps are a general explanation on how to develop consensus on what the customer requirements are and how to meet their needs. In this context, we will call the consensus an agreed-to vision.

The following steps have proven effective in creating an agreed-to vision. These steps require you to gather basic data needed to make educated decisions. They also require the use of tools/models that probably currently exist in your business. These steps are not done in serial, but rather in parallel or iteratively. It will be necessary to revise them based on input from other steps.

Step 1: Create a Tentative Vision
This is not a theoretical vision, but is one that covers the next 18-36 months. The purpose of this step is to get people thinking. This vision will be constantly revised as we gain knowledge in the following steps.

Step 2: Define your Customer Needs
This is basic knowledge that is required, but is really not defined in most businesses. What is the customer’s lead time (defined as how long will a customer wait before he/she buys another brand). This lead time will vary, depending on your product, from seconds in a commodity type product to months for large capital expenditures. The lead time needs to be defined by customer segment and season. While defining customer’s lead time by segment, we should also define segments we expect growth in and how our responsiveness or inventory strategy will support this growth.
The demand pattern, especially if you have seasonal demand, must be defined and should be adjusted for incentives or sales programs. These programs are used to move demand from where our customers would really want the product to where we have the capability to produce it, so we must remain aware of their effects. It is this annual demand pattern that will drive our capacity planning. Another portion of this step is defining
our finished goods inventory strategy for our customers. The key step in this determination is understanding the relationship of customer lead time to total supply chain manufacturing time (including internal manufacturing). A finished goods strategy can be built only after the relationship is fully understood.

The next steps define what our current capabilities are and develop approximate costs of building to customer demand. In these steps, we define the capabilities of the total supply chain, including manufacturing.

Step 3: Define our Current Internal Manufacturing Capacities and Lead Times
These capacities should be in equipment and not related to manpower or the desired number of shifts. One of the key questions will be what is the current capacity? Is it greater or less than pure customer demand peaks? If greater, no additional work is needed in this step. If less, we need to define what the approximate costs are to increase capacity to the peak customer demand. Most likely the cost will be in step functions (to increase from 150 per day requires a new machine at $1.5 mil and the capacity will increase to 200 per day). These step costs will be used in determining the best balance between capital, inventory, and sales programs.

Step 4: Define our Supplier Capacities
How you ask this question will vary on what type of parts you purchase and what percentage of your supplier’s business you represent. This needs to be done only on the parts that require specialized machines or for suppliers that, in total, are near their capacity limit at the time you have high demand. For the parts or suppliers that do not have capacities to support peak demand, estimate the capital required to raise the capacity equal to that of demand. As in the internal capacity step for calculating additional expenditures, keep track of the step functions costs. Note also the capability of suppliers to meet high demand through inventory strategies. This may be less cost than the capital expenditures.

Step 5: Develop Manpower Strategies
In many cases, physical capacity may exist to build to customer's demand. The challenge is to develop manpower plans to support the build schedule. This step is unique by company, factory, and location. Is it a union workforce or not? What are the limitations of the contract? What is the area’s labor availability? Are there companies that have seasonal demands opposite yours? A basic manpower model needs to be used. The model needs to contain all demand including end customer product, service parts, and demand sold to other companies/factories. Also input for necessary manpower in addition to direct labor, a productivity factory, and absenteeism by month. (A critical factor may be managing vacations into low demand periods.)

Step 6: Analyze Production Alternatives
Develop alternatives to determine the least cost approach to meet customers’ demand, investment required, inventory strategies, and manpower strategies. This will probably require a model to complete this analysis. We will also select our alternative and this strategy will update the vision developed in Step 1.

Step 7: Finalize Vision
From the production alternative that is selected, the vision will be adjusted so that it supports how the total Business has agreed to run. This is where we get agreement with Marketing/Sales, Manufacturing, Supply Management, Production Planning, Personnel, Finance, Engineering, etc. The vision needs to be specific enough so that your employees can read it and know the impact on them and what is expected on them. This completed vision will drive business strategies and operations.

Step 8: Determine Gaps Between Today and the Vision
In this step, we identify the gaps between the vision and current operations. For each of these gaps we develop a charter complete with objective, scope, deliverables, timetable, and resources required.

Step 9: Manage Projects
Prioritize projects, assign resources, manage projects, and incorporate the projects and deliverables into your performance management system.These steps will achieve agreement between all functions and disciplines in the business and provide a roadmap of what to do. This will provide the documentation for the S&OP process to achieve business results.