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Putting SOP in High Gear
by Dave Garwood

 

 

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I once tossed out an interesting question to Joe Beebe, then Executive Vice President, Intermec Corporation in Everett, Washington …

Intermec deals in the ultra-competitive world of automatic identification, RFID and barcoding equipment, selling products and facing stiff competition around the world. "How important," I asked, "has the Sales & Operations Planning (SOP) process been to Intermec's success?"

Beebe didn't hesitate. "It's more than success," he said. "Without an effective SOP process, we wouldn't be here. We simply wouldn't be in business." Joe Beebe is one on a growing list of executives who have experienced the tremendous inventory reductions, delivery performance, cost reductions and quality improvements that result when market demand, production capability and financial plans are better coordinated. So what is this SOP process and why is it so essential to do it well?

The SOP process is what's necessary to create and maintain a single company game plan to balance demand with the capability (capacity and material constraints) to make the products we're planning to sell (or ship to sister plants or distribution centers). It's not simply the Annual Operating Plan or sales forecasting. SOP is the key element to linking the business plan to the detailed plans in the business. It's the main gear that drives the business. An effective SOP process is the key tool that puts control of the business in the hands of executive management, where it belongs.

But if the SOP gear isn't engaged with the master schedule, the troops are ordering material, using critical resources, etc., independent of the business plan. Engage the SOP gear and turn it, without regard for it's impact, and the little gears spin out of control. Both are costly and disastrous!

Gears
SOP: Fact or Fantasy?
So now everyone is breathing a sigh of relief. He's talking about Sales and Manufacturing plans, you're thinking. And we've all got Sales and Manufacturing plans.

That's true. During my 30 years of teaching classes and working with more than two thousand companies, I have never seen a company didn't have some sort of planning for both demand and supply. LOTS of plans, in fact! And, unfortunately, one is not usually connected to the other. The plans reside on separate islands. Bruce Achenbach, then General Manager of a Trane company, put it best when he described Trane's old planning process. "I'd have a meeting with my Marketing VP," he says, "then go down the hall and have a meeting with the Sales VP. Later, I'd talk to the Manufacturing guys, and they'd make a key point about something I'd jot down to feedback later to Sales. Except I'd get busy, and the important key point would never get back to sales. I was like a quarterback who, instead of going into a huddle, talked to each player individually."

With these discussions, we think an effective planning process is taking place! We think all the individual plans are working well. After all, product does go out the door every month and money flows in. In fact, the planning process is not effectively working. We survive in spite of, not because of, a process that insures effective integration of the plans, aka SOP process. But the price tag is high.

The implications of these little "islands of planning" are tremendous. We've found, for instance, that the lack of an effective SOP process is a key reason the investment in ERP software doesn't pay off for many companies. The lack of an effective SOP process can sabotage a total quality improvement or lean manufacturing initiative effort before it even gets off the ground because it's hard to concentrate on a quality process and process streamlining when you're running twelve end-of-the-month fire drills a year!
As each department charges off independently and aggressively selling, designing and producing, the sparks fly when the plans are forced together at the 11th hour. Counterproductive, inter-departmental conflicts arise. Teamwork efforts are sabotaged.

Let's just look at the impact on Sales and Marketing. You're the district sales manager and all of a sudden you get a call from headquarters that says find another $500,000 of business because we need the revenues to deliver quarterly earnings. That means it's discount time, and there go the margins. (Of course, sometimes the customers have been holding back on their orders, waiting for the quarterly "Blue Light Special"). Or you are forced to go out and hustle the customers to buy something they don't really want, which does long-term damage to those ever-fragile customer relationships. From a manufacturing standpoint, that big order -- not in the plan, remember -- is the equivalent of a rat swallowed by a boa constrictor ... a big indigestible lump!

You're going to relax the "No Overtime" mandate, override the schedule with hot lists,
substitute materials, maybe even rework some previously rejected material to ship that order to “make the numbers." Purchasing is going to pay premiums and there are going to be lots of happy faces in the offices of airfreight shippers this month. Finance gets to spend lots of time doing "creative accounting," playing with accruals and reserves and fiddling with the depreciation schedules. And in the frenzy of this panic and crisis atmosphere, tempers flare, fingerpointing sets in and frustration undermines teamwork. It's not a pretty sight. But everybody had a plan … individual, disconnected plans! The core competency is excelling at damage control!

If we'd had some visibility, some idea of what was coming over the horizon, some idea of what to really expect, we'd have been able to adjust accordingly before the 11th hour. The mis-alignments between what we would like to do, can do and financial outcome would have been reconciled before they became costly surprises. In other words, if all the plans were linked, we wouldn't be scrambling and flushing big bucks down the drain to make the numbers and/or satisfy customers.

What Goes Wrong?

It doesn't take a rocket scientist to appreciate the critical need for an effective SOP process. What goes wrong? Why is it often an ineffective process? The root causes seem to cluster around a combination of these six frequent problems ...

• The process degenerates into a top-down directive. The troops on the firing line who are accountable for executing the plans aren't involved in creating the plans. They lack buy-in, which leads to token accountability for executing the plans. The mandate from the top goes down sideways. "It wasn't my plan," becomes the inevitable crutch when reality sets in.

• The focus is primarily on the current month. For all practical purposes, the current month is over. We should be focusing on executing the previously established plans and looking beyond the time fence (usually 3-6 months) for replanning opportunities. This is where most of the attention and discussion should take place.

• The plans are often stated only in dollars or in product groups (brands for example) that are too general to evaluate the resource and financial impact. Translating the plans into resource requirements becomes impossible. We go forward on a wing and a prayer! The results are reactive, not proactive, efforts to salvage the inevitable resource shortages or excesses.

• Functional department metrics and individual leaders’ incentives, especially cash bonuses, are in serious conflict. Sales is rewarded based on exceeding forecast which drives a “low ball forecast” behavior….and leaves everyone else guessing…”how low?”. Purchasing is rewarded on lowest cost which ignores the inflexibility caused by the slow, long boat trip time from Third World suppliers. Finance is stretching supplier payments to maximize cash. Individuals become torn between “scoring” well vs. working well together.

• Responsibility for the process is delegated too low in the organization and frequently isolated to manufacturing. Unfortunately, Sales and Marketing mistakenly see SOP as a "manufacturing job" and are not engaged in the process.

• The final SOP plans aren't tied to the individual product (master) schedules. Most ERP software packages start by creating master schedules. The resulting master schedules are "exploded" into detailed part and resource requirements. Ordering material, planning capacity and scheduling become activities independent of the SOP plans. This I why ERP (and it’s predecessor, MRP II) are often mistakenly dubbed “infinite capacity” approaches.

The path to an effective SOP process should include steps that involve key people from all departments in creating the plans to ensure ownership throughout the organization. The plans must be expressed in sufficient detail and proper product families to provide a "budget" for the master schedules.

There are five essential steps to a successful SOP process:

• Gathering data
• Updating demand plans
• Updating supply plans
• Reaching a cross-functional plan consensus (Partnership)
• Executive review and approval (SOP meeting)

Let's look at each step in detail.

1) The first step is to get a snapshot of where we've been and where we are now. This includes collecting historical sales and production performance, comparing the plan vs. the actual inventory and sales order backlog (lead time) targets. The data should be grouped into meaningful product families.

2) Update current demand plans. This means summarizing demand plans by manufacturing product family. Demand includes a projection of demand for customer orders we don’t have ( a forecast) and orders we do have. It also includes consideration of requirements for new product launches, service parts, sister plants, distributors, distribution inventory, etc. This activity is more than just sales forecasting. The risks and assumptions used to establish the revised demand plans are determined, documented and communicated.

3) Update supply plans. The objective of this step is to identify the impact, if any, on the resource requirements to meet updated demand plans. In short, what do need to do to meet the demand plans. The Demonstrated Capacity should be compared to the Required Capacity. Supplier capability and lead times are considered. New supply plans are proposed, factoring in lead time, people and equipment constraints. Another paradigm shift -- manufacturing can never say no! We know we can make as much as needed. The only limitations are time and money. The charter of this step is to determine how much it will cost and how long it will take. We will decide later if we can afford the investment and risk. The risks and assumptions used to establish the revised supply plans are documented.  In both Steps 2 and 3, several people from all levels get involved in establishing the plans, express their concerns, make suggestions and, in general, "buy in" to the proposed plans.

4) Establish a cross-functional consensus (Partnership). Here's where we find common ground between what we can do and what we'd like to do -- and the financial implications. We bring together managers from across the organizational chart, creating a horizontal partnership for the plans of what we are going to sell and make. Manufacturing, Sales/Marketing, Finance, Engineering and Purchasing are all represented. These are the people who will be responsible for executing the plans. They get a chance to understand and discuss each other's needs. They identify conflicts, obstacles and critical issues -- do we need new equipment, overtime, more people, price discounts, more capital, special training for the sales force, etc. Everyone understands what needs to be done and the impact on their area. Surprises are avoided!

Alternative plans, if necessary, are considered. Then they put together the preliminary set of SOP plans. Note that at this point we have “buy-in." It's no longer the Sale’s plan or Manufacturing’s plan or Finance's plan. It's the plan. We've put together a horizontal partnership across the functional departments and created a sense of ownership in the recommended plans. This group is now locked arm-in-arm when presenting the plans up the organization chart to create a vertical partnership with executive management.

The Partnership Meeting is often a missing step. We just skip to Step 5. The result is an ineffective SOP meeting where key executives are trying to make decisions without the necessary information. The session leads to frustration, indecision and, eventually, key players stop participating because nothing ever seems to get decided or it becomes a "slugfest," where final decision making authority is awarded by default to anyone with the stamina to survive. The plans are ignored and everyone returns to their "island."

5) Executive review and approval: the SOP Meeting. Key executives from every functional area participate. The meeting should be chaired by the President, General Manager, or the company's top operating officer. This is where the obstacles, conflicts, risks and consequences to the alternatives are discussed and resolved. After considering the alternatives, executive management makes the decision. A vertical partnership with executive management down through line managers is established. These are now “our” plans … no need to keep looking over your shoulder when executing the plans. Executive management still runs the business by approving the plans "owned" by the middle managers responsible for making them happen.

The SOP process doesn't come about because someone in Sales talked to someone in Purchasing on the way to the cafeteria. It doesn't come about when everyone in the company talks about the plan, but not in the same room. The plans are the result of a formal process. Surprises are eliminated. Everyone is pulling on the same end of the rope. Infighting is eliminated and conflicts are minimized. The entire process usually stretches over 10-12 working days every month. Once everyone understands their role, conflicts are quickly resolved.

" Initially, our final SOP meeting took two days. Now it's down to two hour per month," said Roger Harker, then President of Bently Nevada Corporation. "And our effectiveness in managing the business has increased tenfold. Without it, our ERP system was very ineffective." The SOP process must be a formalized one, and it must be a process that has the unconditional support of executive leadership. A documented SOP Policy that covers such issues as when to meet and who will attend the meeting, who has the authority for changing the plan, etc., ensures the rules of engagement are well understood.
Today's global, competitive world is a new ballgame. During the "golden years" of a few decades ago, business revenues were only limited by how much we could produce. "Make as much as you can," was the old paradigm. The new paradigm is "Make only what and as much as you need." This places a greater need for emphasis on determining how much we can sell -- just enough parts and products -- no excess. Global sourcing has placed a premium on the ability to plan ahead! Air freight recovery tactics across several continents can be very costly. A single, integrated Game Plan is essential!

The new paradigm also calls for buy-in, ownership of the plans at all levels in the organization. The Partnership Meetings are particularly vital to reaching a consensus and spreading ownership of the plans throughout the company. Trust, respect, and Six Sigma execution of the plans increase exponentially with ownership. Otherwise, it's just gears spinning.

" There's no magic in the SOP process," wrote Robert E. Agan, President of Hardinge Brothers, Inc. "It simply takes what common sense tells us is the correct way to interface all the various functions of a business and provides us with a regimented means to get the job done. It provides a common ground where issues can be raised and responded to by all functions of the organization."

It's not easy. It takes time and commitment. But the benefits are well worth it!

 

 

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