"An organism at war with itself cannot survive," said the famous astronomer Carl Sagan. Yet in today's competitive manufacturing environments, many sales and operations 
departments continue to wage war one another—to the detriment of the organization, writes John Boyer in a recent white paper. "If we waste time trying to figure out how we can 'get 'em next time,' the competition will surely 'get us,'" writes Boyer.
So, how can sales and operations stop bickering—and give themselves a fighting chance to win against their real competition?
There's no magic bullet to this age-old problem; however, there are proven management practices being used today that are helping organizations achieve cooperation and teamwork, namely, Sales and Operations Planning (S&OP).
S&OP is a way for companies—at a strategic level—to balance demand and supply on a consistent basis, over a given planning horizon and level of detail. It requires two basic building blocks, according to Boyer:
- Sales people describe what they believe the business will sell.
- Operations people describe what the business can supply to meet those sales.
The difference between the two is the change in inventory investment.
By balancing demand and supply, businesses keep costs down, and customers happy.
For example, say demand becomes greater than supply. Typically that means overtime hours, excessive allocations, outsourcing, and premium freight—just to name a few problems.
Now suppose supply becomes greater than demand. What happens? Underutilized fixed costs, excess inventory, reduction in force expense, etc.
Most industry experts agree: Costs rise when demand and supply are out of balance. However, when they are in balance, a company is better positioned to operate at the lowest cost base, ship product on time, and minimize inventory investment.
S&OP is indeed a "practice of choice," as Boyer writes, that enables the critical balance of demand and supply.
Successful S&OP brings sales people and operations people to the same table.
S&OP creates an environment where all functions (sales and marketing, manufacturing, materials, finance and accounting, engineering, information technology, and human resources) together are working to improve business performance, not trying to bury each other!
A formal S&OP process provides formats, data, structure, timelines, facts, and agendas for building an accountable decision making group. It replaces fragmented, opinion-based foxhole management tactics that drive us to self-competition.
Tell us about your experiences and challenges in balancing Sales' and Operations' goals.
We are pleased to announce that we will be presenting the webinar "The 8 Steps to Sales and Operations Planning (S&OP) Success" on June 12, 2012 at 3:00 pm. The webinar is sponsored by IMEC (Illinois Manufacturing Extention Center) and will focus on the following key learning areas:
- Review of the 8 essential steps of a best in class S&OP process
- Presentation of the critical pre-requisites required in each process step.
- Assessment of the tangible financial benefits realized from a successful implementation.
Sales and Operations Planning (S&OP) is an integrated business management process where an organization's executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization.
Done well, the S&OP process enables effective supply chain management that optimizes resources and drives high levels of customer service particularly in environments where demand and supply uncertainty is the operating norm. Though the process is most often considered to be applicable to only very large organizations, the methodology can be easily adjusted to any size organization.
The webinar is open to the public so please follow this link to sign up.
About IMEC:
IMEC delivers hands-on technical assistance and strategic advisement to help manufacturers to be more productive and globally competitive. Since 1996, IMEC has helped more than 2,500 Illinois manufacturing companies to achieve more than $1.5 billion in productivity, profit, and cost improvements.
We are pleased to announce that we will be exhibiting at the 2012 APICS/IBF Best of the Best S&OP conference this coming June 14 and 15, 2012 in Chicago, IL. More information can be found in our announcement page.
The Best of the Best S&OP Conference is designed to provide in-depth education and practical answers from the supply and demand sides of sales and operations planning (S&OP). At the Best of the Best S&OP Conference, you will discover how to introduce, plan, implement, and collaborate on S&OP at your organization.
In parallel with the conference, we will also be announcing the release of the latest version of the DemandCaster S&OP module. Version 2 of the S&OP module is a significant update to the current DemandCaster S&OP process. It is based on the S&OP methodology of John E. Boyer, the noted S&OP consultant who regularly speaks at APICS, IBF, and ISM conferences. We have worked closely with Mr. Boyer to develop a technology platform that will significantly improve the efficiency and effectiveness of an organizations S&OP process.
Look forward to seeing you all there.
This posting is the third and concluding parts of Supply Chain and Finance. The first two parts were posted in December 2011.
Every company wants to, or should want to, control their inventory. Inventory is essential for smooth production and order fulfillment. Too little inventory or inventory in the wrong balance, will impact revenues. When out-of-stocks are the issue, everyone in all functions are suddenly inventory, planning, purchasing, and logistics experts. A lot of attention is given to this kind of “inventory problem.” The attention comes immediately upon customer service going south. Sales, Marketing, Finance, and General Management all want to help the Supply Chain fix the breakdown in the supply chain.
On the other hand, having too much inventory is also a problem. It is not a problem for Sales or Marketing. As long as they are making their revenue numbers, the Supply Chain is doing well by them. Bloated inventory, however, has tied up cash and this gets the attention of General Management and Finance.
Too much inventory:
[1] May require more short term borrowing to have the right amount of cash
[2] Catches the eyes of both external auditors and Wall Street analysts
[3] If growing unchecked, will eventually require the need for outside storage which is something that seems to irk General Management and Finance even more than it bothers us in the supply chain… and it really bothers us.
Too much inventory makes both General Management and Finance feel that planning, procurement, and production are not well run. It gives the impression of a sloppy Supply Chain. They will want to help and provide direction with increasing frequency depending on the size of the problem. Their interest in this seems to run hot and cold depending on what other business priorities are keeping them occupied. When the attention is on inventory and planning, the attention can be quite intense. It seems that everyone in finance is suddenly an expert in all things inventory and planning related.
Supply Chain leaders, at least the ones we know, do not like any of the above mentioned assistance. They prefer to run their own operations and do not like being told how to do their business. As a result, the better Supply Chain leaders take an aggressive approach to driving their numbers when they can and vigorously defending them when circumstances prevent them from achieving the objectives.
This is a lesson everyone of us can and should follow. Supply Chain leaders always need to be taking the lead. If inventory goes up or down, it would be best if Finance and General Management can hear it from us first. For perpetual inventory, given the sophistication of the ERP systems in place these days, this should always be the case. Monthly and quarterly adjustments and accruals are the responsibility of finance to calculate and report.
Also, in the vein of leadership, if there is a routine inventory review meeting that is separate from staff meetings, the supply chain should organize and chair this meeting. Finance should be part of the meeting and be responsible for any number of recurring agenda items. The supply chain inventory manager should include his or her finance counterpart in the preparation of these meetings. This is important to establish leadership, foster teamwork with finance, and, most importantly, to make sure all numbers presented to the President and CFO are the “official” finance numbers.
To best work with Finance, it is incumbent on the supply chain to understand all of the finance terms related to inventory and how each of the line items in their inventory reports are calculated. As noted in the earlier parts of this series, they look at things from a different perspective than the operational viewpoint we take in the supply chain. When we, in the supply chain, report our numbers must be in sync with the finance numbers.
As the Supply Chain owns the perpetual inventory, we need to always be ready to report on it. We need to be partners with the Finance leadership and analysts dedicated to working capital and inventory. We need to know what they are thinking and wanting to dig into. They need to know the status of our inventory optimization efforts and changes in the market place that will have an impact, either positive or negative, on inventory.
These two factors, proactive and vigorous ownership and management of perpetual inventory and nurturing an open door constant communication with finance, are the key to having an alliance with finance. An alliance with finance is much better than the adversarial relationship that we just see too much of.
We hope this provides a basis our clients and readers to improve the partnership between the supply chain and finance in their organizations. We invite you to post methods you have used to improve this partnership.
Happy New Year to all. May 2012 be a year of health and prosperity to you and yours. May it also be a year of health and prosperity for our businesses.
As has been the case in the past few years, we like to reflect on the past year and provide a business theme for the coming year.
As we end 2011 and begin 2012, we note a few observations and news items form the past month that have shaped how we are looking at the new year:
As we were doing our holiday shopping we noticed that every single store, except The Apple Store, advertised discounts across the board. We were seeing a few such signs in early December when we were reading about the retailers being optimistic about the holiday season. Also the stores were open all kinds of hours opening at 6 am and closing at midnight. Retailers were aggressively vying for consumer traffic and dollars. They also wanted to move as much of their inventory as possible before the holiday and thus not have to discount it even more.
What were the results?
Early reports from the National Retail Federation say that 2011 holiday sales were 3.8% above the same in 2010. The increase in sales from 2009 to 2010 was 5.2%. The ten year average of year to year sales change is 2.6%
A passion of ours is football both pro and college. Needless to say we have been in football heaven the past few weeks. In watching the games, we noticed something in the many automobile commercials aired during these games. Every company was offering either zero or .9% financing for either five or six years.
What were the results in year over year?
Needless to say, at 10.4 million, 2009 was the worst year of auto sales in the US since the early 1980s. Sales increased to 11.5 million in 2010 and are projected to be 12.7 million in 2011.
The stock market ended the year about where it began a year ago. The market was not flat the whole year. It plunged in the summer due to two factors. First the US Congress was unable to approve increasing the Federal Debt. This was followed by the crisis in Greece which quickly became a crisis in all of Europe. The market slid because of a dearth of confidence in the US Government and a fear that Europe would drag the world back into recession. The market recovered in the last four or five months of the year.
What does all this mean for 2012?
Consumer confidence in the economy is still tenuous. There are articles in the press quoting experts saying just that. Yet, these consumers were enticed to buy more holiday gifts and autos. We also read that value investors led by the famous Oracle of Omaha, Warren Buffet, are buying. There are enough values to make them bullish about the market. It has been noted that consumer confidence is the last measure to turn in a recovery. There are also rumbles that the China juggernaut might be the next economy to suffer. It would not surprise us if it is decided that they have, of late, been in a real estate bubble. It that is true and the bubble bursts this year, what will that mean for our businesses? Will they have to revalue their currency? The trend has been for import prices to increase.
From the US Bureau of Labor Statistics, we learned that from November 2009 to November 2010, import prices for non-fuel products increase 3%. In the past year, the increase was 3.8%. The increase in imported fuel products has been more dramatic: 8% from November 2009 to November 2010 and a whopping 31% from November of 2010 to November of 2011.
For us, at Cadent Resources, we are optimistic for continued growth. The recovery is not robust, it is not go-go like previous recoveries have been. The new-new we have been blogging about for two years definitely seems like the norm now. The US is now a nation with a much smaller middle class and thus a country with less spending money. Consumers will spend but they must feel they are getting value if not a real bargain. This sentiment is this is the business environment we all must operate in going forward. Growth is possible but the growth comes like the retailers and auto companies have done. We have to scrape and fight to gain new sales. We have to offer low prices and high service. This means 2012 has to be a year of focusing even more on improving productivity and customer service.
This means we have to seriously look at and improve our supply chains.
- Improve Customer Service: We must aggressively focus on improving our service to retain current customer, get current customers to increase their spend with us, and to attract new customers.
- Improve Planning and Inventory Management: If you do not have Sales & Operations Planning, or something akin, working effectively. Your supply chain is inefficient. You have the wrong size and mix of inventory. If you are managing an international supply chain, and really most of us are, this is critical. This is an on-going continuous improvement process.
- Reduce lead times: American industry in general has been reducing costs by off-shoring for at least the past decade. Reduced costs came at the expense of increased lead times. For the first time, we are suggesting to look for and qualify sources closer to your markets. If the total delivered cost can be maintained or reduced and the lead times significantly reduced, that will help immensely in the above two points: Improving Customer Service and Planning/Inventory Management. Of course, this strategy is dependent on what happens to fuel prices and, even more so, what happens to the Chinese economy.
It is all about Quality, Cost, and Delivery (QCD). If you can be equal to your competitors in two of the three and surpass them in the third, you have a leverage point to entice customers. If you are superior to your competition in two of the three or all three, even better. We all want the same thing. We want to be the Apple Store in the mall:
- The store with the most traffic.
- The company that has such a high level of Quality and Service that discounts to drive business are unnecessary.
Make 2012 the year to work on QCD. Continually improve S&OP and reduce lead times so you can attract new customers and improve the loyalty of existing customers.
Best regards,
Ara Surenian
Mark Gavoor
On behalf of all of us at Cadent Resources, Inc., we would like to wish all of our readers, clients, and supporters a wonderful Holiday season and a healthy and prosperous New Year!
This year, we decided to do something different. Instead of giving our clients and business partners the customary gift of candy, wine, or some other edible, we decided to make a donation on behalf of each of them to DonorsChoose.org. It was fun to give a gift of good that allows our clients to select the school project they would like to support using the money we donated.
DonorsChoose.org is an online charity that makes it easy to help students in need through school donations. We are firm believers that a strong primary education system secures a bright future for all of us, and this is one small way we can help our schools meet this challenge.Click here to learn more about this worth charity.
Happy Holidays!
Let us continue with more financial based definitions for inventory.
There are five ways that Finance can value the inventory. Most companies choose a method and rarely change. The methods are
- First in, First Out (FIFO)
- Last in, First Out (LIFO)
- Average Costing (also called Moving Average)
- Standard Costing
- Order Specific Costing
FIFO: This is the method that matches best how Supply Chain professionals think and manage inventory. FIFO is based on the simple premise that inventory is consumed in the same order it is received. The oldest on-hand inventory is used first and costed as such. The actual oldest inventory items do not have to physically consumed first, but the consumed inventory will be costed as if it was. In inflationary time periods, using FIFO will result in the following as compared to the other methods:
- Lower COGS as older items cost less
- Increased earnings before taxes - lower COGS means higher margins
- Increased taxes due to increased earnings
- Decreased cash flow - more money is tied up in inventory on-hand
In deflationary time periods, the opposite occurs.
LIFO: This method is the opposite of FIFO. Inventory is consumed in the reverse order it is received. The most recently received inventory is consumed first. As in FIFO, the physical units do not have to be consumed in this order, they are just treated as such from a cost accounting standpoint. The benefits of LIFO in inflationary and deflationary time periods are the exact opposite of the FIFO case. In inflationary time periods, using LIFO will result in the following versus the other methods:
- Higher COGS as newer items cost more
- Decreased earnings before taxes - higher COGS means lower margins
- Decreased taxes due to decreased earnings
- Increased cash flow - less money is tied up in inventory on-hand
The opposite of the above will happen in deflationary time periods. It should be noted that in the US, companies need to justify and get the approval from the IRS to use LIFO costing.
Average Costing: As the name suggests, inventory on a specific item is averaged based on what is on-hand, consumed, and what is brought in by item. The average cost could be calculated perpetually, but the great majority of customers that use this costing method do so periodically on a monthly or quarterly basis. Average costing is a smoothing calculation i.e. it smooths the effect of inflation, deflation, and other price swings.
Standard Costing: In a given period, the value of all inventory items is assigned. These costs do not change in that period. The period is usually a month or a quarter. Sometimes it is annual. Rarely is it less than a month. This method provides the most predictable COGS and revenue in a given period… assuming sales are on target.
Order Specific Costing: The actual cost of each item used to make or assemble a finished good is used to make the COGS for that particular item. It requires good systems, whether manual or computer, to track and account for these component costs. This method is used more in make to order industries where production volumes are low and the products are very complex and expensive e.g. locomotives, airlines, ships, etc.
Which method should be used? This is dependent on the company structure, objectives, and the nature of the business. Sometimes legal requirements or restrictions will even influence this decision. The decision is not usually in the hands of the Supply Chain. It is a General Management, Finance, and Legal decision with Finance taking the lead. The Supply Chain can have input but we are not the primary driver in these kinds of decisions. Once a decision is made, it is not usually reconsidered for years. Costing methods are changed with great deliberation when there is a major shift in economic conditions (think hyper-inflation) or when implementing or updating an ERP. The latter allows the organization to reconsider all “as is” processes and policies.
There is a relationship between Finance and the Supply Chain in almost any company. The Supply Chain has a majority of the assets of the company and is responsible for managing the lions share of the costs. The assets include factories, warehouses, and all the equipment and machines used in this facilities. The costs include the Cost of Goods Sold, labor, conversion costs, transportation, and distribution costs. When we add to all of this the value of the inventory being held, it is easy to see why Finance focuses on the Supply Chain.
It is the role of the Supply Chain to effectively and continuously manage the above mentioned assets and costs to help deliver the profit goals of the company. It is the role of Finance to ensure that exactly this happens. Finance accomplishes this by a mixture of partnering with and policing the Supply Chain. Finance prepares reports, briefs senior management, and oversees audits both internal and external to ensure that the company is being properly managed financially.
We have seen and experienced situations where Finance and the Supply Chain form a team and work together to achieve the company objectives. We have seen other companies where the relationship is more adversarial and Finance basically plays the role of a policeman. This often has to do with the culture of the organization and the personalities of the two executives leading the functions. It is in the power of the President or CEO of the business to nurture either partnership or adversity between Finance and the Supply Chain. There are CEOs that believe a little adversity, butting of heads, is good and the resulting course of action is more optimal for the vigorous debating.
Either way, it is imperative for the Supply Chain to understand exactly how finance views and calculates inventory. Let us look at few financial definitions regarding inventory management. While it might seem odd when first reading this, it is true. The Supply Chain does not have full control over the inventory as reported. When it comes to reporting, the Finance reports are what senior management and Wall Street tend to look at. Therefore, it is imperative for Supply Chain personnel to fully understand some basic Finance definitions.
There are two ways of recording and reporting inventory: Perpetual and Periodic.
Perpetual: This is the real time reporting, the day to day, hour to hour, reporting of what is on-hand in terms of Raw, Pack, WIP, Finished Goods, E&O, and what is in transit in each of these categories. Because of the sophistication of ERP systems, we can look at perpetual inventory levels in total, by part, and category any time we wish from any PC in the company. This inventory, these records and transactions, is what Supply Chain personnel deal with all the time. It is the inventory that is tangible and real. You can go out to the factory or warehouse floor and see this inventory.
Periodic: As the name suggests, this is the periodic reporting of inventory. This is more the space Finance controls. The most common periods are months, quarters, and fiscal years. This is less about transaction records and much more about reporting. The periodic reports are the official reports of the company. They are based on the perpetual inventory at a set close point e.g. 11:59 pm of the last day of the month. If this was all Periodic inventory was about, there would be no difference between what the Supply Chain sees and manages and what Finance reports. This is rarely the case. Finance takes this base data and makes adjustments and accruals. They add and subtract dollars, not units, to inventory accounts to fund or account for things such as scrapping obsolete goods, returns, warranty related transactions, in transits at the end of the period, and a variety of other bookkeeping details. This does impact the inventory levels positively or negatively depending on the nature of the adjustments. Supply Chain personnel need to know exactly how since these final numbers are what the inventory objectives of the company are set on.
Many companies use the term Consolidated instead of Periodic. Finance takes the Perpetual view at the end of a Period and “consolidates” all of the reserves, accruals, and other adjustments. We prefer the term Consolidated to Periodic.
The Supply Chain lives in the Perpetual world. Yet, the Supply Chain is measured against Consolidated objectives. Therefore, it is imperative that the Supply Chain be bilingual. We must know what we can control which is the Perpetual inventory. But, we must know what happens in month end Consolidations. The Supply Chain leaders need to know exactly what is consolidated at month end to better manage the Perpetual. They must also know how and why reserves, accruals, and adjustments are made and why. If a policy is flawed or will have a long term negative impact on operations, we can better advocate for a more balanced policy. Finance and General Management can and do use inventory as a cistern, sometimes, for costs that are in a gray zone from a Supply Chain perspective. The business decision may supersede Supply Chain logic, but at least we know what is being done and why. At least, we can make a good knowledgeable case for the Supply Chain point of view.
We have made a number of updates over the weekend that are summarized below:
- Launched Enhanced Event Modeling: We have completely revamped our event modeling process. We will be posting a detailed overview in this blog shortly.
- Modified View of Monthly Buckets in Forecast Table: We have modified the behavior of the forecast table to change to monthly buckets when the forecast graph is changed from a weekly to monthly bucket view. Previously the forecast table would only show the view in weekly buckets regardless of the forecast buckets or graph view selected.
- Changed Multi-Item Linking Behavior: Previously when linking a new item to an old item (supercession), the history table for the new item would show the customer history of the old item. Now the history shows the old item as a single column in history. This allows the user to much easily view where the old history stops and the new history starts. This is particularly helpful when there are multiple items used to form the history of the new item.
- Changed a Few Table Names: Vendors are now Suppliers, Product Classes are now Product Categories, Product Codes are now Tags.
- Locked Unknown Supplier: When an item has no designated supplier assigned (i.e. an internally manufactured item), DemandCaster assigns a default supplier name “unknown.” If a user disable the “unknown” vendor via the data maintenance, all items linked to “unknown” would also be disabled. We have now locked the ability to disable the supplier “unknown” in order to prevent any active item from unintentionally being disabled.
- Modified Selection Interface Item Link Behavior: Previously when clicking on the forecast DemandCaster icon to the left of the item number in the selection interface, the user would navigate to the items forecast list. We have changed the navigation behavior so that the user is directed to the latest forecast for the item. If the user would like to view the items previous forecast, they may click on the previous forecast link in the items forecast detail tool bar.
- Added Current Cost to Two Analytics: We have added the items current cost to stocking and reorder point analytics and reports.
Feel free to contact us with any questions by emailing our support site or calling us at
Very recently we got a phone call from an old colleague who works for a home decor company. He was about to go into a meeting with the executive committee where he was going to propose an SKU management process. He was trying to justify the need and wanted to pick our brains specifically on determining the total cost of carrying an SKU. He said that he had done an internet search on the subject and came up with nothing.
We were glad he called us. We live for questions just like this.
We offered him the following. Most people that look at SKU management look at the contribution to sales. They evaluate eliminating the lowest contributors. The decision is easier if there are other offerings of the same product to absorb the revenue that is being cut. Not moving on SKU management because of not having the exact costs is just an excuse not to manage, i.e. reduce, SKUs.
It is not an easy question.
This problem is the same as trying to find the profit by SKU. This is something that consumer products companies have struggled with for years. It is easy to track revenues by SKU. That comes right off of the invoices. The hard part is to apportion the cost properly. This can be done but it is not an exact science. The best we can do is approximate the costs. The easiest way is to use the percentage of sales to whatever cost base one chooses to use. This will provide as good as an estimate as one could get in short order. Getting an exact measure would require a very sophisticated accounting system and probably not worth the cost of tracking and maintaining the data to that level of granularity.
If we are to use Percent of Sales by SKU to evaluate SKU costs, why not just use Percent of Sales?
We had another colleague that ran the supply chain of a $1B Latin American subsidiary of a consumer products company. He had a very simple rule for which SKUs ought to be deep sixed. He simply said, “If we sell less than a pallet of an SKU per month, it is not worth keeping. It should be cut.” It was a brilliant and visual rule. It resonated with Sales, General Management, and certainly in the Supply Chain. Even marketing folks, who are always the most reluctant to cut SKUs, could not really argue with this very simple logic. On a sales volume of $1B, everyone understood that an SKU that sold such a paltry amount had to be absorbing more cost per unit than other products. Simply changing over in the factory, several months of supply run, and the inventory carrying costs probably made the costs of such an SKU disproportionate.
SKU management need not be complicated. It can and should follow some pretty simple and clear guidelines. It can be accomodated via spreadsheets or a tool such as DemandCaster which incudes an SKU rationilization component. We have found that this either is something that resonates with the executive team or not. If it does not resonate, they will ask for numbers and justifications they know cannot be obtained.
What are your experiences in this area?
Can you determine the cost of maintaining a single SKU?
What are your rules of thumb for putting an SKUs on the consider to cut list?