You Know Your Company Needs to Implement SIOP…So Why Don’t You?

strategy planning

Spend Matters welcomes this guest post from Michael Nelson of Alvarez & Marsal.

Ask any executive in a product-based company if they think a formal Sales, Inventory and Operations Planning (SIOP) process is critical to success in their business and they will immediately say “yes, of course.” Ask them if their companies have this process in place, or do it well, and they will just as quickly say “no, not yet.”

So, why is this the case in too many companies? It is hard to do, and even harder to do well!  There are several factors that contribute to difficulty in SIOP implementation and process stabilization:

  • Misaligned metrics
  • Assuming statistics = information
  • Not recognizing that Sales thinks in dollars and Operations thinks in units
  • Lack of true executive support

However, if you understand the failure modes, you have a much better chance of successfully implementing a beneficial Sales, Inventory & Operations Planning process.

Misaligned Metrics

Sales revenue, inventory dollars, customer service levels, lead time, manufacturing cost, and distribution cost are key metrics that are all pulling in opposite directions. Increasing sales and customer service levels can frequently require higher inventory levels or costs to compress lead times and improve fill rates. Add to this that the sales team is typically incentivized by revenue dollars and operations is driven by cost and inventory reduction, and you have a natural conflict: “what’s good for you is not good for me.”

SIOP Process Overview

 

siop-chart_am

If the individual incentives and metrics are not aligned and consistent, the ability to drive to a common process will be difficult. To address this risk, those participating in the SIOP process must be evaluated on one set of metrics. Aligning the incentives for all participants in the process around agreed-upon customer service, forecast accuracy, inventory levels and cost metrics dramatically improves cross-department cooperation as they now have shared objectives.

Statistical Data is Not Information

A key portion of the SIOP process is using data to drive a statistical forecast. This can be done with forecasting software or even Excel, depending on the size of the business. However, these systems typically output a lot of numbers, and simply sending the summaries to the sales team and asking for their ‘input’ will not work. The statistical output has to be reviewed and targeted for major changes so that the conversations with the selling teams are more focused. Instead of asking for sales to provide estimated sales numbers for their clients across all products, look at where forecast error is highest and drive discussions to the most meaningful products. This can focus the “ask” from sales and will lead to more productive discussions and keep the selling teams engaged in the process.

Sales Thinks in Dollars and Operations Thinks in Units

A major execution issue in the SIOP process is that sales thinks in dollars and operations thinks in units. The forecasting team wants to know how many units of a product each customer will buy and in what time period, but in most cases the sales team only works in dollars by product family. Last period we sold $X of this product type to customer A and we will do Y% more or less than that. Operations then has to determine what that means in units. The two standard ways to do this are to use an average price or use a historical mix to translate the dollars back into units for planning and forecast updates.

However, average price is difficult as the market selling price may vary significantly by customer; average price can be significantly impacted by a shift in customer mix. Historical mix works if the historical demand patterns repeat, which is unlikely. There is no one solution to a problem, however,  and strong communication between operations and sales and a keen focus on learning from exceptions as part of the SIOP process can bridge this issue and improve overall customer service levels.

Lack of True Executive Support

A clear mandate is required from the top down for any SIOP process to be successful because a successful SIOP process takes time: Time from executives to attend the consensus meetings; time from mid-level managers to prepare the demand and supply plans; time from the sales team to communicate the market/customer perspective; time from operations to review capacity; time from finance to reconcile between the current plan and the budget. It requires a significant commitment of time from the whole organization, which is why the support must come from the top of the organization. If the CEO/President or COO dedicate the time and are part of the monthly review and approval cycle demanded by a good SIOP process, then you are likely to have a more successful process. Given the huge positive impact this process can have on business effectiveness and resulting customer service, the investment in time is a beneficial investment.

Summary

Implementing a sustainable sales, inventory, and operations planning process is difficult, but it is attainable for every firm and worthwhile in the long run. Many companies have recognized that if they pay attention to organizational structure, tracking metrics, how the data is developed and used and combine that with top-down executive support, they harness the full benefits of the SIOP Process.

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