My 6 cents on S&OP best practices
In my earlier blog (Office politics and forecasting), I talked about how office politics contributes to forecast bias and how it can be overcome by implementation of a well designed S&OP process. In this blog, I will talk about some of the best practices I have come across in S&OP.
The principal output of the S&OP process is a consensus forecast that is used to drive all demand and supply management decisions. This is achieved through collaborative engagement of cross functional group through a monthly meeting, supported by documented business assumptions. A good S&OP process needs to contain following elements at the minimum.
1. Process ownership by an apolitical group- An empowered apolitical group needs to own the forecasting process. This group would be responsible for managing the planning process, resolving conflicts and responsible for arriving at a consensus forecast. In addition, this central group will also be responsible for generating a statistical forecast, which will serve as a reference point for the functional forecasts.
2. Consensus forecast based on documented business assumptions - Before the cross functional meeting, each of the functional group will come up with their documented assumptions on product, market and supply constraints. This will expose the thinking behind the functional forecast and help in promoting fact based discussions.
3. Time horizon ownership of functional forecasts - Functional teams should focus on where they can best add value. For example, the sales function’s intimate connection with the customers and distribution partners empower them with an accurate knowledge of the immediate term (0-3 months). On the other hand, marketing is more knowledgeable about the longer term over the product life cycle. Higher weightage has to be given to the functional forecast for those time horizons while arriving at the consensus forecast.
4. Explicit management of the gap between consensus forecast and financial goals– the finance function is responsible to ensure that the consensus forecast (when converted to dollar value) meets the financial goals of the company or analyst expectations. Any gaps in the consensus forecast with respect to the financial goals will need to be tracked explicitly so that proactive plans can be built to bridge those gaps. Discussion of the gaps will be an agenda item in all the consensus meetings.
5. Shifting the focus of planning farther out where business assumptions are unclear- organizations with immature forecasting processes tend to focus more on short term forecasts (immediate 2 quarters), typically in a firefighting mode. With implementation of mature planning processes, such as S&OP, the focus needs to shift farther out (12-18 months) where business conditions/assumptions are less clear as well as business benefits are higher.
6. Measure the forecast performance with the goal of continuous improvement- Develop industry standard metrics (such as MAPE and Bias) to measure the forecast performance. Use these facts to provide feedback to the consensus team. This will help in understanding functional tendencies to under or over forecast in a specific horizon and in turn help in correcting that behavior.
Do you have more insights into S&OP/demand planning best practices? Even bad practices would make an interesting discussion. I look forward to your comments.