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A Real S&OP Opera

by Brent Wahba
December 5, 2013

A Real S&OP Opera

by Brent Wahba
December 5, 2013 | Comments (2)

Lean Leader: Sensei, please help me! We have followed your wisdom, but things continue to get worse! We reduced changeover time by 89%, inventory by 93%, lead time by 97%, and defects are at a record low 1.021 PPM. Yet we are still losing money!

Sensei: I see. Did you go to gemba?

Lean Leader: Every day, Sensei! Why just last week we had 27 kaizens on the factory floor. But no matter what we do, lumpy demand is killing our profitability. We never know what we are going to have to produce until after the orders come in.

Sensei: Sigh. Wrong gemba, knucklehead. You must go home and sit on sofa. Even Toyota runs commercials.

Those damn customers and their never-ending demands. They act as if Christmas only comes once a year, you can’t ski in July, and it’s a major faux pas to wear white after Labor Day. It’s as if they have no interest whatsoever in our lean program! Well guess what? They don’t. Customers want what they want, whenever they want it. We can complain all day about it, or we can actually do something different.

Step 1: Get Lean. Most of you are familiar with the basics of Lean and the benefits building responsive, pull-driven operations so I won’t repeat them. Just don’t be lean sheep; make sure you prioritize and implement the thinking, tools, and techniques that are most important to your specific situation and problems.

Step 2: S&OP (Sales & Operations Planning). I am very surprised that this topic doesn’t come up much in lean circles. S&OP is a formalized cadence of Sales, Marketing, and Operations looking ahead at demand together so Operations can better plan resources. Some changes in buying patterns are cyclical (like ice cream, weight-loss, and swimwear seasonality) while others follow different known patterns like home building and car sales correlating with interest rates. These demand patterns shouldn’t be a surprise, but how often do your Operations people know the gory details and ramifications of every contract proposal or new service introduction?

One healthcare insurance case management firm now tracks sales activity (stage in the sales process, likelihood of the customer ultimately signing, demand impact if business is won) within their operations department so they can better plan the specialized resources (registered nurses) they will need to hire and train for each new contract. This resulted in eliminating several months of under-capacitized operations chaos every time they won a major new contract without adding too much staff to cover “what if’s?” They also now look forward to new business.        

Step 3: Get over your profit margin and ROI hurdles. Sometimes we put hurdles in place to make sure our organization doesn’t waste resources on bad projects or money-losing sales, but other times those shortcuts cause us to pass up some good opportunities. The financial goal of most for-profit companies is to make the most total profit, not achieve just one sale at a maximum margin. One specialty agricultural equipment maker offers variable discounts in the off-harvest season to keep their factory running even and full. Their per-unit average margin may be decreased, but their total revenue and profit (not to mention ease of running the place) is greatly improved. What are you doing with your underutilized capacity?

Step 4: Even Toyota runs commercials… and offers rebates and finance deals, and develops new products (or even brands), and enters new markets, and… SHAPES DEMAND! Pricing and discounts, promotion, packaging and merchandizing, sizes / quantities / bundling, new markets / channels / outlets, and new features or models all impact customer demand (up or down depending on the need) and can therefore be used to your advantage if you are scientific enough in their usage.

Think about how carefully Apple controls their new model introductions (including timing, features, pricing, old model inventory, and how much secret information slips out to the media) to make more money while making their customers happier about their latest shiny acquisition. A different PC maker carefully monitors component inventory and costs, and then prices / promotes specific configurations (every day) to increase total profitability. Their customers like this process because they feel like they are getting more value and “a deal.” One problem that a lot of less-sophisticated companies get into, however, is when this demand-shaping sales and marketing activity is disconnected from operations planning. Then salespeople get their fat commissions and bonus trips to Hawaii for the “big sale,” while operations folks run overtime, struggle with quality, expedite shipping, and blow their budgets. Never let internal incentives drive sub-optimal business-wide behavior.

I think we’ve only tackled half our business problem with Lean. We’ve gotten really good at responding to customer pull, but we’ve ignored the fact that we can have a lot of influence over what our customers demand and when they demand it. The level of sophistication and usage of the Scientific Method in the sales and marketing world is often quite impressive (when was the last time you used an MRI machine to measure brain activity during a kaizen?), not to mention powerful. Isn’t it time that we also leverage sales and marketing as an operational advantage?

The bottom line (not to mention your customer) is waiting.

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
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2 Comments | Post a Comment
Daniel Jones December 05, 2013
1 Person AGREES with this comment
Absolutely spot on - ignore the causes of unnecessary variation in your information flows at your peril - too few of us actually go to the custonmers' Gemba. Although actions to level demand in line with capacity are fine - like revenue management for airline seats - in most cases the unpredictable variation experienced by providers upstream is not caused by end customer demand but by the way we manage information - we create it but we are often doing nothing about it! This is true from retail to healthcare - in our experience emergency demand is highly predictable and yet the upstream chaos is caused by 5 day working, end of year budgets and scheduling staff vacations!

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Hans vonGehlen February 17, 2014
1 Person AGREES with this comment

Great thinking Brent. Indeed many approaches to Takt Time are mostly based on experience and new projects – like are most forecasting approaches anywhere. Not that history is a bad guide – I’ve found that we’d often been better off taking the data from the computer generated forecast than from the sales-optimized projections. But then the computer doesn’t know everything and that’s where S&OP comes in.
What most sales groups contribute to S&OP however is mostly looking at the product launches, long range campaigns they create and general market trends. The challenge that you are putting out there is for sales and marketing to also actively manage the short range to correct the bottom line right where things are happening.
In the age of the internet and advanced market psychology we see enough examples of retailers out there influencing consumer decision with price variability down to the hour. Gas stations fluctuate their prices sometimes multiple times a day based on location, time of day, day of week and even traffic flow patterns to maximize the bottom line. Brick and mortar stores run specials for just hours to give customers advantages to buy during certain hours using wireless programmable price “tags” and internet retailers can even track if you looked at an item before without buying, bringing you back with a special note on your Facebook. So, if the S&OP suggests, yes the tools are in place to shape demand by managing sales closer to end-consumer buying decisions. That’s, - if they are buying from you directly!

Daniel hits the spot as he concludes: It’s not end customer demand that’s the cause of the unexpected variance that throws all our S&OP out of the window, but what happens to the sales information. If we are staying with consumer goods –the end customer in masses is actually a quite reliable fellow and his accumulation of individual buying decisions aggregated in POS data usually shows few surprises. If you can plan your factory based on POS you will be in great shape with your takt time.
The challenge lies where a factory is removed from the consumer by one or more degrees of distribution.
As distributors consolidate the customer’s buying voice and mix in their own assumptions such as space, planograms, inventory management software, budgets, cash flow and other constraints that are often not even related to our product, averaged takt time may be okay. The order pattern however may become surprising to us and test the limits of our flexibility more regularly than we like.
None of that however happens on the fly but is part for the retailers/distributors planning process. Sensei was right when he said: “Wrong Gemba, knucklehead”, but the true Gemba may not just be on the sofa. It is instead in the much less comfortable place(s) where information is created in the distribution channel. For the S&OP to be effective in retail or other multi-tiered industries its creators will have to go out onto the Gemba of the entire supply chain up to the point of seller/servicer to understand what’s happening, then still go to the sofa.

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