Sales & Operations Planning: Performance Measures And Tools

Blog post by Charlie Dietz

S&OP is a business process used by many organizations across many different industries, business types, organization sizes and structures (including for-profit and non-profit entities).

At its basic function, the S&OP process allows an organization to regularly review its consumer / customer / client demand, and key organization performance against these forecasts and production / execution plans. It has a tactical / strategic focus, as it generally is looking in time units of your planning cycle (generally monthly, but sometimes weekly (retail) or quarterly or longer (capital equipment)).

The key process of S&OP is the periodic, scheduled mandatory meeting of the stakeholders of the business to review the key business KPIs, at a level of detail appropriate to the business, and agree on forward plans. 

A CPG company selling thousands of SKUs would typically present performance measures at a product class or sub-class level.  A food processing company having few end items would review performance at the SKU level.  A non-profit / association would review key operating variables against plan (membership growth/retention, conference registration, sponsorship sales, fundraising/development revenue, web visits/conversions, etc.).

KPI Example:

For many organizations where there are ongoing sales of products that must be made or procured, one helpful tool is the S&OP Waterfall Forecast and Sales KPI display, a stylized version shown here:

For the Product sub-class: Consumer Widgets (imported from China), representing a summation of the Consumer Widgets, the time to plan, make/procure, and have a widget available for sale is 3 months.  So in March of this year, our current month, we have a current proposed forecast of 200, 130, 125, 125, 100 units for March through July.  We need to understand a few things:

• Since there is a three month delay from a month’s purchase order (PO) placement with suppliers in China until delivery to our customer-facing USA warehouse, the forecast made back on September 1st for delivery on December 1st of 265 units is what we will get (aka Frozen Forecast / what we should measure Forecast Performance against).  The December forecast made on November 1st (for 275) will not change the 265 units originally planned/ordered, unless you take extraordinary actions to change the China suppliers’ POs for 265 made on 9/1.  (and that will likely cost extra $$$$s). 
• So today (March 1st) is the last opportunity to change the forecast / PO being placed for JUNE  1st!
• Our display above measures the Frozen Forecast used to procure product against the Actual Sales, measured in a 3 month rolling total.  Our March KPI for a rolling 3 month KPI calculation would be to compare the Actual Sales (275 + 320 + 255 = 850) to the appropriate Frozen Forecast:  ((265+290+230) – Actual Sales) / Actual Sales =  7.6 % forecast error shortfall.  ( Which may have resulted in lost sales )
• Remember:  for the S&OP Review Meeting, if you have a great number of SKUs, the forecasts and other KPIs are reviewed at an agreed-to aggregate level, and the forecast analysts (and others) are responsible for “allocating” the forecast changes down to the individual SKUs / Suppliers / PO's.
  
  

Other common KPIs used as part of an S&OP review might include:

• In our example, another important KPI might be the ongoing review of and efforts to decrease the lead time of products (considering the tradeoffs of the various associated costs and benefits). 
• You would also likely have a related KPI measuring production/delivery to Frozen Forecast.  In our example, you have to measure the actual delivery to the USA for December 1st against the December Frozen Forecast for the Consumer Widgets from China predicted on September 1st, adjusted for any special changes made to released POs.  
• KPI displays can be constructed that deliver additional measures of the business.  For example: adding current stock levels and safety stock quantities to a display, you can calculate potential stock-outs / lost sales and the ratio of sales to inventory value.
• There are a number of other measures that would be part of the S&OP review, including key financial results. 

There are also other KPIs that would be more operational (day-to-day, weekly).  

• ​A good example would be a “Daily Orders & Shipments” display.  It would probably be at the same level of row detail as the S&OP displays (in our example above, by Product  sub-class).  Each row in the display would list orders and shipments for today and month-to-date in dollars and units compared to the month forecast.  It could further break out the customer orders and order lines by whether they were shipped on-time and/or 100% complete.  A separate display or report would provide detail down to SKUs where there has been under-performance.

Outside experts with S&OP creation and implementation experience can work with your stakeholder team to speed the design, process development and implementation of KPIs and a S&OP process customized for your organization.

The key values to the business of the S&OP process is the development of meaningful KPI measures of the business’ health, the discussion between the key stakeholders over past and current KPI results, and what can be done to continue improvements in all the operations of the business.