D. R. Rice Company

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Sure You have a Headache, But ...
One Company’s Experience with Sales & Operations Planning

By Don Rice

            Ed Clark, GM of Diversified Industries, was looking at last month's numbers. One thing jumped off the page at him, customer service was less than 85% last month. Ed start­ed thinking to himself, "I can remember when less than 100% was considered a CLM (Career Limiting Move)." Sure the busi­ness is bigger now with more customers, more products, and more people. But the customers won't take that as an excuse nor are they going to take a customer service level of less than 85% for long. With the  competition breathing down our neck, every­body wants more from us not less. What happened to the good old days when I could just talk to a couple of people and they would step up and put out the fires and we could move on.

            Farther down the report, another set of num­bers jump­ed off the page, inventories were up almost 20% from last month. WIP was down 50% but both pur­chased and finished goods inventories had increased dramatically. How could this be? Customer service is down and inventory is up, that doesn’t make a lot of sense. “What­’s happening to my company?

            The one positive note was that through­put and cycle times had gotten better than last month. So the products are moving through production and pretty fast at that. But why is finished goods inventory going up and customer service going down? Of course, production is not making what the customers are buying or vice versa. But at least the wrong stuff is being made quickly.

            Purchased material inventory is going up, I’ll have to give Frank a call on that one. Frank Stevens has been in charge of purchasing for the last 18 years. Before that he had run one of the production departments for five years. If anyone was going to know what was happening in purchasing Frank was the person.

Root Causes?

           The phone call to Frank was short and to the point. It almost seemed as if Frank was bothered by being asked to explain the inventory increase. And the explanation was the same story that seemed to be repeated by everyone these days. “More customers and more products meant more changes to production schedules because the forecasts are always wrong.”

            Diversified had always prided itself on putting customer needs first, and it really bothered Ed to hear people complain about customers.

            Today Frank had added a new twist to the story. He started by reminding Ed of the one of the fundamental laws in purchasing. If you have too much inventory you get yelled at, but if you run out you better update your resume fast. Now it seems that purchasing has just started using a new system for managing suppliers and materials, order a lot of everything from everybody and expedite the stuff you really need. Just what Ed needed, one more problem added to his to-do list.

            The report Ed was reviewing was de­signed so that the first page provided non-financial business performance measurements and the second page contained all of the financial measurements. Now Ed turned to page two and was pleasantly surprised by a couple of items. Sales had exceeded the plan by 12%. This was the sixth month in a row of either meeting or beating the sales plan. Cur­rently, customer order backlog has increased by $7.5 million to a record 6 weeks ­of customer orders. Also, shipping was right on budget agai­n. Ed couldn’t re­member the last time Diversified had miss­ed the ship­ping budget.

            But there was plen­ty of bad news, too. Manufacturing material and labor vari­ances were way over budget. Overtime was up 10% from last mont­h. Accounts receivables are now out to 43 days from 38 days last month. The annual budget for pre­mium freight had been used up in the first four months of the year, and to top it off, this is the third month in a row of negative cash flow!

Just how bad is it?

            Let’s summarize what Ed has been hit with in the monthly report.

bulletCustomer service is less than 85%;
bulletFinished Goods and purchased materials inventory is up almost 20%;
bulletCustomer order backlog has in­creased to 6 weeks and customer order lead times are ex­panding;
bulletPurchasing is ordering everything from everybody and expediting short­ages;
bulletProduction sched­ules are changing fre­quently;
bulletSales is overselling the plan;
bulletProduction is hitting the shipping bud­get in volume but is not shipping what customers want and when they want­ it;
bulletAccounts Receivable collection days have in­creased to 43 days;
bulletManufacturing costs are over bud­get;
bulletPremium freight is over budget;
bulletDiversified is consuming cash not gen­erating it.

Boy, for a successful com­pany it looks like Ed has got his hands full.

What to do now?

            Ed hadn’t known he was going to the Sales & Operations Planning (S&OP) meeting until just a couple of hours before, when Joe Wilson, VP of Manufacturing, men­tioned he would be attending the session that day. The S&OP meeting had always provided a wealth of information on what was happening in the busi­ness. Ed had stopped attending the S&OP meetings a cou­ple of years ago. The S&OP process had been work­ing well and the team seem­ed to have everything under control.

            So Ed dropped in on the S&OP meeting unannounced. He figured he could follow the meeting agenda by just look­ing over somebody’s shoulder. There was a live­ly debate going as Ed entered the room. Turns out the meet­ing agen­da was being created on the fly right there in the meet­ing. After a few minutes of point / counterpoint discussion on the agenda it looked like the meeting was going to start. After the initial shock of Ed’s presence had worn off, Nathan, the materials manager, started the meet­ing, about 15 minutes late. Ed looked around the room. Besides Nathan, there was Susan from mar­keting, Bill from inside sales, Gene, the controller, John, representing engineering and Joe Wilson. Joe was the only other executive in the room beside Ed. Fortunately, Ed was able to stifle his desire to start taking names and kicking butts. He had always believed you learned more when you­r mouth is shut than when it’s open. And Ed definitely need­ed to learn what had happened to the S&OP process and, more importantly, what was happening to Diversified.

            The first topic, and what turned out to be the only topic, was the revised forecast from sales, just delivered by Bill. Bill’s only explanation or comment seem­ed to be “Don’t shoot me, I’m only the messenger!” The next three hours were spent trying to figure out how they were going to hit the shipping budget this month in spite of the revised forecast. Ed was truly heart broken; the executive S&OP meet­ing had turned into a month­ly shootout and expedite meeting.

Bad to Worse?

            After three hours, Ed couldn’t take any more. He asked for a few minutes of time for some questions. Well, who’s going to say no to the GM of the company. Ed started to ask questions and it was as if he had memorized a list. As soon as the group had finished answering one question, Ed threw out another one.

bulletWhere are the senior executive representatives from Sales, Marketing, Finance, Engineering, Pur­chasing, Human Re­sources?
bulletWhy wasn’t the agenda pub­lished two days in advance of the meeting?
bulletWhen was the partnership meeting held and who attended?
bulletWhat are the assumptions supporting the sales plan for each family?
bulletWhat are the root causes of the problems you’­ve discussed?
bulletWhere is the action list and assignments for correcting the root causes?
bulletWhy wasn’t the preparation work and anal­ysis done prior to the S&OP?

There must have been 4 or 5 more questions about what should have been happening during the 5-step Sales & Operations Planning process before Ed delivered the coup-de-grace.

bulletWhy aren’t you following the Sales & Operations Planning Policy for Diversified Industries?

The Bottom Line

            Just as it seemed that Ed was going to start up again, Joe stopped him and asked “Ed, why are you picking on these people this way?” Ed’s reply tried to deflect the personal side of Joe’s question. “I’m only trying to determine what’s wrong with the S&OP pro­cess.” This was the opening Joe was wait­ing for. “Well I can help you with that real quick. S&OP meetings have been going down hill ever since you stopped attending regularly. It seems that everyone read your lack of attendance as a way of saying the S&OP process wasn’t important to you any­more. But I know different. You and I were together on starting the S&OP process here at Diversified and I know you fully support the S&OP process. But with all the growth we’ve had in the last few years and all the new people coming on board having to hit the ground running to help us out, they haven’t seen everything and been through the hard times with you like I have. Now I know all these people want to do what’s best for Diversified and our customers. They have just been caught in a bind of not knowing what to do and are out trying to do the best they can individually. Obviously, there has been a lack of understanding on how the S&OP process should work. Some of these people you’­ve been grill­ing for the last 40 minutes are work­ing 6-7 days a week trying to do the right thing. It is just that now with­out a work­ing S&OP model and with no understanding of the S&OP process, no one is sure anymore what they should be doing.

A Plan of Attack

            Ed put his hands in the air almost as if he was surrendering. “Joe, you’ve made some interesting points here. I could give you all sorts of reasons and rational for why I wanted to delegate and “empower” our people to manage the S&OP process. But now that’s not important. What is important is that we get the Sales & Operations Planning process working better. One point that was con­stantly drilled into us at that S&OP class was the need for an executive champion. Well, I’m the one to do it. Diversified is going to do the S&OP process and do it right. Finish up here as you’ve started, let’s keep the place running. I’ve got a couple of ideas on how to get S&OP process back on-track. Ed thanked everyone for their time and feedback and start­ed back to his office.

            Ed had something on his mind. During that Sales & Operations Planning class, a handbook was given out to everyone. The handbook’s ‘Steps to Get Started with the Sales and Operations Plan­ning Pro­cess’ had been the guide for getting started with S&OP at Diversified. It also had a check­list that could be used to evaluate an existing S&OP process. As a matter of fact, one of the recommendations had been to conduct an annual assessment of the S&OP process to find opportunities for improve­ments. As soon as Ed got to his office he looked up the S&OP file and there was the handbook. He turned quick­ly to the check­list and there were the ques­tions he had been throwing out at the  S&OP meet­ing. No wonder they seemed so familiar, he had remembered the check­list. Next on his list was a call to the consultant that had helped get S&OP started at Diversified. The recommendation from the consultant was to conduct a S&OP class for the new people and as a refresher for the other people involved with S&OP. The class took place about 2 weeks later.

            Immediately following the one day class, everyone was asked to fill out the checklist, independently. A matrix was created with the questions listed down the left margin and the names of the people listed across the page along with their responses to the checklist. Each question could be answered either yes or no. By filling in the matrix and counting the no votes, everyone could easily see the areas that had problems. By using a pareto chart, they were able to rank the questions and immediately focus on the areas with the most opportunity. The next step was to select 3-5 items for immediate attention and create an action team for each one. 3-5 items were the limit so that there could be focused improvement efforts as opposed to the scatter shot method. A specific individual was given responsibility for each team and a due date for action was estab­lished.

            The review of the checklist matrix resulted in the creation of action teams for the top 5 areas. For example, one of the action teams was charged with updating and validating the S&OP policy. Another team focused on establishing the month­ly process time table for the S&OP process. Still another action team took on the responsibility of creat­ing an effective partnership meeting. Each of the action teams established due dates for the completion of their work. The task team leaders recruited other people to help them complete the task. As each task was completed, the corrective actions were integrated into the on-going S&OP process. Then a new task team was created for the next item in the matrix. This pattern would continue until at least 90% if not 100% of the questions in the audit were answered with a yes. With­in 90 days of the class, Ed could see dramatic changes not only in the S&OP process but also in his monthly report and bottom-line results.

What can you do?

            If you are having problems similar to Diversified Industries or want to prevent these types of problems from occurring, conduct an internal Sales & Operations Planning process audit. Call 615-221-2196 for a copy of the checklist. If you would like a copy of the complete hand­book which includes a brief explanation of the 5 step Sales & Operations Planning process, steps to get started, sample policies, and other supporting materials, it is available for $24.95. Call if you would like more information about either an Executive Sales & Operations Planning class or a Detailed Sales & Operations Planning class.


            Don Rice is an internationally known expert in improving manufacturing and distribution operations. He specializes in gap assessments, education programs, and consulting, and can provide a client company with management counseling, process definition, and implementation support. To find out how Don Rice can make a difference in your company, and to schedule an introductory meeting, call 1-615-221-2196.

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