7.2 Revisiting the research questions
7.2.1 What are the casual relationships between S&OP policies and profitability of an
S&OP is a recurrent process with the cycle covering a four week period and having a number of discussion and decision points within the business. The key relationships that were identified are:
• Supply planning
Within the business, the planning function is seen as an integral part of ensuring that the correct inventory levels of SKU’s are maintained. The planning function ultimately dictates what the factory should produce and when, whilst considering the various factors and resource constraints that may exist. One of the factors is adherence to the stock holding policy, which exists and is currently the equivalent of three weeks stock. This is based on the forecast which when volatile and continuously changes causes the stock covers to also be variable. The planner is then placed in a frustrating position of having to explain, when the stock holding policy is either exceeded resulting in cash being tied up or when the policy is not met resulting in service level losses. This sometimes leads to the policy not being adhered to with the planning teams using their own experience and discretion to determine ideal stock holding levels. Naturally, when this is done and works no questions are raised but there is an equal likelihood of getting this wrong, resulting in additional noise being created.
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• Working capital
To manage the cash flow within the business working capital targets both in terms of weeks cover stemming from the supply planning discussion above as well as a currency unit value equivalent are set. What this translates into is that the planner is also responsible to ensure the inventory levels does not exceed a certain value. As you can imagine trying to balance the stock holding policy defined in weeks cover and the working capital targets can be a very difficult task. Given the variability seen in both the forecast and customer ordering profiles, doing this is like a rollercoaster ride and ultimately leads to frustration.
More time is spent explaining the over or under situation then attempting to understand root cause and identifying a sustainable solution. Employees are placed in a situation in which they are constantly firefighting and being operational versus searching for sustainable solutions.
• Sales and turnover
The S&OP process typically culminates into a weekly sales volume forecast for the two year period and is then converted into an expected turnover target. These are tracked and reported on a weekly, monthly and Year to Date (YTD) basis. What does frequently occur is that when the actual sales are falling behind target and month end is approaching instructions are given to the sales team to drive sales in those categories that returns a higher turnover value. The product category on which this study was based is one of those categories. This leads to exceptions or jab orders being accepted even though it is over and above the forecast. The knock on impact is that inventory levels are depleted and given the lead to product further service level and turnover losses are experienced in the following weeks and months. This results in a vicious cycle.
• Planning frozen period
As per one of the S&OP policies, the first three month window period is locked and hence no changes in the demand or production plans should occur. The rationale behind this is to ensure the stability of the supply chain as well as to accommodate the various lead times to plan, procure material, produce and distribute the products that manifests itself.
However given the variability experienced and the sales drives that occur this rule is often ignored creating further inefficiencies within the organisation.
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• Distribution and customer service
The lead times to deliver customer orders from the time of order placement to delivery of the products vary between 48 and 72 hours dependent on customer proximity to the warehouse. The service level target that is expected is 88%. Customer orders can be placed before 1pm on any given weekday with the lead time being measured from the 1pm cutoff.
For the most part customer orders are not checked against the original forecast, which means that one customer can order more then what they originally forecasted for resulting in subsequent customers not receiving the minimum quantity that they originally requested. From a customer ordering perspective the general rule followed is a first come first serve basis. When jab or exception orders are received, the distribution team has to expedite these orders in a shorter lead time resulting in further expense.
• Suppliers service level agreements (SLA)
Suppliers have to adhere to an SLA, which has been set and agreed on with the business.
This SLA is based on the forecast that they receive and they have to hold material that is equivalent to four weeks. A similar problem is experienced to that within the supply planning area in that the variability creates uncertainty and is difficult for the organisation to maintain the correct stock levels. This is compounded by the supplier also being constrained by their own lead times as well as internal inefficiencies.
• S&OP procedure
The S&OP process contains the various procedures that must be followed per cycle. It stipulates the meetings to be held and who should attend, together with the expected agenda, inputs and outputs. These are structured so as to ensure that the demand forecast for the two year period is calculated in a robust manner, which then feeds into the supply related meetings in which the supply chain assesses its ability to meet the demand forecast.
The effectiveness of the meeting is largely dependent on having the correct attendance and individual engagement, preparedness and contributions. It is worth mentioning that the brand team is not directly involved in any of these meetings even though they are responsible for determining overall brand strategy. This results in misalignment.
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