What’s the best process to manage growth for manufacturing companies?
One widely used and proven approach to address this is Sales, Inventory and Operations Planning (SIOP) or Sales & Operations (S&OP) Planning. The two processes are one in the same, but inventory is sometimes called out because of its importance to buffer supply and demand variation and the importance of managing inventory levels due to its impact on cash flow. SIOP is a type of management operating system that focuses on aligning all aspects of the business to one future plan that allows teams to orchestrate and align daily activities.
The starting point is extending the business planning horizon beyond the lead time needed to manufacture products and add capacity through investment decisions such as bringing on new people or purchasing equipment. This is typically 18-24 months in the future but can vary depending on the type of business. Extending the planning horizon allows sales and marketing to build campaign strategies, operations to scale capacity by addressing bottlenecks, and supply chain to effectively source and procure parts at the best cost. The challenge then becomes how to forecast demand that far out with all the variability and uncertainty that comes into play around changing market conditions and customer buying patterns, new competitors and any socio-economic business cycles that may impact your business. This is where advances in data analysis along with cross-functional collaboration become critical.
The one thing we know about that forecast is that it will be wrong. But by setting a long-term plan that everyone can work to, you establish a baseline to get better over time by addressing forecast errors, understanding how different variables impact your numbers and getting everyone aligned on the product mix so your team can work efficiently on one plan. Sales and marketing can sell what’s planned, operations can build what’s planned, supply chain can buy the right material and the finance team can model cash and forecast financial results.
Now back to inventory. Inventory comes into play to help buffer demand uncertainty that we know is there and keep that uncertainty from disrupting operations and supply chain.
Although inventory does tie up assets, it can be managed to optimize flow, increase resource utilization, and allow for strategic sourcing of material to lower costs. With the right inventory buffers in place and visibility across the organization, you can optimize your business to run much more efficiently with the results showing through fewer material shortages, improved on-time delivery, higher equipment utilization, and increased sales because you have the right products there to fulfill it. A common issue I see at companies that don’t run SIOP is plenty of inventory on the shelf, but all the wrong parts, which ties up cash and doesn’t allow for investment in the right parts.
The heart of SIOP is the monthly or sometimes weekly collaboration between sales and operations to review the forecast, discuss different sales scenarios, identify potential operational bottlenecks and then agree to a plan that allows everyone to align by incorporating the best information available. This becomes an iterative process that runs each month and allows teams to continuously learn, refine how they work together to meet the needs of a growing business and communicate through a systemic process to address issues and opportunities that come up.
The case for SIOP or a similar process is strong, with proven results and many systems and tools that can help make it easier to deploy today. So why don’t more companies use it? The biggest reason that comes up continuously is that it requires change across many functions, and change is hard. It requires the sales team to look further out into the future and make estimates based on the unknown rather than selling what’s in front of them today; it requires the operations team to manage to a longer term, more dynamic plan that could require them to shift resources and continuously innovate and improve to lower lead times and cost; it requires the entire organization to share data more transparently; and it requires a commitment from everyone to one plan.
It takes time, going head-first into difficult conversations about trade-offs and redefining processes, but in the end it’s by far the most effective way I’ve seen companies align to support growth. And the rewards for everyone include the increasing opportunities that a growing company provides, a clearer understanding of how everyone contributes to a common goal, and a culture of continuous improvement that empowers decisions and actions across many teams that now know the plan.
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