White paper - The Metrics Game - The Link Between Business KPIs and S&OP

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The Metrics Game - The Link Between Business

KPIs and S&OP 28-FEBRUARY-2014. VERSION 1.0. VIJAY BAWEJA

The Metrics Game - The Link Between Business KPIs and S&OP

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Abstract The purpose of this paper is to define a framework for identifying KPIs to measure the effectiveness of an S&OP

process. This will help organizations in achieving maximum value from their S&OP process. Key Performance

Indicators have been widely accepted by various businesses for performance management and monitoring of

different processes. However there are no well-defined reports/KPIs for an S&OP process to monitor its success.

Linking of Business KPIs with S&OP process will result in improved decision making and planning efficiency.

Introduction

Sales and Operations Planning (S&OP) is a subject of great interest to many companies – large and small. In simple

terms, it helps companies match demand and supply. On the demand side, there has been a growing interest to

leverage more and more demand signals so as to make better predictions and on the supply side the attention has

been on inventory optimization. Many companies have adopted a roughly sketched monthly process to review

their demand and inventory situation. However, due to the dynamic nature of today’s businesses and excess

reactivity by management, organizations are looking for best practices and performance measures of an S&OP

process. These measures differ from organization to organization depending on the kind of industry they operate

in. Identifying the right performance metrics of an S&OP process can help customers of S&OP achieve greater

automation and effectiveness. This whitepaper looks at the process that organizations should follow, to identify

performance metrics that are critical for the success of an S&OP cycle. To begin with, let’s look at the formal

definition of S&OP process given by TF Wallace, one of the leading figures in the field of S&OP.

Definition

“Sales and Operations Planning (S&OP) – A set of business processes that helps companies keep demand and

supply in balance. It includes Executive S&OP, Sales Forecasting and Demand Planning, Resource Requirements

Planning, Master Scheduling and other detailed scheduling tools for both plants and suppliers, both conventional

and demand pull. Originally used to identify only aggregate planning, its meaning has expanded to include those

elements that operate at the detailed, mix level. (TF Wallace & Company, 2013)

Executive S&OP – That part of Sales and Operations Planning that balances demand and supply at the aggregate

volume level, aligns units and dollars, and helps to establish relevant policy and strategy at both the volume and

mix levels. It occurs on a monthly cycle and displays information in both units and dollars, for profit planning, asset

management, and so forth. Executive S&OP is cross functional, involving General Management, Sales, Operation,

Finance and Product Development. It occurs at multiple levels within the company, up to and including the

executive in charge of the business unit, (For example, division president, business unit general manager, or CEO of

a smaller corporation). Executive S&OP links the company’s strategic plans and its business plan to its detailed

processes – the order entry, master scheduling, plant scheduling and purchasing tools it uses to run the business on

a week to week, day-to-day and hour-to-hour basis. Used properly, Executive S&OP enables the company’s

managers to view the business holistically, provides them with a window into the future, and serves as the forum

for discussing the relevant policy and strategy” (TF Wallace & Company, 2013)


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Figure 1: Executive S&OP - Link Between Business Plan and Detailed Processes

How does Executive S&OP Help an Organization?

From above descriptions of the Executive S&OP process, it is clear that it is a lever to manage change better in an

organization. Since many things change on the demand and supply front during the course of a business year,

Executive S&OP helps in quickly adapting to these changes. This is because, typically, there is already an agreed

upon plan between various stakeholders as part of S&OP meetings.

Executive S&OP is an offshoot of the earlier Enterprise Resource Planning (ERP). ERP is a set of business processes

by which companies coordinate the functioning of various business areas. The focus of S&OP has been to balance

demand and supply, and to achieve the same, it uses many of the same tools and techniques as used by ERP.

Similarly S&OP is also critically important for supply chain management of an organization as it helps in gaining

greater visibility into the demand and supply situation. Due to today’s complex supply chains, there is a greater

uncertainty in market than ever before. A well-defined S&OP process can make an organization better equipped

towards these uncertainties.

The S&OP Dashboard

When we think of performance measurement of any organization and what is the improvement because of S&OP,

the first question that comes to mind is what is to be measured? As the saying goes, anything that cannot be

measured cannot be improved. The same stands true for the S&OP process as well, where the organization

implementing S&OP should know what the most important KPIs for S&OP are. Every organization has a hierarchy

of KPIs. At the top of the hierarchy would be KPIs which are more aligned towards strategic objectives like perfect

order fulfillment, cash-to-cash cycle, etc. As we move down the hierarchy, these KPIs will get divided into more

specific KPIs, for example, Perfect Order Fulfillment will get divided into perfect item accuracy and perfect quantity

accuracy, etc. As we move further down the hierarchy, we reach the most granular level. The data at the most

granular level should be aligned with higher level KPIs and in strategic direction.

Strategic Planning

Business Planning

Disconnect!

Detailed Planning, Scheduling and

Execution

Strategic Planning

Business Planning

Detailed Planning, Scheduling and

Execution

Executive S&OP


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Another set of KPIs is the process control indicators. These KPIs reflect things like forecast accuracy or Bias,

number of items from previous cycle which got completed, adherence to process map. Apart from the above, a

different set of KPIs is used to measure the benefits from a project. For example, in the case of S&OP

implementation, it can be improvement in inventory turns or reduction in obsolescence. These KPIs are typically

measured at the start of the project and then their progress is tracked throughout the project lifecycle to

understand the tangible benefits of the project. As part of this whitepaper, we are particularly interested in this set

of KPIs with respect to S&OP implementation at any organization.

While deciding on the KPIs for S&OP, the organization should bear in mind that these KPIs should be directly linked

with the goals of S&OP –that is, matching demand and supply. Thus, the prerequisites to deciding KPIs are clearly

defining the goals of the S&OP process and identify all its stakeholders. KPIs can then be used to measure progress

against these goals by various KPI owners. It is important not only to identify right KPIs but also to identify right

KPI owners among the stakeholders. The KPIs change as the organization meets its S&OP objectives.

Designing the KPIs for S&OP process would primarily involve the following steps:

1. Identify needs of various stakeholders in the S&OP process

2. Establish S&OP goals

3. Identify various crucial demand and supply aspects

4. Select metrics and performance indicators for different aspects of demand and supply

5. Assign KPI owners

6. Set targets for metrics

7. Track performance of metrics

8. Monitor S&OP Process Control Indicators


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Figure 2: 8-step Model to Design KPIs for S&OP Process

Essential KPIs and Reports for S&OP

There are various KPIs which can be used as strategic and detailed KPIs for S&OP. The strategic KPIs need to be

tailored according to the strategic objectives of the organization. However still there are a few KPis which can be

considered as essential for S&OP. These can be broadly classified as strategic KPI, Detailed KPI and Process control

measures as shown in the earlier section. Process control measures will vary widely from business to business and

would depend on the level of maturity of S&OP process. Using the 8 step model discussed earlier, following are

the essential KPIs and reports which should be considered at each step:

Step 1: Identify Needs

Business plan and list of planned activities for the past and future eighteen month periods. This can be further

corroborated by analysing the various projects undertaken during this period, their cost benefit analysis, alignment

to strategic objectives, etc. Important KPIs to consider at this step would be Materials Portfolio analysis e.g. SKU

Pareto analysis. Apart from this, the performance of previous projects would be a good indicator to judge the

benefits from S&OP, for example, the percentage of projects that have been fully implemented.

Identify Needs

Establish Goals

Identify Aspects

Select Metrics

Asign KPI Owners

Set Targets for Metrics

Track Metric Performance

Monitor Process Control

Indicators

Track Performance

Monitor S&OP Process Control Indicators


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The organization should look at each product family and analyse the information, like forecast vs. actuals, last year

actuals and last year forecast in financial terms, underlying assumptions and unforeseen risks and opportunities

identified later during the year.

Step 2: Establish Goals

The primary goal of an S&OP project is to fulfil the needs identified in the previous step. Thus for each product

family, the organization should decide on the planned performance, keeping in consideration the inferences from

previous step.

Step 3 & 4: Identify Various Crucial Demand and Supply Aspects and Select Metrics and Performance Indicators

for Different Aspects of Demand and Supply

The organization needs to focus on managing supply and demand. Thus high level forecast, inventory and

production reports should be evaluated simultaneously to identify key constraints and resources for the future.

Different stakeholders should play an active part here. It is recommended to consider at least an eighteen-month

horizon for this analysis so as to get a more comprehensive picture of various critical aspects which affect demand

and supply of the organization. KPIs like forecast accuracy, forecast bias, on time delivery, inventory days of supply,

etc. need to be considered at this stage along with supporting assumptions.

To select KPIs effectively, the organization should look at the following two important sets of KPIs:

a) Strategic KPIs

This step entails a comprehensive reconciliation of the above steps and is one of the most crucial for the success of

the S&OP implementation. At this step the senior management should review the balanced scorecard of various

indicators covered above and come out with a strategic roadmap for future sales and production for all the

business and strategic product families.

b) Detailed KPIs

Once the strategic KPIs are in place, the next critical step is to break it down to detailed KPIs which impact these

strategic KPIs in a direct or indirect manner. It is essential that different facets of business should be considered so

that detailed KPIs properly add up to strategic KPIs. It is important at this stage to ask the questions – “Are we

missing something?” .These KPIs would ensure that a company’s S&OP process is aligned to its strategy. It is also

important at this point to identify right KPI owners who would have a major role in tracking the performance of

these metrics in the coming months. These KPIs can be divided across functions like sales and marketing, finance,

etc. Some of the key metrics at this step are, various costs as a percentage of sales, margin as a percentage of

revenue, fill rate percentage, customer retention percentage, average forecast accuracy for product family, etc.

Step 5 & 6 - Assign KPI Owners and Set Targets for Metrics

Once you have chosen the right performance indicators, it is important that these metrics help in driving up the

performance levels across various demand and supply aspects. This involves assigning the right people as KPI

owners and then setting up performance targets in their respective business areas. It is important that KPI targets

are SMART – Specific, Measurable, Achievable, Realistic, and Time Bound. The organization should be ambitious

enough with setting up the targets but it should not be so high as to discourage the team. Once you have identified

the targets and responsibility has been assigned for delivering them, it is important that necessary resources are

available as and when needed to achieve these targets. Achieving KPI targets will not be a cost free process and

this should be kept in mind while deciding the targets.


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Step 7 & 8 Track Performance of Metrics & Monitor S&OP Process Control Indicators

In this step it is very important that the organizations align their KPIs and goals in such a manner that it permits

early detection of deviations and corrective actions wherever necessary. It is very important that these steps are

closely aligned with previous steps of setting the defined targets and deviations. Most commonly used ways of

tracking performance of metrics are to compare them with others in the industry as well as compare them over a

period of time.

Conclusion

KPIs for S&OP have an end –to-end focus rather than having functional limits. Thus the KPIs for S&OP are different

from other diagnosis KPIs. It is important that as part of identifying KPIs for S&OP, every identified KPI should have

a functional owner and this functional owner should be involved at every stage of the process. Also, care should be

taken that these KPIs are measured frequently. Many of the identified KPIs should even be monitored daily and

others weekly. Also, senior management should pay constant attention towards these metrics and the ground

staff should also clearly understand these KPIs. A well performed S&OP process contributes significantly to an

organization and thus should be monitored closely. A balanced perspective on S&OP measures would have a

positive effect on other measures as well.

References

1. Sales & Operations Planning - the most important KPI's for the S&OP process By Marion Augenstein

2. A Fresh Look at sales and operations Planning (Booz & Co. ) by Harry Hawkes, Abhishek Malhotra and Curt

Mueller

3. TF Wallace & Company, 2013. http://www.tfwallace.com:http://www.tfwallace.com/home/sop_101.html

http://www.tfwallace.com/

http://www.tfwallace.com/home/sop_101.html