Sales and operations planning processes in most organizations are fairly standard. They involve a lot of excel spreadsheets, ERP systems and business process software. But there are many companies that have taken their S&OP processes to the next level by making them more P&L-centric. Operations planning is the process of forecasting demand for products across different sales channels, vendors or suppliers, and recording factors that might impact those forecasts such as seasonality or new product introductions. Operations planning has been around for some time but has expanded with the rise of e-commerce and digital marketplaces. It allows businesses to plan for peak demand days like Black Friday, as well as track in real time what items sell best on which sites so they can adjust future shipments accordingly. However, many companies struggle with an overly complicated S&OP process that is not very P&L centric—operations may be informed but not accountable to the financial performance of a department or division as a whole. Here are three ways you can make your S&OP process more P&L centric:
Make S&OP Responsible for Inventory Turns
Inventory turns are a great way to measure how well your S&OP process is working. Inventory turns are calculated as the ratio of annual inventory divided by annual sales. So if you have $100 million in sales, $20 million in inventory, and an inventory turn of 2, then it took two times the amount of time to sell the inventory as it did to purchase it. That could mean that you have too much inventory. The goal is to get your inventory turns to be as close to one as possible. It shows that your company has enough inventory to meet demand, but not too much. If your inventory turns are low, then it could mean that you have too little inventory, or that products are not moving quickly enough through your sales channels. If inventory turns are high, then it could mean that you have excess inventory that could be tied up in cash or be used for investment elsewhere in the business.
Make S&OP Accountable for Net Sales
If sales and operations planning processes are completely separate, then they are not accountable to P&L results such as net sales or gross margin. In fact, they may be a net drag on the P&L if production or procurement is not held accountable for their part of the supply chain. Therefore, sales and operations planning processes should be designed to be held accountable for net sales. The easiest way to do this is to follow a similar path as with inventory turns. Say you have $100 million in net sales, $20 million in S&OP costs (assuming S&OP does not include procurement), and a $10 million difference. In this case, S&OP is accountable for $10 million of net sales. If you have any variance in that amount, it means there is an issue somewhere in the S&OP process (which could indicate a larger issue in the supply chain or business process as a whole).
Make S&OP Accountable for P&L-based KPI’s
As a result of being accountable for net sales and inventory turns, operations planning must also be held accountable for other P&L-based KPIs such as gross margin, inventory turns and COGS. These are all related to each other, as COGS is a large component of inventory turns and gross margin is impacted by inventory levels (if you have too little inventory, it could lead to an increase in COGS). To get to these P&L-based KPIs, you must first make S&OP accountable for net sales and then find the COGS, inventory turns and gross margin for that number. For example, say you have $100 million in net sales. This means that COGS is equal to $80 million. From there, you can calculate your inventory turns as $20 million divided by $80 million (or .25).
If you want your business to operate more efficiently, the S&OP process must be much more than just a series of spreadsheets and meetings. It must be directly linked to the P&L and fundamental drivers of the business such as COGS and inventory turns. If you are struggling to make your S&OP process more P&L centric, you may want to consider hiring a S&OP consultant to help you get there. S&OP may be a regular part of your business, but there may be some things that you are not doing that you should be.