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