the SOP Vision
month's article was written and contributed by Jay Harmon. Jay is a respected
consultant who spent most of his career
with John Deere & Company.
You walk out
of a meeting shaking your head. What happened? We agreed last month on
what we were going to do and now no one agrees. We were going to improve
our service to our customers and now everyone is unhappy - customers, marketing/sales,
The process that is intended to help close the gap between Marketing and
Manufacturing is Sales and Operations Planning (S&OP). This process
attempts to balance demand and supply, but in many cases remains very much
"we vs. they" both from Manufacturings or Marketings
Much of the time, this frustration is caused because Marketing/Sales and
Manufacturing have a different vision of how to improve. Marketings
vision is a factory that can respond to every customers need. Manufacturings
vision is to have an accurate forecast so that the product the customer
wants can be produced within the current supply base lead-time. Which vision
is correct? Neither!
We begin with the assumption (as reality reinforces) we will have neither
a forecast that is 100% accurate nor a totally flexible factory and supply
chain. Because of these realistic assumptions, we need to develop an agreed-to
business Operating Vision. This vision is used to guide how customers
needs will be met.
To fully benefit from the S&OP process can be a challenge. The effectiveness
of the process hinges on common agreement to inventory levels, flexibility,
and response requirements. The following steps are a general explanation
on how to develop consensus on what the customer requirements are and how
to meet their needs. In this context, we will call the consensus an agreed-to
The following steps have proven effective in creating an agreed-to vision.
These steps require you to gather basic data needed to make educated decisions.
They also require the use of tools/models that probably currently exist
in your business. These steps are not done in serial, but rather in parallel
or iteratively. It will be necessary to revise them based on input from
Step 1: Create a Tentative Vision
This is not a theoretical vision, but is one that covers the next 18-36
months. The purpose of this step is to get people thinking. This vision
will be constantly revised as we gain knowledge in the following steps.
Step 2: Define your Customer Needs
This is basic knowledge that is required, but is really not defined in
most businesses. What is the customers lead time (defined as how
long will a customer wait before he/she buys another brand). This lead
time will vary, depending on your product, from seconds in a commodity
type product to months for large capital expenditures. The lead time needs
to be defined by customer segment and season. While defining customers
lead time by segment, we should also define segments we expect growth in
and how our responsiveness or inventory strategy will support this growth.
The demand pattern, especially if you have seasonal demand, must be defined
and should be adjusted for incentives or sales programs. These programs
are used to move demand from where our customers would really want the
product to where we have the capability to produce it, so we must remain
aware of their effects. It is this annual demand pattern that will drive
our capacity planning. Another portion of this step is defining
our finished goods inventory strategy for our customers. The key step in
this determination is understanding the relationship of customer lead time
to total supply chain manufacturing time (including internal manufacturing).
A finished goods strategy can be built only after the relationship is fully
The next steps define what our current capabilities are and develop approximate
costs of building to customer demand. In these steps, we define the capabilities
of the total supply chain, including manufacturing.
Step 3: Define our Current Internal Manufacturing Capacities and Lead
These capacities should be in equipment and not related to manpower or
the desired number of shifts. One of the key questions will be what is
the current capacity? Is it greater or less than pure customer demand peaks?
If greater, no additional work is needed in this step. If less, we need
to define what the approximate costs are to increase capacity to the peak
customer demand. Most likely the cost will be in step functions (to increase
from 150 per day requires a new machine at $1.5 mil and the capacity will
increase to 200 per day). These step costs will be used in determining
the best balance between capital, inventory, and sales programs.
Step 4: Define our Supplier Capacities
How you ask this question will vary on what type of parts you purchase
and what percentage of your suppliers business you represent. This
needs to be done only on the parts that require specialized machines or
for suppliers that, in total, are near their capacity limit at the time
you have high demand. For the parts or suppliers that do not have capacities
to support peak demand, estimate the capital required to raise the capacity
equal to that of demand. As in the internal capacity step for calculating
additional expenditures, keep track of the step functions costs. Note also
the capability of suppliers to meet high demand through inventory strategies.
This may be less cost than the capital expenditures.
Step 5: Develop Manpower Strategies
In many cases, physical capacity may exist to build to customer's demand.
The challenge is to develop manpower plans to support the build schedule.
This step is unique by company, factory, and location. Is it a union workforce
or not? What are the limitations of the contract? What is the areas
labor availability? Are there companies that have seasonal demands opposite
yours? A basic manpower model needs to be used. The model needs to contain
all demand including end customer product, service parts, and demand sold
to other companies/factories. Also input for necessary manpower in addition
to direct labor, a productivity factory, and absenteeism by month. (A critical
factor may be managing vacations into low demand periods.)
Step 6: Analyze Production Alternatives
Develop alternatives to determine the least cost approach to meet customers
demand, investment required, inventory strategies, and manpower strategies.
This will probably require a model to complete this analysis. We will also
select our alternative and this strategy will update the vision developed
in Step 1.
Step 7: Finalize Vision
From the production alternative that is selected, the vision will be adjusted
so that it supports how the total Business has agreed to run. This is where
we get agreement with Marketing/Sales, Manufacturing, Supply Management,
Production Planning, Personnel, Finance, Engineering, etc. The vision needs
to be specific enough so that your employees can read it and know the impact
on them and what is expected on them. This completed vision will drive
business strategies and operations.
Step 8: Determine Gaps Between Today and the Vision
In this step, we identify the gaps between the vision and current operations.
For each of these gaps we develop a charter complete with objective, scope,
deliverables, timetable, and resources required.
Step 9: Manage Projects
Prioritize projects, assign resources, manage projects, and incorporate
the projects and deliverables into your performance management system.These
steps will achieve agreement between all functions and disciplines in the
business and provide a roadmap of what to do. This will provide the documentation
for the S&OP process to achieve business results.
Jay Harmon has
35 years of experience in all areas of manufacturing and Materials.
He has successfully developed and implemented numerous Customer centered
replenishment strategies that insure response with the Customer's lead-time
while providing stability within manufacturing and supplier's lead-times.
He is an industry leader in definition of sub processes within Customer
Order Fulfillment especially in the front end from Market forecast until
the parts are available for assembly.