Why Balance Customer Orders, Inventory, & Profitability?
If you want to serve your key customers successfully (with high on-time-in-full (OTIF), short lead times, and proactive service) so that you can take advantage of the opportunities coming down the pike while addressing the hard realities of the current business environment (potential recessions, high interest rates, and less access to capital), you MUST balance sales, operations and inventory.
Otherwise, you will have one or more of the following issues arise:
- Inventory Overload: Too much inventory of the wrong products and WIP (work-in-process) in the wrong place at the wrong time.
- Slow Moving Inventory: Too much slow moving or obsolete inventory
- Production Schedule Disruptions: Not enough of the right inventory in the right place to keep production running smoothly.
- Weak Service: Not high enough service levels to ensure you can maintain and grow your business during turbulent times, let alone meet business plans
- Not Prepared for Growth: Not able to take on significant opportunities coming down the pike. For example, as companies expand manufacturing in North America, customer orders continue to increase down-the-line in the supply chain
- Skyrocketing costs: If you aren’t balanced, you have to spend more to meet customer objectives.
- Inflation cost increases: The only way to offset the massive cost increases related to inflation is to be able to get in front of what’s coming.
Instead of these dire consequences, the smart are proactively balancing customer orders, inventory and profitability.
How Do You Balance Sales, Inventory & Operations?
The good news and bad news is that balancing these factors does not require significant capital investments, the latest technologies like ChatGPT, and a mountain of resources. It simply requires rolling out the appropriate strategy and tactics that is uncommon common sense. Roll out the appropriate strategic processes largely encompassed with Sales Inventory & Operations Planning (SIOP), also known as S&OP, processes. Focus solely on achieving directional progress, and you’ll gain quick wins.
However, strategy alone will not “work”. It has to be accompanied with the appropriate tactics which is the execution of the fundamentals required to support Sales & Operations Execution (S&OE). If you aren’t familiar with S&OE, don’t fret. It is a common term in software circles, but in manufacturing and supply chain circles, it is known as demand planning/ forecasting, supply planning (master scheduling, production planning, material planning, replenishment planning, inventory planning, production & labor scheduling, etc.), operational execution, shipping, receiving, etc.
Client Examples: Using SIOP / S&OP To Balance Sales, Inventory & Operations
The SIOP process is geared to aligning sales with operations, customers with suppliers, and demand with supply.
How SIOP Fueled Growth for a Biotech Manufacturer
For example, a biotech manufacturing client couldn’t meet aggressive sales goals with high enough service levels to ensure customer loyalty and future growth. Sales was frustrated and executives were concerned about how to support future growth goals. On the other hand, Operations didn’t have the information to prepare in advance to meet the service objectives with the aggressive goal goals. They were concerned about spending money until they knew the product wouldn’t go to waste, and management was concerned about hiring manufacturing employees until volumes were confirmed in enough detail to know the work centers and skills required. The bottom line: Sales was out of balance with Operations. Thus, the right inventory was not available in the right place at the right time.
After rolling out SIOP in combination with S&OE (as you cannot have one without the other), we developed a directionally correct sales forecast by geography, product and unit of measure that “added up” to the growth goals (in dollars) in a way that made sense when viewing by customer, product groupings and growth rates. Simultaneously, we focused attention on understanding capacity (production requirements vs. available capacity by key work area and equipment). It quickly became clear that we had to reallocate a few resources to the bottleneck operation, and we gained approval to hire a few people to support the growth plans. Once the bottleneck operation smoothed out, we gained efficiencies in down-the-line operations, and most importantly, customer service improved and customers gained confidence. Sales, Operations and Purchasing also had insights that enabled cost reductions, product rationalization plans, and key pricing decisions. Nice side benefits to the aggressive growth goals!
How SIOP Accelerated Cash Flow & Reduced Debt by Increasing Inventory Turns
In another example, an aerospace manufacturer had turned the company around following the 9/11 downturn and was interested in selling the business. Thus, they wanted to maintain their excellent service levels while maintaining/ improving profitability and reducing unnecessary debt. We had to balance sales with operations and inventory to reduce unnecessary inventory (not required to support service, spikes in sales and predictable disruptions in supply) while focusing on operational performance. Thus, we assigned executive leadership to the topic to emphasize the priority, clarified the sales plans, and focused attention on inventory planning processes (again, the combination of SIOP/ S&OP and S&OE).
In this case, we had to balance profitability/ margins by site with customer orders and inventory plans. We rolled out improved business processes, better utilized the ERP system, provided training and education to the inventory teams, and we aligned the goals of the Site Leaders with corporate objectives and the Inventory Leaders. Inventory levels came down by 30% in key product lines while maintaining/ improving service levels and growing the business. The company was also better positioned for sale and for continuing operations so that no matter which path was chosen, the company was in a healthy, robust position.
SIOP can be an important process in aligning people (within your organization and with your supply chain partners) and processes (demand and supply) to improve service, support growth, reduce debt, accelerate cash flow, and improve profitability. During times of volatility (inflation, recession, stagflation, technological advances, talent shortage), there will be more opportunities for those companies prepared for success. The winners will be separated from the losers and opportunities will abound. SIOP requires focus, but it doesn’t require capital intensive investments. There is no downside to becoming more profitable, having greater access to cash, and better serving customers and preparing for growth.
Refer to our SIOP webpage for more information, our blog (SIOP category) for hundreds of articles, and learn more about SIOP and what’s important for a successful implementation in our new release eBook, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. If you are interested in talking about how to improve profitability, free up cash, and/or improve service, contact us.
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SIOP/ S&OP Playbook: Creating Predictability & EBITDA Growth