Intelligent Control Instead of a Planned Economy

In the first part of this article, enomyc Partner and author Jan Ulrik Holsten addressed the shortcomings in sales planning at many Mittelstand companies and explained where the problems lie. In the second part below, he shows how cross-functionally networked planning processes and high planning quality can improve profitability and competitiveness, and how this shows up in individual KPIs.

In our projects, we keep finding that sales often does not know what company-wide relevance its planning results have. That is a major shortcoming, because the quality of sales planning processes can decide the fortunes of an entire organization. The better sales succeeds in anticipating market developments and mapping customer buying behavior in its plans, the better procurement and production processes can align with market and customer requirements. This also yields valuable advantages for liquidity management, because capital tied up in inventories can be reduced and forecast accuracy improved.

It is all the more important to anchor responsibility for planning quality in sales organizationally as well, for example through target agreements. A good KPI for reflecting quality requirements is linking incentives to what is known as “forecast accuracy”.

What Can and Must Sales Plan?

Against the backdrop of our complex system environment, no salesperson can be expected to predict the future one or two years ahead. Anyone who could would no longer need to work in sales. What can be expected, however, is that a B2B salesperson is so close to their customers and their project development or procurement processes that they can make valid statements for a short-term horizon. How long or how short such a planning horizon can or must be depends on the industry, the company's own value creation and the requirements of the supply chain. What is important – and common to all good S&OP processes – is that sales planning is set up as a rolling forecast, so that it continuously delivers high forecast accuracy.

Another important aspect in designing sales planning processes for S&OP is finding the “right” planning level, or translating into it. What does that mean? While salespeople often plan at the level of regions and/or customers, for procurement and financial planning processes it matters less who buys something than what is bought. After all, operations managers (purchasing and production) must ensure that the right products are available in the right quantity at the right time. To do so, an operations manager needs to know the demand at the level of their planning objects and adjust it against the background of their constraints and process-optimizing criteria (for example replenishment lead times, order sizes, price/volume scales, etc.).

Important financial planning processes (for example treasury, short-term liquidity planning) also need more detailed planning references than just sales volumes and revenue. To be able to plan inflows and outflows reliably, robust assessments are needed of which customers, on which payment terms, are likely to generate a planned amount of incoming payments, but also of which suppliers relevant (preliminary) products were purchased from and which (outgoing) payment terms are associated with them.

S&OP: The Advantages Prevail

The added value of functioning S&OP processes has been the subject of many studies and analyses in recent years. Their consistent conclusion: the advantages are undisputed. They can be summarized briefly as follows:

1. Better Customer Service

Functioning S&OP processes are based on good demand planning and an appropriate response on the supply side. Because this makes the right products available, they make an important contribution to better customer service. This in turn leads to more revenue, brand loyalty and customer retention.

2. Better Integration of Different Functions

One of the major advantages of S&OP is the better integration of the company's various functional groups. The result is shared goals, better communication and more transparent processes. This advantage undoubtedly brings great demands, because S&OP forces the organization to increase its functional orientation and to consistently introduce cross-functional processes.

3. Optimized Working Capital and Free Cash Flow

With S&OP, companies can put an end to the vexing imbalance between supply and demand. Before problems escalate into a crisis, they can be addressed systematically with the help of quantitative and qualitative analyses. Unnecessary inventories can thus be reduced and customers won over with attractive terms. Obsolescence is eliminated and cost-to-serve is optimized. The ability to generate free cash flow through improved service, lower inventories and better capacity utilization is one of the key reasons for the great popularity of S&OP.

Broken down into various KPIs, the following concrete improvements could be achieved on average across various industries:

• Forecast accuracy +30 percent

• Delivery reliability (on time in full) +30 percent

• Inventory turnover +25 percent

• Plant utilization +40 percent

• Productivity improvement +35 percent

• Safety stock -20 percent

  
  

What are you waiting for? Or are you already planning in an integrated way?

Do you have questions about how cross-functional, networked planning processes and high planning quality can improve your profitability and competitiveness? We are happy to answer them! Schedule a no-obligation conversation with our expert Jan Ulrik Holsten now.