Sales and Operations Planning (S&OP) gets a lot of attention in tough economic times. Given the volatility caused by the recent crisis it’s an essential process and everybody will be scrutinising their plans and forecasts right now as the future they had predicted 6 months ago has completely changed.
One of the reasons S&OP is so important is aligning demand and supply. So for wholesalers is it missing a vitally important element. Inventory – specifically management and optimisation.
Inventory management / optimisation is critical: firstly, it ensures product availability and high service levels. Secondly it prevents tying up working capital (CASH) in stock.
Inventory management is the business process responsible for ordering, managing, storing and moving inventory. It’s supervising the flow of goods from manufacturers to warehouses and onward to the sales channel.
Inventory optimisation is predicting and managing supply and demand variables, whilst undertaking inventory management processes. It allows you to manage inventory better, by balancing capital investment and service-level goals with demand and supply volatility. Simply put – right product, right place, right time as efficiently as possible.
The classic S&OP model starts with demand planning followed by supply planning. It’s in supply planning where the most common deficiency resides. It can overlook service-levels – instead including a calculation for safety stock or even a simple rule-of-thumb. While these approaches are common they are not best in class.
The ability to calculate inventory levels based on service-level goals allows for optimal levels of inventory investment.
But it’s not necessarily easy. Inventory optimisation is an evolution of inventory target setting. Inventory targets may be set by a static formula – or the team may need to take the data out of the ERP system and manipulate it in spreadsheets to derive them.
Static formulas can come unstuck (and the time taken to manage them) when demand, supply and consumer behaviour becomes volatile. It’s one of the reasons that the AGR Dynamics software has the ability to apply multiple forecasting methodologies to identify the most appropriate for current patterns.
What happens when the ‘I’ is inserted and it becomes SI&OP – Sales, Inventory and Operations Planning? It becomes possible to optimise Inventory-based on service-level goals. The increased rigour of Inventory planning can be applied across the entire time-horizon to drive enhanced supply decisions.
In times of volatility, S&OP is proven to reap significant rewards. Those wholesalers who are able to incorporate Inventory planning and create an integrated SI&OP process stand to gain more – improved cash-flow, enhanced service levels and increased sales.