To highlight the virtues of his unit’s new sales and operations planning (S&OP) process, Richard Shields, CFO of Oakley, a maker and distributor of eyeglasses, shoes, and athletic apparel, likes to paint what he calls “a before-and-after picture.”
Before the process was installed at Oakley (a division of Milan, Italy-based Luxottica Group) earlier this year, representatives of sales, marketing, finance, and manufacturing would all show up at planning meetings with different data reports to defend their department’s positions. Manufacturing people, focused on production output, would ask for high inventory levels. Similarly, sales and marketing people, eyeing commissions built on revenue, wanted “immediate shipment on all orders” and thus maximum stocking, according to Shields.
On the other hand, the finance team, interested in low levels of working capital, was trying to keep inventory down. “The first discussion would be, who’s got the right data, and what data are we missing?” the CFO says. Because the division’s finance team at Oakley had more analysts, they would be equipped with the richest data. And finance usually held sway.
Ironically, Shields didn’t like that situation. “The finance shadow on these decisions was a little too heavy, and we weren’t getting enough consensus through sales and marketing and manufacturing,” he says. After the launch of the S&OP process, however, “there’s much better alignment of the four key groups,” according to the finance chief.
Now, the data issues are hashed out at meetings of junior management in a succession of three meetings a month. In a final monthly meeting, senior executives are presented with fully inclusive data in a set of agreed-on metrics. The discussion is “very much a discussion of the business” rather than a debate about which department’s data is appropriate, says Shields.
While S&OP has been a fixture among manufacturers for a long time, it’s lately become a hot item for a broader array of industries, experts say. The big reason for the reemergence of the process — which aims at setting manufacturing output goals to match sales plans and general business targets — may well have been the economic downturn.
Previously, with consumer demand routinely outstripping supply, there wasn’t as much of a need to tightly mesh production goals with revenue targets, notes Charlie Chase, business enablement manager for SAS Institute, a software company. Now, when supply can routinely outpace weak consumer demand, companies need to have a way to respond to inventory overages.
The increased interest in S&OP may also be dovetailing with a change in approach to planning among many CFOs. “Finance’s job was always to try to hold everybody to the financial plan, which was done six months earlier and in many cases was no longer valid,” says Chase. Today, he notes, the role has shifted to one of balancing a company’s production capacity with customer demand on a more current basis.
A big part of that role is keeping a variety of sales forecasts in daily alignment. For his part, Shields checks each day whether three types of forecasts meld. An early forecast, done perhaps months earlier, is part of Oakley’s budgeting and planning process. The second forecast is a rolling prediction for the following 18 months that’s updated each month. The third forecast focuses in detail on the revenue generated by different product styles and stock-keeping units.
The S&OP process enables the CFO to check, for example, whether the sales department’s requests for inventory are justified in light of prior budgeting. Says Shields: “If I see the budget is coming up over or under [sales requests for inventory], I’ve got to go back to the sales guys and say, ‘I’m not seeing this in terms of the buildup for the budget. Have you guys thought that through?'”