The two most basic concepts in business are supply and demand, but as they play out in something as complex as the modern industrial supply chain they’re anything but basic. To wit, about 70% of supply chain businesses have adopted some kind of S&OP (sales and operations planning) workflow in order to more effectively match demand projections and production/operational plans on a quarterly or yearly basis. Though processes like these are a good start, even they aren’t the be-all-end-all. To wit, nearly two thirds of respondents to a recent survey said they wanted to take steps to improve their S&OP processes.
Let’s say you’re a kid, and you’re trying to set up a lemonade stand in front of your parents’ house. You go to the store (possibly with parental supervision) to get lemons and sugar, you come home and mix the two into a pitcher, and you set up a little folding table near the sidewalk. Since children are notoriously bad at big-picture thinking, you probably think of the lemons and the sugar as your only real costs, and you price the cups of lemonade (which are set out by the pitcher) accordingly in order to achieve a worthwhile ROI.
The actual production of automobiles on the factory floor has been getting more efficient for decades. In the ‘80s, it would take General Motors about 40 labor hours on average to produce a new vehicle—today, that number is much lower. Since 2007, Toyota’s average labor time per vehicle has dropped from 29.4 hours to 17-18 hours. This is an encouraging trend from a planning perspective. And yet, we know that in reality the process of getting any single car made starts well before the stamping and welding. After all, the 30,000 or so parts that make up a typical car have to get produced first, and even then there are long lead times involved in the sales and planning process before the materials and time get allocated to a particular vehicle.
Remember when you were in school? No matter the class, every term you got a syllabus for each class that laid out when exams, quizzes, and term papers were all due? Then you set about working each syllabus into your own personal calendar, with short-term items like quizzes, mid-range ones like exams, and the long-game term papers for each class. There’s a similar way to look at your production planning schedule, with short-, mid-, and long-range goals and KPIs. Long-range is handled by your annual strategic plan, mid-range duties fall to S&OP, and today we’re going to dig into the short-range process of S&OE. Specifically, we’re looking at how to know if your sales & operations execution process is successful or not.
If you ever go to Las Vegas, you should be advised that casinos heavily frown upon card counting, and it’s easy to understand why. A game like blackjack is supposed to be more or less random in terms of what cards are dealt when, which puts the house at an advantage. Over the course of several hands (before the entire deck has been reshuffled), however, a careful observer can note the proportion of face cards that have come out in order to come up with a rolling estimate of how likely or unlikely they are to come up in future hands. This puts the player at a real statistical advantage over the house—at least until the casino politely (or not so politely) asks her to leave.
Raise your hand if you’ve heard the story of William James giving a lecture on the structure of the galaxy. After the lecture, an old woman comes up to him and says that his theory (in which the sun is at the center of the solar system) is no good, because the world actually rests on the back of a giant turtle. When James asks his interlocutor what the turtle stands on, she responds: "You're a very clever man, Mr. James, and that's a very good question… but I have an answer to it. And it's this: The first turtle stands on the back of a second, far larger, turtle, who stands directly under him."
Supply and demand are the first two concepts that most people learn about with regard to economics—and they’re also two of the most crucial elements of any manufacturing supply chain. In order to effectively meet customer demand, you need to ensure that you have enough supply on hand; and in order to profit by that demand, you have to make sure that your supply doesn’t wildly exceed your needs. As with so many things in manufacturing, this is easier said than done.
Sales and operations execution, or S&OE, is a little bit like flying an airplane. In the modern era, you already have a host of processes that have been digitized and automated, including many of the actions that pilots themselves used to be solely responsible for. Your point of departure and destination, as well as the route that you’ll take from one to the other, is already fixed—all of which means that as a pilot your job is mostly to monitor incoming information and make slight adjustments as needed, even if those adjustments are just a fairly rote response to alerts being sent to you by your instruments.
Ah, the old dilemma: make to order vs. make to stock. The debate has been raging in the world of manufacturing for many years. On the one hand, making to stock (i.e. the process of creating products in anticipation of demand that hasn’t yet materialized) involves a lot of guesswork, with potentially costly results: if demand for a particular product doesn’t meet forecasted levels, you could find yourself in possession of large quantities of unsold stock, which you might have to sell at a loss in order to free up costly warehouse space. Making to order (in which you start your production process only once an order has been placed), on the other hand, presents its own potential pitfalls: you risk meeting demand comparatively slowly, and the relatively lean nature of the typical make-to-order supply chain makes it more susceptible to risk in some ways.
Most businesses in the manufacturing sphere have some form of sales and operations planning (S&OP) workflow that covers the monthly or quarterly timetable that’s often left unplanned in longer term business goals. In the Industry 4.0 era, a newer, even more granular level of planning has emerged to supplement S&OP by covering the daily, weekly, and monthly supply chain activities that might otherwise go without any cohesive planning structure. The name of this new level of planning? Sales and operations execution, or S&OE.