Growing Sales and Profitability with Sales & Operations Planning

At Axial’s most recent industry roundtable, Brian Pitera, Managing Director of Blossom Growth Partners, discussed the importance of Sales and Operations Planning (S&OP) for growth-oriented middle market companies and the private equity firms that buy and own them.

The goal of S&OP is to focus, align, and synchronize all functions across a company so that sales, operations (manufacturing and supply chain), and finance teams are in tune to deliver the top and bottom line monthly. Most often, Blossom gets called on to help companies institute an S&OP process when they’ve hit a growth plateau and the organization is constantly chasing sales or struggling to deliver products or meet service levels. Sales and profits are usually less predictable and falling short of expectations.  

The Symptoms of a Broken S&OP Process

If you’ve ever heard a sales team say, “We sold it, but they couldn’t get it out the door,” or operations moan, “We made it, but they didn’t sell it,” it’s likely the company in question is a candidate for S&OP. “Some of the most common symptoms of an organization whose sales and operations teams are misaligned are erratic sales, the inability for operations to ‘keep up’ with sales, and service levels that are below the 98% benchmark of healthy consumer goods and OEM companies,” said Pitera.

What this really means is that the sales team is doing one thing and the operations team another and no one is speaking the same language. Blossom’s approach to S&OP starts with an annual operating plan (AOP) that is broken down by month, by product, and by customer. Every month, the entire team — including sales, operations, engineering, and finance — sits down and re-acclimates to reality to build a common company plan. This enables the manufacturing organization to have clear sight of their expectations and the sales team to understand what can and cannot be done in time to service orders. Even though the process is standardized, it is unique to every company based on the lead time of raw materials, manufacturing lead times, and the order lead time of what is promised to customers.

“Every time we’ve implemented such a process, the changes have been tremendous in terms of the exactness of what the management team can predict from a sales and profitability perspective on a monthly basis — somewhere between plus or minus 2%,” said Pitera.

Cleaning Up the SLOB

“What happens when you go to your companies and tell them to lower inventory?” Pitera asked the roundtable attendees — a mix of CEOs, bankers, advisors, and financial sponsors. There were audible sighs in the room.

Without S&OP, SLOB (Slow Moving and Obsolete Inventory) is usually out of control. There is a lot of finger pointing and complaining that there is too much of what we don’t need and not enough of what we need. The clean-up becomes the sales teams’ problem. Discounting? Loss of margin? Write offs? “We hear from a lot of companies ‘my working capital is out of wack’,” said Pitera. “The S&OP process aligns the sales and operations team around a common plan. Working capital can be shored up pretty quickly through this process.” A robust S&OP will dramatically reduce SLOB.

Introducing S&OP

According to Pitera, the first step is to get everyone in the same room — finance, operations and sales leads sitting together, talking about the numbers to come up with a common plan. It needs to be an open and safe forum where everyone scrutinizes the numbers and walks out with an executable consensus plan. More importantly, Pitera warns, it’s about accountability. If the sales don’t come through, operations needs to feel comfortable asking them why (and vice versa) and then regrouping to adjust.

The monthly plan can’t just be aspirational. Committing to a sustainable S&OP process means making it a part of the culture of the business, driving it down through the ranks and into the business. “We think it’s a top-down and middle-up situation,” said Pitera. “If we can get the CXO team on board and then drive it from the middle up — picking some key leaders at the management or director level who have strong relationships throughout the organization and can influence day-to-day activities — then that’s the perfect situation.”

Keeping the Train on the Tracks

While it may take up to a year of commitment to S&OP to fully integrate into an organization and realize the full set of benefits, there are a handful of specific financial outcomes an organization can count on as they roll out the process. “SLOB is usually the first to go,” said Pitera. “Labor costs will start to decrease (i.e., overtime, stranded labor, etc.), discounting at the end of the month and quarter to make a sales number slow down significantly or even stop.”

The group at the roundtable seemed keen to learn from Pitera how, once a consultant like Blossom has left the building, organizations can prevent regression to pre-S&OP behavior. “It typically takes six months to make the process stick and prevent areas that are reversing,” he said. “Change management is key. Health checks are key.”  

Once a company sees what a successfully integrated S&OP process can do for earnings and working capital, however, it’s much easier to maintain the program. Pitera left the group with some powerful numbers: A company doing $120m in sales and about $18m in EBITDA invested $2m in a business process redo including S&OP process. “You might wonder how a company in that range could afford it,” Pitera said. “The company went on to grow by over $14m in EBITDA (77% increase), and we had the monthly forecasts tuned in within 2%.”