Guest Author: Seth Burkhart, Director, Supply Chain Planning at enVista
In the post-COVID economy, many companies have gone from being supply-constrained to a demand-constrained environment and heightened focus has shifted from producing “at any cost” to driving efficient and profitable sales. Sales and Operations Planning (S&OP) is a common approach but getting started and the lift of building a robust program like S&OP can be very daunting.
Importance of S&OP for Cost Reduction
S&OP can help cut costs in several ways by improving coordination, efficiency and alignment across different functional areas within a company. Here are some key ways S&OP can contribute to cost reduction:
- Demand and Supply Alignment: S&OP facilitates better coordination between sales and operations teams. By aligning demand forecasts with production and supply capabilities, companies can avoid excess inventory build-up or shortages.
Cost Impact: This reduces costs associated with carrying too much inventory or incurring rush production costs due to unexpected demand spikes. - Improved Production Planning: With S&OP, organizations can plan production more efficiently based on accurate demand forecasts. This helps optimize production schedules, reduce setup times and minimize overtime or underutilization of resources.
Cost Impact: Efficient production planning directly reduces operational costs. - Optimized Inventory Levels: S&OP ensures that inventory levels are aligned with anticipated demand levels. By accurately forecasting demand and production needs, companies can reduce excess inventory costs (storage, handling, obsolescence) and free up working capital that may have been tied up in inventory.
Cost Impact: Minimize or eliminate tertiary costs associated with the management of excess inventory while reducing obsolescence/write-off risks. - Enhanced Supplier Collaboration: S&OP involves close collaboration with suppliers. By sharing demand forecasts and production plans with suppliers, companies can negotiate better terms, secure bulk discounts and reduce lead times.
Cost Impact: Heightened supplier relationships and efficiencies contribute to overall cost reduction. - Reduction in Expediting and Overtime Costs: When production plans are well-coordinated through S&OP, there’s less need for expediting orders or paying for overtime to meet unexpected demand.
Cost Impact: Reduced costs associated with rush orders and premium freight. - Better Resource Utilization: S&OP enables more efficient utilization of resources including labor, equipment, and facilities. By having a clear view of demand and production schedules, companies can optimize resource allocation, minimize idle time and improve overall productivity.
Cost Impact: Reduced labor volatility and minimized asset idle time. - Improved Customer Service Levels: While not a direct cost-cutting measure, better S&OP processes can enhance customer service levels by ensuring timely delivery and availability of products. This can lead to increased customer satisfaction and potentially more repeat business, indirectly impacting costs.
Cost Impact: Happy customers typically lead to more sales and less “jumping through hoops” to attain customer satisfaction.
Overall, effective implementation of S&OP promotes better decision-making across the supply chain, leading to cost efficiencies and improved profitability. It fosters a culture of proactive planning and collaboration, which is essential for sustained cost reduction and operational excellence. enVista focuses its planning practice on targeting end-to-end synergies and building an integrated process focused on aligning the company to a single unified plan while balancing tradeoffs and minimizing costs. Contact us to learn more. Let’s have a conversation.®
