The retail industry is made up of organizations and individuals who sell finished products to end users. Around two-thirds of America's gross domestic product (GDP) comes from the retail industry. In fact, store openings and closings provide indicators for the overall health of the U.S. economy.
Over the past five years, a large number of retail bankruptcies and closings gave a glimpse of a shift in consumer shopping habits and an uncertain economy. In the past, the retailer had the power to tell the consumer what they should buy. Today, that is no longer the case in a consumer-driven market.
Retailers miss opportunities when they continue to operate in traditional silos as opposed to coordinating channels based on consumer demands. This is about becoming digitally savvy and incorporating omni-channel trade. Then, there is also the need to review legacy procedures and systems. In addition, there must be a paradigm shift in store operations.
This is where sales and operations planning (S&OP) can provide a boom for retail. While not a new process, sales and operations planning seems to be making a comeback. But, it isn't the easiest of processes.
Sales and Operations Planning can be Complex
A success outcome of thoughtful sales and operations planning would be when the company has a deep understanding of supply constraints and commercial drivers. Since sales and operations planning has become so popular, some billion-dollar companies have integrated over five separate sales and operations planning processes.
Yet, this strategy isn't necessary since metrics need to first reach across functions. In a functional retail organization, metrics need to be overarching and aligned throughout cross-functional processes. Then, there is the fact that the supply chain can be quite complex.
Only two out of five companies believed their current processes were effective. For instance, supply chain metrics are nonlinear and interconnected. In addition, supply chain metrics should be a part of the operating strategy. It seems simple enough for the sales team to produce the orders and then, for the operation team to fulfill them. Yet, many in the retail industry just aren't set up to produce the most optimal results.
There isn't any question that real-world sales comes in varying quantities such as slow periods followed by a mad rush to have enough inventory and get the products out in time. In terms of production and sales, they are usually not on the same schedule. If sales are slow, then production sits idle. Then, when a bevy of new orders come through, products must be produced at a rapid pace--sometimes, workers must be paid overtime to meet the deadlines and demand.
So, understanding how sales and operations planning can be integrated is difficult but certainly not impossible. It takes an organizational alignment and balance that requires a possible revision of inventory positions, product mixes and go-to-market strategies. When the sales and operations planning process achieves balance, then it can induce greater operational efficiencies including managing less inventory at a lower cost. The trick is figuring out how to get there.
Take the Straightforward Approach
The sales operations and planning process can differ between varying companies and industries. Nonetheless, most processes revolve around a monthly timeline with long-term forecasting out between 18 to 36 months.
In addition, the planning process is consistently reviewed for alignment with the overall objectives of the business. Meetings are held, with the right participants, to review inventory, new initiatives, financial plans, sales, production, marketing and more--and, to ensure they are set up to meet company goals.
Connect Key Processes
The purpose of sales and operation planning is to foster an integrated decision making process within your retail business. Key steps include:
- Supply management
- Forecast management
- Product management
- Customer management
- Sales forecast, inventory, capacity and production plan reconciliation
- Senior management review
With all the central steps in mind, the goal is to link existing processes to present a more accessible view and projection for every staff member who is involved. It is critical for every employee to understand the needs of each department.
Yet, you can still separate capacity, production and sales planning as long as they are connected by a single, validated and monthly sales forecast. At the monthly meeting, complete these tasks and reviews:
- Innovation review
- Balanced financial integration
- Base-line and demand-sensing review
Integrate and Link Software Applications
It is no longer possible for retail companies to be successful in a consumer-driven market when they continue to operate with disparate and legacy systems. You don't want to eliminate disjointed software systems the can produce outdated and inaccurate data, as well as increase the potential for a data breach with data remaining on various systems.
Successful sales and operations planning requires data integrity and security that can only come with an integrated solution that takes a comprehensive look at the product, supply, demand, financials, sales and more. As a result, you can make quick and insightful decisions aligned with your business goals.
Get Executive Ownership
The company's executives need to own the sales and operations planning process--otherwise, it won't achieve the desired outcomes. To get executive buy-in, give them snack-able and forward-looking data.
Furthermore, the information needs to be actionable. This is where integrated software systems, and the right technology, can help. Instead of focusing on calculation, use the right software to focus on data analysis. Then, you can increase the potential for full executive engagement.
Review the Demand
For retailers to understand demand, they must understand the current demand and how that can change over time. Forecasting should include these items:
- Product seasonality
- Patterns during point-of-sale
- Sales history
It is also critical to get insight from distributors, vendors, sales reps, the marketing department and customers--they all can contribute insight to improve the overall accuracy of a demand forecast. Despite the fact that a forecast can never be 100% accurate, the executive team can still create plans factoring in the potential for errors. Then, compare real demand to the forecast on a consistent basis to detect any anomalies and align production accordingly.
Review the Supply
Now that you have your demand forecast, consider how to meet the demand through inventory and production optimization. The right mix of inventory and stock can help to ensure continued customer satisfaction. This is why sales and operations planning is necessary to align supply with demand.
The goal is to have the ability to meet both short-term and long-term demand, including unexpected spikes in orders. Having the right amount of inventory, when needed, prevents lost sales.
On the other hand, too much inventory increases costs. To get the right mix, you must analyze the connections between product categories, customer buying habits, stocking decisions and inventory purchases. The sales and operations planning process should balance the needs of the company with that of the target customer.
So, set up various simulations testing out demand vs. inventory. Here are a few methods to try:
- Capacity-limited economic order quantity
- Minimizing short shipments
- Decreasing inventory
- Having a set number of days for specific types of inventory
Set up mock planned events such as sales, clearances and more to test out your demand forecast against various levels of inventory.
It is impossible to succeed in the modern retail marketplace without a balanced approach to sales and operations. Sales and operations planning can provide the results you need to ensure customer-focused execution. Effective sales and operations planning can also help you avoid pitfalls, and instead, provide a distinct road map for reaching your company's goals.