Gartner Research just completed its annual supply chain conference during which they were sharing a lot of their research and one of their findings is really just mindboggling: after initial investment in S&OP software (and forecasting and Demand Driven Value Networks (DDVN)), fully two thirds of companies have failed to mature their processes or continue to drive investment in order to obtain measurable benefits to their bottom line. In fact, most of the companies did not focus on ROI at all.
That’s somewhat reprehensible, not to mention disheartening in a business world that is growing more competitive and difficult. We have spoken at length about the fiduciary responsibility of executives and officers to drive the performance of their companies and to be able to measure and confirm those impacts for the good of their stakeholders, their shareholders, and their own careers. There has also been ample information posted here and elsewhere about what those benefits would add up to in terms of shareholder value and cash flow.
But for some reason, obtaining and documenting a minimum 5% improvement in company earnings (measured by EBITDA and as used as a proxy average for ROI measured in a bunch of different ways) has not proven to be a big enough incentive to focus companies on wholeheartedly pursuing improved forecasting.
Maybe companies really don’t know how. Perhaps enterprises are struggling to figure out how to move forward once the original work (process design? System implementation?) is done. Or, perhaps the fundamentals of the business are changing (acquisitions, competition, etc.) such that the original work is no longer relevant and no one has the time or the focus to make sure that the S&OP and forecasting components stay up to date and relevant to the business.
Given all of that, we would like to share what we have learned from our clients regarding best practices to ensure relevant S&OP software and forecasting and, more importantly, measurable bottom line results and continuous improvements to those results.
The number one most important best practice for any company wanting to be best in class for S&OP and to ensure continuous improvement within this strategic capability is:
A member of the C-suite executive group owns the forecast, its accuracy and the S&OP process.
And by own it, I mean
- It is part of their job description
- It is publically acknowledged as a critical strategic capability for the company that will improve
- The remaining C-suite executives publically commit to support the executive in achieving the stated goals
- Most importantly, it is a large part on the compensation profile for the executive who owns it as well as a portion of the compensation for the remainder of the c-suite. By large I mean somewhere between 20 and 40% of their total compensation (for the specific c-suite executive and 5 to 15% each for the remaining C-suite team) is determined by the companies’ S&OP performance anchored most visibly by the forecast error measurements.
We are not going to go so far as to say which C-Suite member should own it, as different industries and different organizational structures and cultures will lead to different answers that work best for each company, but someone in the C-suite has to own it.
It is not possible to overstate the importance of this best practice. If Gartner were to go back and apply this additional criteria piece to their research, I would bet body parts, (yes even my own), that they would find that the vast majority of the companies in their research data base do not follow this best practice.
Why is it so important? What does it add? Because once this fundamental best practice is fused into the DNA of the company (i.e. the C-suite putting compensation at risk), it ensures that the next set of best practices can and will be set in place and that addresses the problem highlighted in the Gartner research cited at the start of this note. We will cover these in upcoming blogs, but an example of additional best practices include (not in any particular order)
- Corporate alignment – not just who does what but also what does each group gain from their involvement
- Appropriate resources and measurement
- Appropriate and flexible process
- Appropriate technology.
No one is suggesting this is easy; we are here to say that the payoff is more than worth it and that is supported today by a large and growing quantifiable pool of research from many different communities.
If you are wondering, there is a first, pretty good step you can take to start this journey – get the group (C-suite, perhaps direct reports) together and answer the question – If we could improve forecast error by 5% what would that be worth to our bottom line (EBITDA, Cash flow?)? What would 10% be worth? What would 25% be worth?
Once that question is answered, the basis for this best practice is patently obvious. And the exercise will also open up all the supporting areas that will contribute to and benefit from the elevation of S&OP to a strategic capability – competitive advantage, improved customer service, reduced working capital requirements etc.
This is just the start. But always best to start a journey that is worth it. And getting S&OP and forecasting right is absolutely worth it.
This is a part 1 of a series, followed by part 2, Best practices to ensure investments in S&OP software and Demand Forecasting deliver measurable benefits – Number Two: Measurement