Planning ahead

Sales and positive cash flow are the lifeblood of any manufacturer, and only one report is needed to assess the business: a daily summary that shows bookings (new orders), billings (invoiced items) and the current backlog (workable with materials, drawings and specifications, and non-workable).

This “BBB” report is a powerful management tool. Dividing daily billings into the total backlog quickly determines the average process lead-time. This allows the team to decide if the business is competitive or how processes should be simplified with more or less capacity, depending on the size of the backlog. But most important, the workable backlog can be increased by constantly reviewing the unworkable backlog.

You also need to know what kind of potential business has been identified and the likelihood of it becoming reality.

Who should own the forecast? Misalignment occurs when each department moves forward with its own projection. Salespeople set revenue goals, the controller has a year-over-year budget and operations has its excel sheets and run rates. All three pseudo-forecasts will be vastly different. The result is likely to be overstocking, stock-outs and unrealistic budgeting.

It’s natural for people in operations to say sales should own the forecast. After all, they interact most with the customer. But the sales team is building relationships with customers, which takes up much of their time. Yet sales input is important.

How about supply chain and operations? Workbooks of excel forecasts are only as good as past data can predict. Although good for providing analytical skills and championing the process, they would need help from other departments.

Controllers present budgets to management based on how the next year looks to senior executives, but their broadly based forecasting lacks the detail needed by operations.

One way to create a reliable forecast for all departments is to create a robust sales and operations (S&OP) planning process. It’s something most companies are still learning, but the ones who figure it out seem to thrive.

S&OP calls for structured and disciplined sharing of information to build a forecast that unites the company. Thus, everyone involved in the process becomes the owner of the forecast.

Define roles
To avoid the “nobody’s responsibility” syndrome that often plagues forecasting, everyone sits down to define the role each department will play in the process. Sales provides customer insight and commitments, operations provides historical analytics, and finance ensures cash and budgets are in line with the overall strategy. Most importantly, senior management makes S&OP a top priority, holds each department accountable to the process and offers support as needed.

When you begin building your financial roadmap as a sales and operations team, review the historical track record and remove any anomalies. This becomes the plan that’s used to calculate rough budgets for materials, labour and energy consumption.

Next, focus on building the forecast. For example, look three months ahead with lots of detail by following the Demming cycle but in the following order:

• Forecast/plan. Look three months out by client and SKU at what the potential is for incoming business. Include any significant factors such as vacations or days of celebration.
• Do. Looking forward for the next two months reviewing expectations whether or not there is alignment with materials, labour and training requirements.
• Act. In the current month, ensure flawless execution meet our numbers on a daily basis.
• Check. Reflect on the previous month’s sales and review what went well, what didn’t work well and finally what could have been done differently. Incorporate these traits into the forecasting methodology.
Bringing the key players together to develop the forecast ensures there’s one everyone will follow that aligns with the company’s objectives.

Richard Kunst is president and CEO of Cambridge, Ont.-based Kunst Solutions Corp., which publishes the “Lean Thoughts” e-newsletter.

Comments? E-mail jterrett@plant.ca.

Find this article in the March 2014 issue of PLANT.