The Cost of Disconnected Planning
Integrating sales and operations planning is a must if you want satisfied customers. If your sales forecasts do not match up with your manufacturing capacity planning, you're business planning model is pretty much worthless.
In this blog, we are discussing the cost of disconnected planning and the need for integrating sales and operations planning.
One of our favorite “you must be kidding” experiences from 50 combined years of consulting came from our work at a major heavy equipment manufacturer. Having been engaged by the company's minority shareholder to review the multi-year business plan, we found four interesting points:
- The sales plan projected approximately 500 units of a certain model of equipment to be sold over the next 5 years. Not being experts in this industry, we used external sources to validate that this was a reasonable projection.
- The manufacturing plan projected approximately 300 units of this model to be completed in the same time period, and based on the company's experience and capacity this too seemed like a reasonable projection.
- Obviously, this leaves 200 units sold but not delivered at the end of the plan period, a number that in and of itself might be acceptable. But those 200 units would take 3+ years to be delivered, which in turn meant that customers were waiting an average of 5 years between order & delivery. For this particular piece of equipment, a 5-year lag was not acceptable.
- The financial plan reflected revenues from the sale of 500 units, as one might expect. But it also reflected the manufacturing budget which of course was based on making only 300 units.
So what did we have? Perfectly sound and realistic sales and manufacturing plans that obviously had been prepared independently and in a totally disconnected manner – no wonder the financial plan looked so good! We still recall presenting to the Board members appointed by the minority shareholder and telling them that “We don’t know which of the sales or manufacturing plans will turn out to be right, but it cannot and better not be both!”
Now how does a multi-billion dollar global manufacturer produce such totally disconnected plans? It’s easy and all too common: have each major function or business unit be responsible for its own plan, often developed using each function’s unique terminology.
And the consequences? Think of your own organization: does your unit share hiring plans with corporate recruiting & on-boarding? Are they prepared to interview the 200 staff that should generate your needed 50 new hires? How about IT? Does it have the capacity to set up 50 workstations or configure 50 laptops? And where are all these people going to sit? Do you have enough managers trained to supervise these new hires? Or for that matter, provide basic orientation and job-related training?
So how should organizations 'Mind the Gap', or as we prefer to look at it, ensure Connected Planning? The first requirement to integrating sales and operations planning is a common language, using the same words to mean the same things (this avoids the situation of a bank not knowing how many mortgages it issued in a year because each channel defined “issued” differently – that’s a true story, we didn’t make that up!). With a common language, the organization can use a common platform. And with a common platform, each ‘plan’, or appropriate summaries thereof, can be visible to upstream, downstream, and sister business units.
Leading organizations already have common platforms, feeding sales forecasts into financial, procurement, manufacturing, and capacity plans. Connected plans enable smoother operations, with fewer surprises, and support the ability to assess changing circumstances quickly.