Using SIOP to Solve Inventory Mix
Outline
Introduction
Problem
Solution
What is SIOP?
What are the components of SIOP?
Who leads SIOP?
What are common measurements used in SIOP?
Results summary
Introduction
During my tenure at Moog Music Inc. we saw a number of paradigm shifts that required the organization to think differently on the approaches to building instruments to stock and for supply. One such paradigm shift was born from becoming more efficient on the production floor. As the company worked towards consistent quality standards from part vendors, clarity in work instructions, more impactful training and efficient line setup, the team began to produce above the typical standard. Our approach to getting better was working! However, this “squeezed the balloon” and created a new bottle neck and challenge: uneven product stock on the shelf. In this new world, we were faced with a problem. If we are no longer building to customer orders, what are we building to?
I implemented a process called SIOP, and this article summarizes what SIOP is, application of the methodology and the benefit consumer products companies gain by taking this approach.
Expanding on the Problem
Perhaps you or your company has been here before. It is the end of the month or quarter and everyone is pushing hard towards success via company revenue. The top priority of revenue achievements has been announced and all hands are on deck to get it done. Yet there is a good amount of internal friction - the operations group has products on the shelf they wish the sales team would move and the sales team is complaining of not having the right product mix that customers want. Or maybe your situation looks more cohesive but still produces a similar outcome. Sales teams present opportunities that cannot be filled due to lack of availability, and the operations team is beholden to supplier lead times regardless of what customers want. Team members are wondering how marketing is helping to generate demand and everyone is all but sure the purchasing group might be to blame anyway. Either way, collectively the group has decided the financial goals are now unrealistic. Hitting the targets now feels like moving mountains.
With both ‘product’ and ‘sale’ being at the heart of our business needs we can trust the culture or gap I described doesn’t go unnoticed. We create meetings, or daily huddles to gather team members more frequently and ensure the attention is on the problem. Daily the team tries to work together to overcome this issue without great success or impact. This is because each team plays a part in solving the issue of having the right products on the shelf, yet, traditionally no one team holistically owns that success or failure. There are far too many inputs to this equation for any one team. Instead we all contribute something to either the solution or the problem in an unorganized fashion. Oftentimes, efforts can lead to success for the immediate, yet we run across the same challenge later down the road.
Expanding on the Solution
SIOP is an approach that could solve the problem of product mix and team alignment.
What is SIOP?
SIOP stands for Sales, Inventory and Operations Planning.
It is a methodology that aids in strategic planning. It coalesces sales, marketing, product development, procurement, operations, inventory management and finance. It is a lever for the executive team or leadership to achieve alignment and focus towards the company's financial objectives.
It is important to note that your teams are already doing the actions of SIOP…or you wouldn't be in business anymore. SIOP is a methodology of formalizing the operations aspects of your business, which uncovers areas that are blindspots or forgotten in a less formal approach.
Typically SIOP takes the form of a monthly activity routine. Information is gathered, a report is published with the key data, and a meeting is held which goes through the details. Appropriate action is set and status updates are provided throughout the month.
What are the components of SIOP?
Enterprise Revenue Plan or Annual Budget
Rolling Sales Demand Forecast
Customer Orders
Sales Performance
Customer Survey / Feedback / Communication Report
Inventory Report
Incoming Material Lead Times
Resource Capacity
New Product Road Map
Who leads SIOP?
This will depend on your organization's structure. In order for SIOP to be effective it will require resources to collect the information, publish reports and chair a meeting for stakeholders and executives. It will also require a collaborative environment within your leadership group. The actions will have owners in each department in the organization to be accountable to. Often, hosting SIOP becomes a primary responsibility of the inventory management or procurement teams.
What are common measurements used in SIOP?
It is important to settle on a few ‘Key Performance Indicators’ (KPIs) appropriate for your organization. Below are some examples of KPIs that will help in deciphering action and accuracy for the details provided within the SIOP report.
Forecast Accuracy
Order Fill Rate
Inventory Turns
Gross Margins
On Time Delivery
Achievement to Revenue plan YTD
$ Sales / Employee
Capacity Utilization Rate
How do you know you need SIOP?
If these kinds of questions come up at your company, it is likely that SIOP could provide value:
Why are we missing customer delivery dates?
How long are we keeping this in stock?
How many units are we expected to sell in the next few months?
Why is there so much variance in the production output compared to the plan?
What is our build plan for the next 6, 12, 18 months?
What is the sales forecast for product X?
Why are we missing our revenue targets?
How can we reduce the continuously growing backlog?
The minimum order quantity feels high, should I be ordering more?
What is the marketing plan for this product?
The fallout rate for this material is increasing, should I order more than usual?
It seems like we are selling more of this item, did something in the market change?
Is it possible for the sales team to focus more on this product?
Are we hitting our targets?
Is our employee turnover rate positively trending?
How can we improve our inventory turns?
Results Summary
When I implemented SIOP at a previous company we were extremely pleased with the results. What we noticed was greater team alignment and awareness, more immediate action taking, more frequent status updates, creative alternative solutions being offered and less hectic path to revenue plan achievement. By reviewing these aspects of the organization, together with the key stakeholders, you increase both empathy and solutions. This results in better team work and a better work environment. People feel included and it contagiously leads to solutions. While we were already doing the action of SIOP via the team members daily routines, often subconsciously and certainly without any form or structure, formalizing the process and cadence greatly reduced the stress. This resulted in increased engagement from employees because they are a part of the entire company's plan. They can see their important role, their cog in the wheel, that if broken puts everything at risk. Before SIOP team members would rely on hallway conversations, team chats, or even mind reading to uncover some critical detail that put the company's objectives at risk. This would hopefully trigger some reaction of deciding which stakeholders needed to be aware or worse, giving up on the objective. After SIOP team members would use that same space to be proactive in following up a path the organization previously agreed to together. We stopped spending time making sure everyone was aware of a new discovery because we could trust SIOP reports and activity already had everyone on the same page.
In addition to a cultural impact, we also saw tangible, measurable benefits like reduced inventory, savings on expedited freight expenses and better channel promotions that were in line with our current inventory challenges. We became aware of threats to our goals much earlier in the process. Most importantly, the SIOP routine gave us confidence that we did not need to abandon an objective, we simply hadn't uncovered the new solution yet. When you increase the collective awareness of both the goals and stucks, you can simplify the focus to action and results.
Implementing business methodology is a strength of mine at Amplify & Sustain Consulting. If you want to explore more on SIOP or other methods to overcome challenges, please reach out to me.