Unlocking Value – How Effective Sales, Inventory and Operations Planning (SIOP) Can Boost Middle Market Company Performance

SIOP is a dynamic, repeating, integrated business process that aligns sales forecasts with production plans, purchases and inventories to consistently and efficiently meet targeted financial goals. An effective SIOP capability can improve customer service levels and stickiness, produce incremental revenue, reduce operating costs and optimize working capital.

Getting SIOP right can be challenging, especially for middle market companies that may lack the know-how, processes or tools to manage it well – resulting in a range of preventable performance gaps –

• • Poor customer service or inventory stock-outs that drive lost sales and related margin
  • Production problems due to insufficient raw material supplies on hand
  • Higher freight costs to expedite shipments and fix backorder problems
  • (On the flip side) over-ordering / overproduction that drives big increases in excess and obsolete (E&O) inventory – i.e., stranded capital
  • Higher storage costs and excessive discounts required to address that E&O inventory

The Bottom Line – SIOP challenges directly result in lower sales, weaker profit margins, excessive working capital and higher than desirable operating costs.

Sponsors and management teams can minimize these downsides – or avoid them altogether – by taking a proactive, hands-on approach to actively and effectively managing the SIOP process.

• Reduced inventory by 25%
• Improved asset utilization by 15%+
• Improved customer service levels by 5%+
• Eliminated obsolete inventory (20% of on-hand)
• Restored 60% of liquidity shortfall
• Reduced cost of goods sold (COGS) by 10%+

*Representative actual results achieved for middle market clients across a range of industry sectors

FOUR CASES TO ILLUSTRATE COMMON PITFALLS IN SIOP

The four case summaries that follow are examples of middle market companies that partnered with Portage Point professionals to leverage key SIOP processes to produce better outcomes.

• Challenge – An inventory planner misunderstood the concept of service levels and related safety factor requirements, resulting in a broken planning model that led to a massive overbuild of finished goods inventory
• Solution
  • Developed a revised inventory and purchase planning model to properly incorporate variability risks and the correct use of safety factors / safety stock to assess required reorder quantities
  • Implemented a more fulsome and stable SIOP process, including revised staff training sessions
• Results
  • Identified massive overstocks that resulted from prior approach, cancelled unneeded reorder volumes, developed liquidation strategies to burn off existing excess inventory over time to minimize margin impacts and increased order quantities for certain items that had been under-forecasted
  • Set client on path to reduce combined inventories by 30% while increasing in stock position of faster-moving items to generate higher sales and related margins

• Challenge – Misuse of Microsoft “Forecast” function in Excel caused seasonal inventory imbalances
• Solution
  • Developed a more nuanced forecast algorithm to better incorporate seasonally promoted demand and regionally specific demand variability patterns
  • Identified substantial over- and under-stocked product lines and SKUs
  • Developed novel liquidation strategies for gross overstocks, including adoption of diversion channels to reduce target market pricing pressure
  • Trained cross-functional SIOP team, incorporating proper use of new toolset
• Results
  • Reduced overall inventories by 25% while increasing in-stock position of frequent out-of-stocks
  • Eliminated temporary storage once overstocks began to wind down
  • Reduced customer churn by 15%

• Challenge – A retailer’s recent computer-aided ordering (CAO) system installation resulted in slow-turning inventories (three times per year versus industry average of 4.5 to 5.5 times) and high stockouts (78% in-stock on shelves versus industry average of 92%). The CAO was viewed as a “black box” to most employees after the original solution architect and installation team had departed the company – no one left really understood it
• Solution
  • Conducted rapid assessment and identified multiple flaws in CAO approach, including overly simplistic replenishment algorithms, that led to multiple unintended consequences
  • Developed detailed SKU and store-level demand histories based on point-of-sale (POS) data for prior two years
  • Created new demand forecasting algorithms to incorporate both promoted and non-promoted demand variability as well as seasonal demand variability
  • Developed optimized shelf planogram space requirements to better reflect actual store-level demand patterns
  • Fostered rigorous supplier reliability assessment by vendor and developed optimized reorder point calculations
  • Piloted the changes in a limited set of stores, then rolled out across the entire store system
• Results
  • Reduced inventory investment by over 25% while increasing in-stock position to over 96% by bringing available stock much more into balance with expected store-level demand

• Challenge – An ambitious and unrealistic top-down budget and forecast (>50% growth year-over-year) was set by leadership without being validated by sales or operations, resulting in a major inventory over-purchase, much of which eventually required substantial outside contract storage space and excessive discounts to liquidate
• Solution
  • Conducted a bottom-up demand plan based on historical unit sales and customer-specific sales plan
  • A top-down mid-year reforecast led by sales generated a 25% decrease from prior sales forecasts with substantial mix adjustments
• Results
  • Produced a clear and comprehensive view of E&O inventory, enabling sales teams to develop tactical plans to address slow-moving inventory and improve liquidity
  • Abated future inventory purchases, conserving working capital and staving off the need for expensive debt while supporting 20% growth year-over-year