Is it really necessary to adopt a “Plan to Profit” methodology for my company? It is, but only if you are concerned with actually achieving your goals. (note sarcasm)
Distributors always describe themselves as being goal driven and having operational, sales and marketing plans closely tied to measurable goals. There is nothing wrong with this as long as they can be confident that their goals are realistic and achievable. So how do companies create goals and ensure that they’re reasonable?
For most firms, goals follow a series of discussions that happen sometime in September or October (for the forward thinking firms) where they review last year’s performance, discuss ownership expectations and engage in high-level discussions. At the end, it is decided that they will increase sales by X%, revenue by Y%, reduce costs by Z% and increase margins by a number based on the above.
I will give these companies credit for trying. I say trying because the flow and thought that they apply is basically correct. The execution is just not there.
It all started with Oliver Wight (Oliver Wight Group)
In order to be able to establish real goals and objectives for the coming year, there is a tried and true process that needs to be followed. This process was originally defined and presented back in the mid-80s by the Oliver Wight Group. Everyone understood the process and agreed it was correct, however, there was no readily available solution for 99% of the companies. The major issue was that software systems and programs capable of automating the process didn’t exist.
The Oliver Wight Group insisted that you could not set goals and objectives for the coming year without having tested and approved the plan for achievability – is it do-able?
Early in Ollie Wight’s career, he recognized what separated well-managed companies from those out of control. A few leading-edge companies had planning capabilities that continuously reflected what they needed to do and, as well, what they were able to do. Working as a team, everyone contributed to the company-wide plan and its execution.
Over the years, they led the evolution of MRP into MRP II and expanded Production Planning into Sales & Operations Planning. From strategy to tactics, these processes integrate sales, marketing, finance, manufacturing, engineering, distribution, purchasing, suppliers, and customers. Everyone is linked to the company’s game plan.
Theory of Constraint (TOC)
Later that decade Eliyahu M. Goldratt introduced the Theory of Constraint (TOC).
A combination of the Oliver Wight Groups’ S&OP (Sales and Operations Planning) together with Ely Goldratt’s TOC presented a solution that would allow for planning, reviewing and approving a plan for the coming year at a high level. However, even as manufacturers were successfully applying these practices, distribution firms were still running into challenges in their supply chain. The most important (and most evident) reasons were related to complex and numerous price and trade agreements.
Distributors have many times the number of customers and vendors that manufacturers have. Distributors have complex and changing trade agreements with vendors and customers driven by effectivity dates, campaigns, SPAs (Special Price Agreements), chargebacks, vendor support and more. All of these factors affect margin and require flawless planning and execution to achieve. A team reviewing prices on sales orders and then following up with vendors for the support dollars has always been doomed to fail – just too many combinations and permutations.
Goldratt’s Theory of Constraints addresses best-selling author Eli Goldratt’s unique approach to dramatically improving corporate performance, found throughout his books, The Goal (North River, 1992) and It’s Not Luck (North River, 1994). This book thoroughly explains the theory of constraints, as well as detailing for the reader exactly how to problem solve using TOC.
Cloud Computing to the Rescue
Until the advent of Cloud Computing and Cloud Solutions, which reduced the upfront cash outlay and the evolution of software programs created specifically to address this issue, the Plan to Profit process was still out of reach for the majority of Distributors.
Today, Plan to Profit is available to all!
There are many solutions on the market that have the horsepower to help distributors operate more efficiently and in context of organizational goals, but my hands-down favorite is AXIO Distribution for Dynamics AX. I helped design this solution and have worked directly with many successful deployments. AXIO Distribution for Dynamics AX is a comprehensive ERP and supply chain solution that is available entirely in the cloud. Distributors are able to automate planning, operations and collect more reliable metrics.
Back to the cloud… You can begin by creating your S&OP and then collaborate with customers and vendors for pricing and cost agreements (at multiple levels) so you can agree to a real/achievable/doable margin level for the coming year.
Once the plan is in place and approved, then the remaining functional capabilities of the software will allow you to manage and execute the plan so that you can really deliver the expected results… results based on real numbers that were agreed to and signed off by the firm’s management team.
Plan to Profit is a methodology I believe in and have seen many of our customers benefit from. It is real and “do-able”. Most important is that these businesses identified their need and sought a capable solution. Their plan turned into profit. Are you ready to do the same?
My team would be more than happy to speak with you and develop the proper plan for your business. Leave a comment below if you would like to see AXIO Distribution for Dynamics AX in action.
Dominic Telaro CFPIM, CIRM
Vice President Industry Solutions, SBS Group
Dominic Telaro brings over 35 years of Manufacturing, Distribution, Software and Consulting experience. Half of his professional career has been in Manufacturing and Distribution from shop floor and warehousing positions to management. During this time he implemented ERP, DRP and Logistics solutions as internal Project Leader. The second half of his career has been in consulting, product management, product development and both consulting and software sales. He has held positions as VP Of Industry Solutions, VP of Product Development, VP of Sales and Marketing and Global Practice Leader for companies like IBIS Inc., IBM, Janis Group, Metamor, Marcam Corp. and more. Presently he is responsible for Industry Product Vision for multiple ERP solutions at SBS Group USA.
APICS Fellow and Certified in Integrated Resource Management, Instructor at Universite de Montreal, Vanier College and Granby CEGEP for APICS certification; Lead instructor for internal APICS training at Bell Helicopter, Avon, Le Groupe Hamelin