Executive Briefings

Do Backward-Looking KPIs Have a Place in S&OP?

Backward-looking KPIs, especially those on safety stock, are a necessity in successful S&OP processes, says Erik Hjerpe of TreeHouse Foods, a private-brand food manufacturer. He explains why this is so and how TreeHouse employs a variety of safety stock strategies.

The key reason that backward-looking KPIs are a necessity in sales and operations planning is continuous improvement, says Hjerpe, senior director of supply chain at TreeHouse. “Unless you know how well the process performed in the recent past, you can’t know where to focus improvement efforts,” he says. “You need to know your margin of error and be able to communicate that to downstream stakeholders.”

Because safety stock is very granular, people question whether it is a reasonable KPI consider in S&OP, Hjerpe says. “But most companies will tell you their objectives for S&OP include the ability to forecast working capital,” he says. Working capital and cash flow are largely determined by five buckets of inventory: in transit, cycle stock, anticipatory stock, MRO stock and safety stock. “Safety stock tends to be one of the larger buckets, so it is very important to understand it within the S&OP process,” he says.

Because TreeHouse Foods has grown to its current annual sales of $4bn through acquisitions, the company has had to incorporate many different safety stock strategies, ranging from operations with no formal program to ones with very sophisticated processes, Hjerpe says. “We have to look at strategies that are the right fit not only for the company as a whole, but for each of these acquisitions,” he says. “The challenge is to become expert at identifying organizational core competencies.”

Key internal competencies that are needed to do a good job include a good IT infrastructure and systems that can provide planners with the data they need to understand volatility, variability and trends, he says. “You then need good human resources to interpret that data. So systems, data and human resources are the key elements.”

To view the video in its entirety, click here

The key reason that backward-looking KPIs are a necessity in sales and operations planning is continuous improvement, says Hjerpe, senior director of supply chain at TreeHouse. “Unless you know how well the process performed in the recent past, you can’t know where to focus improvement efforts,” he says. “You need to know your margin of error and be able to communicate that to downstream stakeholders.”

Because safety stock is very granular, people question whether it is a reasonable KPI consider in S&OP, Hjerpe says. “But most companies will tell you their objectives for S&OP include the ability to forecast working capital,” he says. Working capital and cash flow are largely determined by five buckets of inventory: in transit, cycle stock, anticipatory stock, MRO stock and safety stock. “Safety stock tends to be one of the larger buckets, so it is very important to understand it within the S&OP process,” he says.

Because TreeHouse Foods has grown to its current annual sales of $4bn through acquisitions, the company has had to incorporate many different safety stock strategies, ranging from operations with no formal program to ones with very sophisticated processes, Hjerpe says. “We have to look at strategies that are the right fit not only for the company as a whole, but for each of these acquisitions,” he says. “The challenge is to become expert at identifying organizational core competencies.”

Key internal competencies that are needed to do a good job include a good IT infrastructure and systems that can provide planners with the data they need to understand volatility, variability and trends, he says. “You then need good human resources to interpret that data. So systems, data and human resources are the key elements.”

To view the video in its entirety, click here