Within S&OP, we are trying to manage the trade-offs between Service, Cost and Capital.
Tensions exist between these axes so this means that choices that favour one, impact the other.
This is why you see Sales, Operations and Finance fighting over the amount of stock that needs to be kept on hand, to name a classic one.
However, it’s not always neccessary to assume there is a relation, or maybe the relation is there but it’s very weak. So, for example imagine huge amounts of overstock. Sales may not care about what is in the long tail, or may want to have the SKU on hand but perhaps not need it in those amounts. So really all is to gain and nothing to lose with reducing these stock levels, meaning you can optimise locally and remove the waste from your system.
Same goes for the other axes (increasing Service, reducing Cost).
It can actually be quite naive to think that the system is already in a perfect balance and that touching one axis will therefore automatically affect the others.
The trick is to try and get as close to where the real tension is. What if you reduce stock with 1 item? What if you do that with 1000? Where does it start to impact Service?
Having this distinction sharp lets you focus on the real pain points.
How to Find the Real Tension
Questions you can ask to determine whether the items are worth your time in an S&OP meeting:
- What variability is this stock protecting against?
- Does the stock level ever get close to 0?
- (other way around) If we add stock, does the service level improve?
- Can a stockout on this item be absorbed by another item?
If things are still unclear, test it out by reducing stock gradually and see where you’ve reached your system’s limits.