Uh-oh! You’re in the S&OP Rabbit Hole!

Procurement Leaders recently released their CPO Guide for 2013. One of the key findings, related to the economic environment, was that most CPOs seem over-optimistic about their organization’s sales potential for 2013, but are less positive about the wider economy. To be blunt, if the economy is going to remain stagnant, then the majority of you are going to have stagnant sales. Mathematically speaking, the only way a majority of organizations could have an increase in sales in a stagnant economy is if one or more major market players in the majority of market segments went bankrupt, freeing up a considerable percentage of the market to be divided among everyone else. And even then, the market share gain most organizations would get would be miniscule. Let’s illustrate this with a table.

Company Current Market Share Economy Grows 2% Equally Economy Grows 2%; 3 Top Players Grow 4%   Market Share after A goes bankrupt
A 25% 25.5% 26%  
B 15% 15.3% 15.6%   26%
C 15% 15.3% 15.6%   24%
D 10% 10.2% 10%   15%
E 8% 8.16% 8%   12%
F 6% 6.12% 6%   5%
G 6% 6.12% 6%   5%
H 5% 5.1% 5%   5%
I 5% 5.1% 4.9%   4%
J 5% 5.1% 4.9%   4%

In other words, if the economy grew 2% and all things were equal, a company’s business would only grow 2%. No more. If some companies beat the market, and grew a combined total of 4%, as demonstrated in column 4, for three companies to beat the market, in a good scenario, we would expect four to five companies to hold steady while two to three companies drop in sales (and at least one company must have decreased sales). And the market leader going bankrupt will not help much either. What typically happens is the top two companies rush in to fill the void and get the lion’s share of the business, the next two companies, taking advantage of the marketing frenzy created by the new top two and their lower prices pick up the rest, and the companies at the lower end of the spectrum actually lose business to those making all the noise (with enough market share to get noticed by the big buyers). A likely scenario is given in column five. In other words, since the market is fixed, only a few companies are going to increase their sales more than average.

So don’t let sales and marketing lead you down the S&OP rabbit hole where you negotiate volume discounts that never materialize (as you never order the full volume) and get stuck with obsolete inventory (as you will front load to meet the massive increase in demand that sales and marketing are promising). You’re smarter than them and know that stagnant markets mean stagnant sales.