You can pick your favorite inspirational quote regarding the importance of innovation, as it’s a continual theme throughout business leadership as well as all human creative pursuits. William Pollard (noted physicist and clergyman) said, “Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” Steve Jobs (Apple’s co-founder and CEO) came up with a couple bangers on the subject, including “Innovation distinguishes between a leader and a follower” and “Innovation is the ability to see change as an opportunity, not a threat.” According to Peter Drucker (widely influential thinker and writer on the subject of management theory and practice), “Innovation is the specific instrument of entrepreneurship… the act that endows resources with a new capacity to create wealth.” Sounds not only inspirational, but lucrative, right? Or we can venture a tad into the metaphysical with Disney CEO Bob Iger, who quipped, “The heart and soul of the company is creativity and innovation.”

Regardless of what inspirational quote you prefer on the subject, the fact is that innovation in business must be strongly linked to any effective sales and operations planning (S&OP) process. You can’t separate the two. Innovation is the fundamental business process that generates new ideas and “out of the box” thinking, and keeps a company relevant in a rapidly evolving marketplace.

Why innovation review must be the first step in the monthly S&OP cycle

We’ve written before on how vital an effective S&OP process is to business success today. S&OP is part of a business’s master planning strategy (ideally with an integrated business planning approach) and helps align finance, sales, marketing, production, warehousing, shipping, management, and operations teams with the overall business strategy for the most efficient route to success. But this all hinges on intentional, consistent innovation as its foundation.

Briefly, the key steps of the monthly S&OP process include:

• Innovation review, including gathering and analyzing data (week 4/ week 1)
• Demand review, planning, forecasting (week 1)
• Supply review, planning, and inventory projection (week 2)
• Financial review (week 2/week 3)
• Pre-S&OP (also called review and reconciliation) (week 3)
• Presentation/finalization of plan and implementation (Executive S&OP; week 4)

The key elements of the innovation review are:

1. Identifying any significant new product changes and innovations in any arena connected to the business. This could be sales, marketing, sourcing, production, warehousing, logistics, HR/management, finance, demand/supply planning, or any other area of the business. Or it could be identifying innovations in the industry that may influence the current business strategy, product line, or services provided
2. Voicing concerns that are related to these new ways of thinking or acting, and developing strategies for further development, evaluation, and possible implementation of innovations
3. During the formalized innovation review period, sales and marketing assumptions must be clearly identified in preparation for the next step in the S&OP process. Data gathering and analysis should be constantly occurring throughout the monthly S&OP cycle, but is often most intense during the dedicated innovation review period, in order to prepare teams for the demand and supply review meetings that follow. Team leads and members should confirm that they are aligned on assumptions, discoveries/innovations, and related recommendations before the demand review meeting (typically the following week)

The innovation review (along with data collection and analysis) is the first or foundational step in the monthly S&OP cycle because without innovations, existing ideas and processes stagnate and businesses don’t improve, grow, and move forward. The innovation review needs to occur before the demand review and supply review meetings because new ideas for products, processes, or services can potentially have significant impact on the direction of the company and the resources that need to be allocated, depending on where team and company leads prioritize these innovations.

Strategies and best practices to foster innovation

Since innovation is so crucial to business success and growth, it’s worth going over some key concepts and best practices that encourage it. Each of these talking points could merit a complete business leadership discussion (and they have), but we’ll present them here in an abbreviated overview.

Innovation strategy

• Each executive team will determine the appropriate limits here, but in every business there should be a significant amount of resources dedicated to research and to developing a deep understanding of internal and external business factors. Leadership should spend time developing and optimizing a well-defined innovation strategy and processes that generate new ideas and outside-the-box thinking
• Leaders must establish a well-developed OGSM (objectives, goals, strategies, and measures) process, by segment, that specifically includes innovation and sets clear priorities for such
• Communication efforts should clearly articulate the need for and priority of innovations. This needs to be well-understood throughout the organization, at every level
• The operating strategy must clearly address resource allocation for new products or services

Demand planning and S&OP excellence

• As mentioned earlier, innovation must be inseparably linked to the S&OP/demand planning process
• The demand planning review and planning meetings rely on insights gained and data gathered during the innovation review the week prior

Structured process

• Management should clearly define roles and responsibilities for developing and fostering innovation
• The expectations of each stage must be clearly articulated
• New projects should be segmented based on business impact and complexity (Transformational, Substantial, Incremental, Non-Consumer Noticeable)
• Capacity for pilot programs must be allocated
• There will typically be more effort/activities in the early stages to achieve concept clarity, and then the processes can be reevaluated when more data is available

Clearly defined “gate criteria” for new projects

• Definitions allow decision makers to pass/reject projects through a gate
• Clearly defined success criteria are based on the business segment strategy
• Early firming of product expectations is required – financials, marketing, and technical assessment

Improved innovation review process and resource prioritization

• Meetings are designed to make decisions
• Key decision makers are mandatory at these meetings
• Project and resource prioritization are performed in these forums
• Any tradeoffs are clearly articulated in the meetings so priorities can be set and decisions made

Metrics and tracking

• Scorecards track pre- and post-launch project success
• Quarterly reviews track planned vs. actual KPI performance for all projects
• Tolerances for performance are clearly articulated
• Deep root cause analysis is utilized when KPIs are out of tolerance

Organization: Role of product development managers

• Project managers are owners of projects with full accountability
• They are responsible for resolving even major issues by working closely with senior leadership and have authority to escalate issues quickly

Innovation: Business effectiveness

From an overall business impact perspective, the following need to be analyzed, balanced, and considered, ideally during the innovation review period:

• Percent of volume/revenue/profits attributable to new products
• Customer satisfaction/delight with new products
• Market share attributable to new products
• NVP (net present value) of entire new product portfolio
• Cannibalization due to new products
• Product proliferation vs. growth (actual number of listed SKUs per volume/revenue/profit dollars)
• Dollars spent on new products vs. revenue and profits generated

Innovation: Process effectiveness

Similar to the above, the following factors and data points need to be weighed and considered when evaluating innovations’ influence on process effectiveness:

• Forecast accuracy relative to new products (new products can be more difficult to predict)
• Speed to market
• R&D/innovation spending as a percentage of sales
• Ideas or concepts already in the pipeline
• Number of new products launched vs. business effectiveness score
• Allocation of “fast track” managers’ time to innovation (how much should be dedicated to innovation vs. performance based on existing KPIs and procedures)
• Number of new products launched based on ideas sourced from outside of the organization
• Breakthrough vs. incremental growth from new products

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In an effective business, all employees and leaders will constantly be striving for innovation in everything they do, at any point throughout the S&OP cycle. When team leads encourage out-of-the-box thinking and approaches in a healthy way, the road is opened for innovative new products and strategies that help ensure business flexibility, growth, and rapid responses to unforeseen challenges and disruptions.

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