A practical guide to S&OP, one of the most important integrated business management processes your company will ever need.
In a world where you can easily get overwhelmed by the sheer number of supply chain-related acronyms, S&OP is one you don’t want to overlook or forget about. This is because sales and operations planning integrates all of the things that make your company tick: sales forecasting, marketing, operations, financial reconciliation, logistics and tracking against strategic objectives.
Handled collaboratively, these processes help align your supply chain with your sales and replenishment goals. Managed in silos or disparately, the same processes can lead to overstocks, understocks and unhappy customers—all of which can ding your bottom line.
“S&OP is the single most important and critical cross-functional process,” says Micheal Youssef, a senior director analyst with Gartner, Inc. “If S&OP is done properly, it leads to significant returns, including increased revenue and profitability.”
What is S&OP and How Does it Work?
Sales and operations planning integrates demand, inventory, supply and financial planning into a single, cohesive business plan. How else can you define S&OP? According to the Institute of Business Forecasting and Planning (IBF), S&OP also links strategic plans to operational plans, all with the goal of developing the most desirable product portfolio and mix to maximize sales and profits.
S&OP Explained – Here’s How it Works:
Using a continuous, structured supply chain management approach, S&OP combines demand planning, supply/demand balancing and inventory management to create and execute a single set of integrated plans.
Then, S&OP provides continuous monitoring of performance against the plan to help organizations respond to changes, minimize disruptions and maximize their bottom lines. Performance is reviewed regularly, and plans and alternatives for future sales and operations are presented to senior management for approval.
Demand planning plays a crucial role in this process because it “feeds” S&OP the data it needs to establish accurate production plans and inventory levels. Without these forecasts, companies risk either over- or under-producing goods—both of which lead to lost sales.
The Heart of S&OP: One Set of Numbers
Pity the poor demand planner who found out after the fact that his plant was going to be down for three weeks. Stockouts were running rampant when the demand planner finally decided to call the plant to see what was going on. Turns out he was never notified of the reason for the shutdown, which was not due to mechanical issues (as assumed). Rather, the plant manager made the unilateral decision to shut down for inventory control.
This company obviously had no S&OP process in place, nor were its many departments collaborating on critical functions like sales, marketing, operations, financial management, demand planning and supply chain planning.
This is just one real-life example of how quickly things can go awry when sales and production plans aren’t aligned with supply chains. In the same scenario, finance was probably working off its own set of numbers, sales may have even had a forecast and operations was probably just “adjusting” based on gut feel.
The good news is that with one set of numbers to work from, the same demand planner would have known well in advance that a plant shutdown was looming (if one was actually necessary!), sales would have accurate forecasts to work from, finance would know the numbers and operations could made good decisions that benefit all stakeholders—right down to the individual customer.
S&OP Gets Everyone Working from the Same Playbook
Demand planning, supply planning, inventory management and financial planning are all interdependent sub-processes that are cross-functional by nature. Each contributes to the collective whole and, as such, works optimally when one hand knows what the other is doing.
Let’s say a manufacturer’s sales department wants to double the amount of product X it sells for next month. The supply planner may know that supply of product X is very tight at the moment and that there’s no way operations can meet the sales team’s expectations of doubling production. If the demand planner is out of the loop, then the mission may proceed as planned and, inevitably, fail.
Or suppose marketing wants to introduce a new product two months earlier than previously planned. The supply planner may know that the equipment needed to make that product can’t be installed within the shorter timeframe. If the planner is in on the early meetings—and collaborating effectively with marketing—then the expedited plan can be reassessed during the planning stages.
These are some of the key reasons why cross-functional representation at all sub-process meetings is so important. For best results, each side should know where the “other side” is coming from versus always looking at the final output and wondering, “What in the world were they thinking?”
When S&OP Breaks Down the Silos, the Magic Happens
It’s no secret that workplaces operate better when cross-functional collaboration leads to cohesiveness. The same principle applies in demand planning and supply chain management, where all organizational functions can benefit from or suffer from these processes.
When you use S&OP to break down the silos, you not only save money and improve inventory management, but you can also deliver more orders on time, reduce production overruns and eliminate costly overtime.
Sales and operations planning also supports top-line improvements. For example, when Rhodia Eco Services, a $230 million dollar division of global chemicals giant Rhodia, Inc., implemented a full S&OP process, the company improved its overall capacity availability from 85% to over 90%. With this increased capacity, Eco Services can respond more quickly to last-minute changes in demand to gain market share.
S&OP Drives Sustainable Growth
A well-run S&OP process also helps companies increase organizational effectiveness while de-stressing supply chain managers who now have time to think strategically about continuous improvement opportunities. By leveraging the power of S&OP, growing organizations can achieve better alignment, enhance collaboration, optimize their supply chain operations and drive more sustainable, predictable growth.
