Sales and Operation Planning (S&OP) is probably the least understood aspect in Supply Chain Management. It provides the key communication links for top management to coordinate the various planning activities in a business. The main objective is to develop an overall business plan, which integrates various functional planning efforts, and if S&OP is not integrated and working to a cross-functional plan, the business can fail. Here are the 5 main ways S&OP can revolutionize your company.
Eliminate The Battle Over Ownership Of Finished Goods Inventory
S&OP is top management’s handle on the business. It provides important visibility into the critical interactions between Sales, Marketing, Production and Finance. Under S&OP, manufacturing’s job is to hit the schedule, eliminating the battle over “ownership” of finished goods inventory. If actual inventory levels do not agree with planned inventory levels, it’s not a manufacturing problem (as long as they hit the schedule). It’s either a Sales and Marketing problem (the products didn’t sell according to plan) or a problem of product mix management in the demand management activity (the wrong individual items were made).
Better Integration Between Different Functions
Better integration between functional areas in a business is one of the major payoffs of S&OP. Once collaboration between the top levels of the functional areas is developed, it can be translated into detailed plans that are in line with top level agreements. This results in a set of common goals, improved communication and transparent systems.
No More Panicked Rushing
Without a Sales and Operation plan, the expectation is that somehow the job will get done, and in fact, it does get done, but at a price. That price is organizational slack: excess inventory, poor customer service, excess capacity, long lead times, panicked operations, and poor response to new opportunities. Detailed decisions will be made by clerical level personnel with no guiding policy except “get it out as best we can”. The annual budget cycle won’t be tied in with the detailed plans and will be inconsistent and out of date before it’s one month old. An effective S&OP process removes all of these problems.
The Whole Company Works To One Set of Numbers
One of the benefits of S&OP is being able to run the business to one set of numbers, whereby Sales and Marketing, Production and Finance all agree on anticipated sales and the company’s ability meet those sales. This inevitability requires collaboration. Top management should lead the cultural change to make that happen as this can only come from the top. An unfortunate but frequent approach is to invest significant time in setting up S&OP but then stepping back, allowing the company to be run by separated performance measurement systems or budgets.
The Ability To Shape Demand
If demand planners are aware of likely sales, production capacity and inventory, they can figure out to increase profit margins for particular products. If they know, for example, that a particular SKU cannot be produced in sufficient quantity to meet customer demand for the next month, they can then present this information to Sales and Marketing who can promote other products. This is just one example of the powerful ability to shape demand, which can only come after demand planners collaborate with Production and Sales and Marketing.
To Achieve These 5 Benefits, Management Must Do The Following
Commit to The S&OP Process
Top Managements’ first obligation is to commit to the S&OP Process. This means a major change in the organization. The change involves establishing the framework for S&OP, getting the right team together, participating in the process and so on. The change may also imply modifications of performance measurements and reward structures to align them with the plan. As part of the commitment to the planning process, top management must force the resolution of trade-offs between functions prior to approving plans. S&OP provides a transparent basis for resolving these conflicts.
Incorporate S&OP Into Your Strategic Planning
Senior management must be directly involved in the S&OP process, which should be directly related to strategic planning. They must ensure insight gained from the S&OP process is used to drive longer-term planning, and ensure operational plans contribute to strategic goals.
Understand S&OP Is Planning, Not Scheduling
View the S&OP process as a planning process instead of scheduling process. This will seem obvious to many, but in companies without an S&OP process, you can be forgiven for viewing S&OP as simply a means to produce a certain volume by certain dates, when it is so much more. This way, the company goes beyond simply producing a defined amount, and starts thinking strategically to maximize profit. Remember that the operation plan is not a forecast, but a managerial statement of desired production output.
All Functions Must Agree On The Numbers
The operations plan should be a part of S&OP and it should be in complete agreement with the other functional plans (Sales, budget and so on) that make up the business plan. Senior management must foster this integration and collaboration. [Editor’s note: See this guide on developing the Executive S&OP Meeting to reach one number forecast]
Continuously Review The Plan
Reviews of performance against sales and operations plans are needed to prompt re-planning when necessary. Overall, the company must consider continuous improvement to be an important ingredient in further improving the S&OP process. A successful supply chain focused company views S&OP as a journey, not a destination!