What does the S&OP today look like? How has it evolved since its inception in 1990s, and is there a modern textbook process that best-in-class companies follow that take into account the massive changes we’ve seen in recent years?
Sales and operations planning (S&OP) is a structured monthly business process that aligns all functional areas under a unified set of assumptions to enable and coordinate decision making. It integrates product, demand, supply, operations, and financial planning into one game plan for business. It is not a meeting but a process that integrates different steps and functional areas.
The confusion comes when trying to understand what the process steps are in a good S&OP/IBP process. I have personally seen everything from over-simplified 3 steps to an overcomplicated 15 monthly steps. S&OP originally consisted of 5 steps: data gathering, demand planning, supply planning, Pre-S&OP and Executive S&OP. You still find this basic design on the web and in many trainings but is it still viable for today’s business needs?
Today we see these steps in many of the top companies and most mature S&OP processes are modern-day variation of the original. It consists of 4 or 5 functional processes (or steps) that starting with product or portfolio review and flows through demand and supply to an executive summary or review. What is noticeably absent today is the data gathering as a defined, structured step and the Pre-S&OP. Sometimes these are optional components.
1. Product or Portfolio Review
The product review (sometimes referred to as the portfolio review) is typically the first step in S&OP and IBP today. This is a venue to discuss the current and future product portfolio. This may include discussion about new products and end of life strategy along with portfolio optimization and SKU complexity and rationalization. This is also an excellent opportunity for discussions on obsolete or excess inventory dollars as well as disposition plans for slow moving and obsolete (SLOB) inventory. This review or step did not appear in the original S&OP process way back when but today it is a basic necessity for any business and a key part of mature S&OP process.
2. Demand Review
All decisions, whether it be about opex cost strategy, improving service and top line growth, or inventory and cash flow, and strategy are driven by a forecast. Coordinated decision making supported by forecasts is critical, and S&OP/IBP enables this in the demand review. This is a more traditional process through which a consensus demand plan is generated, using internal and external inputs. The goal of this step is to create an unconstrained forecast or consensus demand planning, incorporating a holistic picture of independent and dependent demand. Factors influencing independent and dependent demand may include marketing, new product introduction, product hierarchy, and consumer trends and other external variables.
3. Supply or Resource Review
This is another of the original S&OP steps, but nowadays some companies pay more attention to it than in the past. The Supply Review helps in defining the supply response constraints and gaps in fulfilling the consensus demand; aligns demand, supply and financials; and develops options to mitigate financial and capability gaps to deliver the supply response. There are discussions about resources needed to achieve strategic goals. It is at this step that risk and opportunities are reviewed in-depth and scenarios are developed and understood.
4. Executive Review
Executive engagement still determines a S&OP/IBP’s success or failure. Engagement from leadership adds great value to the S&OP process making the Executive Review still the number 1 forum for bringing insights to an organization and facilitating decision making. This final step of the monthly S&OP/IBP process brings together all the plans, resolves critical gaps, and unifies the organization regarding a set strategies to execute.
Components Lying outside The S&OP Process
When S&OP first was introduced in the early 1990’s data gathering was a formal process and a major challenge. Now data is much more dynamic and coming in daily or even hourly in some cases. Collection, storage, and management of data is in a very different place than it was back then. Data gathering today is not a step in itself but part of every process step and drives analytics and insights.
The same applies to strategy – it is not a process step but it is part of all steps in the S&OP/IBP process. Strategy drives the discussion the in Product Review, Demand Review, and Supply Review, and allows us to determine the trade-offs for each decision.
As for Pre-S&OP, for different companies it means different things with organizations adapting it as they see fit to meet their unique business challenges. It can be financial reconciliation, category rollup before an enterprise S&OP, or a more traditional Pre-S&OP where gaps between demand and supply are identified. Some companies miss out this step altogether and research indicates that about 40% of companies have slimmed down their S&OP, not formalizing this step and only doing it ad hoc as and when required.
The answer to the question of “what is modern S&OP” is, and will remains, “it depends”. That said, we have seen a broad migration to a standardized 4 step process in mature companies consisting of a Product or Portfolio Review, Demand Review, Supply Review, and Executive Review. This is now standard. Where are you on the maturity curve and how strong is your S&OP?
If you’d like help building a roadmap to S&OP maturity complete with recommendations and expert guidance, check out IBF’s S&OP Assessments. An IBF expert will go into company and, using an advanced proprietary maturity model, will gauge your maturity level, identify gaps, and provide tailored recommendations to improve specific functional areas – all designed to take you to the next stage in your S&OP evolution. Click here for more information.