S&OP - What is it and how important is it for my business?
Practitioners often question how implementing a new process such as S&OP can provide benefits that far outweigh any cost of change. Statements or comments we hear when discussing the logic of engaging in this approach can include;
- S&OP sounds like a lot of work when the supply chain is already working well
- We have a great team who know the business and manage any issues that arise. What will S&OP give me that will improve that?
- We are getting our product out to our customers and isn’t that the main objective!
- Our suppliers have been in place for a long time, and they know our business
Sales & operations planning (S&OP) is the process through which the business decides on the future demand, capacity, resourcing, and financial plan. While most organisations will have a plan that they operate against, many plans are built in functional silos, and don’t consider the business as a whole.
Has your organisation ever produced a sales forecast that the supply chain and operations team have not seen, or have dismissed because it’s ‘not realistic’ or ‘can never be met’? Does your business set financial targets without validating that it has the operational, supplier and delivery capacity to meet them? As many companies are finding out now with materials, logistics and port constraints, there is nothing more dangerous than assuming that supply chains can scale to meet the needs of a financial or sales plan.
Particularly in times of change, growth and uncertainty, there is real benefit in a consolidated approach to planning. This brings together all the major areas within the business, to create an aligned view of the future and how best to get there. Ask yourself – when last were you not in a time of change, growth and uncertainty?
A successful S&OP process
is a cycle which an organisation undertakes, on a regular periodic basis – most often monthly. It has a defined set of inputs from functional areas, a defined review process to consider the inputs and a mechanism to create an aligned, collaborative plan that can be shared across the relevant areas of the business. The plan considers physical volumes tied to customer and financial plans over a defined time horizon with more specifics for near term requirements. The process works to balance demand and supply. It considers product mix, capacity, constraints, resources, risk, opportunities, and customer requirements.
The formality of a well run S&OP process, which many can find daunting at first, is what enables its success. Defining the inputs, participants and outputs for a regular recurring business review, highlights what is really changing – the requirements of the business. It helps to accelerate critical business decisions with those that are empowered to execute. It highlights potential risks and mitigation and builds confidence that the organisation has the capability to deliver on the plan.
At a time where global supply chains face increased uncertainty, having a solid process to communicate and align around changes in requirements, capabilities and constraints has never been more critical.
Building a successful S&OP process is not always easy. It requires buy-in from the senior leadership, ongoing commitment and sharing of information across functions and a process owner to drive learning and improvements over time. The benefits, however, far outweigh the challenges and in an uncertain world you need to ask the question – can I afford not to have an aligned sales and operations plan?
Some key considerations include:
Engage executive sponsorship and assign a champion of the process
It is important to have executive sponsorship and a champion assigned. This sends a clear message to your organisation that S&OP is important to your business. A collaborative culture is critical to the success of the process, so the chosen champion must be in a position to provide leadership and ensure collaboration throughout. They should be a member or have the full backing of the organisations’ senior management, to ensure the ongoing importance of the process is supported.
Ensure planning inputs from across the business
Inputs to your monthly S&OP process should come from across the business functions. This ensures that all plans are represented, supply and resource capacity constraints are identified, market driven factors are considered, and risk is identified and mitigated. Omitting any area of the business reduces the overall benefit that the S&OP can provide.
Inputs should include:
- Sales & Marketing plans, having factored in any NPI and EOL inputs, market insights, promotional activities, customer requirements
- Demand plans, including an agreed forecast that has been adjusted to reflect all insights from the business
- Distribution plan, taking supply inputs having considered known supply constraints and known demand
- Manufacturing plan, having factored in all known capacity constraints
- Current metrics across key performance areas
Monthly S&OP to become the standard practice across the business
Initiating regular S&OP meetings provides the cycle needed to ensure alignment of the business with the plans for the period ahead. Initiating the process is one thing, but maintaining it is key. This may sound complex, but in essence it is a meeting, chaired by the process champion, which brings all relevant stakeholders together to;
- Review the past months’ and ongoing performance metrics
- Review planning assumptions, risks, and ensure alignment
- Reflect on supply issues, supplier capabilities and performance
- Highlight budget gaps, cost of capital and working capital impacts
- Identify production gaps in meeting demand
- Consider product quality, NPI and EOL plans
- Review inventory holding, E&O considerations
- Review resource plans and agree resolution to resource issues
- Evaluate major issues and determine path to resolution
- Actions are assigned, decisions are made, outcomes are documented
Ongoing monitoring and communication
The key to the success of most new processes is communication. The S&OP process provides for inputs and engagement from the whole business.
Communication is two way; Ensuring data and information inputs from across the functions, and ensuring the S&OP team receive feedback regarding all changes and decisions that come from the S&OP monthly meeting.
Benefits of implementing S&OP within your organisation
There is no point in implementing change within an organisation unless it can bring benefits. The benefits of S&OP are many, and vary across organisations depending on how collaborative the process that is implemented. Qualitative and quantitive benefits that we have experienced include:
- Forecast accuracy improvements. While we are all aware that forecasts are wrong or lucky, particularly in a post Covid world, alignment of the forecast and information sharing across the business, allows for improvements in its accuracy.
- Increased inventory turns. Through the shared focus on inventory holding, expected demand, market events and inbound supply, inventory turns can be significantly improved. This has the added benefit of improving the available working capital.
- SKU rationalisation improvements, through closer insights into the requirements, holding and movements of stock
- Right sizing of inventory holding. There may not always be a knock-on reduction in your stock levels. Rather, the S&OP process can support ensuring the right level of inventory across all products.
- Service level improvements can be gained for your customers, by closer monitoring of inventory levels, broader visibility on upcoming events, and closely managed inbound supply. Indeed by more closely aligning the internal functions through the S&OP process, greater awareness and visibility can drive improvements from your supplier and outsource service providers.
- Ongoing monitoring and fixing of issues becomes the norm. Ensuring the right metrics are in place is key to successful ongoing monitoring activity.
- A collaborate approach to planning brings the benefit of ensuring the functions of an organisation are aligned in their working towards a common goal. This can provide for a greater opportunity in meeting and exceeding an organisation’s business targets.