In most organizations, departmental silos emerge as a matter of course. In companies that deal with physical products, there is generally a clear delineation between supply chain operations and sales functions. The latter is responsible for forecasting sales, then maximizing revenue and margins; the former must see to it that the supply chain operates as efficiently as possible.
To achieve better alignment between these two functions, many companies have adopted a different approach, sales and operations planning (S&OP). S&OP encompasses supply chain operations from end to end. It’s about coordinating and streamlining all functions in the value chain–from strategic planning to forecasting and demand planning, inventory management, strategic sourcing, and distribution.
In a traditional approach where supply chain management (SCM) is relatively disconnected from sales and marketing, the focus of SCM is typically on matching supply to demand.In contrast, with S&OP, planning processes are collaborative, and the overall goal shifts toward maximizing value. In this context, finance is directly involved in the process and is typically the top-level owner of S&OP as a whole.
An Example of Sales and Operations Planning
Here’s an example of how S&OP differs from traditional planning. Imagine that your company sells to two distinct customer segments. The first is a small group of large customers whose top priority is on-time delivery. They’re willing to pay a premium to ensure they get the goods they need on time. The second segment consists of a broader group of smaller companies who generally care more about price.
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In a traditional organization, the sales department might create an aggregate forecast that accounts for both groups of customers, but supply chain operations might have no clear idea about the relative priority of on-time delivery for those two customer segments. As far as operations is concerned, the company has received multiple orders, has promised to deliver product by a certain date, and must find the most efficient way of making good on that promise. If demand is outstripping supply, then operations will seek ways to accelerate incoming orders. If supply exceeds demand, the company will lower its orders for incoming goods, and may even choose to liquidate some of its excess inventory.
With S&OP, this scenario might look a bit different. Instead of developing forecasts that focus solely on demand, the company might look at the bigger picture. Which customer segments are most profitable, and how can both sales and supply chain operations be aligned to support maximum profitability? With this lens, the company may decide that the smaller group is more profitable and focus efforts on making its supply chain tighter to keep these customers happy.
With a traditional approach, go-to-market strategy tends to take the lead, and supply chain managers are tasked with delivering goods in the most efficient way possible. With S&OP, the supply side is considered as a key factor from the beginning. S&OP recognizes the crucial importance of SCM in determining the cost of goods sold, which in turn factors into gross margins.
The net result of S&OP is better visibility of the levers that impact profitability and closer alignment between the supply side function–SCM–and the demand side of the organization–sales and marketing.
The Six Stages of Sales and Operations Planning
There are various approaches to S&OP, including a relatively simple top-down approach driven by demand, or a more collaborative bottom-up approach in which resource constraints such as limited manufacturing capacity tend to dictate what happens on the supply side. Other important factors include the cost of carrying inventory and the organization’s capacity to scale production up or down easily. These will dictate a company’s decision to focus on a consistent level of production versus a more elastic approach in which production scales up or down to match demand.
Regardless of which approach is suitable for your business, company leaders will need to engage in six key planning stages. Although these are listed as distinct phases in the process, there is usually a back-and-forth interplay between them, especially in the case of the first three.
- Sales Forecasting
Sales forecasting is generally the first step, but in the context of S&OP, it will typically happen as part of an iterative process that also involves demand planning and supply planning. This begins with an initial sales forecast, which will eventually be adjusted as that iterative process unfolds.
- Demand Planning
Demand planning considers what can be done to optimize value by influencing demand. This may include, for example, sales promotions or discounts, advertising, PR, or other measures the company wishes to take to drive additional demand. Conversely, if demand is already high and the company is challenged to meet the production levels necessary to fulfill it, then demand planners might choose to dial back advertising and promotion accordingly.
- Supply Planning
Supply planning is about outlining scenarios for vendor relationships, order levels, and production plans necessary to fulfill the overall plan.
- Pre-S&OP Meeting
The pre-S&OP meeting is where the sales forecast, demand plan, and supply plan come together. Finance generally leads this discussion and seeks to align the three plans around a single scenario. Alternatively, the pre-S&OP meeting may produce several competing scenarios to be presented to executive management for a decision.
- Executive S&OP Meeting
The executive S&OP meeting is where management reviews and approves the plan. Revisions to the plan and subsequent meetings may recur as frequently as every one to two months. The S&OP planning process typically uses a forward-looking time horizon of between one and two years.
- S&OP Plan Implementation and Measurement
Once management approves the plan, the plan is implemented and the results of the plan are monitored and measured over time.
Making the Most of Sales and Operations Planning
Effective S&OP processes rely on accurate data, with powerful but flexible tools to model outcomes based on real-time information from historical trends. To accurately model outcomes, it’s essential to have the right tools, with direct integration to enterprise resource planning (ERP) data so that you can incorporate up-to-date information into plans. This means everyone throughout the organization has visibility of how the numbers are progressing with respect to the plan.
At insightsoftware, we provide planning tools that empower users in finance, operations, and elsewhere throughout the organization to build powerful reports, dashboards, and analytics to drive better, faster decisions. Our solutions integrate with multiple systems, providing real-time access to information that can be refreshed with the click of a button. If your company is striving to achieve greater profitability and supply chain agility, insightsoftware can help. Contact us today to arrange a free, no-obligation demo.