In this latest article in our series on S&OP processes and best practices, I want to address something I’ve noticed that companies often miss when setting up an S&OP process — the need to customize it to your organization’s specific needs and to keep it flexible as time goes on.
In other words, rather than blindly adopting someone else’s approach or external frameworks, it’s essential to tailor your S&OP process and then let it evolve organically.
Over the course of my career, I’ve seen many new business processes take corporate America by storm, from Reengineering to Six Sigma to Agile for business functions. All were introduced with the best of intentions but then took on a life of their own, with organizations becoming more focused on rigid adherence to the process rather than on achieving meaningful results. Over time, this fixation led to diminishing returns and caused these approaches to fall out of favor.
Fortunately, S&OP has had more staying power. This idea that took hold in the 1980s is more popular than ever today. Many companies have achieved great results with S&OP, and it’s now ingrained in their businesses. That said, there can be a tendency for some companies to focus too much on the process and forget the reason they’re doing S&OP in the first place, the same problem that doomed some of the above business fads.
Don’t get me wrong — process is important, and companies should follow best practices. But sometimes a focus on process risks missing the forest for the trees.
In this article, I’ll discuss several ways to avoid this and ensure that your S&OP process stays flexible and ultimately invaluable to your business.
S&OP in a Nutshell
To make sure we’re on the same page, I like to define S&OP as a regular, cross functional management process for:
- Evaluating gaps between your business goals and your operating plans
- Reaching a consensus on corrective action to fill any gaps.
Your goals should reflect corporate priorities for revenue, cost, profit, and customer service levels over a medium-term planning horizon, typically starting from a rolling four months to 18-36 months out.
S&OP planning is usually done at the monthly and quarterly level by product family. Item and weekly granularity are done in tactical planning only, outside of the S&OP process.
[Also, please note that there’s traditionally been some debate around the use of the terms S&OP vs. IBP. For our purposes, I use the terms interchangeably.]
Why S&OP?
The real value of any good S&OP process is in getting key functions (marketing, product development, sales, supply chain, finance, and leadership) to work together to ensure your organization’s business goals are met.
More specifically, in an effective S&OP process, teams proactively identify gaps between projected and target performance and close these gaps as much as possible.
The benefits of S&OP done well include increased profit, better customer service levels, lower freight costs and delivery penalties, fewer missed sales, and improved planning productivity.
But many organizations face challenges realizing these benefits.
Typical S&OP Challenges
Some of the main obstacles companies face in building a successful S&OP process include a lack of a leadership champion and inconsistent participation from marketing, product teams, and finance in driving cross-functional alignment in support of the company’s overall goals.
Additionally, there’s a temptation to get bogged down in reviewing and rehashing history or in resolving short-term operational challenges. These need to be resolved, of course, but not at the expense of longer-term planning.
Finally, in times of rapid change, some assert that S&OP, or planning in general, is no longer useful. During the pandemic, for example, many companies refocused on S&OE (Sales & Operations Execution) instead, and it was helpful — especially in the beginning.
But for most businesses today, planning is still both possible and advisable. In fact, during times of economic uncertainty, businesses increasingly rely on S&OP as a crucial tool for managing volatility and maintaining operational stability.
In order to do so, however, your process must build trust and collaboration.
The Key to S&OP Effectiveness
If your company is not meeting your core objectives, look for telltale signs of distrust.
For example, there’s almost always tension between sales and operations. Sales may pad or inflate forecasts to ensure higher inventory levels, while operations underestimates forecasts to minimize costs. This tension can potentially lead to stockouts in some instances or excess inventory in others — harming financial performance and undermining customer satisfaction.
Poor collaboration among teams, lack of shared goals, and failure to commit to agreed-upon plans cause even more distrust. It can become a vicious cycle, weakening your S&OP process even further.
The solution? Leadership that fosters and models trust, collaboration, and flexibility.
Dangers of a Too-Rigid S&OP Process
A good S&OP process looks ahead, allowing for planned changes instead of last-minute reactions. This requires different departments to think ahead and work together.
The main goal of an Executive S&OP meeting is not to review what has already happened but to approve, change, or reject plans made by the S&OP team to improve performance.
So what are some signs of an S&OP process that values process over results?
First, as mentioned earlier, meetings frequently get bogged down analyzing past performance. While it’s important to understand past mistakes to avoid them in the future, spend most of your time focusing on future performance and addressing any gaps.
Another common issue is not focusing on the metrics that matter most to senior management. If senior managers think these meetings are just about reviewing operational performance charts, they might not join. They need to see Executive S&OP meetings as a chance to make key decisions for the company’s future.
For example, marketing might update its plan to increase revenue, product development could change a design for a quicker launch, and manufacturing might add a new production line to meet demand.
S&OP Best Practices
So with the above ideas in mind, I think it’s worthwhile listing some best practices with an eye towards ensuring that your S&OP process is not too rigid and is serving the needs of your organization:
- Leadership must play an important role in ensuring S&OP remains flexible and responsive.
- Choose where to start by prioritizing based on your organization’s toughest pain points rather than worrying about creating the perfect textbook process.
- For example, if an S&OP process template says you should be doing X, but X is not important to your organization, don’t do it. The goal is to improve your business performance, not check off every element of somebody’s S&OP maturity model.
- Leaders must be engaged and model trust, understanding, and collaboration.
- Shared workspaces and joint planning sessions can be helpful for encouraging communication and cooperation.
- Leaders must make sure to align priorities with shared metrics that reward overall company performance rather than function-specific outcomes.
- Reiterate the goal of S&OP at every opportunity.
- Don’t aim for process perfection. Remember that “perfect is the enemy of the good.”
- Start with a simple process so you’re not overwhelmed with complexity, e.g., aligning demand with financial target or balancing demand and supply, etc.
- Expand the breadth and depth of the process over time once you’ve mastered your current process.
- And finally, keep these S&OP best practices continually top of mind.
Technology’s Role in Supporting a Strong S&OP Process
The best technology can’t fix a bad S&OP process.
But good technology is a key enabler of an effective S&OP process.
Spreadsheets or BI/reporting tools don’t cut it, because they lack the ability to simulate alternative demand and supply scenarios. It’s also best to avoid having to import data from operational systems into spreadsheets and then send your revised plans back into your operational systems for execution, because each manual import/export involving a spreadsheet introduces the potential for errors.
You need an integrated platform that empowers you with:
- The ability to simulate and analyze sophisticated what-if supply scenarios.
- Strong forecasting and demand planning capabilities that let you avoid getting bogged down in discussions of past performance and instead focus on ensuring you achieve your future goals.
- Audit trails that allow you to review changes made last month, including who made the changes, when, and why. You can then reassess targets and implement corrective actions if needed. You want to be able to do post-mortem analyses, modify past assumptions, update plans, and document the reasons for changes.
Measure and Ensure the Success of Your S&OP Process
Building a more flexible S&OP process is well worth your effort now and is likely to only become more important over time.
When you keep these S&OP best practices in mind, you’ll be better positioned to achieve your business objectives for revenue, costs, profits, customer service levels, and other strategic metrics.
A flexible S&OP process that grows and morphs with your company’s needs and priorities will ensure your key business functions are on the same page, regularly evaluating your plans versus your goals, and proactively addressing gaps. You’ll improve your company’s performance and predictability while weathering an uncertain business environment.
To Learn More
Interested in learning how New Horizon can support your organization’s S&OP process? Talk to one of our experts.
