Introduction to Sales and Operations Planning
Interest in sales and operations planning (S&OP) always runs high in times of economic uncertainty, so I’ve been fielding a lot of questions the last couple years from clients on how to do S&OP. Despite S&OP having a history going back decades, there’s still a lot of confusion about what it is and how to do it. The proliferation of alternative terms for S&OP has added to the confusion. There are no shortage of articles, videos, and books on S&OP, so rather than reinvent the wheel, I thought I’d do a brief write-up of answers to some key questions that get to the heart of S&OP.
1. What is S&OP?
If you ask people what S&OP is, a very large number will say it is demand and supply balancing. This represents a small part of S&OP, so it’s worth setting the record straight upfront. There are lots of definitions out there, perhaps more elegant than mine, but I like to use the below one to emphasize that S&OP is primarily a process of identifying performance gaps and resolving them.
S&OP is a periodic and cross-functional management process for evaluating gaps between your business goals and operational plans, and for reaching a consensus on corrective action to address any such gaps. The goals should reflect corporate priorities in areas such as revenues, costs, profits, and customer service levels over a medium-term planning horizon, typically a rolling period starting in 4 months and extending to 18-36 months.
While terminology differs, most S&OP processes have a monthly cadence of reviewing product plans, demand plans, supply plans, and financial plans, and culminating in an executive review meeting in which proposed changes to the S&OP plan are reviewed, key decisions are made, and the plan is finalized for execution.
2. What’s the difference between S&OP and integrated business planning (IBP)?
This question always generates a lot of debate. Proponents of the term IBP position it as a more advanced form, mature stage, or even superset of S&OP. Traditionalists claim that S&OP always was intended to achieve the same goals as IBP, and that IBP is just a new marketing term dreamed up by vendors, consulting firms, and analysts trying to sell more stuff. (See Patrick Bower’s Integrated Business Planning: Is It a Hoax or Here to Stay?)
There’s no official definition of these things, so I’ll offer my take. Regardless of the intentions of the founders of S&OP (generally attributed to Richard Ling and colleagues at Oliver Wight in the 1980s), in practice S&OP processes are often seen as narrowly focused supply chain initiatives. The term IBP gained popularity in the 2000s to connote a more strategic and truly cross-functional management process (including marketing, product development and finance, in addition to sales and operations) aimed not just at improving supply chain performance but achieving overall company goals.
In the last decade, SAP named its new supply chain planning suite (and not just the functionality for doing S&OP/IBP) “SAP Integrated Business Planning.” That was probably a clever marketing move but has created some confusion and soured some software vendors on using the term.
I tend to favor the term S&OP because it is more common, but appreciate the rationale behind the term IBP. I believe whether you call it S&OP or IBP, companies should aspire to the more visionary process attributes connoted by IBP. In the rest of this blog, I will use the terms interchangeably.
3. Should we implement sales and operations execution (S&OE) instead of S&OP?
No, S&OE complements S&OP rather than replaces it. The S&OE process was conceived of to connect the typically monthly S&OP planning process with shorter-term planning and execution.
The concept of S&OE has been around for a while, but it has grown in prominence recently because of the pandemic. Because of disruptions to both demand and supply, there was a sentiment out there that planning (including S&OP) was no longer useful and supply chains had to assume a day to day reactive mode. That may have been the case for some businesses early on, but for most businesses today planning is both possible and advisable.
4. What are the benefits of S&OP / IBP?
First and foremost, you will increase the probability of meeting your business objectives in areas such as revenues, costs, profits, customer service levels, and other strategic metrics. By getting all key functions on the same page, regularly evaluating your operating plans relative to your goals, and taking corrective action, your performance will improve and become more predictable.
The global management consulting firm McKinsey & Company recently published research documenting the following benefits achieved by the average company with a mature IBP process (compared with companies that lack a well-functioning IBP process):
- 1 – 2 additional percentage points in EBIT
- 5 – 20 percentage point improvement in service level
- 10 – 15% reduction in freight costs and capital intensity
- 40 – 50% reduction in customer delivery penalties and missed sales
- 10 – 20% improvement in planner productivity resulting from technology and process discipline
5. Who should be involved in the S&OP process?
Too often S&OP is seen as a supply chain initiative with limited involvement from other functions. And it may get pushed down in the organization with limited involvement by senior management. This is a BIG mistake. To be successful, S&OP has to be seen as the primary vehicle for managing the overall business and ensuring key business goals are met. A senior executive with accountability for these goals and the authority to make decisions should be the owner of the S&OP process. Accordingly, the process should be tailored to serve their management needs. Likewise, there should be senior owners for each of the functional sub-processes covering product, demand, supply, and finance.
The above owners should attend review meetings for their respective functional areas and then come together in the executive review meeting to finalize the plan. To collect information and analyze plans to prepare for these meetings, owners should be assigned to manage the process and do the detailed analysis.
6. Should we have an S&OP Czar?
I don’t think I’ve actually seen an S&OP Czar, but I’ve definitely been asked this question, and have certainly seen people with the title of VP of S&OP. We should focus on roles in the S&OP process rather than actual titles on people’s business cards. There should be someone who owns the running of the S&OP process, meaning they ensure that teams are prepared for review meetings, software systems enabling the process are working, roadblocks are removed, and the process is continually improved. This role could be called the S&OP coordinator or similar, and in a large company with a complex S&OP process, this might be a full-time job with a title of VP/Director/Manager of S&OP.
That said, this person isn’t the business owner of the S&OP process. That needs to be a general manager who has responsibility for achieving business targets, not someone focused solely on running the S&OP process.
7. Do marketing, product development, and finance need to actively participate?
Absolutely. The purpose of S&OP is not for the supply chain organization to modify its plans to meet the needs of the other functions. It is to achieve cross-functional consensus on how the business is going to achieve its overall goals. If a product launch is delayed because of a shortage of a key component, product development needs to consider alternate plans, such as finding a substitute for the critical component, or accelerating the launch of another new product to make up for the delayed product. If the demand forecast is short of the revenue target promised to Wall Street, marketing needs to come up with a plan to increase demand. Throughout the entire S&OP process, finance needs to be involved to try to reconcile operating realities with financial goals.
8. What should our planning horizon be?
S&OP should plan for a rolling period, starting at month 4 and extending to 18 – 36 months, depending on the company and industry. This is a medium term-horizon. S&OP should not cover the short-term period of the next 3 months or so, because this will invariably lead to short-term crises getting in the way of longer term planning. (Such crises should be addressed in another process.) But S&OP is also not about very long-term strategic planning, addressing questions such as, should we exit this market, should we acquire a competitor, should we invest in a new technology platform, etc. S&OP is operationally focused on meeting goals in the context of your current business model: launching new products, marketing and selling them, and producing and distributing them.
The time frame should be tailored to your industry and company. So for instance, if you are a producer of bourbon that requires 12 years to age, your S&OP process should extend to at least 12 years out. You’re not going to meet your sales goals 12 years from now unless you distill enough bourbon in the current year.
9. What should the S&OP cadence be?
The typical S&OP process repeats every month. I get pushback on this from clients who say that the monthly cadence was conceived of in the 1980s, and business moves way too fast today to wait up to a month to make decisions. Yes, there are lots of decisions that need to be made more quickly than monthly, but these are typically best handled outside the S&OP process. There’s still a need for a separate S&OP process focused on longer time horizons. But there are cases where a weekly process makes sense. During the pandemic, particularly in the early days, major events were happening weekly that were going to affect long term plans, and for this reason, some of my clients adopted weekly S&OP cadences.
That said, if the systems and data supporting the S&OP process are useful for shorter-term planning, by all means take advantage of them.
10. At what level of granularity should we plan?
Tactical supply chain planning is typically done at the item and week level. This is too much detail for S&OP and will bog down analysis. S&OP should usually be done at the product family level and monthly or even quarterly level of granularity so that you can focus on the big picture.
Conclusion
I’ve been fairly prescriptive in my answers above, but it’s important to remember that the process should serve the business, not the other way around. S&OP, if tailored to the unique requirements of your business and embraced by senior management, can be a powerful tool for aligning your organization and achieving your business goals. While this is not a comprehensive guide to S&OP, I hope it’s been a useful introduction for those embarking on the S&OP journey for the first time, or old pros looking for a refresher course.
To Learn More
If you’d like to discuss how New Horizon can help enable your sales and operations planning process, contact us – we’d love to talk.
