What is an S&OP Process?
Many companies require some sort of process or structure to run their supply chain. Teamwork and communication from all ends of the spectrum is required for every business to run smoothly. The sales & operations planning process was first created by Dick Ling to streamline business management operations.
A simple definition of the S&OP process is the collaboration and executive decision-making process of sales forecasting, supply planning and demand planning, meeting financial considerations and the requirements of each individual division. These collaborations are generally discussed in monthly meetings with a group of managers.
The Need for S&OP
Before addressing the ins and outs of the S&OP process, it’s important to note the reason for implementation.
Let’s take a fictional company: "Crafts of America." Joe is director of operations at COA. His job entails procurement, customer services and distribution of materials. Unfortunately, the communication between Joe and other sectors is not consistent. The demand planners and sales organization often run completely different reports, resulting in conflicting data. Further, the reporting relationship within COA is often foregone, resulting in the absence of teamwork and shared risk management. Poor collaboration among the stakeholders of the company also results in increased expenses and lead times.
Joe’s situation exhibits the exact reason all companies need a proper S&OP process. Dick Ling was the first person to create and coin the phrase, “S&OP process” in the 1980s. His expertise in the field of supply chain makes Ling a figure that many companies turn to for consulting and training in the S&OP process. In the preface of his book, Orchestrating Success: Improve Control of the Business with Sales & Operations Planning, Ling says:
“Sales & Operations Planning provides the general manager and his staff a means of gaining more control. With it, they can operate their business more effectively: set attainable objectives, see consequences, evaluate alternatives, communicate approved plans, measure performance, and achieve predicted results.”
This general synopsis of his book also outlines the benefits of an S&OP process. If the general manager of S&OP can work well with other members of the sales, supply, and demand teams, the company will achieve unprecedented results.
How Does the S&OP Process Function?
Each S&OP process is customized to meet the needs of a business, but the principles can apply across the board.
For starters, a meeting should be held at least monthly which includes sales, manufacturing, business and finance units. The general planning of S&OP encompasses company policies, strategic objectives, financial constraints, demand forecasts and capacity constraints. Two plans that are also included are separate sales and operations plans.
The sales plan includes a market plan, production plan, sales plan and distribution plan. Meanwhile, the operations plan could include resource, inventory, shipment and operations.
A specific department manages each factor that goes into S&OP. For example, capacity information is primarily under the manufacturing team, while staff availability falls under human resources. Each department should address challenges and solutions to improve company efficiency.
A typical S&OP meeting agenda could look something like this, according to Anand Subramaniam in her LinkedIn slideshare presentation "S&OP Process":
- What changes have we seen this month?
- Are we on target financially?
- What new risks should we take into account?
- What decisions need to be made now?
- What decisions need to be made in the near future?
- How are product families performing?
- Are we on track with product development?
- Do we have any critical constraints?
- Is there any need to revise long term plans?
In the meeting, the team could review orders booked, backlogs, sales and shipments, finished goods inventory, production, and performance measures by product group.
In the end, the purpose and overall objective of the S&OP meetings is to improve
the processes of each division, minimize cost, maximize profits, maximize customer service and keep managers in better control of optimal outcomes.
The assignments given and follow-up to each monthly meeting is included in a thorough end of the month review. Thankfully, S&OP software products were designed to make this collaboration of business goals and strategies easier.
Why Do S&OP Processes Fail?
Even as the S&OP processes are designed to work effectively, there is still room for improvement for many companies striving to implement this process. According to Duncan Alexander in his journal article "S&OP and Strategy: Building the Bridge and Making the Process Stick," here are some reasons many S&OP processes falter early on:
- The lack of understanding of what S&OP is (ranging from basic supply-and-demand balancing as advocated by most applications vendors and many large consulting firms to a strategy deployment and delivery process as we recommend).
- The very wide scope of a typical S&OP process makes it a difficult change project because it touches on so many different parts of the organization.
- Not keeping pace with the drastically different and changing context from when the process was first conceived; for example, globalization, increasingly networked organizations, outsourcing, offshoring, and working across multiple organizational boundaries.
- Focusing on process and systems and forgetting the people side.
- The Law of Change–A good test for an S&OP process is whether it survives a change of Managing Director or President.
- The Law of Entropy–Will your great new process survive once the project team is disbanded?
- The Law of Perspective–Your process does a great job for you in supply chain, but if it feels really painful from the perspective of Sales, there will be problems ahead.
Useful Tips for Successful S&OP Processes
Even with pitfalls in the process, there is a solution to ensure successful performance. From Jenny Schneider’s "S&OP Step by Step" article on APICS, here are a few tips to enable the collaboration team:
- Focus actions and thoughts more on revenues, growth, category development, brands and channels versus forecast error and inventory record accuracy KPIs.
- Engage all business functions to achieve better participation; the S&OP manager should be the facilitator, not the one owning the entirety of the forecast.
- Focus meetings on expectations to keep meetings within a reasonable time frame. Meetings should be once monthly, at the least.
- Talk forecast in dollars if that will help the salespeople understand an accurate forecast.
- Supply meetings should be focused on constraint resolution.
- The full team meeting should have a goal of forming a partnership plan, a strategy used to develop the financial forecast. This meeting should enable review and approval of the forecast.