What is sales and operations planning (S&OP)?
Sales and operations planning (S&OP) is a regularly scheduled process in which a company’s finance, sales and marketing teams collaborate with demand, supply, inventory and capacity planners, to project demand, as well as the resources needed to meet that demand, to create a viable production plan for the future.
S&OP has been a procedural staple in supply chain planning for more than three decades and is designed to help companies bring stability to their decision-making activities so they can maximize revenue and market share, align budgets, and minimize costs and risks. While the process has traditionally taken weeks or months to complete, new methods and capabilities have significantly reduced planning time by eliminating reliance on slow moving, siloed tools like spreadsheets and emails, and increasing cross-functional transparency and collaboration.
What is the difference between S&OP and integrated business planning (IBP)?
S&OP is widely considered to be one component of integrated business planning (IBP), which is a more comprehensive, longer-term planning process that places a greater emphasis on financial forecasting.
Adopting IBP can be considered the next step for companies with an S&OP cycle already in place. It extends the principles of S&OP throughout the entire organization, seeking to align all business functions with the company’s financial performance and strategy. While S&OP is focused on balancing supply and demand over the short to medium term, IBP works on a longer time scale, looking further ahead to find ways to improve the bottom line and determine budgetary requirements while also supporting operational requirements.
What is the traditional S&OP cycle?
The monthly S&OP cycle usually consists of five stages that can happen sequentially or concurrently, depending on your planning capabilities:
- Data gathering: Gathering information on variables such as inventory, sales and cash on hand to create a baseline forecast (which includes any plans for new product introductions and sales opportunities).
- Demand planning: Creating a demand plan based on forecasts and any demand-shaping activities (e.g., promotions, price incentives).
- Supply planning: Creating a supply plan based on production and distribution capacity.
- Supply/demand balancing: Reconciling and aligning supply and demand plans to ensure they can overcome any potential constraints with machinery, people or suppliers.
- Executive review: Planning for revenue, margin and profitability, followed by approval of the final supply and demand plans by senior management.
What are the benefits of S&OP for the supply chain?
S&OP is an ideal tool for organizations struggling to align supply chains to market demand. When done correctly, the S&OP cycle greatly improves supply and demand forecasts. This can help companies cut inventory costs, which then boosts working capital because less money is tied up in inventory. More accurate forecasting also improves on-time delivery rates, resulting in higher customer satisfaction and potentially increased market share and revenue.
An effective S&OP process also provides greater visibility across sales, production and procurement activities. Without S&OP, companies may miss out on business opportunities simply because they don’t see them coming — or if they do, by the time they’ve mobilized a response, it’s too late to take advantage.
Why does the traditional S&OP process need to be improved?
For S&OP to be effective across the supply chain, functional silos must be connected and a robust feedback loop needs to be implemented. But the typical approach to S&OP isn’t designed to do that — and can’t match the pace of today’s supply chain, which requires greater speed and agility in both strategic and execution planning.
Monthly S&OP processes are too linear and rigid: each function (e.g., demand, manufacturing, logistics) works in its own silo, focused only on evaluating its own plans, which are then passed down the line to the next link in the chain. Too often teams don’t work together to evaluate conflicting plans or negotiate tough decisions on how to respond to changes in demand and supply. Key performance indicators (KPIs) are also often misaligned across functions. This leads to an inability to make rapid adjustments like short-term promotions or last-minute price changes, or to deal with unexpected interruptions outside of regularly scheduled planning cycles. The time it takes to analyze, model and make informed decisions increases exponentially with every silo involved in the S&OP process.
Another issue is how long it takes to capture and analyze data from extended supply chain partners and customers. If that data is housed in multiple systems with little to no integration, or if planners are still using Excel spreadsheets to create operational roadmaps, it is impossible to get the most up-to-date information across all nodes of the supply chain. As a result, the data used to make critical trade-off decisions during each month’s S&OP meeting could already be weeks out of date. Plus, the bottom-up aggregation of this information for presentation to executives often provides limited feedback down the chain before the start of the next planning cycle.
What are the three elements of effective sales and operations planning?
The most mature S&OP processes are built on three foundational elements: what-if scenario simulations, cross-functional planning and record-keeping.
What-if scenario simulations
Simulations help planners identify opportunities and make trade-off decisions between conflicting KPIs, divisions or business partners to find a situation that provides the best overall win for the company. They can be used to explore and answer questions such as: What if sales of the new product are slower than we expect? What if we run a promotion to clear out inventory of the older model? What if a supplier unexpectedly shuts down, either temporarily or permanently?
For maximum effectiveness, scenarios should be quick and easy to run, seamlessly combine and analyze data from multiple sources, allow for simple side-by-side comparisons of options, and support collaboration across the enterprise and extended supply chain. Everyone should have the ability to run a simulation using any data at any time, then share the results with others throughout the supply chain.
Cross-functional collaboration is essential to managing unanticipated supply chain risks and adapting dynamically to change. It’s about breaking down the silos that isolate each internal function, bringing together all decision-makers so they can more easily identify supply chain issues and opportunities, formulate and evaluate scenarios, and implement solutions that support the organization’s supply chain goals.
Collaboratively making decisions allows for a faster, more efficient understanding of the end-to-end impacts of potential choices — and for more informed trade-offs to be made. Instead of working toward individual objectives, the focus is on a shared set of corporate-wide metrics. It’s less about what’s easiest and best for each functional area and more about what’s the right decision for the entire company.
Cross-functional planning for S&OP requires collaboration among many groups, including:
- S&OP process owner: Monitors the overall process and ensures decisions are on time and the process meets expectations.
- Finance: Maintains financial targets and monitors and reports on performance against those targets.
- Demand planner: Enters adjustments and overrides to the demand plan to create a realistic forecast that represents all parties (e.g., finance, sales, marketing, operations).
- Sales/marketing: Provides input and sales/marketing forecasts.
- Supply planner: Delivers a high-level supply plan in response to the demand plan and collaborates with the operations team to ensure available capacity in support of the supply plan.
- Inventory planner: Evaluates and maintains inventory target levels and updates inventory policies.
- Operations: Assesses the demand plan and provides the constrained supply plan as input for balancing the demand and supply plans.
- Executive: Selects and approves the final S&OP plan.
Effective record-keeping is one of the keys to understanding why a particular decision was made — and to learn and grow from past mistakes. But in many companies, what-if scenario creation and collaborative discussions take place across multiple systems. On top of that, those systems are likely capturing just the end results, not the context, debate and trade-offs leading up to those results.
Ideally, historical record-keeping is happening within a single system of record (and in the same system where scenarios are being created). This allows for the easy retrieval of past scenarios similar to a company’s current reality, making it possible to quickly compare the past state of the supply chain to where it stands today and look into the future to see where it’s going.
In their own words: Lessons from planners on the importance of S&OP
How can concurrent planning improve the S&OP cycle?
What-if scenario simulations, cross-functional collaboration and record-keeping not only drive successful sales and operations planning. They are also the backbone of concurrent planning.
Rejecting the traditional iterative and sequential S&OP cycle, concurrent planning is the process of making and managing synchronized plans across multiple time horizons, business processes and organizational boundaries all at the same time. It extends beyond a company’s internal functions to connect all nodes in the supply chain (including external partners such as suppliers, contract manufacturers and logistics service providers), enabling end-to-end visibility and control for improved cross-functional coordination and faster, more effective decision-making. In short, it’s about connecting all data, processes and people in a single, harmonious system, allowing companies to plan expected performance, monitor progress and respond to disconnects in the supply chain as they happen.
Concurrent planning helps solve the planning horizon challenges many organizations now face — namely, bridging activities for short-term planning (low-impact, high-frequency events) with long-term planning (high-impact, low-frequency events). The cadence and scale of these planning activities makes it difficult to synchronize them across multiple horizons. In most organizations, short-term planning is a result of distributed and siloed decision-making, while long-term planning is centralized and hierarchical. Concurrent planning allows for a seamless approach to both through a more networked and democratized process.
When implemented through S&OP supply chain management software, concurrent planning looks very different from the typical monthly S&OP cycle — and can shrink planning cycles and response times down to just a few hours.
What are the benefits of S&OP supply chain management software?
Supply chain management software plays an important role in concurrent planning by automating the S&OP process, facilitating cross-functional collaboration through greater transparency across the organization, and eliminating data silos to provide easy access to analytics and simulations.
Often implemented as part of a company’s digital transformation efforts, cloud-based supply chain management software can connect data, processes and people into a single environment for a consolidated view of the entire supply chain. Simple, intuitive dashboards provide at-a-glance insights on measures such as ending inventory value, margin percentage, revenue value, on-time delivery to request and key constraint utilization percentage. That means no more wasted time reconciling spreadsheets or aligning email chains. Instead, teams work in parallel to set financial targets, measure progress and optimize outcomes. When it comes to S&OP, that leads to more rapid plan development, real-time scenario planning, reduced cycle times and more accurate results.
Concurrent planning software also makes it easier for companies to:
- Synchronize demand and supply planning, inventory management, capacity planning, finance, sales and marketing to get fast, clear insights into each team’s changes and their impacts
- Rapidly evaluate and compare alternative scenarios across multiple functions, then quickly collaborate cross-functionally for increased consensus and faster trade-off decision-making
- Consolidate disparate data from multiple systems (e.g., enterprise resource planning, demand planning, material requirements planning) to ensure the right data is always available when it’s needed
- Continuously orchestrate business activities and coordinate course corrections that optimize overall performance and profitability
- Drive sustainable cost reductions and profitable growth by bringing key financial data and metrics into supply chain planning
- Combine rolling forecasts with S&OP so financial, strategic and supply chain goals align for the best business outcomes
- Easily scale and align S&OP processes as company and team objectives change without sacrificing efficiency or precision
- Expose and reduce risks and maximize business opportunities with improved ability to set financial targets and acceptable levels of variability
In addition, supply chain management technology lets companies easily scale and expand with new components as their planning requirements change, including industry-specific modules for demand, supply or inventory management.
Who benefits most from S&OP supply chain management software?
Concurrent planning through supply chain management software delivers benefits to everyone in the S&OP process:
- Executives gain a complete picture of the entire supply chain so they always have a finger on the pulse of what’s going on. This lets them spot opportunities faster so they can make smarter business decisions and stay on track to competitive and financial success.
- Finance teams know everyone is working toward the same set of corporate and financial goals, meaning they never have to worry that metrics like revenue at risk aren’t being represented in S&OP decisions. By identifying potential risks earlier, they can act sooner to mitigate impacts to the bottom line.
- Managers can more easily work collaboratively with other departments for easier problem-solving and decision-making. Increased visibility across functions helps ensure their decisions are on time and the S&OP process meets expectations.
- Planners can simplify their day-to-day tasks with access to all the data needed to do their job efficiently and effectively. They can make decisions and changes with confidence knowing they are fully aware of and understand the implications on others.