Each new customer and each new product is an opportunity to increase sales. However, expanding the portfolio increases operating costs and thus reduces the profitability of the business. If you agree with this statement, it is time for you to implement the Sales & Operations Planning process, S&OP for short, in your company.
I present what S&OP is and how it affects organizational performance. I also mention the most common mistakes made when implementing the S&OP process and discuss good practices for successful implementation.
The original version of this article was published by Puls Biznesu as part of the S&OP conference supplementary materials.
The version you can read below has been updated. It includes more examples and graphics illustrating the concepts discussed.
What is S&OP?
Sales & Operations Planning (S&OP) is the process by which management evaluates demand forecasts, supply plans and expected financial results.
S&OP is a decision-making process guaranteeing that plans in each area of a company’s operations are consistent with the company’s overall business plan.
S&OP involves creating one business plan over several meetings, which in most organizations are held on a monthly basis. The following stages of S&OP are:
- Collecting data: Summarize sales volume and value for the most recent period, production level, or purchase per product, aggregate information from the market
- Demand planning: Forecasting the volume of future demand per product, including the detection of new customer needs and opportunities to shape them
- Supply planning: Revising production, purchasing or distribution plans and assessing possible supply chain constraints inside and outside the company
- Consensus: Align demand and supply plans with each other, ensure they are within the company’s financial capabilities and goals, and prepare recommendations for the final step
- Executive meeting: The board recognizes the plan, makes the required decisions and approves the final operating plan for the next period.
In the S&OP process, the whole company should use one set of numbers to define available resources and set goals. As a result, it is possible to move away from a model of working in functional silos and enter a model based on the substantive cooperation of individual departments of the organization.
The owner of the S&OP is very often the person responsible for the Supply Chain. However, Sales & Operations Planning is a process that integrates the whole organization, which very quickly influences its results.
How does S&OP affect company performance?
Firstly, implementing S&OP improves collaboration between Sales, Marketing, Production, Logistics and Finance at the most detailed level of per-product plans. At the level the organization creates costs.
If everyone agrees on the level of expected sales, the role of the Production and Supply Chain is to deliver the right amount of goods. If the inventory level does not match the planned one, the problem should be solved by Sales and Marketing. Not by the operational departments.
An effective S&OP implementation thus shifts the responsibility for inventory to the departments that directly affect the demand for the products or services the organization provides.
As a result, there is a significant improvement in the financial results of the company. The main benefits relate to the cost elements of the income statement. Many times the result is simultaneous:
- reduction of operating costs by 5-10%
- reduce inventory levels by 20-30%
- increase in sales by 2-3%
Few initiatives you can undertake to improve your business produce results similar to successful S&OP implementation.
How to implement S&OP?
If there are significant benefits to implementing a Sales & Operations Planning process, why isn’t it use in most organizations around the world?
The implementation of S&OP must be done with the direct involvement of the management or business owner. If the decision-makers are not involved then the process has no chance of being implemented.
In companies where the S&OP process works best, S&OP leaders report directly to the president or CEO. Particularly during times of change, only the person responsible for the overall outcome of the company can ensure that commercial and operational issues are balanced.
For S&OP to work, all key areas of the business must be involved. They all need to have the same data. But not necessarily presented in the same way. Everyone should get the information at the level of detail they need.
For Logistics and Production, demand forecasts have to come down to a product per period. However, analyzing forecasts at this level with Sales and Marketing usually does not make sense. The Finance department, on the other hand, is usually only interested in plans presented as values and not as quantities.
Therefore, an important part of the implementation is to develop a reporting format that allows the seamless transition between the required views. Below are some examples of such reporting developed by IC Group for one of the S&OP process implementations.
Finally, S&OP should be based on statistical forecasts and expert adjustments. The use of an appropriate information system at the current level of complexity of most organizations’ product and service portfolios is therefore essential.
How not to implement S&OP
However, keep in mind that implementing S&OP is not implementing a new system. I wrote about how to choose a system for Supply Chain Planning in a previous post.
Before implementing a Sales & Operations Planning in your company, you need to realize, as well as everyone involved in the process, that the system is a necessary but not sufficient tool.
Implementing an S&OP process is about changing the way people work together. Implementations where the process is less sophisticated but regular and involving everyone in the company bring the greatest business benefits.
Implementations in companies that focused primarily on the technical side of the project are among the least successful. They end after 2-3 years with frustration and abandonment of the process. Then the company returns to the previously functioning non-optimal solutions.
Putting the above-mentioned issues in one sentence, we can say that S&OP implementation is not about changing the process or tools on which the organization works. S&OP implementation is in fact a cultural change.
It requires a change in the way we think about collaboration within the organization. This is why S&OP is so difficult to implement.
Fundamental mistakes of S&OP implementation
If you already know what the Sales & Operations Planning process is all about and the benefits of implementing it and you’re thinking about making changes in your company, stop by.
Think carefully about what you want to do and how to achieve the desired effect. Despite appearances, change management is not a skill that every operations manager possessed. Certainly not to the extent that you can implement S&OP in your organization.
So to help you prepare for the S&OP process, I’ve compiled a list of common mistakes. Think carefully about each one. Discuss all of them with the people you choose for the project.
- Irregular management involvement
- Non-inclusion of key departments in the process
- Excessive complexity of the demand forecast stage
- Lack of documentation of decisions made
- Focus on IT systems instead of process
- Planning exactly to the budget
- Based only on static data
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