SCM Awareness: S&OP Process

Better Planners make Better Plans.

SCM Awareness: S&OP Process

S&OP

Sales and Operations Planning is better known as S&OP.  It is a common process designed to give management an overview of the expected performance of the business through the next few months with an objective of balancing supply and demand. It started in the 1980s with large multinational corporations but is now an increasingly mainstream process in all sizes of company. It sits between, and provides an essential bridge linking, the very long-term strategic planning and the short term daily/weekly planning.

APICS, the American Production and Inventory Control Society (probably the most accepted authority in this field), define S&OP as “The function of setting the overall level of manufacturing output and other activities to best satisfy the current planned levels of sales, while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan”. (Don’t worry the quiz won’t ask you to repeat that).

The elements of the S&OP process could simply be summarised as: 

  • Demand: What will we sell 
  • Supply: What can we make 
  • Budget or Strategic Plan: What did we officially commit to sell and make 
  • What is the difference between them? 
  • What can easily we do to close or at least narrow that gap?
  • What hard decisions need to be made to close the remaining gap?

So, in essence S&OP is the process which links long term plans and live information together into a coherent overall plan.  It also     links Sales and Operations.  The process takes in information on demand (history, forecasts, orders and New Products) and supply (capacity, resources, Inventory etc) and combines these together through the lens of the strategic long term business plans to develop schedules for sales, production, logistics etc etc.  The key output is the master schedule which forms the base data for the operations in the factory.  

S&OP allows management to track the expected performance of the business and act if needed.  The objective throughout the process is to balance supply and demand.  

Among the benefits of the S&OP process are 

  • It provides a framework for companies to combine data from various departments, functions, and locations into one coherent overview of their supply chain.
  • They can optimise their inventory and resource utilisation.
  • A company with proper scrutiny of forecast etc through the S&OP process should see improved customer service.
  • And this allows them to optimise their profitability and cash flow.
  • They can identify a common agreed set of actions to address any imbalances
  • A common approach to creating and reporting data. In the past many large organisations left individual locations or departments create their own reports which were often difficult to collate centrally when it came to end of year reporting etc. The S&OP process allows an organization to create common reports and standards.
  • It provides operations with a management agreed plan that they can execute without undue fear of making incorrect decisions. This particularly applies if the company must produce products well in advance of orders being placed.

The S&OP process should happen monthly, although given the time and resources required some companies will do it less often depending on the business requirements.

S&OP generally looks a medium to high level. While it will give more detail than the longer-term business and strategic plans it may not break the requirements down to individual product levels but rather keep it at a family level. For example, if you make meat products it may break it down to just pork, beef, and chicken or if you are in medical implants it may break it down as Hips, Knees, etc. That said some companies will do this as a process that does go down to item level demand.  It really depends on what the needs are for an individual company.

However, it still will not get down to the day by day plan for machines and products.  It will generally only say that in this month, or maybe this week, a particular factory will be required to produce X amount of family Y or Z amount of Product 123.  It is then left to the factory to develop the detailed daily or hourly plans to support that requirement in the master scheduling process. 

A typical S&OP report will look out for maybe 2 to 3 months in weekly buckets and then another 10-12 months in monthly buckets.  I have seen companies that look out 2 years and I have heard that some companies go out to 3 years in the future. Invariably the forecast for a particular month in 2 to 3 years time is highly inaccurate. However at least it is giving the company some estimation to base strategic plans on.  If they can see that at the current expected rate of growth we will need to purchase a new machine then they can start to plan for that purchase in advance, or conversely they can plan to adjust their growth plans and not pursue new business if the purchase of the new machine cannot be justified financially.

So what is the S&OP Process?  It has five widely accepted steps.

  • Data Gathering
  • Demand Planning Review
  • Supply Planning Review
  • Reconciliation of Demand and Supply 
  • And then the S&OP meeting itself.

Now we will look at each section in more detail

Step 1 Data Gathering: This involves collecting all required data specifically, Firm orders, Forecasted demand, Inventory, Sales, Resource Capacity etc.  This can be a lengthy process if the organisation is particularly large.  I have seen some companies where this could take a day and I have seen others where this could take up to 3 weeks. The latter is highly inefficient but in larger organisations dealing with a lot of legacy systems, processes and politics it can easily take that long.  The S&OP process owner and their team should take responsibility and leadership for this process.  The S&OP owner should be a senior manager in the company with influence and authority to get the data the process needs and the soft people skills to be able to navigate the potential political issues and keep everyone aligned to the common goal.

Step 2 Demand Planning Review. This step involves taking all the demand information (forecast, orders, stock driven demand etc) and reviewing it for accuracy and bias (we will talk more about these things in a later module but for the moment just know that demand, particularly forecast is often just a best guess).  

The objective of this step is to confirm the demand plan that forms part of the S&OP.  It will need to be scrutinized and aggregated for accuracy. It is also important that the new product department are included in this process so new products they are working on are included in the demand plan.

  • Participants in this Review: Sales Management, Marketing Management, NPD management, Supply Chain Management, Representative from Operations Management, S&OP Owner
  • Agenda: Review performance vs previous month’s demand projections. Review assumptions in the forecast. Review and agree forecast for the period covered by the S&OP. 
  • Output: Confirmed demand plan

Step 3 Supply Planning Review. Similarly, to the demand planning review the data provided on supply capability also needs to be reviewed. This can include things like factory output and constraints, Inventory levels and requirements, distribution capability etc. 

The purpose of this meeting is to confirm the supply capabilities and discuss any constraints vs the demand plan from step 2. 

  • Participants in this review: Operations Management. Supply Chain Management, NPD Management, Engineering Management, Representative from Sales Management, S&OP Process Owner.
  • Agenda: Review performance vs previous month’s production projections. Review assumptions in the plan. Review the demand plan and identify any constraints or excess capacity issues. Review and agree supply plan for the time period covered by the S&OP. Produce proposals for any shortfalls etc.
  • Output: Confirmed Supply Plan

Step 4 Reconciliation of Demand and Supply.  Now that we have a clear picture of expected demand and expected supply you can start to see imbalances between them.  Much should have been smoothed out in the supply planning review meeting, but some larger issues may remain. They may also be out of line with the stated financial goals and objectives of the company as communicated to investors and adjustments may need to be done, as long as those adjustments are achievable, realistic and agreed by the people impacted.  Often this is done in a Pre-S&OP meeting.  

  • Participants: This is usually at director or even VP level. Basically, the head of each company function. Sales Director, Operations Director, Finance Director, Marketing Director, Supply Chain Director, S&OP Process Owner
  • Agenda: Review Last Month’s Performance. Agree Demand & Supply Plans and identify any gaps versus the annual budget. Agree action plan to address these gaps.  
  • Output: The objectives of this step are to identify any gaps between demand and supply. Identify any gaps versus the annual budget or financial plan. To agree a list of potential actions to resolve those gaps. And finally, a report that can go to senior management for approval.

Step 5 S&OP meeting by top level management.  Once the data has been gathered and reconciled the senior management team should meet to formally review that, agree any resulting actions and release the data to operations to begin to action.  

  • Participants: VPs or directors of the company plus the S&OP Process Owner.
  • Agenda: Review Companywide performance vs last month’s expectations. Review and agree Plan. Approve actions to close any gaps. 
  • Output: Release the plan for operations to begin to action.
Business Meeting
Business Meeting

So what are some of the common pitfalls in the S&OP process:

  • Lack of Senior management support and understanding of the process: It is important that senior management understand the S&OP purpose and process.  It is there to identify and solve problems and if the process is properly followed the company will operate more effectively. It is critical that senior management are on board with the process and understand how it works.

Poor quality data.  Very often after the S&OP process there will be an unexpected and not understood change in demand or supply that causes a significant change to the production plan.  This is often blamed on the S&OP process but in reality the process is only as good as the information it is fed. Garbage in equals garbage out.  In the early stages of an S&OP process implementation is it likely that there will be significant differences between the plan and the actual. You must be prepared for that and use those events to learn how to improve the data and the process and not simply use it as an excuse to abandon the S&OP process.  It is also important that people give accurate information and not just what they think the company executives want to hear. If sales are going to be low in your region then it is better to call it out and explain the situation before the inventory is built. If your new product is going to be late put the accurate date in the plan. If your factory is struggling to hit targets root cause it and then explain what is a realistic target. 

Company Culture and Politics That sort of culture of openness and collaboration must be set from the top by senior management.  I mentioned that the reconciliation should be achievable, realistic and agreed by the people impacted.  That is critical.  As such the S&OP process should involve all representatives from across the organization and that those representatives are aligned on the objectives and outcome of the S&OP process.  If one department holds too much influence and power then you may result in an unrealistic and unattainable master plan.  I sat in on a Pre-S&OP conference call for a company. That organisation had an issue with high levels of stock being built up in one particular region.  That stock level increase had been agreed months before hand based on sales projections from that region.  Increased capacity had been put in place at a factory to meet this demand but there was a slump in sales and the region was performing poorly.  Now there was an imbalance between supply and demand and that needed to be addressed. However the sales director for that region opened up the call by stating “I don’t care what anyone else wants in this meeting, that bloody factory is out of control and has to be shut down for at least 4 weeks”. That opening statement totally destroyed any possibility of collaboration as people scrambled to defend their position. Eventually a compromise was reached where the factory reduced it’s output, without letting staff go for month, and inventory levels were reduced. However it took several days to talk everyone down from the various hard line positions they had taken.  People must understand that they are working to a common goal and good communication is essential.

Leave a Reply

Your email address will not be published. Required fields are marked *