The S&OP Process: A Fundamental Driver of Cross-Departmental Collaboration

 

An excellent quarterly sales performance couldn’t be realised because the extra stock has not been ordered in time. A dip in customer demand has lead to a swollen inventory and a crowded warehouse. A global supply shortage hasn’t been communicated to the sales team, causing cancelled orders and unhappy customers. And all of this felt distinctly avoidable.

Sound familiar?

Such undesirable scenarios, and a whole host more, could be prevented through effective Sales & Operations Planning (S&OP). In this article, we examine the purpose and benefits of Sales & Operations Planning, delve into the process itself, and give advice on how to implement S&OP in your company.

 

What is S&OP?

 

Simply put, S&OP is an organisational process that improves transparency, communication, and decision-making across all the departments involved in ordering, manufacturing, and delivering the product to a customer.

In essence, it is a cross-functional process that brings together a number of disparate teams in order to find a compromise that works best for the company. Sales & Marketing, Demand Planners, Supply Chain, and Finance share plans and forecasts, and convene in regular meetings to align objectives and collaborate on pressing issues, all under the steer of an Executive.

An effective S&OP process is founded on good data, accurate forecasts, timely planning, structured communication, and effective escalation. Ultimately, its purpose is to ensure the customers’ needs are fulfilled while avoiding waste.

 

Who is involved in the S&OP process?

 

Purchasing has calculated with the next best price level at the supplier and orders a certain outstanding quantity to reach it. Inventory management, however, is trying to clear long overdue slow-moving items and reduce inventory. Yet, production planning is currently unable to release free capacity because demand planning forecasts other products and these must be given priority. Sales is trying to bring back a leaving customer with quantity promises for another product, without taking into account the current supply bottleneck for certain components.... One could continue the list like this. In short, each department has different goals and often these are in conflict with each other. Since ultimately all decisions should be made in the best overall interest of the company, a joint dialog and holistic consideration of the respective departmental goals is necessary.

To that end, S&OP isn’t the work of a single, all-knowing, all-powerful stakeholder; it's a collective effort between several inter-dependent departments, all with equal importance. 

 

 

An effective Sales & Operations Planning Process involves the following departments and stakeholders:

• Sales, Business Development & Marketing: In the S&OP process, the Sales and Marketing teams are responsible for conveying the sales strategy for the coming period. This includes promotions, product launches, product alterations, and product sunsetting. They also provide analyses on how their strategy will affect the sales volumes by, for instance, taking into account volume uplifts due to discounts and sales cannibalisation. In instances where the product itself changes regularly (e.g. complex technology rather than steel rivets), the Sales team may seek additional input from the Product Team, who can provide more in-depth information and rationale behind the product strategy.
• Demand Planning: In conjunction with the information provided by the Sales Team, the Demand Planner uses past sales data and product forecasts to create an accurate demand profile for the coming period. This takes into account a number of factors, including seasonal variation, economic conditions, market conditions, competition, and more.
• Production planning:Production planning attempts to translate the existing demand planning to the production requirements. The tasks include lot-size planning, scheduling, capacity planning and sequence planning. In other words, it must be planned when which quantities are to be produced, how and by whom/which machine. Among other things, machine and personnel resources, material availability and sales deadlines must be taken into account.
• Supply Planning: The Supply Planner is responsible for reviewing the status of the supply chain. This means providing an understanding of the current stock conditions while also reviewing the external supply risks, for example, product shortages or logistics issues. The Supply Planner then develops an accurate picture of the supply capacity for the upcoming window.
• Procurement: Similar to the Supply Planner, Procurement is responsible for reviewing the company’s procurement position and risks. This includes factors such as price fluctuations and supplier issues. The amount of input required from Procurement is dependent on the business model. For instance, pass-through vendors will require a large input from Procurement, whereas OEMs may combine Procurement’s input with the Supply Planner.
• Finance: Finance is an extremely important stakeholder in the S&OP process. They are ultimately responsible for the budget, which becomes an enabler or limiting factor for all of the above. They review the last period’s performance and use it to create baselines and adjustments that the S&OP team must adhere to.
• Executive: In an effective S&OP process, the executive should be C-suite or even CEO. The executive chairs the meeting, not only to provide the process with gravitas but also to resolve conflicts and issues as the highest point of escalation.

 

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What does the S&OP process entail?

 

There are three key stages to the S&OP process, which take place at a regularity that suits the organisation and the product. Typically, they are monthly or quarterly.

 

1. Prior to the S&OP Meeting

The various functions involved in the S&OP process perform their duties before the S&OP meeting itself. These include:

• Sales, BD & Marketing provide an overview of the strategy for the upcoming period, including promotions and launches. Provide this information to Demand Planning.
• Demand Planning use the information from the Sales, BD & Marketing teams to turn an Initial Demand Forecast into an Adjusted Demand Forecast, which can then be used by the other departments.
• Production planning: Creates a Production Plan based on the Adjusted Demand Forecast, which ultimately must also be reconciled to the capacities of the Procurement Plan and must be compatible with the Supply Plan.
• Supply Planning, in collaboration with Demand Planning, reviews the current status of the supply chain, including both internal and external supply risks. Produce an overview of stock levels, inventory targets, safety stock, and scheduling and work this into a ‘Supply Plan’ depending on the Production Plan.
• Procurement taking into account supply contracts, pricing, and supplier status, determines the minimum and maximum procurement quantities and work this into a ‘Procurement Plan’.
• Finance reviews the previous period’s performance and the next period’s financial forecasts to produce the budgetary constraints.

Given the level of interaction required between the functions, it can be useful to hold a ‘Pre S&OP Meeting’ or bilateral coordination meetings. This meeting typically takes place without the executive and is used to reconcile plans ahead of the S&OP Meeting proper. This is particularly important when information is flowing in a circular fashion. For example, in a situation where the Supply Planner needs to offload some stock due to an approaching expiration date, and so the sales team works up a new promotion, in the process altering the demand profile; in this case, the sales, demand, and supply plans all need to be adjusted based on the communications between the teams. Finance must be involved at this stage to ensure that any reconciled, consolidated plan is within budget.

The goal of this phase is to create a preliminary consolidated S&OP plan. In preparation for the S&OP meeting, each department should analyze this plan in terms of departmental requirements, identify risks & derive necessary measures. This way, these can be presented in the S&OP meeting and decisions can be made efficiently.

 

2. The S&OP Meeting

The S&OP meeting is attended by all the key stakeholders, including the executive, who typically chairs the meeting. The objective of the meeting is to sign off the consolidated Sales and Operation Plan, which will then inform activities for the next period. The meeting is also a forum in which to address any conflicts and resolve issues. 

The meeting typically includes the following agenda points:

• Performance review for the last period against agreed KPIs
• Presentation of the Sales, Demand, Supply, and Procurement Plans to the executive, including identified risks & necessary measures
• Review of new and carried-over risks
• Consensus building on a consolidated plan for the next period
• Sign-off

An effective S&OP meeting involves collaboration and compromise between the departments; in essence, it is a consensus-building exercise.

 

3. After the S&OP Meeting

Following the S&OP meeting, the plans are adjusted as agreed and the information disseminated to the relevant teams. These activities tend to occur within the departments, though it is often useful to share the final plans among departments to ensure there are no misunderstandings. Any risks or obstructions that become apparent at this stage should also be shared; however, if the process is working properly such occurrences should be infrequent. 

If, for whatever reason, unresolved issues remain after the S&OP meeting – i.e. issues that could not be resolved by the attending executive – they should be escalated to the board or equivalent authority. Any subsequent decisions made by the board will have to be incorporated into the agreed plan.

Once the plan has been implemented, it's probably time for the next S&OP cycle to begin.

 

The Benefits of S&OP

 

An effective S&OP process can transform the effectiveness of an organisation. The key quantifiable benefits are as follows:

• Sales growth through increased reaction speed, better delivery capabilities, reduced out-of-stock, and optimum launch conditions for new products
• Cost reduction through reduction of freight costs due to forward planning, improved order times and quantities, and a reduced need for costly, emergency interventions
• Working capital optimisation through planning accuracy and optimised inventory levels

The benefits of an S&OP process are not only limited to those that impact the balance sheet. The process can be seen as a broader initiative to enhance collaboration between departments, breaking down the siloes that often exist within organisations. To that end, the benefits of the S&OP process reach beyond the process itself by fostering better relationships between stakeholders.

 

S&OP Best Practices: 8 ways to ensure your S&OP process runs smoothly

 

Perhaps your organisation doesn’t have an S&OP process, or it does but it doesn’t work. Whether you’re looking to implement or transform an S&OP process, here are 8 ways to ensure your S&OP process is effective.