Successful Sales and Operations
Planning in 5 Steps
The Sales and Operations Planning (S&OP)1 process is well known and understoodÂ in the world of supply chain management. In most companies, the monthly S&OPÂ meeting brings executives from all major operational departments â€“ sales, marketing,materials/procurement, manufacturing, transportation, and finance â€“ together toÂ determine how best to manage company resources to profitably satisfy customerÂ demands over the next quarter, year and beyond.The monthly S&OP meeting is a critically important, high-level decision-makingÂ activity that sets the overall direction for the company. Executives discuss the variousÂ trade-offs between customer service, inventory investments, production capabilities,Â supply availability, and distribution concerns. In essence, the executives determineÂ how the companyâ€™s resources will be spent in an effort to strike an optimumÂ balance between what generates the most profit and satisfying the companyâ€™s mostÂ important operational goals.Â Thereâ€™s no debate, S&OP cannot be completed effectively without reliable, accurateÂ information. The S&OP team must have up-to-date information regarding futureÂ time-phased demand, production capabilities, inventory status, and any limitationsÂ on resource availability such as warehouse space, transportation capacity, limits onÂ cash or credit, and their influence on each other and overall company results.Â There are a number of tasks and analyses that need to be completed prior to eachÂ executive S&OP meeting to make the most efficient use of the monthly planningÂ session.
â€¢ Innovation and Strategy Review â€“ impact of New Product Introductions (NPIs)
â€¢ Demand Review â€“ includes base-line demand as well as demand sensing and
demand shaping activities
â€¢ Supply Review â€“ monitor inventory levels and production capabilities
â€¢ Financial Integration â€“ ensure balanced demand and supply plans meet
company financial objectives and are within working capital constraints
â€¢ Executive Business Review â€“ executives from all major departments review
future plans and impact
These tasks gather and prepare the information the S&OP team needs to fullyÂ understand the range of considerations that must be included in their decision making.Â Armed with this information, the S&OP team can make the tough decisionsÂ that will ultimately determine how well the company performs, regardless of theÂ priorities and challenges.
S&OP Process Challenges
As with any multi-department process, there willÂ be challenges that a company must overcome.Â An October 2009 AMR Research report identifiedÂ these key S&OP challenges:
1. Data timeliness and quality
2. Using plan in daily operations
3. Connecting strategy to S&OP
4. Moving from demand/supply focus toÂ profitability
5. Getting plan agreement
As S&OP became more global and companiesÂ settled in to the process of bringing teamsÂ together, according to the AMR Research2 report,Â the big challenge changed from coordination of
global teams in 2007 to the need for data qualityÂ and timeliness. Data was pulled from disparateÂ systems at different times and often deliveredÂ differing results from an overload of Microsoft Excel
spreadsheets. Instead of one version of the truth,Â organizations have been faced with conflictingÂ opinions of fact.Â The right tools in place help ensure data qualityÂ and drive towards determining a feasible planÂ where consensus can be reached by all attending
departments. There are many tools available todayÂ to gather and prepare the information and modelÂ the multiple scenarios that are needed for anÂ effective and efficient S&OP process. The more
thorough the preparation, the more efficient andÂ effective the meeting will be and the better theÂ resulting plan.Â The second most identified challenge was usingÂ the plan in daily operations. The natural tendencyÂ is to attend to the â€œsqueaky wheel.â€ The changeÂ in thought process has to be towards the activityÂ that provides the Â reatest impact towards reachingÂ corporate goals. S&OP helps develop a plan andÂ set priorities to maintain this focus.
Another challenge that has appeared in manyÂ research studies is the integration with financeÂ and understanding the role of finance in S&OP.Â In an increasingly cost conscious environment,Â integrating finance into the equation is gainingÂ importance. While a shift, it also follows with recentÂ data from AMR Research3 that shows more thanÂ 60 percent of supply chain executives now reportÂ directly to a member of the C-suite. ExcludingÂ finance in the process can cause S&OP to lackÂ support of the executive team and whither on
the vine.Â Another key reason to have finance involved isÂ the concept of shared metrics. Without visibilityÂ of the financial impact of decisions made duringÂ S&OP, it is difficult to fully understand the impactÂ of sourcing, inventory, postponement, and otherÂ pivotal business strategies. (The concept andÂ impact of metrics on the S&OP process will beÂ discussed in more detail later in this paper.)
S&OP is a process that by nature unites allÂ key constituents to a single goal. Senior levelÂ executives responsible for sales, marketing,
materials/procurement, manufacturing,Â transportation, and finance meet to consider theÂ needs and constraints of each of their respectiveÂ areas in light of overall company objectives, and
agree on an operating plan for the next month,Â quarter and year. This process is repeated eachÂ month as the plan is updated and extended.
The key word here is agree. The S&OP processÂ is one of compromise. The best performance inÂ inventory control, that is, the lowest inventory level,Â will not yield the highest customer service. HighÂ customer service is expensive. The most efficientÂ production will likely increase inventory and mayÂ not coordinate with sales shipment objectives.Â Dealing with these trade-offs is at the heart of theÂ S&OP process.Â In order to balance sound business decisions to
construct the best overall plan, the S&OP teamÂ must have accurate, reliable information â€“ theÂ current status, future conditions, constraints, andÂ concerns about demand, production, inventory,
procurement, and finance. They must also knowÂ how changes and decisions in one area impactÂ performance in others. And, they need theÂ flexibility to evaluate multiple business scenariosâ€”
optimistic, pessimistic and realistic. Without thisÂ information, executives must rely on experience,Â intuition and risk assessment.
These challenges are not insurmountable; in fact,Â the following five steps can make your planningÂ process impactful and effective.
Step 1 – Innovation and Strategy Review
An important consideration for any company isÂ managing product life cycles.
â€¢ What products should we introduce to the
â€¢ When should we introduce them?
â€¢ What products should we sunset or
These are all critical questions to answer and theÂ impact on sales, production, inventory, and financeÂ must be understood.
Introducing new products is a key aspect ofÂ the innovation and strategy review. NPIs canÂ significantly impact the well being of a companyÂ including inventory and lost sales. The ability to
predict sales on NPIs, where there is no salesÂ history to model, can be difficult. TraditionalÂ time-series forecasting tools that utilize history willÂ not work effectively for NPIs. To overcome these
challenges, more advanced techniques must beÂ employed.Â Companies that have been successful in
managing NPIs utilize advanced techniques suchÂ as attribute-based forecasting which generatesÂ demand profiles for new products based onÂ existing product demand tied to identifiable
attributes such as style, color, season, materialÂ type, etc. A well-designed attribute-basedÂ forecasting system will continually monitor demandÂ signals, quickly recognize any deviation from the
forecast, and adjust the assumptions and forecastÂ to match the actual demand signals.
In addition, attribute-based forecasting techniquesÂ can be used for product retirements. When retiringÂ a product, the history for that product is no longerÂ a reasonable indicator to predict a retirement
demand profile. Attribute-based forecasting is aÂ preferred method to predict how fast or slow theÂ product will sell during the retirement phase byÂ looking at how products with similar attributes
have been previously retired.
Having solid forecasts for NPIs and retirements is anÂ essential first step in preparing for the S&OP meeting.
Step 2 – Demand Review
A primary output of the S&OP process is aÂ decision on the level of customer service theÂ company will strive to achieve through the
effective use of all of its resources. To plan to meetÂ demand, you must know what current demandÂ is and how it can change over time, the art andÂ science of the forecast.
Proven forecasting techniques rely on rigorous statistical analysis of past demand includingÂ orders, shipments and point-of-sale (POS) patternsÂ overlaid with demographics, product lifecycle
projections, seasonality factors, and managementÂ judgment. These techniques abound for matureÂ products with a sales history though each stillÂ requires consistent and accurate information.
To this end, collaboration is critical and mustÂ be sought whenever possible while developing,Â refining and creating consensus forecasts.
Customers, distributors, sales reps, and marketingÂ all have information and insight that can augmentÂ and improve on the statistical forecast to boostÂ accuracy.
A forecast is never 100 percent accurate.Â Realizing this, management will formulate plansÂ that recognize expected forecast error andÂ compensate accordingly. Nevertheless, it is
important to monitor forecast accuracy on aÂ continuous basis. As real demand occurs, it canÂ be captured and compared to the forecast. EarlyÂ detection of differences and trends will help avoid
shortages / over-production and can be usedÂ to adjust the forecast to bring it closer to actualÂ demand. This should be completed on a regularÂ basis, even in between scheduled updates.
Multiple demand signals can assist in sensingÂ changes in demand patterns. For example, orders,Â shipments and POS can be used in combinationÂ to show if changes occur. The most detailed and
up-to-date demand signal is POS since it providesÂ true consumer purchasing activity. Anything furtherÂ upstream does not indicate how much of theÂ product actually sold; it simply provides details
on what is still in the customer supply chain.Â For purchase parts and raw materials, manyÂ companies have established close collaborative
relationships with their suppliers to pass actualÂ usage data upstream for POS-like timeliness.
Recent analyst firm surveys have shownÂ manufacturing executives cite a strong need forÂ improved forecasts and more timely demand
sensing to provide more visibility to supply chainÂ and manufacturing teams into real demand toÂ provide field sales people or brokers with a betterÂ ability to resolve out-of-stocks and capitalize on
selling opportunities as well as improve stockÂ positions, especially on promotions. DemandÂ sensing also enhances the ability to differentiateÂ the demand for individual products within product
lines or groupings. Not all products sell at theÂ same rate; inventory position and policy mustÂ recognize these differences to be able to provideÂ optimum availability and avoid stock-outs and/or
Often, company management and the S&OPÂ team take the approach that demand variability isÂ a given; and the challenge is to understand it andÂ act in the most effective way possible. That is true
to a certain extent, but demand can be influencedÂ and driven to meet the companyâ€™s objectives.
Through proactive measures, you can shapeÂ demand to meet company goals.Â Many companies are engaged in demand
shaping; however, most do so disconnectedÂ from the overall operational plan. It is crucial forÂ a companyâ€™s on-going profitability and growthÂ to make demand shaping an integral part of the
S&OP process.Â For example, if one plant has available capacity,Â it might be prudent to develop a promotion planÂ to drive demand to fill up that plantâ€™s capacity.
Promotional activities in support of a new productÂ launch are frequent demand shaping techniques.Â Advertising, pricing actions, coupons, andÂ incentives to salespeople, dealers or retailers are
all examples of demand shaping activities.Â Any demand shaping plan must be developedÂ in conjunction with the forecast. As demand
is changed the forecast must be adjustedÂ accordingly or you will create a major rippleÂ throughout your supply chain. Thereâ€™s an iterativeÂ loop implied here:
â€¢ Initial forecasts and plans reveal anÂ opportunity where increased demand wouldÂ improve results
â€¢ Demand shaping activities and expectedÂ results are proposed
â€¢ Forecast changes reflect the expectedÂ changes in demand
â€¢ The full planning process reveals the resultingÂ changes in sales, inventory, production,Â logistics, customer service, and profit
Inherent in the demand review is balancing theÂ demand plan against the companyâ€™s overallÂ financial objectives. It is critical the demand planÂ and the alternatives presented at the executiveÂ S&OP meeting are created to meet service level,Â inventory, production, and profitability objectives.
Step 3 â€“ Supply Review
Once the demand plan is finalized, the supplyÂ team needs to determine how they can meet theÂ demand plan. Two elements are key in determiningÂ how to profitably satisfy the demand plan.
1. Inventory Optimization â€“ How much inventoryÂ is currently available and where is it in theÂ supply chain?
2. Production and/or Procurement Optimization -Â Do we have the production or purchasingÂ capability to meet the demand plan?
Inventory is one of the largest investments that aÂ company will make and is the primary determinantÂ of customer service. It is therefore appropriate thatÂ inventory policy and specific inventory positioningÂ decisions be key outcomes of the S&OP process.
Where to keep product across the supply chainÂ including raw material, work-in-progress (WIP)Â and finished goods helps optimize the financialÂ investment in inventory.
The primary purpose of finished goods inventoryÂ is to meet expected short-term demand whileÂ components and raw materials provide for theÂ needs of manufacturing to meet future demand.
The right amount of the right inventory in the rightÂ place at the right time helps prevent lost salesÂ though this must be balanced with the cost andÂ risk of holding too much inventory as that willÂ place a strain on cash flow. To balance this, manyÂ companies optimize for each location, product,Â and channel within overall company objectives
such as total inventory investment and customerÂ service requirements.Â The best way to set inventory plans and policiesÂ is to thoroughly analyze and understand theÂ relationships between various stocking decisions,Â service levels, and inventory investments for eachÂ category of goods, channel, and customer orÂ customer group. This is where the most difficultÂ decisions are evaluated. The sales team wantsÂ the ability to ship any product every day which
requires a higher inventory level to improve fill ratesÂ and avoid stock-outs. Procurement and finance,Â on the other hand, want less inventory to reduceÂ costs and improve cash flow. Production wants
more components and raw materials to reduce theÂ risk of manufacturing disruptions due to shortagesÂ and wants to match production schedules withÂ efficiency, regardless of demand. The heart of theÂ S&OP process focuses on balancing these tradeoffs
to develop the plan that best satisfies theÂ needs of the company as an entire organization,Â not just a silo within the company.
To optimize inventory, supply chain leaders runÂ simulations that explore the dynamics of theÂ demand/inventory to Â vailability/service levelÂ relationship. They also review and identify the idealÂ stage, raw, WIP and finished, for each product inÂ inventory, and the proper placement of inventoryÂ in the distribution network. Simulation allows aÂ choice of methods including minimize inventory,Â service objectives, minimize short shipments, andÂ various order quantity options including economicÂ order quantity (EOQ), inventory turns, â€˜xâ€™ days ofÂ supply, capacity-limited EOQ, etc. Additionally,Â these leaders consider the redeployment ofÂ inventory, moving of excess inventory from oneÂ warehouse or distribution center (DC) to anotherÂ DC instead of making more product.
To take this a step further, you can include plannedÂ events such as pricing actions, sales incentives,Â advertising changes, and competitive actionsÂ when running the simulations. Simulations and
proper planning through collaboration can helpÂ make sure there is sufficient inventory and logisticsÂ capability to cover any changes in demand drivenÂ by these events.
The bottom line is about shipping product â€“ when,Â where and how much. The challenge is to developÂ a supply plan that profitably meets companyÂ objectives. When developing a supply plan,
manufacturing must take into account multipleÂ considerations including:
â€¢ Do not exceed a pre-set level of productionÂ on certain products during a specific period,Â or overall production during a given time,
whether expressed in units, pounds, hours, orÂ some other indirect measurement
â€¢ Do not exceed the availability of certainÂ components
â€¢ Do not exceed production capabilities; noÂ overtime
â€¢ Minimize inventory build-up to accommodateÂ high-demand periods (this often conflictsÂ with the previous point)
â€¢ Do not exceed a certain level of inventory atÂ one, several, or all distribution center(s) or doÂ not exceed a certain inventory value or
volume at a location, a group of locationsÂ or overall
â€¢ Maintain 99% service for certain customersÂ and 95% for the rest, or different serviceÂ levels for various products, product lines,
channels, or regions
â€¢ Minimize less-than-truckload (LTL) shipments;Â minimize overall transportation costs;Â eliminate premium freight; or only use owned
or contracted transportation resourcesÂ The only way to intelligently make this kind ofÂ complex decision is to have the information
available along with the ability to explore theÂ impact of various factors through simulation.
The ability to see the interaction among theÂ various factors is the key to ensuring the supplyÂ team is effectively utilizing available resources.Â The supply team will analyze the findings of the
various scenarios, and perhaps suggest alternativeÂ strategies that can be modeled to test theirÂ effectiveness.Â Collaboration is essential at this stage. It isÂ important to discuss alternative scenarios with
the affected partners and ensure that critical partsÂ and resources can be made available in sufficientÂ supply to support any plan that the company mightÂ want to enact. It is also appropriate to discuss
any significant changes in demand or distributionÂ expectations with the affected sales people to getÂ their concurrence that the expectations are realisticÂ and uncover any possible snags in the plan theyÂ might be able to identify based on their knowledge
of the customers and the markets.
Step 4 â€“ Financial Integration
This is the most critical of all the pre-S&OPÂ processes. While the demand and supply teamsÂ have kept the companyâ€™s overall objectives inÂ mind, in many businesses some bias creeps into
the process. The financial review step removesÂ that bias. It is at this time that all constituentsÂ agree on the final demand and supply plan andÂ what alternative plans will be presented during the
executive S&OP review.
It is crucial during the financial integration stepÂ that key metrics are balanced against companyÂ financial objectives. A key technique in boostingÂ S&OP effectiveness is leveraging shared metrics.
This combats the issues when objectives areÂ looked at from a silo perspective. For example,Â the VP of manufacturing may be measured onÂ how efficiently operations utilize available resources
(total uptime). When viewed from a silo, runningÂ at 98 percent efficiency looks fantastic; however,Â when viewed from a shared metric perspective, 98Â percent efficiency may drive excess inventory inÂ products where there is little or no demand. That is
why it is imperative to adopt a shared metric viewÂ for S&OP.Â Figure 4 shows a number of metrics thatÂ companies can use to measure the health of theirÂ supply chain. But it is not a one size fits all view.
Each company must look inward and determineÂ which metrics they need to focus on that willÂ enable them to sustain profitability.
Step 5 â€“ Executive Business Review
The ultimate objective of the S&OP process is toÂ leave the meeting with an operational plan thatÂ best achieves the companyâ€™s objectives withinÂ known constraints. The deliverable from the
executive business review is a list of actions thatÂ implement the decisions and plans agreed upon.Â Besides reviewing best case and alternativeÂ demand and supply scenarios, it is imperative that
executives assess risks to their supply chain.Â Risks include:
â€¢ Quality issues
â€¢ Supplier failure
â€¢ Demand spikes
â€¢ Demand disruptions
â€¢ Strikes â€“ internal and with external suppliers
Understanding the impact from these and otherÂ risks and having contingency plans in place isÂ paramount for any company. Having the supportingÂ information from the demand, supply and financial
teams makes this an informed decision as opposedÂ to a â€˜shooting from the hipâ€™ decision.Â Between meetings, department heads andÂ managers carry out instructions, and keep a closeÂ eye on current activities and events in order toÂ detect any deviation from what was outlined in theÂ plan and bring that information to the attention ofÂ the appropriate individuals as quickly as possible.
Corrective actions can bring the situation backÂ in line or, if that isnâ€™t possible, the plan may haveÂ to be revised with the new constraints in force.Â Simulation becomes a key tool once again inÂ responding to deviations from the plan; alternativeÂ responses can be tested for the S&OP team toÂ consider in revising the plan.
A Plan Goes into Action
Sales, inventory and operations planning comeÂ together in the form of a monthly meeting betweenÂ the executives responsible for sales, marketing,Â inventory, procurement, production, and finance.
At the executive S&OP meeting, the challengingÂ decisions are made as to how the companyâ€™sÂ resources will be applied to meet company
objectives, including customer service andÂ profitability, within the constraints and capabilitiesÂ available. Typically, a one-year plan is advanced,Â with successively more detailed quarterly and
monthly plans. Once the plan is set at the monthlyÂ meeting, the group does not need to meet againÂ until the next month unless there is a significantÂ deviation from the plan that must be addressed
immediately.Â Because the primary business of the executive
S&OP meeting is to compare and balance tradeoffsÂ between the various competing objectivesÂ this information must be made available to theÂ team before and during the meeting. Proper
preparation can make the S&OP meeting efficientÂ and effective.Â This planning involves the need to model severalÂ scenarios and understand the impact each hasÂ to the company. It is easy and more comfortableÂ to provide the model that everyone wants to see;
however, understanding how deviations in supplyÂ or demand can lead to more reliable roadmapsÂ and growth, and improved bottom line results.
Planning software provides the ability toÂ develop â€˜what-ifâ€™ plans and scenarios to testÂ possible changes in policies, the effect ofÂ constraints and varying conditions. The resultÂ of this analysis is reviewed by the S&OP teamÂ and additional scenarios might be run toÂ test other alternatives while developing theÂ final plan.Â For example, through modeling multipleÂ scenarios, opportunities may be uncoveredÂ where demand shaping can stimulate sales. InÂ these cases, additional models can prove theÂ validity of promotional programs and incentivesÂ through revised plans. The next step is to
confirm the new plans through collaborationÂ with key suppliers, sales personnel, logisticsÂ suppliers, and others that might be taxed byÂ unusual demand for their products or services.Â The more work that goes into the preparationÂ process before the meeting, the more efficientÂ and effective the meeting will be. TheÂ availability of simulation tools for use duringÂ planning discussions makes the decisionÂ process much more precise and allowsÂ executives to clearly see the impact of theÂ operational and policy decisions they
are making.Â Proper preparation creates a defined,Â repeatable process and gives executives theÂ confidence to develop and execute the bestÂ plan possible to drive the business toward its goal.