A slew disruptions have hampered the smooth operation of many companies in the past few years. Many are unable to get the products they want to their customers or the necessary parts. Business leaders should prepare for the economic uncertainties that are likely to persist in the near future. They can help their company adapt to these changes more efficiently and effectively.
According to my experience as a consultant in business planning and operations, the best method for achieving this goal is sales and operations plan (S&OP). This collaborative method can be implemented in different ways, but all of them help businesses develop an integrated long-term strategy (12-18 months) which includes and aligns the specific objectives set by both commercial divisions (products, sales and customer service), as well as operations. I recommend that companies also include the finance division (financial budgeting and cost management), as well as global strategy, when they implement S&OP. This method is sometimes called integrated business planning.
S&OP, as an iterative approach, incorporates input from all stakeholders. This allows a business to react quickly to changes in the environment. One of the main benefits of this approach is its ability to match daily operations with business goals, and also sync up supply with demand.
Companies who use information constantly to adjust can anticipate problems. S&OP, for example, can warn firms when they need to find alternative suppliers, manufacturers or distributors if their usual partners are unable to deliver. I worked with a company that purchased products in Ecuador to sell to their customers a few years back. Our vendors in China were having trouble supplying us with parts. In the S&OP process, we found an alternative parts distributor and had researched it. We reacted quickly when obstacles arose to ensure that we could get our products through this new supplier and minimise any negative impact for our customers.
Our experience is not unusual, according to research. McKinsey & Company’s assessments of over 170 organizations found that companies with a successful IBP have higher service levels, lower freight costs, lower capital intensity (total asset divided by sales), and lower customer delivery penalties, as well as missed sales, by up to 50 percent, than companies that do not use IBP. Companies with optimized IBP are up to 20% more efficient than those without, and can respond quickly to disruptions.
S&OP may not be a brand new concept, but the recent supply-chain crisis made it obvious that many companies do not benefit from this process. This is either because the processes are not in place or aren’t being used to their full potential. This article shares my thoughts on how to implement S&OP so that your business can handle supply chain issues and potential disruptions such as freight container limits, natural disasters or IT outages.
S&OP optimization is important now
S&OP was first introduced to me more than 20 years ago when I set up the manufacturing resource planning system for a cosmetics company. S&OP back then was an effective way to align company goals, increase productivity and decrease waste when problems that weren’t the norm arose. S&OP is now a must-have for companies that depend on multiple supply chains.
The global disruptions to the supply chains caused by COVID-19, the Russia/Ukraine conflict and the sky-high freight shipping costs, as well as the limited supply of shipping containers, have largely subsided. There are still unknowns ahead. McKinsey’s Global Institute found in a report that “supply chain disruptions lasting at least a month are likely to happen every 3.7” years. The accumulated loss of such events can be as high as 42% over the course of a decade.
Supply chains today are long and complex. They can be highly susceptible to interruptions. This includes extreme weather, terrorism or commercial disputes. S&OP plays a vital role in this. According to The Hackett Group’s 2020 survey, chief supply officers have ranked improving S&OP as their top priority. It is also a major focus for optimizing. It is an implicit acknowledgement of the fact that a simple process is not enough. A poorly executed S&OP may also hinder an organization’s capacity to identify alternate customers, suppliers, or distributors, as well as its ability to enlist alternative manufacturers, vendors and distributors.
Unexpected events have long been a concern for companies. They could affect their ability to obtain the necessary materials, meet customer demand or deliver their product. Today’s high-productivity businesses are more vulnerable than ever, relying on an increasingly fragile global value chain.
The S&OP Process
Let’s first examine the S&OP design. This is a collaborative process involving input from all departments at each stage. The first step in implementation is the creation of a multi-functional S&OP group that will work to finalize and coordinate plans for each phase. The exact makeup of your IBP team will depend on the size and composition of your business. However, the IBP method usually involves people from these departments:
- Commercial ismanagers of product, customer service, and sales. Demand managers and planners are also included.
- Operation: Production master schedulers, supply chain planners and buyers.
- Finance – Controller, Costing Accountant, Financial Planning Manager or Budget Manager
The main steps of the S&OP process are the same, no matter who’s on your team.
The S&OP Process: Core Steps
You can modify these steps to fit your company. If one meeting becomes unmanageable or too complicated, it can be divided into two smaller ones. If, on the other hand a number of meetings are short, they can be combined into a single session.
- Review of the product portfolio: The goal is to create a corporate-wide product strategy that is unified by analysing the product lifecycles. To allow the S&OP group to have a comprehensive view of the products and services that are going to be launched and offered to the customers, the S&OP teams will need to collect data from all departments. This includes previous sales and forecasts, inventories, production capacities, demand projections and any external factors that may affect the demand. This step takes into consideration the latest financial information, including production costs and margins as well as holding costs, transport costs and other costs. S&OP being an iterative procedure, this plan is integrated with the product review after the initial presentation.
- Planning demand: This step has the goal to align your organization’s sales and resource goals so your supply chain and production can quickly produce inventory in order to meet customer expectations. The process is based on past and future demand forecasts and patterns to determine the need for services and products throughout the entire supply chain. The historical sales figures, the market conditions, and any other pertinent information from different departments is analyzed in order to determine how many of each product or service are needed. It is important to get input and feedback from your operations team so you can determine realistic demand levels based on product availability. S&OP also analyzes and adjusts the demand plan to align it with company strategic goals such as product line growth and discount percentage.
- Operational/supply planning: The demand plan will be translated into an inventory plan to ensure that supplies and inventories are ready for the anticipated demand. Some tasks include forecasting the demand for inputs such as raw materials and components; identifying potential suppliers; monitoring the performance of those suppliers; identifying potential supply risks (such as freight restrictions, disruptions of supply chains, or changes to market conditions) and creating plans to reduce these risks.
- Financial Planning:Financial planning is based on demand, supply and operations plans. The financial team uses the estimated demand and costs for products and services to determine the financial performance of the business over a certain period. Here, you will need to deliver the following: the P&L projection, projected cash flow, and budget compliance. The cost is only a secondary consideration. The S&OP cross-functional team discusses and reviews the plan along with the demand and production plans in order to ensure that the financial goals of the company are aligned to its operational goals, and to make sure that it has all the necessary resources to meet the demands and reach its financial goals.
- Presentation of executive S&OP: The S&OP Team then presents to the senior management the key points in the plan, to gain their input, approval and buy-in. The team, along with the leadership, will often consider what-if scenarios when making decisions or final adjustments to a plan. After reviewing the recommendations of senior management, the S&OP group incorporates them and moves forward. This meeting will produce a plan which is comprehensive and integrated, aligned with company strategic, financial, and operational objectives. The plan will be used to inform the S&OP for the following period.
The S&OP cycle, which is repeated every month, allows stakeholders to remain aligned, while continuously refining their long-term plans based on changing business requirements, supply chains, and market conditions. Since the daily activities of each department are directly connected to the long term plan, they can all act quickly to deal with unforeseen circumstances. S&OP should immediately be informed of any changes to needs and circumstances. This includes new constraints or changes. A long-term strategy that is regularly revised can also help your business reach agreements with key vendors and customers. It will increase responsiveness and margins, as well as improve the relationship between you and them.
S&OP Tips: 5 Steps to Success
It’s been 25 years since I began working in S&OP, and five issues have consistently hindered successful implementation. Here are five best practices that your company should adopt to get the most out of S&OP.
Continue to collaborate
S&OP is often seen as a linear process by many companies: the commercial team creates a requirement for demand, while the operations team produces enough inventory to meet it. The business will not be more responsive if you follow this approach. You must instead get everyone on the S&OP multidisciplinary team to start working together, not sequentially. The commercial team must communicate with the operations as develops its demand plan, so that operations can begin producing inventory. Operations must also talk with the finance team to find out how much stock the company is able to afford.
It’s not a given that this kind of collaboration will occur. In 2005, when I began working for a local branch of a major food processing and manufacturing corporation, there was no dedicated S&OP or effective S&OP process. The commercial department would present a monthly plan of demand, but operations would always alter it and then develop its own plan without sharing with commercial. There were therefore two plans that ran in parallel.
The team that I created to optimize S&OP in this company began by analyzing objectively historical data. We then used these insights to make corrections on the original plan. What was the result? The result? The commercial team was able to promote their promotional strategy and the operations group could pay for it. After seeing the benefits, departments began to work together more, leading to faster planning.
Leadership is key to success
The effectiveness of the S&OP process is significantly weakened by a CEO/general manager that does not commit fully to the plan created by the S&OP Team. S&OP aims to align and maintain all departments. Subordinates must follow if a CEO doesn’t understand the process, or is unaware of it. The company will at best be divided; at worst the departments may be at odds. S&OP is not always integrated in the decision-making of executives because it’s seen as an option.
My first step when I introduced S&OP to a major cosmetics company in Latin America was to meet with the manager of one business unit to talk about the process. He didn’t want to have an extra meeting because he already held a committee monthly with senior employees. I proposed merging meetings, and reviewing key business KPIs along with S&OP plans. The first meeting lasted over 10 hours. It showed him the benefits of the method, so he agreed to use it for the business. The GM helped to define the plan and agreed to oversee it. He also gave his team unwavering support. The executive S&OP meetings were shortened over time to less than 3 hours.
Hold people accountable
In every organization, a S&OP requires the execution of daily tasks that have due dates as well as a clear chain of responsibility. Each participant is responsible for their duties. It should come as no surprise that accountability is important, yet I have seen it neglected by many organizations. The worst thing that can happen to an S&OP group is for them to realize the plan has failed simply because someone didn’t finish a particular task.
Senior management should not tolerate failures but hold each member of the S&OP Team accountable. To make this work, it is important to clearly define responsibilities. It is important to track and specify each individual assignment. There should also be consequences for failing to fulfill duties, as well incentives for success. To achieve this, you can tie your earnings to your performance.
Shut off the noise
Focus is essential for S&OP. Many implementations that I have worked on waste time by team members reviewing historic results. This is often due to them arguing, trying justifications for their decisions, or blaming past failures. The historical results are only to be used as a reference point for the S&OP Process. I have a general rule that your team should spend one third of their time reviewing the past, and the other two thirds developing and analyzing the plan for the next.
Poor data management or quality is another source of noise. This can include inconsistent data across departments and a lack of clarity in data preparation. Your S&OP team’s first meeting should be used to define, implement, and agree on a formal method for gathering, integrating, and presenting data. You can then quickly take decisions on the basis of data that is trusted by all departments, which will help the business pivot in response to a disruptive industry change.
Continue to Streamline Information
Communication channels and communication practices will determine how quickly companies can react. According to my observations, companies that were able to respond effectively and quickly when faced with COVID-19 supply chain restrictions gathered information rapidly throughout the organization as they took collaborative decisions. To stay aligned, commercial, operational and financial departments need to have solid communication systems. Meetings at least weekly and daily updates are required.
The food company that I spoke of earlier was a perfect example of the consequences of poor communication. Commercial and operational departments did not share information in a consistent manner and failed to follow an unified plan. The commercial department didn’t share the sales figures with operations, which led to an overproduction of product. The company was left with unbalanced inventories and large quantities of scrap product due to expiration. This resulted in losses close to $1,000,000. In order to solve this problem, I created an Excel sheet that managed inventory based on the first-expired-first-out principle using a forecast and stock. The spreadsheet generated alerts, which prompted the operations team to make adjustments to their estimates. This allowed the commercial department to create promotional campaigns for products at risk. This process was strengthened by weekly meetings. The S&OP team cut product write-offs in half within a year.
You can’t delay information like the inventory level of products at risk. Companies should not only implement the S&OP communication cycle, but also communicate well on a daily basis, which is what some companies call S&OE (Sales and Operations Execution).
S&OP implemented optimally helps you anticipate problems and solve them quickly. Long-term planning improves the ability of your company to minimize disruptions in your supply chain or other networks. Regular review and revision is also emphasized to keep business running as usual. While the initial set-up may take time, effort and thought, it will enable your business to be able to react adroitly no matter what comes its way. Change is inevitable, but you can prepare for it.