There are as many definitions of S&OP as there are practitioners and consultants (maybe more). Here's one we've found applicable across many businesses and industries:
Sales and Operations Planning is a continuous, structured process for managing the supply chain so that supply is balanced with demand in accordance with the business strategy.
It incorporates Demand Planning, Supply/Demand Balancing, and Inventory Management subprocesses which meet monthly and interact continually to create and execute a single set of integrated plans.
It provides continuous monitoring of performance vs. plan and a disciplined way of responding to changes to minimize disruptions and maximize the bottom line. The process culminates in a monthly meeting at which
recent performance vs. plan is reviewed, and
plans and alternatives for future sales and operations are presented to senior management for decision-making / approval.
The definition is deceptively simple, perhaps, until you examine the details. Let's point out the most important points, so you can compare with your business' current state:
Continuous, structured process
Single set of integrated plans
Subprocesses&8230;interact continually
Disciplined way of responding to changes
Senior management decision making/approval
Continuous, Structured Process
S&OP is not just a monthly meeting. Nor is it something you do sporadically and only when there's a crisis to address. Occasional flashes of brilliance are great, but you can't count on them to run a supply chain. S&OP is a way of managing the entire supply chain for dependable, reliable, reproducible results.
S&OP is also a structured process. The same set of steps and subprocesses are repeated each month in preparation for the "Executive S&OP Meeting." Meetings are scheduled a full year in advance, to avoid calendar conflicts. Charts (very similar month to month) are issued beforehand and minutes afterwards. Action items have both responsibilities (who) and timetables (when) attached, and are reviewed at the following meeting.
While entire organizations may be allowed to participate by teleconference, the speaking roles are clearly defined in order to keep the meeting focused and brief (1 to 1 ½ hours). All the hard work either has been done before the meeting (generating plans, alternatives, pros and cons, assumptions) or will be done afterwards (executing the plans and monitoring for adherence to plan). Anything unusual or controversial has already been communicated, so that there are no surprises at the meeting itself.
Single Set of Integrated Plans
Here is the heart of the S&OP process, often referred to as "one set of numbers" or a "single version of the truth." In businesses without an S&OP process, even those which may have some sort of demand and/or supply planning in place, all too often each function has its own set of spreadsheets containing its "version of the truth."
Finance is working off a set of numbers all its own, instead of a dollarized version of the S&OP plan. Sales may or may not have a forecast. Operations may or may not believe it and so may decide to "adjust" it to what they think is more realistic. Or perhaps no sales forecast is provided, so that operations are forced to do the best it can to outguess demand and produce accordingly.
Pity the poor business (true story) in which the demand planner found out that his plant was going to be down for three weeks. He was stocking out of product right and left when, half way through that time, he finally called the plant. He had assumed they were having mechanical problems ' but learned that they'd decided unilaterally to go down for inventory control. Obviously, there was no S&OP process in this business.
So how do you get to a single set of integrated plans? That's where the subprocesses come in.
Subprocesses . . . Interact Continually
The Demand Planning, Supply Planning (also called Supply/Demand Balancing), Inventory Management, and Financial Planning subprocesses are not strictly sequential and are definitely not independent of each other. Each has a cross-functional component.
The Demand Planning meeting, for example, should include a representative from supply planning. Why? Suppose Sales proposes to double the amount of product X it sells for next month. The supply planner may be able to say without reference to anything but the knowledge in his head that supply of product X is very tight, and there's no way operations can supply double the usual amount next month. Or suppose Marketing wants to pull the introduction of a new product up two months earlier than previously planned. The supply planner may be able to say right away that the equipment required can't be installed within that time frame. By having supply planning represented in this meeting, we can prevent a lot "looping back" to revisit earlier stages in the planning cycle. This is why it's so important to have cross functional representation in each subprocess meeting. In addition, it's important to have each function hear and understand the discussions to comprehend "where the other side is coming from" instead of just looking at the final output and wondering, "What in the Sam Hill were they thinking?"
Similarly, at each step of the way, finance needs to be identifying gaps between plans and the Annual Budget or other financial commitment to the corporation. Specific plans to fill these gaps ("hope" is not a plan) must be devised and responsibilities and timelines assigned.
Once a monthly set of plans is approved, communications among the subprocesses continue throughout the month as there are fluctuations and variations from plan.
Disciplined Way of Responding to Changes
Having a "single set of integrated plans" doesn't mean blindly following the plan all month if, for example, expected demand is not materializing, or demand for one product is much higher than expected. What it does mean is that when the "continuous monitoring" detects such deviations, there is a structured, defined way for all plans to change together.
Depending on business policy, this may mean a quick re-cycle of the whole monthly process in mid-month. More efficiently, it may mean that under pre-defined circumstances (e.g., deviation of more than X% from plan), the demand planner and supply planner together, say, may be empowered to collaborate informally with the other supply chain stakeholders and then change the operational plans. In such a case, they would also be obligated to inform all other supply chain participants ' sales, finance, inventory management, top management, etc., of the new plans. The details of the changes, their causes and outcomes, would be reviewed at the next S&OP meeting.
Senior Management Decision Making/Approval
The S&OP meeting itself is not just (or even mainly) for reporting how you did last month. Its reason for being is for decision making by top management. The top business manager, be it CEO or Division Manager or General Manager, is a must-have attendee. All other top management (sales, finance, operations, etc.) must either attend or send a delegate empowered to make decisions in his/her place. The meeting cannot be hamstrung because Joe couldn't make it. Also present, of course, are the Demand Planner, Supply Planner, Inventory Manager, and Finance representative, along with the S&OP Coordinator (who may be the same individual as one of the other roles) who has prepared the slides and made sure all the necessary pre-work and communications are done.
Each month, the S&OP Coordinator presents the integrated plans decided on by the team, along with the assumptions behind them. If there are unknowns to be considered (e.g., there may be a strike four months from now which would idle two of our three plants), then alternative scenarios and the pros and cons of each should be prepared in advance. The art of being the S&OP coordinator is guessing in advance what sort of questions management is likely to ask and being prepared with the answers (How soon do we need to start building inventory if there is a strike? How much will we have to build? What will it cost us? How likely is the strike? If we build the inventory and then there is no strike, how long will it take us to work it off?). Each and every month, top management has a decision to make, even if it is only to approve the single set of integrated plans presented by the team.
Why should a business implement S&OP?
Tangible Benefits
Traditionally, S&OP has been seen as a way of reducing costs ' and indeed, it does that admirably. A study by consulting firm PRTM showed that best-in-class companies typically run with 50-80% lower inventories than the median, while providing 15% higher on-time deliveries and 40-64% shorter cash-to-cash cycle times. Sunsweet Growers, the world's largest producer of dried fruit, reduced its production overruns from 30% to 12% after implementing a full S&OP solution. In addition, they eliminated costly overtime, improved schedule stability, and decreased changeovers.
Perhaps more importantly, S&OP is now being seen as a way to increase the top line as well as to cut costs. Rhodia Eco Services, a $230 million dollar division of global chemicals giant Rhodia, Inc., implemented a full S&OP process which enabled it to improve its overall capacity availability from 85% to over 90%. The increased capacity allows Eco Services to respond more quickly to last-minute changes in demand and to gain market-share.
Aberdeen Group, in its March, 2005 "Investing in S&OP: High Value Opportunities," reported that its research indicates that a typical $500 million revenue/year business investing in upgrading its S&OP processes can gain an average of $25 million/year in gross margin.
Intangible Benefits
One of the greatest intangible benefits of a well-run S&OP process is the increase in organizational effectiveness ' and corresponding decrease in unnecessary pressure on individuals in supply chain functions. Instead of firefighting, these professionals now have time to think proactively about continuous improvement opportunities.
Crises occur much less frequently than before, because the planning process itself creates visibility of potential problems far enough out that alternatives can be developed and contingency plans evaluated and approved.
This is key to the "competitive advantage" we mentioned: it's difficult to put a dollar value on preventing the train from wrecking, but it's far, far better and cheaper than cleaning up after it. You didn't disappoint a customer. You didn't miss your numbers because of out-of-control inventories. As a result, your stock price didn't fall. It's difficult to put a number on being proactive, but it's not at all difficult to recognize the benefits.
Sometimes, once things are running very smoothly, someone will ask, "Why do we need to keep having these monthly meetings?" The answer, of course, is that the process which culminates in the monthly meeting and the consensus path forward which comes out of it are precisely what keeps everything running smoothly.
Why start with S&OP instead of, for example, with scheduling?
Sometimes businesses think that their biggest "pain point" is something very deep in the supply chain process, such as plant scheduling. Why should such a business begin with S&OP implementation instead of plunging directly into improving scheduling?
The answer lies in the description above of the nature and benefits of S&OP. A business needs a coherent plan ' including an agreed upon forecast ' before it can really benefit from improving execution steps. If, as if often true in businesses without an S&OP process, manufacturing distrusts the forecast and schedules based on its own guess, an improved scheduling process could result in simply making more of the wrong stuff. Solving the underlying problem of agreeing upon a "single version of the truth" to be used throughout the supply chain must precede improving execution steps if the business is truly to optimize its supply chain.
What has to change for S&OP to work?
For most companies, effective S&OP means an entirely new way of managing the supply chain. It means that jobs are going to change ' everyone's job. Here are just a few of the key areas that must change.
Data Visibility
One of the necessary prerequisites for a robust S&OP process is the visibility of data. In many businesses, even a single inventory planner, for example, may not be able to easily view his worldwide inventories. With S&OP, many people in many locations can view these inventories, in order to promise orders, plan production, monitor warehouse capacity, etc. Just the data visibility itself tends to allow businesses to improve their inventory levels.
"Data visibility" also implies usability, meaning that paper reports don't cut it. One custom film business had twenty-five voluminous paper reports generated daily from its order entry/inventory system, but no on-line visibility. No one had time even to sift through all these reports, much less to try to understand and correlate the data. Organizing this data so that it could be delivered electronically as useful information gave this business the starting point for developing an effective S&OP process.
Finally, data visibility is necessary for data-cleanup; your decisions can only be as good as the data on which they are based.
Sharing Data and Decision Making
There is no "need to know" in the supply chain. An effective supply chain requires much more open, honest communication than before across functions and hierarchical levels. Decisions have to be made more quickly, using a wider range of data, and considering a wider range of alternatives ' and the decision-making authority needs to be pushed as low as possible in the organization. Furthermore, since supply chain personnel are generally already juggling more data and alternatives than they can possibly analyze, enabling technology will be necessary to allow such broader-based decisions to be made.
Re-inventing Reward Systems
Frequently, the incentive systems in functional silos within a supply chain reward behavior which optimizes the metrics for that silo but suboptimizes the business as a whole. For example, sales reps are frequently rewarded for exceeding forecast (which wreaks havoc with supply), while manufacturing is rewarded for maximizing yield, regardless of whether the pounds they are making are the ones the business needs. Incentives need to be redesigned to recognize that everyone, regardless of function, needs to work toward "optimizing the whole, not the parts."
Education on the Big Picture
If everyone is to cooperate on "optimizing the whole," everyone needs to understand the impact of his/her actions and data on the rest of the supply chain. For example, one business found that its customer master contained "Rubbermaid" spelled 8 different ways and "IBM" spelled twelve ways. Obviously, if different customer numbers are associated with each spelling, and if a computer system is generating a statistical forecast by customer, there will be 8 or 12 forecasts, respectively, where there should be one apiece.
Once the CSRs who maintained the customer masters were made aware of the impact of their entry of "duplicate" records, they were much more careful to search for existing entries with similar spellings before creating new customer masters.
Business Process and Technology
Business processes are the way people go about accomplishing given tasks within an organization. Frequently these processes have grown up over time, but no one remembers anymore why that particular process is done that way: "That's the way it's always been done." The old process may have been the best one possible at some point in time with the data and systems available ' but as circumstances changed, in all probability the processes have not kept up.
As the business has grown and the rate of change in the marketplace has increased many-fold, the old, manual processes must give way to new ones which leverage "best practices" and take advantage of newer technologies in order to respond rapidly to changed circumstances.
Changing technologies without changing the business processes which surround them is one of the surest ways to get the very least "bang for your buck." The greatest system in the world is worthless if no one uses it. If business processes are not truly, deliberately, and openly changed (and documented), people will slip back into their old, sub-optimal ways of doing things as soon as no one is looking.
How does one go about implementing S&OP?
The "Big Bang" approach to business change is a sure-fire path to failure. Instead of changing everything at once, which merely maximizes pain and risk, take smaller steps with clearly defined benefits so that the organization can absorb each change at its own pace before moving on to the next. We recommend the following five-step approach:
Understand Your Demand and Its Variability.
Analyze Your Inventory and Position It to Support Demand.
Create a Collaborative Demand Planning Process.
Build a Quantitative Framework for Balancing Supply and Demand.
Institutionalize the S&OP Process.
1. Understand Your Demand and Its Variability.
Every business' demand patterns will differ, and every business needs to be aware of just what its demand pattern is in order to most cost-effectively serve its customers.
Using at least two years of sales history, answer these and similar questions appropriate for your business:
Which products/customers are most variable/difficult to forecast, or cause the most production problems if the forecast is too low?
Which products have only a few customers?
Which products would be appropriate for MTO (Make to Order)?
Which customers provide the shortest lead-times? What problems is this causing in the supply chain?
Which customers/products are most profitable? Which are getting the best customer service? (The answers may surprise you!)
How can shipment history in the ERP be used most effectively for statistical forecasting, and at what level of aggregation?
What new business processes do you need to put in place to ensure that analyses such as these are repeated on a regular basis?