Sales & Operations Planning: More than forecasting

Sales and operations planning (S&OP) is an integrated business management process that was developed in the 1980s by Oliver Wight. In general terms, it refers to the decision-making processes involved in balancing supply and demand, creating profitable volume and mix propositions, and engaging in optimal asset management. Its scope is business-wide, integrating financial and operational planning, and linking board-level strategy to on-the-ground day to day operations.

Broad scope
S&OP involves a wide range of company activities, the plans drawn up with input from marketing, manufacturing, engineering, finance and procurement to drive the overall financial plan. As such, S&OP is in reality a broad reaching term for how senior management runs the company. It is about creating the optimal balance between goods in and out, and ensuring operations are managed to support profitable sales activities. With sales and operations managers not always automatically aligned, strong leadership and fact-based decision-making are essential to get everyone pulling in the same direction. It helps operational leaders need to understand that ‘sales’ is the core of the business, and to focus on ensuring transactions can occur as smoothly and as quickly as possible.

Ownership of S&OP
The S&OP is top management’s tool for steering the company. It helps ensure that day to day operations work towards the business plans agreed upon to deliver the company’s top-level strategic objectives. This visibility into performance against planning allows senior management to effectively guide lower management, helping them successfully steer the day to day activities at ground level.

S&OP is also a dynamic process that needs to be re-visited regularly to remain effective. At the end of each monthly cycle, top management needs to review the balance of the supply chain and ensure the resources for meeting the agreed business objectives are available. The decision-makers need to be committed to a continuing cycle of Plan, Do, Check, Act – creating one master outline that delivers customer satisfaction, required profit and, above all, is achievable. The plan should be ambitious, yet achievable. If it asks for too much, it loses credibility.

S&OP Process
As mentioned above, the S&OP process runs in cycles. Input will come in a variety of shapes and forms, all of which need to be carefully transformed to fit an overall plan clear to all stakeholders. At all points, it is essential that strategy and execution remain clearly connected.

The starting point is the business’ most up-to-date sales history and committed purchase orders. This input for the sales forecasting process is then considered in combination with current inventory and supply capacity, enabling leaders from sales, marketing, operations and finance to reach consensus on demand and supply, and on what can be made available to promise.

The output of these discussions needs to be one consolidated plan, one set of numbers for the whole business to work from. A business may work with several scenarios and track actual performance against them. However, it is essential that every scenario is based in realism, with firm indicators that such a level of performance is achievable.

Managing expectations over time
Expectations and ambitions then need to be clearly communicated. The vision, mission and goals must be understood by all stakeholders, enabling them to successfully cascade from the long term plans to everyday execution. It’s also important that leaders are able to confidently differentiate between trends and exceptions and adjust plans as necessary – an idea that isn’t flexible is likely to break under strain. Planning horizons, period sizes and review frequencies should reflect the underlying dynamics of the business. Business with long supply lead times need to look several months into the future, even for operational planning. The time it takes to make a substantial increase in capacity drives the planning horizon for the capital investment calendar. With the S&OP also linking product mix and product innovation plans to operations, most companies should look to plan at least the next 18 months on a rolling basis.

With a set of well supported plans in place, the business needs to establish the right set of objective criteria to measure progress. Strategically aligned Key Performance Indicators (KPIs) are the tool for this job, representative of commercial priorities and suited to active monitoring of planning accuracy.

Keeping track of how effective financial and sales volume forecasting has been is a key area. Closely reviewing up-to-date sales volume and revenue data is essential, as are more operational performance indicators like inventory turns, total inventory, lead time adherence, return on promotional spend and new product introductions success.

In general, any business will get a good idea that forecasting was well considered when stock declines steadily to each re-order point, and service levels maintain consistency. Careful monitoring against well-considered forecasting will also ensure that exceptional occurrences are highly visible and easily considered for future planning.

The role of IT
By definition, connecting top level strategy with organization-wide operations is a genuinely complex matter. Creating an accurate view that touches all relevant processes and stakeholders requires the handling of large volumes of data. To effectively interlink past performance with future expectations, the historical and current information needs to be complete, accurate and highly flexible in how it can be mined, reviewed and presented. In order to serve multiple perspectives, it must be possible to work with the data on a range of levels. This will allow upper managers to visualize the overall status of the business, whilst maintaining clear links to all operational activities.

Choosing the right tools
As a result of these demands, S&OP success is largely dependent on the software employed to support it. Many companies use MS Excel as an S&OP tool, it being easy to configure, flexible, inexpensive and familiar to almost everyone. However, it will always fall short in comparison to a properly configured, integrated planning tool. Excel is not real time, has poor version management and is not multi-user. As such, it’s a major challenge to use it for effective collaboration.

Spreadsheets have their limitations
The information in a spread sheet is relatively static, not easily manipulated and not suited to easy viewing from different perspectives. Deep diving through a top level data set into the various processes that contributed to it is not realistic, while combining separate reports into a useful top level summary is difficult and time consuming.

In short, Excel misses the manipulative power needed to properly analyze the vast, wide-reaching data streams that hold the information needed to create effective plans. And that’s only in terms of collecting historical data to support planning decisions. Running a set-up where current performance and real time figures can be compared to the plans and then used to effectively update and adjust them is near-on impossible.

Dedicated solutions
The right S&OP software needs to underpin management by not only thoroughly analyzing the past, but providing easy access to the business’s ongoing progress against the planning as the cycle unfolds. It must be collaboration friendly, bringing often highly dispersed, international operations together with any external parties involved in the processes (customers and suppliers).

The ability to create and then manage scenarios is also a key aspect of a good solution, effectively sharing them with a wide community of stakeholders throughout the business’ ecosystem. Connecting operational planning, execution and financial planning capabilities — ideally at the data and process model level — will support a truly active planning environment that can be followed closely, adapted as necessary and analyzed fully at each point in the review process. Workflow management, controlling and cataloguing the passage of information through the involved people is an important part of this.

Dealing with complexity
Stakeholders need easy access to detailed reporting on the established KPIs – both vertically within specific operational processes, and horizontally in relation to the end-to-end supply chain – helping management identify the root of issues and make the right decisions when trading off competing values.

In short, the right tool needs to be able to capture and manipulate all business critical information, from right across the company, in whatever form the decision makers require it to make choices with confidence. Base planning data needs to be available in a range of views and formats specific to the various groups that will work with it, supporting them in releasing the patterns and insights they’re looking for.

Creating the right mix
The best results will be achieved when system calculations can be combined effectively with human insight. Think about a system that can combine input from sales and marketing professionals with output from a forecasting engine. The data tells a lot, but it’s also important to fine tune it with intelligence from the people working closest to the market.

Given the above, creating and then managing a realistic, trustworthy Sales & Operation Plan is obviously a complex process dependent on deep understanding of past and current performance. As such, it’s too big and too important a job to be trusted to a tool not fit for purpose.

Why use S&OP?
With supply chains becoming longer, wider and more complex, there has never been more “distance” between the raw materials and the consumer. At the same time, modern technology has made it possible to keep all stakeholders informed at every step of the way. Today’s competition is no longer between individual companies but between networks of companies. Accurate processes to optimize a company’s role in these complex environments have never been more important. Without end to end planning covering the entire ecosystem of business relationships, achieving success promises to be a real challenge.

Understanding the customer
In addition to the wider reach of company activities, it is essential that businesses respond promptly and effectively to fluctuations in customer demand. Changes in customer needs directly influence planning for logistics, manufacturing and procurement. Companies need to be able to work with these changes effectively, ensuring they are stocked to meet needs without tying up capital unnecessarily.

As product life cycles get shorter, accurately matching supply and demand is certainly not getting any easier. Balancing them to maximize profit has become a key, complex discipline in its own right. Simple, unscientific forecasting, using underpowered IT support, will not give businesses the platform they need to realize their potential.

Solving existing issues
Executed effectively, S&OP addresses a wide range of internal issues related to unacceptable lead times, excessive on hand inventories, customer service issues and ineffective utilization of resources. It helps companies move away from finger pointing between sales and operations. It ensures optimal use of resources in accordance with effective execution of the company strategy. And if things do go astray, clear ownership allows problems to be addressed quickly and effectively.

S&OP-driven businesses can provide clear answers to questions around which products will be sold, where and when they should be available, in what quantities and at what price. The planning proposes a framework to deliver on the strategic objectives, providing a clear case for the proposed demand and the business’ ability to profit from it. It confirms that the proposed course is fully executable with the available resources, and marries the projected sales and operations numbers to the annual business plan and budget.

Increased accuracy boosts the margin
Improved coordination, communication and team work will result from clearer starting points for processes, and clearer signposting of where activities should be leading. The details will make it clear who is responsible for what, leading to greater ownership and more careful management of day to day activities. More accurate supply plans can lead to leaner execution of manufacturing processes. Logistics, Warehousing and Distribution benefit from fewer changes, while more precise inventory management (less working capital in the form of safety stock) results in fewer incomplete orders and better customer satisfaction.

S&OP is an integrated set of business processes linking the company’s top level strategy to the day-to-day activities in place to realize it. Although external factors can never be controlled, having a thorough knowledge of the company’s current position and past performance can provide a reliable basis from which to make important decisions for the business’ future.

Having access to a broad and organized information collection, analysis and reporting tool, able to gather and manipulate wide ranges of current, accurate data, is one of the prerequisites for success. With a clear picture of the business issues that need addressing, it can provide the insight needed to steer the business on a path to success and growth.

Provided strong leadership ensures buy-in from both sales and operational departments, the S&OP’s process has the power to touch the entire business. Detailed plans, based in sound business intelligence and responsive to actual progress, become the blueprint to which the whole company can look for guidance. While sales forecasting can give businesses an idea of where they are headed, S&OP is the process to help companies go about making corporate strategy an operational reality.