Since 2020, a series of outages have clogged the smooth operation of businesses around the world, making it difficult for many people to get the parts they need or bring their products to customers. Given that significant economic uncertainty is likely to continue for the foreseeable future, business leaders will do well to prepare their companies to adapt more quickly and holistically to changing conditions.
Based on my extensive experience as a business planning and business operations consultant, I believe the best way to do this is through sales and operations planning (S&OP). There are different ways to implement this collaborative methodology, but they all help companies develop a comprehensive long-term plan (12 to 18 months) that includes and aligns specific goals for business divisions (product, sales, and customer service) and operations. I usually recommend also including the finance division (financial planning, budgeting, and cost management) and overall strategy when implementing S&OP, a method sometimes referred to as integrated business planning (IBP).
S&OP is an iterative process, so it regularly incorporates new input from stakeholders, allowing companies to respond quickly to a changing environment. And one of the main benefits of my approach is being able to synchronize supply with customer demand, while also combining day-to-day operations with business goals.
Companies that are constantly using new information to adapt can find problems that approach before they arrive. For example, S&OP may warn companies that they may need to identify alternative manufacturers, suppliers, or distributors to use when their regular partners are unable to deliver products. A few years ago, I worked with an auto parts company in Ecuador that bought products to distribute to customers. We started having trouble getting parts from our supplier, who is based in China. But in the course of S&OP’s work, we have researched backup suppliers and found a parts distributor in Dubai. When bottlenecks arise, we quickly pivot to get products from these new sources and minimize any impact on our customers.
Research shows that our experiences are not unique. According to the assessment of more than 170 companies conducted by McKinsey & Company, organizations with a well-functioning implementation of PPI have “a service level that is five to 20 percentage points higher, the cost of delivery and the capital intensity (total assets divided by sales) which is 10% up to 15% lower, and penalties for customer delivery and sales losses that are 40% to 50% lower” than companies without effective PPI. Companies that have optimized IBP processes are 10% to 20% more productive than companies without them, and respond to disruptive events quickly and effectively.
While S&OP is not a new process, the supply chain crisis has made it clear that very few companies benefit from it, either because they don’t have the right processes in place or don’t use them to the best effect. In this article, I share my thoughts on how to start or improve an S&OP deployment so that your company can address supply chain issues and other potential disruptions, such as cargo or cargo limitations, natural disasters, or IT outages.
Why S&OP optimization is so important now
I was introduced to S&OP over two decades ago while building a manufacturing resource planning process for cosmetic manufacturers. Back then, S&OP was a useful way to maintain alignment with company goals and increase productivity and reduce waste when specific issues arise that are exceptions to the norm. Today, after the widespread global supply chain crisis, S&OP has become a necessity for companies that rely on a variety of supply chain processes.
For now, global supply chain disruptions caused by the COVID-19 pandemic, conflicts between Russia and Ukraine, skyrocketing prices of goods, limited supply of shipping containers, and other factors have largely declined. However, there are always unknowns on the horizon. A report by the McKinsey Global Institute found that companies should “expect supply chain disruptions to occur that last a month or more every 3.7 years” and that cumulative losses from these events can account for 42% of a year’s profits over a 10-year period.
Today’s long and complex supply chains are particularly vulnerable to disruptions, including extreme weather events, terrorism, or trade disputes. That’s why S&OP is so vital. In fact, improving the S&OP is a top priority for supply managers, according to a 2020 survey by The Hackett Group, and remains a key focal point for optimization. This concern is a tacit admission that simply regulating the process in motion is not enough. A poorly run S&OP can also interfere with an organization’s ability to recruit alternative manufacturers, vendors, and distributors; identify alternative customers; or generally manage your market and demand.
Companies are always worried about unforeseen events that can make it difficult for them to get the materials they need, produce enough to meet demand, or bring their products to their customers. But for today’s hyper-productive companies, which typically rely on highly fragile global value chains, the stakes are higher than ever.
How the S&OP process works
First, let’s examine how S&OP is designed to work. It is a highly collaborative process that involves input from all departments at every stage. Initial implementation begins with the formation of a cross-functional S&OP team that works to coordinate and finalize plans at each stage. Although the exact composition of your team will vary depending on the size and composition of your company, with the IBP approach, it usually includes people from the following departments:
- Commercial: product, sales and customer service manager, demand manager and demand planner
- Operations: master production programmer, supply chain planner, buyer, quality control specialist and distribution manager
- Finance: Controller, Cost Accountant, and Financial Planning Manager or Budget Manager
No matter who is on your S&OP team, the main steps in the process should be the same.
Central steps in the S&OP process
For proper implementation of S&OP, you must perform and repeat all these steps, but you can customize them for your business. For example, if one of these meetings gets too long or complicated, you can split it into two meetings that are easier to manage. On the other hand, if several meetings seem short, you can combine them into one session.
- Product portfolio review and forecasting: This step aims to provide a unified enterprise product strategy by analyzing the life cycle of each element in the company’s product portfolio. In order for the S&OP team to see an integrated review of each product or service that will be released to the customer and offered to the customer, all departments involved in the S&OP process contribute data, such as previous sales history and sales estimates, inventory, production capacity, demand projections and external events that may affect demand. This step also takes into account the latest financial data, such as production costs, prices, margins, maintenance costs, transportation costs, etc. Since S&OP is an iterative process, after the first time, the plans obtained in S&OP’s latest executive presentation are also integrated into the reviews of this product.
- Demand planning: The purpose of this step is to ensure that your company’s sales resources and goals are aligned, so that your production and supply chain can generate inventory to meet anticipated customer demands immediately. This process uses past demand patterns and forecasts to predict the needs of products and services along the supply chain. Historical sales data, market trends and other relevant information from different departments are analyzed to estimate how many products or services will be needed. Operations group input and feedback are critical here so you can determine realistic demand levels based on product availability. The resulting demand plan is also analyzed and adjusted by the S&OP team to stay aligned with the company’s strategic objectives, such as product line growth, discount percentage, and gross margin.
- Supply/operations planning: Next, the demand plan is translated into a bid plan, so that inventory and inventory are available to support projected demand. Some of the tasks here include estimating the demand for raw materials, components, and other inputs; identifying and evaluating potential suppliers; monitoring the performance of suppliers; identify and assess potential supply chain risks (such as delivery constraints, supplier disruptions, or changing market conditions) and develop a plan to mitigate these risks; and ensuring that the supply plan is aligned with the company’s priorities, such as inventory levels, resource utilization, fulfillment rates, and order percentages perfectly.
- Financial planning: Based on demand and supply/operation plans, the finance team’s plan analyzes the expected demand for a product or service and related costs to estimate the company’s financial performance over a period of time. The main results here are a projected income statement, a projected cash flow statement, and a budget compliance report. Cost is discussed as a secondary issue. The S&OP cross-functional team reviews and discusses the plan along with the supply and demand plan to see that the company’s financial goals align with its operational objectives and that the company has the resources needed to meet demand and achieve its financial goals.
- S&OP Executive Presentation: Next, the S&OP team presents the key points of the overall plan to senior management for executive input, approval, and acceptance. Typically, teams and leadership also consider what-if scenarios to make decisions and adjustments to the final plan. The S&OP team then enters the senior management’s recommendations and reviews the results before proceeding. The main result of the meeting was a comprehensive and integrated plan that is aligned with the strategic, operational and financial objectives of the company. The plan will also inform S&OP’s first steps for the upcoming period.
This S&OP cycle is typically repeated monthly, allowing stakeholders to stay aligned while continuing to refine long-term plans based on changing business needs, supply chains, or market conditions. And since the daily activities of each department are directly connected to the long-term plan, each can act quickly to cope with unforeseen situations. Any changes in needs or circumstances, including new or changed restrictions, should be communicated immediately to the entire S&OP team. Having a long-term plan that is reviewed frequently also helps your company reach agreements with strategic suppliers and customers, improve business responsiveness, and protect margins.
5 Tips Sukses S&OP
During my 25 years in the field, I have seen five implementation issues that consistently hinder S&OP’s success. Here are the best practices your company should follow to get the full benefits of S&OP:
Many companies view the S&OP process as linear: the commercial team presents the demand requirements and the operations team generates enough inventory to support it. This approach will not improve business responsiveness. Instead, you need to get all participants in the S&OP multidisciplinary team to work together, not in order, from the start. The trading group needs to communicate with the operation when developing its demand plan so that the operation can begin generating inventory. Similarly, the operation should talk to the financial group to determine how much inventory the company is capable of producing.
This kind of interrelated collaboration is not a given. When I started working with the local office of a large food manufacturing and processing company in 2005, the company did not have a dedicated S&OP team or an effective process. Although the commercial department presents a monthly request plan, the operation always changes it before developing their own plan, without dividing it with the commercial. So there are two different plans running in parallel.
When I optimized S&OP in this company, the team I formed began to conduct an objective analysis of historical data and use the insights we gathered to refine the original plan. Result? A unified and efficient plan that increases productivity, reduces expenses, and minimizes losses. Finally, the operation pays for the manufacturing level corresponding to the commercial team’s promotion strategy, and the financial group has the cash flow to support them. Once they see these benefits, departments are more willing to collaborate with each other, which makes planning ahead faster and easier.
Having a CEO or general manager who is not fully committed to the plan set by the S&OP team significantly weakens the effectiveness of the process. S&OP strives to bring in and keep all departments aligned. If a CEO does not know the process or does not fully understand it and sets a different direction, subordinates should follow it. At best, the company’s efforts will be fragmented; At worst, the department will work with cross-purpose. However, executive decision-making is often not aligned with S&OP because they consider it an optional addition, rather than as a fully integrated system in their meetings and day-to-day operations.
When I implemented S&OP at a large cosmetics company in Latin America, my first step was to sit down with the general manager of one of the business units to discuss the steps involved. The manager already holds monthly committee meetings with his senior staff, so he does not like the idea of an “additional” appointment. I suggest combining meetings and reviewing key KPIs and business issues along with the S&OP plan. Our first session lasted over 10 hours. But he showed GM the benefits of the methodology, and approved its use for the company. He helps determine plans, agrees to manage them, and provides an unconditional support team. Over time, the S&OP executive meeting was reduced to less than three hours.
Insist on accountability
In every company, the S&OP process requires the execution of daily tasks with a transparent due date and chain of responsibilities. Each participant must be responsible for the tasks he receives. Responsibility is supposed to be a fact, but I have seen many companies ignore it. And the worst situation an S&OP team can face is to realize that the plan failed because someone didn’t complete the task.
Instead of allowing failure, senior management should hold all S&OP team members accountable. For it to work, responsibilities must be clearly defined. Individual tasks must be defined and tracked, and there must be repercussions for failing to fulfill tasks, as well as incentives to succeed. One way to achieve this is to link profit to performance.
Turn off the noise
For S&OP to work well, focus is key. In many implementations I’ve worked on, team members waste too much time reviewing historical outcomes, often because they’re arguing and trying to justify their decisions or blaming past failures. Historical results should only be a benchmark for continuous improvement of the S&OP process. My rule of thumb: your team should spend a third of their time looking at the past and two-thirds defining and analyzing their plans for the future.
Another type of noise is poor data quality or management. Examples include inconsistent data across departments, as well as a lack of clarity on data definition and preparation. At your first meeting, your S&OP team must determine, approve, and apply a formal methodology for obtaining, unifying, and presenting information. This way, you can quickly make decisions based on the data that every department trusts, helping pivot businesses even in the face of industry-changing disruptions.
Keep information flowing
Companies can only react as quickly as their channels and communication practices allow. Based on my observations, companies that respond effectively to supply chain constraints related to COVID-19 are quickly gathering and moving information through their organizations as they make collaborative decisions. Commercial, operational, and financial departments also need robust communication processes to stay aligned as they respond to crises. This means holding meetings at least once a week and sharing updates and information on a daily basis.
I see the effect of inadequate communication in the food establishments I mentioned earlier. Commercial and operational departments do not share information consistently and do not follow a unified plan. The operation does not know the sales volume of the sales team, so it produces too many products. As a result, the company has unbalanced inventory levels and large volumes of used products due to expiration, which means losses are close to $ 1 million. To solve this problem, I developed an Excel spreadsheet that performs the management of expired inventory first and first out with specific estimates and inventory. It generates alerts that direct operations to suggest forecast adjustments, allowing sales teams to create promotions for risky products. Weekly meetings between teams strengthened this process, and the S&OP team reduced product amortization by 80% in one year.
Information such as the inventory level of a product at risk cannot wait. To improve responsiveness, companies should implement not only monthly S&OP cycle communication, but also good communication practices for day-to-day operations, which some organizations call sales execution and operations (S&OE).
An efficient S&OP implementation helps your business anticipate and resolve problems quickly and efficiently. The long-term planning involved improves your ability to reduce disruption to your supply chain or other networks, while the emphasis on regular reviews and reviews makes business-as-usual business a priority. And while the initial setup may take time, thought, and effort, this process will allow your company to skillfully respond to anything that comes your way. You can’t stop the change, but you can be prepared for it.