Sales and operations planning (S&OP) is an integrated planning process that aligns demand, supply, and financial planning and is managed as part of a company’s master planning. S&OP is designed and executed to support executive decision-making related to approving a feasible and profitable material and financial plan.
The sales and operations plan uses global, aggregate demand as a starting point and compares that expected demand to available supply in terms of resources—such as machines and manpower—and material capacity. The level of analysis and the trade-offs presented allow the executive team to understand the decision criteria and come to a consensus decision on a plan the company should move forward with.
The sales and operations plan is part of both strategic and tactical planning. Strategically, insights into how demand may shift in particular geographies or for specific product lines can impact decisions such as increasing (or decreasing) manufacturing capacity, the need to increase (or decrease) the workforce, or determining longer-term supplier management. More tactically, the S&OP process creates a production plan, approved by executive management, which is used to create a master schedule and a material requirements plan (MRP).
The challenges of sales and operations planning
S&OP is largely a company-wide, collaborative process performed on a recurring basis with participants from finance, operations, marketing, sales, and other groups as required. In addition to the challenge of coordination and communication across this diverse group during the planning cycle, the primary challenges of sales and operations planning are:
1) Establishing accurate and recurring reporting on key demand and supply inputs to support the decision-making process
2) Preparing a pre-work analysis which recognizes changes in demand or supply which will require management consideration prior to plan approval
3) Developing a succinct presentation of the decision criteria in terms of decision impact on key performance indicators, such as customer service, supply chain costs, and revenue
4) Planning for the introduction of new products, the end of life of existing products, or the incorporation of new (or divestiture of sold products and/or product lines) as a result of a merger and acquisition (M&A)
5) Transforming large data sets from multiple systems into actionable, decision-support information for reporting
Sales and operations planning evolved over the past 15 years as part of the evolution of MRP and ERP programs that companies use. At its core, an ERP is an application that automates business processes, and provides insights and internal controls, drawing on a central database that collects inputs from departments including accounting, manufacturing, supply chain management, sales, marketing and human resources (HR).
Most companies run enterprise resource planning (ERP) software and enhance their material and resource planning through the use of supply chain management (SCM) software, which can be configured for planning and managing their specific supply chain challenges.
However, many planners still use spreadsheets for S&OP due, in part, to the widespread access to spreadsheet software and its flexibility. Spreadsheet technology, however, is incapable of taking advantage of modern advanced technology, such as artificial intelligence (AI), and is limited in the amount of data it can process. Additional concerns around spreadsheets as a secure mechanism for distributing company data create further challenges with this approach.
As more data and information became available, it developed to integrate business processes so that executive leadership could align and synchronize sales and operations. It allowed executives to focus and develop their strategy for future business operations over months and years.
SIOP is a step beyond S&OP because adding the “I” means reaching higher levels of inventory optimization, which requires more sophisticated planning capabilities but will likely result in increased benefits to the business.
When it comes to the supply chain, the age-old dilemma has been, how do you get the right product delivered to the right place, at the right time, and in the right quantity? Now across industries, same-day delivery is pressuring companies to move products through more channels in less time. This growing challenge requires more careful planning.
S&OP systems usually operate over an 18- to 36-month forecast window using aggregated data such as sales order position, industry trends, and other broad information. However, many companies have begun to include inventory optimization in their S&OP strategy. As software has advanced in recent years, product companies can now deploy inventory optimization software to link their operation to dynamic inventory calculations. This deployment has different benefits, depending on a company’s overall strategy.
By adding inventory optimization software, companies can benefit from a system that accounts for planned service levels, demand volatility, and lead time variation. Inventory optimization software can also improve inventory turns. This factor is critical for product companies that invest a greater proportion of working capital in inventory. Some product companies have reported a 15 to 30 percent decrease in inventory costs and a 25 percent increase in service levels within a single year.
Sales, inventory and operations (SIOP) planning
The Association for Supply Chain Management defines sales, inventory and operations (SIOP) planning as “a business management process through which an executive team continually achieves focus, alignment, and synchronization among all functions of the organization.” Sales, Inventory & Operations Planning enables the company to fine-tune its long-range strategic plan and annual business plan. The strategy must answer such vital questions as:
- What is our business (products, and services)?
- To whom do we sell (markets, customers)?
- What resources are required (people/skills, technology, plant and equipment, distribution, etc.)?
- What is the measure by which we compete (quality, delivery, price, service)?
- What is our financial strategy (profit, growth, ROA, ROI)?
- Any additional strategies (make or buy, market share, flexibility)?
Developing a proactive strategy that syncs up all divisions across a company enables flexibility and improves overall production
One of the objectives of SIOP is to support and measure the business plan. Sales, Inventory & Operations Planning helps to determine whether your original financial expectations (budget), current sales plan, and operations plan are in sync with each other. It does this through monthly reviews of the marketplace and updates of the company’s operations plans. The updated plans must be in tune with the marketplace.
A critical aspect of SIOP is that it is not a one-time event during which production levels are established. For each Sales, Inventory & Operations Planning cycle, the key players from each department compare actual results to plan, evaluate their performance, and prepare updated plans for the current period.
Sales, Inventory & Operations Planning (SIOP) is a dynamic process in which the company’s operating plan is updated on a regular monthly or more frequent basis. Sales, Inventory & Operations Planning meetings should take place at least once per month. A month is usually a sufficient period of time to differentiate a trend from a minor variation or “blip,” but it is not so long that corrective action is no longer possible.
The plans take into account projections made by the sales and marketing departments, the resources available from manufacturing, engineering, purchasing, and finance, and are directed toward hitting the company’s objectives.
Sales, Inventory & Operations Planning is done on an aggregate or family level, and covers a sufficient span of time to make sure that the necessary resources will be available. Any difficulties in supporting the sales plan are worked out. The approved aggregate plans drive the individual departmental detail plans. Each month, the representatives meet again to determine whether the overall company plan is on course, and to adjust for changes in the marketplace and changes or problems within the company.
Effective SIOP processes help companies balance supply and demand by providing better visibility into sales, marketing, operations and finance data. As Modern Distribution Management (MDM) notes, supply chain planning helps identify the most profitable strategies from many different scenarios. By aligning all business functions to a company’s short, medium, and long-term goals SIOP planning allows companies to fine-tune their long-range strategic plans and annual business plans.
S&OP, machine learning, and artificial intelligence
AI and machine learning technology are being used more successfully and frequently to support some of the automatable decisions that are done in S&OP. Examples of this include using machine learning to predict available capacity to drive promotion planning or to quickly discover and recommend no changes to highly stable and mature product planning, reducing analysis cycles.
There are several developing SCM applications that can make use of IoT technology to improve the outcomes of S&OP. For example, IoT could be used in predictive maintenance, providing executives with insights into why and when capacity will be rolled in and out of service and what the backup plan is to ensure continuity.
Advanced analytics solutions, implemented to work in concert with supply chain execution in logistics, manufacturing, and order management, are increasing the availability of information that provides supply chain managers with decision criteria related to performance to plan. This in turn, reduces the decision latency, which may have historically relied on the next S&OP planning cycle to adjust.