While most supply chain executives agree that Sales and Operations Planning is vital for ensuring supply chain efficiency, many companies struggle to implement and conduct the process successfully. In the following, we will discuss the most common pitfalls of implementing S&OP, the steps needed to ensure proper execution, and the benefits a smooth S&OP process offers.
Before discussing the most common and important challenges of implementing a successful Sales and Operations Planning Process, it is important to take a step back to generate a common understanding of the well-known and often slightly differently interpreted term "S&OP."
In a nutshell, Sales & Operations Planning (S&OP) is a business management process to balance demand and supply, integrate financial planning and operational planning, and link high-level strategic plans with tactical and short-term operations. S&OP functions as a lubricant between the different departments involved, their functions, and different plans, merging them into one integrated set of numbers. The extension of this process is known as Integrated Business Planning (IBP), which is mainly differentiated by an increased focus on financial integration and alignment to the business plan.
Depending on the industry and operating model, Sales and Operations Planning is performed weekly, monthly, or quarterly, reconciling demand, supply, and financial plans on the detailed level and the aggregated, usually reviewed by management. The process is run on a tactical level, covering a time horizon from 3 to at least 18 months, supporting the annual budgeting process.
Having the objective to generate one integrated set of numbers, S&OP does not replace the necessary planning processes such as demand and supply planning but instead aligns them in a series of collaboration meetings. The general phases of an S&OP cycle are:
- Product Review: This stage focuses on reviewing the current and upcoming product portfolio, focusing first and foremost on start- and end-of-life products, as well as product segmentation. The product review addresses the manufacture/procurement strategy for those products, ensuring a smooth transition. Marketing and Product Management plays a major role in the product review meeting, especially new product introductions.
- Demand Review: While other demand management activities, such as influencing and prioritizing demand using information from previous S&OP cycles, also occur during the Demand Review Meeting, the main objective is to align on one unconstraint demand plan, including the market knowledge from sales and marketing.
- Supply Review: The third meeting aims to align one detailed supply and inventory plan to fulfill the unrestricted demand plan passed in the previous meeting. The demand plan is restricted only when this demand cannot be fulfilled by any activities such as pre-producing on stock or increasing production capacity. Those limitations are reviewed during the next cycle.
- Integrated Reconciliation: Also called pre-S&OP meeting, the main target is to set the agenda for the Management Business Review Meeting, preparing different solution-oriented scenarios for bottleneck situations. Furthermore, the financial perspective is analyzed to design decisions in the overall economic interest of the company.
- Management Business Review: This final meeting, attended by top management, has the primary objective of generating an understanding of upcoming demand and supply issues and decide on required actions to be taken. Furthermore, to align the integrated set of numbers with the strategic business plan and ensure that businesses meet long-term goals. In practice, this meeting is often conducted only on demand to react to immediate issues that need management attention or quarterly to take strategic decisions.
Benefits of successful Sales and Operations Planning
Having created one aligned set of numbers according to transparency and communication between the functions involved results in various improvements within the supply chain, such as:
- Synchronization of demand and operation planning, ensuring customer value and efficiency across the supply chain.
- Alignment of operational and tactical plans with a strategic vision of the business plan.
- Proactive risk- and activity management rather than being reactive and investing resources in short-term firefighting.
Harvesting the power of these improvements coming along with an effective S&OP process leads to multiple tangible benefits:
- Increased sales: S&OP ensures efficient inventory management for a business. This allows quicker responsiveness to meet client demand, resulting in up to 15% increase in sales.
- Decreased supply chain costs: Companies can optimize their resource utilization, reduce waste, and reduce supply chain costs by up to 10%.
- Inventory reduction: S&OP can reduce inventory by up to 30 %, avoiding producing the wrong products on stock. Using an aligned demand and supply plan and consequently adjusted inventory strategies to fulfill market demand and control production capacities.
- On-time delivery: An improved forecast, inventory, and management allow the business to better react to incoming customer orders. This improves on-time delivery and better customer service by up to 50%.
- Improved fixed capital: S&OP can improve fixed capital in the long-term up to 15%. By having a long-term view tactical plan, management has the sound information basis to take strategic decisions timely and proactive before any challenges occur.
- Reduced Stockouts: A transparent collaboration across departments and using one integrated set of numbers enables frequent adjustments in the inventory management strategies according to forecasted demand, reducing stockouts up to 12%.
Common pitfalls and challenges when implementing S&OP
Since the process is straightforward, often even described as "simple common sense," while at the same time having all these fantastic benefits, you must be asking yourself: why is not everyone doing this?
There are quite some challenges and common pitfalls that stop companies from leveraging the benefits of a successful Sales and Operations Planning process.
Insufficient Leadership Involvement
Implementing an S&OP process is a collaborative project that includes the various key top management stakeholders and business departments involved.
The implementation and the later monthly recurring process require committed support from the executive management level as leader and sponsor of the process. Without the top management leading the process, the function as an integrated business process used to control the business with one set of numbers is not achievable. In practice, middle management often leads the S&OP meetings before the final management business review meeting, prepares the required information, and guides their teams accordingly. Thus, the middle management must be empowered and trained accordingly, bringing us to the next point.
Underestimation of Change Management & Training
Educated and dedicated participants are critical to a smoothly running S&OP process – in the end, the foundation of the process is a collaboration among different departments! Unfortunately, it is a common misbelief that once this is achieved by the top management, the middle management and their teams will follow. Having a structured change management and training approach is pivotal to overcoming this hurdle, especially since the Sales & Operations Planning results lead to review and redesign of various planning processes. An important point to be mentioned but not further detailed in this article as the focus is on S&OP itself.
Assuming that leadership involvement is given and the required participants are S&OP enthusiasts, implementing an effective Sales and Operations Planning process can still fail due to a lack of technology. Working with one set of integrated numbers might require implementing a system solution supporting the process, such as Advanced Planning Systems (APS). In finance reconciliation in a more mature stage than a simple volume to value conversion, additional systems might be required as part of an Integrated Business Planning process.
Local Excel Files, in the worst case with different data sources in each department, are the death sentence of achieving one integrated set of numbers shared across all functions.
Although an S&OP process can be run using Excel sheets combined with system solutions such as SharePoint or MS Team, respective digital system solutions can provide real-time data, enabling sound-based decision-making based on the latest information. Having the latest and accurate data is critical to a successful S&OP process.
Underestimation of Project Management
Successful projects require skilled and robust project management. This is a statement most people immediately agree to who have suffered from weak or non-existent project management. In S&OP projects, this is even more true as the process reaches up to the highest management level across various departments. Thus, it requires a seasoned project manager who can push and work with the necessary people from different departments and levels.
Setting the right agenda for S&OP meetings is also a task that needs to be closely overseen by project management to ensure that all functions are represented accordingly and their requirements fulfilled in the long term. This mainly involves defining the right key performance indicators (KPIs) to measure the success of the process. Thereby, metrics must be differentiated to measure the long-term success and mentioned benefits of the S&OP process and project management metrics during the process implementation to track the progress of the project itself.
Summary of key success factors for sustainable Sales & Operations Planning:
- The process is acknowledged as a decision-making management process to run the business with one set of numbers. Therefore, it is led by the executive management but also accepted and supported by the senior management.
- There is an ongoing meeting routine with educated participants empowered to make decisions during each meeting.
- Technology support to enable correct and up-to-date information
- A structured meeting agenda is in place, and performance measures are defined for each meeting.
Measuring the long-term success of S&OP
Measuring the success of the Sales and Operations Planning process is necessary to check if the targeted objectives were achieved and to ensure long-term success. Unfortunately, the definition of the right performance indicators is often undervalued in the initial implementation, especially since the KPIs are only improved, and the benefits are achieved once the process is in a steady and mature state.
In the following, some of the most important and common performance measures are listed. Improving these KPIs play a vital role in achieving the previously mentioned benefits. Improving the forecast accuracy, for example, can have a positive impact on all these benefits.
Forecast Accuracy & Bias
Forecast accuracy is one of the most commonly used performance indicators for measuring the success of demand planning activities in terms of the S&OP process, the Product Portfolio, and Demand Review Meeting, aligning on one final consensus forecast. Forecast Accuracy represents the complement of the forecast error as a percentage, indicating the reliability of a forecast. The target must be set individually by each company and strongly depends on the industry.
Forecast Accuracy is often combined with the Forecast Bias, representing the deviation from the mean in one direction. Combining these two indicators enable a company to judge the quality of a forecast and detect trends for over-and-under forecasting.
On-Time In-Full (OTIF)
This KPI is used to define the overall efficiency of the supply chain. The analysis of this metric indicates the customer satisfaction rate by checking how many orders were delivered according to the requested date and quantity. OTIF is defined as the number of deliveries made on time and in full during a given period against the total number of orders for the same period. Hence, it serves as an important metric, especially during the Supply Review Meeting revealing any critical production or inventory issues.
Average Capacity Utilization
Another performance indicator used for the supply review part of the S&OP process; it indicates the capability of the production to fulfill the demand plan while adhering to resource utilization goals to keep profitable. In case of insufficient demand and a resulting low-capacity utilization, a decision must be made during the S&OP meetings to either strategically produce on stock or reduce production resources.
The extension of this performance indicator is Overall Equipment Efficiency (OEE), which is defined as "Availability (Capacity Utilization) * Performance * Quality. Since Performance and Quality are very operational performance metrics, they are often reviewed in day-to-day operations. At the same time, availability (Capacity Utilization) often requires more tactical and strategic decisions to ensure that businesses meet demand plans accordingly. Depending on the operating model, the better fitting KPI must be chosen for the S&OP process, depending on the focus placed during an S&OP meeting.
Supply and Production Plan Adherence
These metrics are used to track how well a business' supply and production chain can cope up with the aligned set of numbers and if orders are placed and delivered in time accordingly. This is used to determine whether the supply chain functions can scale the production and procurement to meet the consensus forecast or if any operative or strategic action should be taken.
Sales & Operations Planning vs Sales & Operations Execution
As explained initially, Sales and Operations Planning is a tactical and strategic process focused on mid-to-long-term supply chain planning. Hence, it typically covers a time horizon from 3 to at least 18 months. It also serves as a link between the tactical plans with the day-to-day operational business. However, to ensure that these plans are executed accordingly in daily operations and adjusted in case of any unforeseen events, another process is needed: Sales and Operations Execution (S&OE).
The Sales and Operations Execution process covers the near-term horizon, commonly 0 to 3 months. This time horizon can vary by business and industry, mainly depending on how it is still possible to conduct operational changes, e.g., based on the manufacturing/procurement lead times. Consequently, the focus of S&OE is much more on operational activities such as master production scheduling (MPS), material requirement planning (MRP), and production activity control (PAC), as well as other short-term processes like transportation planning, allocation planning, and order management.
Sales and Operations Execution is a weekly or even daily cyclical multi-step process, depending on the industry and size of the company. S&OE follows a similar meeting cadence as the Sales and Operations Planning process but deals with the short-term horizon, only ensuring that the agreed S&OP plan comes to life. S&OE can be seen as the operative management of challenges from the actual demand and supply and the required reconciliation with the S&OP plan, dealing with upcoming operational challenges like production issues, supplier shortages, delay in deliveries, canceling customers, and so on.
This clear distinction between S&OP and S&OE in many companies is often not given but mixed within the same meeting cadence as part of the S&OP process. Clearly differentiating between tactical/strategic decisions and the operative execution is a key driver of achieving the potential of S&OP.
Even having mastered the challenges of successfully implementing a Sales and Operations Planning process, a company can still fail to harvest the benefits if the execution is not ensured. Hence, it is vitally important to integrate the design of the Sales and Operations Execution process into S&OP projects and consider and outline the different focus and objectives of both processes.
Learn more on how our AIOplatform can support overcoming the supply chain performance gap and ensures leveraging the benefits of S&OP by unlocking the real value of S&OP Execution in our upcoming webinar on September 23rd!