What is Sales and Operations Planning (S&OP)?
The Sales and Operations Planning Process (S&OP) is best defined as a planning process to ensure the business maintains sufficient inventory to meet customer demand. The S&OP process typically operates on a monthly cadence, and includes a series of meetings that drive alignment between sales, marketing, and supply chain:
- Demand Planning Review
- Supply (Production) Planning Review
- Pre S&OP Review
- Executive S&OP Review
Each of these meetings has a special agenda, which I describe more fully below.
What is the Purpose of S&OP?
Align Supply and Demand
In short, the purpose of sales and operations planning is to align supply and demand. Without an S&OP process, the supply chain wouldn’t know what products to make, and at what time. The sales and operations planning cycle ensures that the manufacturing facilities know what products to produce, and at what time.
Eliminate Inventory Stock Outs
A robust S&OP process will ensure the supply chain stocks sufficient product to meet customer demand. On average, nearly 5% of all orders are unfilled due to insufficient inventory.
Companies with a nonexistent or weak S&OP process frequently lose 10% or more of sales due to unfilled orders. By investing in a strong planning process, companies, can dramatically reduce the amount of stock outs, resulting in higher sales and happier customers.
Reduce Excess Inventory
Not only do you want to produce enough to meet customer demand, but you also want to keep from building excess products. Every extra pallet consumes valuable warehouse space, and excess products frequently spoil or goes obsolete before the products are sold.
All this costs money. In fact, it is estimated that it costs nearly $20 per year to maintain $100 of inventory. One of the key benefits of sales and operations planning is that it nearly always reduces the amount of excess stock, yielding innumerable benefits to the
How do You Implement Sales and Operations Planning?
1. Culture of Optimization
First, the entire business must be willing to prioritize the operations planning cycle. If the sales organization is solely focused on growth at any cost, then they may not be excited about investing the time to help develop a solid forecast to enable supply chain efficiencies.
Sales associates often overestimate demand for their products, with the intent of securing enough product for their own customers. While this may reduce stock outs in the near term, this of course leads to excess inventory and write-offs in the future.
For this reason, successful deployments of S&OP often include incentives for the sales team to provide accurate forecasts of customer demand. Ideally, sales associates use data in their sales pipeline in the company’s CRM application.
Frequently, supply chain management represents the group that is most engaged on the topic of sales and operations planning. However, this team is sometimes hyper-focused on maintaining service levels, and may lose sight of the true cost of excess inventory. This focus is likely a reaction to being ‘beaten up’ by the business leaders for missing sales due to stock outs.
Supply chain management needs to always quantify the holding cost of excess inventory, and drive their own planning teams to minimize inventory and optimize production costs while delivering sales.
2. Deploy S&OP Process Cadence
Sales and operations planning generally comprises a series of four key meetings, all of which recur on a monthly basis. These cross functional meetings are designed to promote alignment between demand and supply, and foster collaboration between the sales forecast and the production plan.
Demand Planning Review
The demand planing review is focused on predicting customer demand. Leading up to this meeting, the sales team provides the demand planner with pipeline data, which helps the planning team develop a near-term sales forecast.
Further, the marketing team provides data on long-term category trends and new product introductions. Using this data, the demand planner develops a reasonable sales forecast by product.
The demand planner will likely also utilize S&OP software that uses historic demand to create a statistical forecast. With this information, the demand planner is tasked with creating the demand plan, which is a product-level forecast of customer demand for the next 12 to 18 months.
Typically, the demand planner facilitates this meeting, although other members of the planning or sales teams may contribute. Generally, representatives from marketing, sales, and operations should participate in the demand plan review.
Supply Planning Review
The supply planning review (also known as production plan review) is focused on how the production plan (also known as the supply plan) will satisfy predicted customer demand. The supply planner prepares production plans that account for both customer demand and existing inventory of each product.
This review meeting summarizes the demand plan (as reviewed in the demand plan review), and how the supply chain will manage inventory and production to meet this demand. The supply planner typically leads this activity, and most of the meeting participants are from either planning or operations functions. It is possible that sales and business teams may participate, depending on specific content of the meeting.
Pre S&OP Meeting
The pre S&OP review summarizes both the demand plan and the production plan. This review also includes the financial impact of these plans. With the production plan nearly final, the operations team can project the cash flow impact on both the sales and inventory build. For this reason, the division finance team is included in this meeting, as this provides valuable input into their forecasts of both sales and cash flow.
The pre S&OP meeting is often led by the demand planner, as this dedicated role is largely responsible for overseeing the sales and operations planning process. However, it could be facilitated by anyone in the organization.
S&OP Executive Meeting
The sales and operations planning executive review is largely just that – It is an opportunity for business leaders to see how operations is reacting to predicted demand for the company’s products. A well-run executive review will help leadership with the following items:
- What products are predicted to sell well in the foreseeable future
- How product mix is shifting over the long term
- Whether operations has a capacity constraint (or surplus)
- How a new product is expected to perform
As with the other meetings, this is a cross functional collaboration that should include sales, marketing, operations, planning teams, and finance leadership.
3. Cycle of Continuous Learning
A successful sales and operations planning process is based on the principle of continuous improvement – Each of the S&OP review meetings should have the objective of developing best practices based on lessons learned from prior months. It is an evolving cycle that gets better with time.
As with many things in business, there is little to be gained on blaming anyone for past decisions. The sales and operations planning (S&OP) cycle will often reveal past supply planning decisions that resulted in excess inventory or lost orders. Keep moving forward, and focus on using these incidents to develop best practices and make tactical plans for the future. Remember, you are in this for the long game!
4. Be Willing to Make Big Changes
Any constructive S&OP / sales and operations planning cycle will inevitably reveal issues with your existing planning processes. It is common to find the following issues with your planning cycle:
- You consistently overstate demand for a new product
- Your S&OP software is not performing as intended
- The planning team is simply not trained on proven forecasting methods
The sales and operations planning process is essential for the company to make tactical plans on how to best use its resources to satisfy customer demand. Companies that adopt robust S&OP processes nearly always improve their product-level forecast, resulting in less waste and higher fill rate.