Three Principles for Sound S&OP
Interest in sales and operational planning has increased, but many are still searching for the keys to success.
By Lora Cecere -- Supply Chain Management Review, 5/1/2005
With the increase in manufacturing outsourcing, interest in sales and operational planning (S&OP) has skyrocketed. And as a result, companies are scrambling to define the S&OP process and pinpoint the keys to success.
When companies controlled manufacturing in house, demand variability could be absorbed by operations. But when another organization is doing your manufacturing for you, that demand signal has to be much more accurate—otherwise you risk not getting the supply. An effective S&OP process will help companies balance sales and operations by assessing what is right based on corporate goals and commonly held measurements. And the results can be very compelling. Research shows that an effective sales and operations planning process can drive market-leading results—such as a 20-percent better performance on perfect orders, one-third less inventory, and lower supply chain costs.An Effective Definition
An obstacle for many companies, is agreeing on what the process involves. Unfortunately, this is like buying Baskin-Robbins ice cream: There are at least 31 flavors in the market. Each company has a slightly different definition.
There are six steps involved in an effective S&OP process:
1. Develop a Corporate Forecast: This forecast is based on historic shipments or orders. It should be developed for an agreed-upon forecast horizon (usually 12-24 months in the future).
2. Reach Consensus Forecast Agreement: Operations and marketing and sales should agree on the demand plan and review the impact of previous consensus forecasting efforts on forecast accuracy.
3. Analyze How to Best Shape the Market: Build business scenarios to look at how demand will be affected by changes in price, the effectiveness of promotional events, competitive behaviors, and the effectiveness of the sales staff. Present the agreed-upon demand plan and scenarios to the supply group for modeling.
4. Model Supply Options: For each scenario, model the effect of demand, paying particular attention to its impact on supply options. Track key metrics like revenue, profitability, and perfect-order impact.
5. Make Trade-off Decisions: Meet as a group to develop a constrained plan—an operating plan that shapes demand based on the trade-offs among impacts on new-product launches, account relationships, profitability, revenue potential, and perfect-order numbers. These meetings should include representatives from sales, marketing, finance, procurement, manufacturing operations, and logistics.
6. Close the Loop and Track Effectiveness: Track performance against the constrained plan and report effectiveness. More advanced processes in chemical and process industries actually control the constrained plan at an account level against established contract terms. The commonly held process standard for sales and operations planning has morphed and changed dramatically in the past decade. Now there is more emphasis not just on balancing demand and supply but on shaping demand and developing a plan that optimizes corporate profitability and other goals. As a result, technologies are more focused on what-if analysis and performance analysis. Today’s sales and operations planning process is dramatically different from the supply chain-oriented processes of the past.
Three Principles to Build On
To guide companies in creating an S&OP process suitable for today’s environment, we suggest three key principles. Principle #1: Balance is important, S needs to equal OP. To succeed in the S&OP process, a balanced approach is essential. The efforts in S (sales and marketing) should equal OP (operations and procurement). Few companies have achieved this balance. Retailers seem to understand and concentrate on the S, while manufacturers understand and focus more on OP.
But as Exhibit 1 shows, a successful S&OP process balances sales and marketing decisions with operations and procurement options. The most successful S&OP projects have a rallying cry that encourages the functional silos to focus their efforts on an important corporate goal. Procter & Gamble serves as a good example. CEO Alan Lafley turned store in-stocks into a rallying cry for the company’s recent turnaround efforts.
Principle #2: Commonly held metrics matter. When the topic of S&OP arises, the conversation often turns to metrics. What metrics lead to the right behaviors? For a program to be successful, the metrics should be well-understood, shared by all the members of the group, meaningful to the business, and well-honed. Many teams are trying to hold themselves accountable for too many metrics. One team took us through 52 metrics for its S&OP process. How can a team be effective with this many metrics? These are the only five metrics you really need: revenue, profitability, projected perfect-order performance, forecast accuracy, and inventory turns.
Principle #3: S&OP is a business process not just a supply chain process. While supply chain planning technologies often aid operations planning, management teams need to remember that the technology is not the main focus. As one business executive explains, “The supply chain technology supports [S&OP], but it is not the reason for it. In developing the teams, to make the process successful, we made S&OP everyone’s responsibility.”
The greatest successes come when the team concentrates on what is right for the business based on strategy and trade-offs in revenue, market share, and profitability—and not on creating a supply chain process that matches demand with supply. 
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