The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
In a report released in August, 2011, research firm The Aberdeen Group of Boston, MA found that a formal process of Sales and Operations Planning was a key enabler in companies who were able to achieve best-in-class results in customer service levels, average cash conversion cycles, forecast accuracy at product family levels, and in gross margin rates realized.
Author Nari Viswanathan, Vice President / Principal Analyst, Supply Chain Management at Aberdeen discussed benchmarking survey findings that North American business face three predominant pressures: to reduce supply chain operating costs, to improve the management of increasing demand volatility, and to improve top line revenue. Firms surveyed also reported pressure from customer mandates for faster, more accurate and more unique fulfilment as well as a need for tighter integration between planning and execution. Managing demand forecasts within an S&OP framework, and integrating the financial planning and budgeting processes within the S&OP process were seen to address these pressures.
Top performers – those earning best-in-class status – had an average cash conversion cycle of 46.4 days, a perfect order rate of 92.8%, experienced 75.3% forecast accuracy at a product family level, and enjoyed a gross profit margin rate of 43.5%.
Put simply, Sales and Operations Planning (S&OP) is a business process that facilitates the balancing of supply and demand. Occurring over a monthly cycle, it is cross-functional, involving the participation of staff from various business units within a company, including Sales, Marketing, Production, Distribution, Finance, and Product Development. S&OP is meant to bring together all the plans for the business into one integrated set of plans.
S&OP was first developed by Richard C. Ling in his pioneering work titled Orchestrating Success: Improve Control of the Business with Sales and Operations Planning (1988). Ling devised a process that would improve upon its predecessor, known as “Production Planning.” Production planning is a process that demands that Sales and Marketing devise a forecast and hand it off to Operations, who execute the plan through functions like Master Production Scheduling.
S&OP, on the other hand, requires that the barriers between Operations, Sales, and Finance families be removed – that a single comprehensive plan is developed in a collaborative manner. Forecasts are articulated at aggregate (product family) levels, rather than at item levels of detail. Differences that frequently arise between various functional areas within the business are reconciled before the plan is set to execution. In other words, in a “Production Planning” environment, sales plans and operations plans are sequential; in the S&OP case, sales planning and operations planning occur jointly.
While S&OP was initially targeted to improving business processes in manufacturing firms, the principles apply equally to any firm engaged in forecasting future needs: wholesalers, retailers, and service industries can all benefit from what S&OP has to offer.
Thomas F. Wallace of Cincinnati, Ohio has worked feverishly to promote the benefits of S&OP since 1999. His book, Sales & Operations Planning: The How-To Handbook provides a concise and practical summary of the process.
Wallace explains that the monthly S&OP process occurs essentially in five stages, with Steps 2, 3, and 4 being characterized as the “heavy lifting” activities:
John Skelton is the Principal Consultant and founder of Strategic Inventory Management.