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From basic S&OP to advanced S&OP
S&OP, introduced in the 1980s, is now a well-known and widely used concept within the supply chain community and beyond. A basic form has been implemented within many organizations and meaningful results are being achieved. After the basic form, there is much room for further improvement and stronger impact through advanced S&OP.
What is S&OP?
Sales & Operations Planning (S&OP) is, simply put, a monthly process that aligns demand, production and/or purchasing to optimize customer service and inventory. Put even more simply, the process allows companies to forecast what can be sold and adjust inventory accordingly to achieve these sales. If the company does this well, goods are available on time and in the right quantity.
Basic S&OP
A characteristic of basic S&OP is that planning is done in volume (pieces, kilograms, liters). The process consists of a demand forecast in pieces, followed by a capacity plan (also called rough-cut-capacity-plan or RCCP), in pieces, followed by so-called pre-S&OP meeting (meeting with the key planners and their managers) and finally an Executive S&OP meeting, the company’s management team possibly taking impactful decisions, or being briefed on the important issues.
The key questions that the basic S&OP process answers are: how much can we sell through our distribution channels and do we have sufficient capacity to produce this volume? Although we call this process “basic” here, the benefits of this level of S&OP for companies are significant. The company can proactively manage the supply chain with knowledge of what to produce and/or purchase when in order to have adequate supplies of the right product without facing shortages or overstocks. In other words, by aligning sales and production, the company produces what needs to be produced resulting in increased profitability and sustainability.
The transition to advanced S&OP
After basic S&OP, there is a lot to gain further. S&OP can be enhanced and the value coming from it can be much greater. Advanced S&OP is characterized by:
- A strategy-driven approach
- A more deeply developed process
- A strong team
- Support through a complete planning landscape
- Use of advanced technology
Strategy-driven S&OP
According to Bram DeSmet (Supply Chain Strategy and Financial Metrics, KoganPage, 2017), supply chain management revolves around the balance between service, capital and cost, known as the Supply Chain Triangle. A company’s strategic focus determines this balance. Treacy and Wiersema (“The discipline of market leaders,” Basic Books, 1997), cited by DeSmet, distinguish three strategic directions:
- Operational excellence: low cost, limited service, efficient production
- Product leadership: innovation, premium products with higher margins
- Customer intimacy: customer-centric solutions with comprehensive service
S&OP must be aligned with and can drive the company’s strategic direction so that decisions about service, operating costs and capital are consistent with long-term strategy.
Deepening the S&OP process
Advanced S&OP deepens a number of process steps. Examples are:
- The assortment plan: phasing in and out (new) products, assessing product performance and portfolio rationalization is a separate subprocess, which takes place at the beginning of the monthly cycle
- The material plan: insight into raw material inventories, delivery times and contracts, incorporating availability of raw- and intermediate material into planning
- Cost- and margin-oriented S&OP: the addition of sales prices, cost prices and selling, general and administrative costs to analyze margins and profitability
To add cost and margin (“value planning”) to the process, the following steps are taken:
- Adding the sales price that will give planners the insight into what the sales, other than in units, will generate in money
- Inserting a simple cost per product is the next step. This provides significant insights for the assortment plan discussed earlier by allowing planners to see what products yield in margin.
- To arrive at (an estimate of) the net margin, two sub-steps follow. The first is to add fixed and variable production costs to the capacity plan. After this, other costs (“SG&A”) and raw material costs are added into the calculation to arrive at operating profit. It gives planners insight into production costs versus revenue and allows choices about whether or not to activate specific lines. It also gives insight into profit expectations at the end of the monthly S&OP cycle, which is very powerful.
Deepening demand forecasting
Demand forecasting can also be deepened. Fluctuations due to promotions and seasons are focus areas for this. A separate process can be set up, and in some cases a separate forecasting module or solution can be used to include the promotion or a peak season (called Trade Promotion Management solutions, or TPM). The so-called incremental sales and revenue are added to the “baseline.” By earmarking sales in the ERP (promotional volume orders are given an attribute), “baseline” and “incremental” sales can be separated. This provides the planner with more data to better predict new promotions again in the future (in many cases promotions are repeated year after year, making this data very valuable).
Once the aforementioned deepening is in place, the option arises to “shape” the market more to the company’s advantage. Instead of responding to market demand, which will not always be possible, or is costly, the company can shape the demand and would allow its interests to emerge.
Integrating sustainability through carbon considerations
By including Co2 emissions from raw materials, production and transportation in S&OP, companies can operate more sustainably. This insight helps in making strategic choices regarding suppliers and production processes.
The importance of a strong team
In basic S&OP, planners often have a generalist role combining several process steps. In advanced S&OP, specialists can delve into specific tasks such as demand planning or production planning. Training can help prepare planners for this, for example by giving them a better understanding of commercial strategies and the structure of the organization’s costs (the profit and loss account).
In addition, interpersonal skills become more important: communication, persuasion and initiative are crucial.
An integrated planning landscape
S&OP does not function in isolation, but must be integrated with:
- Strategic planning (>5 years ahead)
- Budgeting process (annual)
- Sales & Operations Execution (S&OE, short term 1-2 weeks)
Strong collaboration between these processes prevents inefficiencies and supports strategic decision-making. S&OP can feed the budgeting process with the most up-to-date forecasts
The role of technology in advanced S&OP
New technologies make S&OP more efficient and accurate. Key improvements include:
- Stronger forecasting algorithms: AI-based models can choose the best-fit forecasting technique
- Automatic analysis of historical data: Large Language Models can generate reports
- Scenario comparison: Decision making is improved by analyzing different scenarios side by side
- Digital Twin technology: Visual display of supply chain networks helps with problem identification and resolution
- Time Machine functionality: forecasts on inventory and KPI trends support long-term decisions
By combining strategic choices, process optimization talent and technology, S&OP becomes a powerful tool for growth and profitability.
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