Sales and Operations Planning (S&OP) has been around for a long time. It’s been called “old hat” and “the new kid on the block.” Both are true. And despite having been around for decades, S&OP continues to gain momentum and grow in maturity. Most of us in the supply chain industry have a conceptual and common understanding of what S&OP represents, however the variety of ways in which S&OP is executed demonstrates that it can mean very different things to different organizations. A typical/traditional Sales and Operations Planning (S&OP) process is primarily:
- Operations led
- Mainly focused on satisfying revenue and margin goals
- Aimed at attempting to meet a forecast for a discrete planning horizon, usually 6-24 months
- Sequential and involves isolated planning activities consolidated at a high level and then pushed up to management for approval, and pushed down to manufacturing for execution
And most experts agree that S&OP has four ingredients:
- People: the cross-functional teams involved
- Process: the way you make decisions and manage meetings
- Information: the data from your demand and supply chain
- Technology: the systems that support planning and decision-making
Not everyone agrees on the correct proportions of these ingredients, but everyone agrees that S&OP needs all four. Knowing exactly what is required for each of these areas, and potentially most importantly, finding the right balance between them is the key to effective and efficient planning cycles that drive maximized value for the enterprise. When defining S&OP, it’s also important to look at S&OP Maturity Curves. A maturity model is like a staircase that describes how companies manage a certain area of their business. The lowest step is usually sporadic and disorganized, while each step up becomes more organized and effective. These models allow us to quickly measure how we’re doing in a specific area and point the way up to the next level. Numerous maturity models have been developed for S&OP. Most are variations of the same theme, with four or five stages from immature to mature. For example, Gartner calls these stages React, Anticipate, Integrate, Collaborate, and Orchestrate. Here’s a typical model, based on the approach of Larry Lapide from MIT:
The bad news is that most companies are stuck at stages 1 or 2. Of course, no company is a monolith - different divisions may be more or less mature at S&OP and companies can even lurch ahead and then fall back due to a merger or acquisition, a failed project, or resistance to change. Regardless, not putting a focus on S&OP can make a big difference within your company. As one example, Aberdeen Group classifies 30% of all companies as laggards in terms of the maturity of their S&OP processes. These organizations suffer from:
- Lower customer service (79% of orders on-time vs. 95% for best-in-class competitors)
- Inaccurate forecasts (accuracy of 25% vs. 86%)
- Poor ROI (cash conversion cycle of 85 vs. 46 days)
On the flip side, companies that improve their S&OP to best-in-class levels can achieve:
- A profit margin of 12% above the industry norm and 21% above laggard companies
- An order fill rate that is 11% above the industry norm and 13% above laggard companies
- 5X faster responses to market changes
Ultimately, S&OP should be about piloting your daily operations and monthly plans toward your long-term business goals. It’s about getting everyone headed in the same direction – including your contract manufacturers, suppliers, distribution partners, and customers.
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S&OP in the 21st Century As the S&OP process continues to evolve and mature, a different interpretation and expectation for S&OP is emerging that entails better, broader goals. This recently published eBook elaborates on the evolving horizontal S&OP process capabilities that are required in order to achieve a transformation. |
Additional Resources
- S&OP frequently asked questions
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