5 Reasons Procurement Should Want S&OP

Sales wants infinite supply with zero lead time. Operations wants firm schedules with maximum lead time. Same planet, different worlds. What to do? Enter Sales and Operations Planning (S&OP). In the right circumstances S&OP is a great way to align your company’s sales and production activities. It’s also one the few ways to bring supply chain directly into the strategic business planning cycle and demonstrate how awesome you are and how you contribute to enterprise success. 

Here we briefly explore the evolution of S&OP and the benefits to both you and your company of adopting these processes, including some practical examples of successful implementation.

Who is Oliver Wight? Oliver Wight is a consulting firm recognized as the originator of S&OP over two decades ago. They have since evolved their framework to Integrated Business Planning (IBP), providing a comprehensive approach that integrates demand, supply, product management, sales, marketing, and finance over a rolling two-year horizon. Oliver Wight’s methodology emphasizes the importance of alignment and integration across all business functions, ensuring that companies operate with a single set of priorities and numbers.

Why S&OP?

In the 1980s companies were struggling with misaligned operations, fragmented planning processes, and an inability to effectively balance supply with demand. These challenges led to inefficiencies, high costs, and missed opportunities, prompting Oliver Wight to devise a more integrated approach.

One of the key problems S&OP addressed was the disconnection between different departments, such as sales, marketing, operations, and finance, each of which often operated in silos with their own priorities and metrics. This lack of coordination resulted in conflicting objectives and suboptimal decision-making.

The first documented user of S&OP was the consumer goods company Procter & Gamble (P&G). P&G was dealing with significant challenges in aligning its production schedules with market demand. 

Specific numerical data for P&G’s early S&OP achievements are not readily available, but  companies typically experience:

• 10-15% improvement in forecast accuracy
• 20-30% reduction in inventory levels
• 10-20% improvement in service levels

The success achieved with P&G demonstrated the effectiveness of S&OP and paved the way for other companies to consider the implementation of S&OP.

Key Benefits of Adopting S&OP

1. Enhanced Alignment and Collaboration

How It’s Achieved: S&OP creates a structured framework that brings together key departments such as sales, marketing, operations, and finance. 

This framework ensures that everyone is on the same page and working toward common goals. Regular cross-functional meetings and integrated planning sessions help to align priorities and strategies.

Anticipated Success: By eliminating silos and promoting a unified strategy most companies experience smoother operations, reduced misunderstandings, and enhanced teamwork. 

When done right, procurement becomes a core player in strategic planning, and you will experience faster decision-making and more agile responses to customer demand.

You will also have less inter-departmental frustration. A more collaborative approach can result in improved  revenue, decreased inventory, higher overall efficiency, and better employee satisfaction.

2. Improved Forecast Accuracy

How It’s Achieved: S&OP brings multiple departments into the planning process, leveraging diverse perspectives and data sources to create a much more comprehensive view of demand.

For example, you will be able to contribute information about component availability that can confirm demand your sales team is anticipating.

Or perhaps you will learn of a factory interruption in your supply chain and by knowing what your sales team is thinking you can decide if you should bring in buffer stock.

This collaborative approach ensures that all relevant information is considered, leading to more accurate and demand forecasts.

Anticipated Success: With better forecast accuracy, you will optimize raw inventory levels and reduce the costs associated with excess stock while minimizing the risk of finished goods stockouts. 

You will very likely achieve improved customer satisfaction due to the timely availability of products, as well as reduced working capital requirements and improved cash flow that will make the C-suite happy.

3. Increased Profitability

How It’s Achieved: Better alignment and accurate forecasts allow you to optimize your resources more effectively. This means producing the right amount of product at the right time, minimizing waste and inefficiencies. 

Anticipated Success: You can anticipate higher profit margins due to reduced operational costs and fewer lost sales opportunities. 

Efficient resource utilization can lead to lower production costs and better financial performance. 

The ability to meet market demand promptly can also enhance market share and competitive advantage.

Pro Tip: High-margin products should be prioritized, always maintain inventory levels to meet demand. There is more risk in losing sales than in overproducing.

4. Risk Mitigation

How It’s Achieved: S&OP enables companies to anticipate and respond proactively to changes in demand, supply, and market conditions. 

By continuously communicating key metrics and reviewing flexible plans, you can quickly adjust to new information and potential disruptions.

The electronic component market can be highly volatile. At key inflection points it will be invaluable to already have in place structured and open communication between sales and operations.

You can use tools like Nexar Spectra (sign up for the monthly newsletter) and Octopart’s Inventory History section to identify trends.  

Anticipated Success: Proactive risk management helps prevent supply chain disruptions, reducing the impact of unforeseen events on operations. 

Companies can maintain continuity and reliability, protecting their reputation and customer relationships. 

This approach also allows for better contingency planning, ensuring that alternatives are in place to mitigate potential risks.

5. Strategic Decision Making

How It’s Achieved: S&OP integrates strategic planning with top level operational plans, providing a holistic view of the business. 

This comprehensive perspective enables senior management to understand the implications of various decisions across the entire organization, supported by accurate data, predictive analytics, and cross-functional buy in. 

Anticipated Success: With a clearer understanding of how different strategies will impact the business, senior management can make informed decisions that drive long-term growth. 

This strategic alignment ensures that resources are allocated effectively, goals are realistic, and the organization can adapt to changes in the business environment. Companies can reasonably expect to be much better prepared to support sustained growth, improved performance metrics, and a stronger competitive position.

These benefits underscore the transformative potential of adopting S&OP enabling your company to achieve greater alignment, efficiency, and strategic success.

As a procurement professional you will also feel much more connected to the overall success of the enterprise and recognized for your contributions.

Practical Examples of Successful Implementation

Intel

Intel implemented S&OP to enhance its supply chain coordination and demand forecasting. They faced challenges with fluctuating demand, a huge sales operation, and complex production processes spanning multiple continents. By adopting S&OP, Intel integrated its sales, production, and financial planning, resulting in a more cohesive approach.

Results

• Achieved a 25% improvement in forecast accuracy within the first year.
• Reduced inventory levels by 20%, leading to significant cost savings.
• Improved on-time delivery performance to 98%, enhancing customer satisfaction.

Cisco Systems

Cisco leveraged S&OP to align its diverse business units and improve operational efficiency. The company had been struggling with siloed planning processes and inconsistent demand signals across its product lines. The problem was further exacerbated by the need to continually integrate new acquisitions. 

Results

• Increased forecast accuracy by 30%, which led to better alignment of production schedules with actual market demand.
• Achieved a 15% reduction in lead times by optimizing their supply chain operations.
• Boosted profitability by 10% through better resource allocation and reduced operational costs.

Texas Instruments

Texas Instruments (TI) adopted S&OP to streamline its operations and enhance collaboration across its global supply chain. TI aimed to address the challenges of highly variable demand and astonishingly complex manufacturing processes. Like Intel, TI also needed to integrate the input from a massive global sales force including a wide range of authorized distributors throughout the world.

Results

• Improved forecast accuracy by 20%, resulting in more reliable production planning and inventory management.
• Identified potential savings of $50 million by reducing excess inventory and optimizing production schedules.
• Maintained a high service level, with on-time delivery rates improving to 97%, thereby strengthening customer relationships.

When S&OP May Not Be Suitable

• Highly Unpredictable Demand: Companies with extremely volatile demand may find it challenging to implement S&OP effectively.
• Short Product Lifecycles: Businesses with very short product lifecycles may struggle to align S&OP processes with rapid changes.
• Service-Based Businesses: Pure service companies may not benefit as much from traditional S&OP processes and might need customized approaches.
• Limited Staff: If the team that would be involved in S&OP is less than 10 people, you’re probably better off with less formal communication. If you have more than 50 people contributing, you would definitely benefit. 

The Evolution of S&OP to IBP

Initially, S&OP was a straightforward process aimed at balancing supply and demand within manufacturing environments. 

However, the business landscape has changed significantly, and so has the scope of S&OP. 

Today, Integrated Business Planning (IBP) adds financial and strategic planning to the original cross-functional collaboration of S&OP, making it a vital tool for dynamic companies.

By integrating business plans and financial objectives with operational plans, IBP provides a more provides a more holistic view of the company's performance and enables proactive strategic decision-making. 

Summing Up

Adopting S&OP and evolving towards IBP might bring substantial benefits to you and to your organization, including improved alignment, better forecast accuracy, increased profitability, and enhanced risk mitigation. Companies like Intel, Cisco, and TI have demonstrated the transformative power of these processes. 

S&OP has the further benefit of bringing procurement professionals directly into the strategic planning process creating an opportunity to showcase your significant contributions to the company’s success.

Additional Resources:

• Octopart
• Nexar Spectra