What Is S&OP And Why It Matters For Supply Chain

Too much inventory, too little inventory. One moment, the focus is on Excess & Obsolete, the next moment, it's Shortages. A key method to finding balance is Sales & Operations Planning (S&OP).

S&OP can be complex and not for everyone. Is it right for your company? Let's find out.

What Is S&OP?

The core function of S&OP is reconciling demand and supply into a management-approved financial plan. What do you do with the demand plan if the supply chain cannot fulfill it? Understanding how to navigate this scenario is crucial for procurement professionals and anyone else involved in electronics manufacturing and sourcing. Here, we explore the dynamics of supply and demand planning within the Oliver Wight S&OP framework.

Oliver Wight is a prominent consulting firm and pioneer in the field of Integrated Business Planning (IBP) and S&OP. Their framework emphasizes the alignment of various business functions—sales, operations, finance, and more—into a cohesive plan that drives better decision-making and performance. The core components of the S&OP framework include:

1. Demand Review: Assessing market demand and sales forecasts.
2. Supply Review: Evaluating the capability to meet the demand with available resources.
3. Financial Review: Ensuring the demand and supply plans align with the financial goals.
4. Reconciliation: Resolving discrepancies between demand and supply plans.
5. Executive Review: Presenting the integrated plan to leadership for decision-making.

Key Factors Influencing S&OP Strategy

To determine the optimal S&OP strategy in the real world, several predicate factors are crucial:

1. Business Type: S&OP is most effective for product-based companies. Manufacturing-as-a-service companies are better thought of as a component of a product company's S&OP process.
2. Profit Margin: High-margin products justify larger inventory levels to avoid lost sales, as the cost of carrying inventory is lower than the cost of missed opportunities.
3. Demand Variability: The predictability and seasonality of demand affect how inventory and production are managed. Stable schedules are best planned with traditional MRP push-style planning, while highly variable schedules are often best planned with JIT/Kanban-style pull-based planning.
4. Product Lifecycle: The length of the product lifecycle influences inventory and obsolescence risks, impacting supply strategy.

Reconciling Supply and Demand

As a supply chain professional, it's critical for you to address real-world constraints that might necessitate adjustments to the production plan. Here's the typical cycle:

1. Initial Demand Plan: The demand plan starts as an unconstrained forecast, showing the true market demand without considering supply limitations. This plan is essential for understanding potential sales and setting financial targets. The demand plan is most often generated by sales using feedback from customers and/or potential customers. Be cautious with the concept of an unconstrained forecast. Sales teams quickly learn from prior experience and adjust their behavior accordingly. Constant communication of supply constraints can result in a demand plan that is no longer truly 'unconstrained.' Conversely, operating under the assumption of infinite supply is also unhelpful. This dynamic often results in multiple forecasting scenarios, such as minimum requirements, best realistic forecast, and best case.
2. Supply Review: During the supply review, the supply chain's capability to meet the demand scenarios is evaluated. If the supply chain cannot fulfill the demand, the supply plan must indicate what can realistically be produced and delivered.
3. Reconciling Demand and Supply: The reconciliation process involves adjusting the demand plan scenarios based on supply constraints. This adjustment is crucial for aligning the final demand plan with the supply capabilities.
4. Financial Implications: In the financial review, the adjusted (or constrained) demand plan is analyzed to understand its impact on the company's financial goals. Lower sales projections due to supply constraints must be factored into financial forecasts. At this stage, management makes decisions on what the team will strive for. This often includes releasing a schedule for the ERP.

The demand plan should remain as unconstrained as possible. If supply constraints are identified, the business must decide whether to invest in increasing supply capacity. If no such investment is feasible, the demand plan must be adjusted, and customers must be informed of potential delays or cancellations. Again, inventory costs must be weighed against the cost of lost sales. You should never lose a $1 million sale because you didn't stock enough penny resistors.

Practical Examples and Best Practices

Scenario 1: High-Margin Products

For high-margin products with unpredictable demand, maintaining higher inventory levels can mitigate the risk of lost sales. In the S&OP process, the demand plan might show a high potential for sales. During the supply review, if constraints are identified, options such as overtime or expedited production can be considered to meet the demand. Production should strive to create an inventory level that exceeds any reasonably foreseeable demand spike.

Scenario 2: Seasonal Demand

For products with seasonal demand, the demand plan might indicate peak sales periods. If the supply chain cannot meet this peak demand, the reconciliation process might involve adjusting the demand plan and planning promotions or incentives during off-peak periods to balance sales.

Advantages of S&OP for Supply Chain Professionals

For supply chain professionals, the S&OP process offers several significant advantages:

1. Improved Forecast Accuracy: By integrating data from various departments, supply chain professionals can develop more accurate demand forecasts, reducing the risk of stockouts or excess inventory.
2. Enhanced Collaboration: S&OP fosters cross-functional collaboration, ensuring that supply chain constraints are communicated and addressed in a timely manner. This leads to more cohesive and aligned business operations.
3. Better Resource Allocation: With a clear understanding of demand and supply capabilities, supply chain professionals can allocate resources more efficiently, optimizing production schedules and inventory levels.
4. Risk Mitigation: The S&OP process helps identify potential supply chain disruptions early, allowing professionals to develop contingency plans and mitigate risks.
5. Strategic Decision-Making: By providing a holistic view of the business, S&OP enables supply chain professionals to make strategic decisions that align with overall company goals, enhancing long-term performance.

Common Reasons for S&OP Failures

While S&OP can significantly improve supply chain management and business alignment, there are instances where it has failed to deliver on its promises. These failures often result from various challenges, such as poor implementation, lack of executive support, inadequate data, and insufficient cross-functional collaboration. Here are a few examples and common reasons for S&OP failures:

• Lack of Executive Support: Without strong leadership and commitment from top management, S&OP initiatives may lack the necessary resources and attention to succeed.
• Inadequate Data Quality and Integration: Poor data quality or failure to integrate data from different departments can lead to inaccurate forecasts and ineffective planning.
• Insufficient Cross-Functional Collaboration: S&OP requires input and cooperation from multiple functions (sales, operations, finance, etc.). A lack of collaboration can undermine the process.
• Resistance to Change: Employees may resist new processes and systems, particularly if they perceive them as additional work or a threat to their established ways of working.
• Overly Complex Processes: Overly complicated S&OP processes can be difficult to implement and sustain, leading to confusion and inefficiency.
• Misalignment with Business Strategy: If S&OP is not aligned with the overall business strategy, it may fail to deliver the expected benefits.

Is S&OP Right for You?

Deciding whether Sales and Operations Planning (S&OP) is right for your company involves evaluating several factors and asking key questions to understand your current processes, challenges, and strategic goals. Here are some critical factors and questions to consider:

• Business Complexity: Assess the complexity of your supply chain, including the number of products, suppliers, and markets you serve. Companies with complex supply chains will benefit more from S&OP, for simple supply chains S&OP is too burdensome.
• Demand Variability: Consider the variability and predictability of your demand. High variability in demand can make S&OP particularly valuable in improving forecast accuracy and planning. If you know exactly what you're going to build for the next 12 months don't bother with S&OP.
• Inventory Management: Evaluate your current inventory management metrics. For example, inventory turns above 10 is good, below 4 is bad. Excess & Obsolete should be 1% or less of raw inventory. If you have problems S&OP can help optimize inventory levels and get your metrics in line.
• Cross-Functional Collaboration: How would each function (sales, marketing, operations, finance) score your company's level of collaboration between functions? Misaligned scores may indicate underlying issues.
• Resource Allocation: Assess how effectively resources (production capacity, labor, materials) are currently allocated.
• Strategic Alignment: Consider whether your operational plans are aligned with your strategic goals. This might seem obvious, but if you've ever worked for a large corporation, you probably know how easy it is to become mis-aligned.
• Technology and Data Quality: Evaluate the quality of your data and the technology you use for planning. Good data and appropriate technology are crucial for effective S&OP. Garbage in/garbage out definitely applies, S&OP won't fix bad data so address any problems with data or technology (think ERP) first.

Conclusion

Choosing to manage supply and demand within the S&OP framework requires a careful balance between complexity and benefit. In the right circumstances, following the S&OP framework can ensure that demand plans are realistic, aligned with supply capabilities, and approved by management. This structured approach helps in making informed decisions that drive business success, improve accountability, and reduce stress.