Understand what S&OP is and how to succeed in deploying it to generate more effective planning, resulting in reduced operating costs and increased service levels
In an increasingly competitive and rapidly changing market, an important practice adopted by companies to maintain a competitive advantage is sales and operations planning, better known as S&OP — Sales and Operations Planning.
With origins in the late eighties, it became a strategic tool for companies, ceasing to be just a medium and long-term production plan. Currently, having a flexible S&OP is a key factor for companies to be resilient to environmental changes, providing an increase in the level of service and a reduction in inventories. In this way, the implementation of S&OP can increase revenue, reduce company costs, and leverage product marketing performance.
What is S&OP?
Broadly speaking, S&OP can be understood as a series of decision-making processes that, supported by mathematical models and quantitative analysis, aim to:
- Balancing supply and demand
- Integrate the financial plan with the operational plan
In other words, it is basically a continuous planning process through which the company aligns the production plan with the sales plan. It is responsible for maintaining coherence between the company's strategy and its operation by interconnecting plans at the strategic, tactical, and operational levels.
S&OP integrates different areas such as Operations, Logistics, Sales and Finance so that, together, they define the best demand and supply plan. In addition, it has the participation of senior management, who is responsible for the final decision.
A false idea that many companies have is that S&OP is limited to systems, when in fact it is a structured plan with the alignment of the different areas involved, being only supported by systems.
The S&OP is a cyclical process, repeated periodically and consisting of seven steps, beginning with the collection of data to forecast demand and ending with the execution of sales and operations plans.
In this way, it contributes to the reduction of conflicts between decisions of the various areas involved, management of bottlenecks and commercial/operational restrictions, as well as the integration of plans into the budgeting process.
Implementing S&OP
The implementation of the S&OP process can be structured in four phases: motivation, definition, operationalization, and implementation. It can be carried out in partnership with consultancies or developed internally, requiring, in any case, a team dedicated to the implementation of the processes. In general, the main costs involved are those of labor and those of possible system purchases.
1. Motivation
The first stage consists of understanding the motivators behind the implementation of S&OP in the company. It is essential to carry out a diagnosis of the current situation to understand the existing planning process and its main Gaps. In this way, the future process can be designed and implemented in a way that is more in line with the company's reality, as well as with the expectations of the top management.
The main motivators for implementing S&OP are the need to:
- Preparation of a plan in line with the company's reality;
- Efficient and effective change management;
- More effective inventory and capacity management;
- Performance evaluation;
- Integration of the areas involved in the planning
2. Definition
Once the objectives of S&OP in the company are understood, it is necessary to design the model that will most effectively attack Gaps of organization planning. Thus, in this stage, more comprehensive decisions are made, such as product families, the degree of detail with which each of them will be treated, and mathematical models to be used.
3. Operationalization
At this moment it is defined how the S&OP will be operationalized. That is, at this stage the following are established:
- Those responsible for the process, such as the leader; pre-S&OP teams, demand planning teams, area planning teams, and executive S&OP teams.
- The report templates that will be generated, such as the operations report, logistics report, sales report, and others.
- Os KPIs which will be calculated, such as sales forecast indicators (MAPE, MAD, ME), inventory indicators (Turnover, Coverage, Service Level), among others.
Learn more: KPIs
ME: Indicates the error of the prediction regarding what was achieved. Since the errors can be positive and negative, on average they can cancel each other out, giving the false impression that the error is low.
MAD: Indicates the magnitude of the prediction error over what was achieved in the form of an absolute number.
MAPE: Indicates the magnitude of the prediction error over what was achieved in the form of an absolute percentage.
Rotation: Indicates the number of times (speed) that the stock of a product is replaced during a given period.
Coverage: Indicates the amount of time (in days, weeks, or months) it would take for existing inventory to be fully consumed, if there were no replacement.
Service Level: Measures the probability that there will be no Stockout, that is, how much your demand is being met. There are different ways to calculate the level of service, such as type 1 (α), which measures the frequency at which demand is fully met, and type 2 (α — Fill Rate) that measures how much of your demand you are meeting.
- The systems that will be used to monitor the process, such as a planning consolidation system, a KPI monitoring system, and a financial monitoring system for the process.
- The S&OP procedures including annual schedule and review schedule.
4. Deployment
Finally, the last stage consists of the preparation of the S&OP process implementation plan and its execution. As with any implementation of a new process, this stage requires strong change management work. It is necessary to engage everyone involved, always with the support of senior leadership. Um Sponsor Cross, who looks at the transition as a whole, like a CEO, is fundamental to the successful implementation.
Key Factors for Success
The success of S&OP and the achievement of the expected results depend mainly on three key points:
- Governance/Processes
- People
- Tech
In addition, it is necessary to have the objectives clearly defined and aligned with the company's strategy, as well as to carry out a Follow up constant to identify improvement points.
It is important to emphasize that, to adopt this practice, it is not necessary to invest heavily in very complex systems and/or processes right from the start. It is possible to start implementing S&OP with simple spreadsheets and gradually, as the processes mature, implement more robust technologies.
The most important thing is to have the support of the leadership and the will to “make it happen” of the team. Budgetary issues should not hinder implementation, since initial benefits can already be obtained with some simpler S&OP practices.
Thus, the implementation of S&OP is becoming increasingly common, both by product and service companies, consolidating itself as a strong market trend.
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About the author
Ana Pantaleão is a Visagio consultant specializing in logistics, supply chain and operations projects, having worked in operational and support areas in the retail, banking, oil and gas, mining, and other sectors. He has a master's degree in Supply Chain Management and Optimization from the Écoles des Mines de Nantes