At first, many businesses believe that the sales department is the only operation that directly impacts revenue. However, there are several processes occurring behind the scenes that play a part in facilitating and maintaining sales.
With sales and operations planning (S&OP), companies gain insight into their own financial data and demand trends within their market. This enables managers to optimize operations, from procurement to final shipments, saving inventory costs and mitigating risks.
An effective S&OP process ensures a company can source products from the right place, at the right time, by balancing supply and demand.
What is S&OP?
Sales and operations planning is a supply chain management process that aims to balance a company's supply with demand.
S&OP requires collaboration with all business segments, including marketing, manufacturing, and finance, to create accurate, inclusive forecasts. By including all sectors, stakeholders gain the full picture of a company's stability and longevity.
S&OP is only required for large corporations that handle multiple supply chain processes, whereas small businesses may only require inventory management. Eventually, medium-sized companies may need to add demand and supply planning as they grow and expand their product range.
With adequate S&OP, organizations can enhance transparency, coordinate operations, and balance supply and demand to improve profitability. S&OP can extend generic forecasts to gain a holistic view of the procurement and sales network, expanding management capabilities.
Benefits of S&OP
S&OP considers every supply chain operation so businesses can align processes and-
Gain Insight into Financial Data
The S&OP process gathers pertinent financial information from management systems, such as resource-planning and forecasting software, creating a centralized planning system.
With thorough S&OP, companies can determine where they can cut costs within the supply chain to minimize expenses and maximize service quality.
Businesses that do not have an accurate gauge of customer demand often experience inflated supply chain costs from overstocking or expedited shipping. Trying to quickly source products after experiencing an unexpected influx of sales can overwhelm the chain and create disruptions, elongating the wait.
A structured S&OP system mitigates these risks by establishing a standard process that predicts demand so companies can anticipate emerging market trends. This functionality not only enables companies to expand but also-
- Reduces on-hand inventory
- Improves customer service
Lower Transportation Expenses
A 2018 study found that the practice of S&OP in e-commerce increased the parcel shipment volume by 7% in just one year. By extending their delivery capacity, companies can meet customer demand quicker and at lower shipping costs, preserving the profit margin.
With modern transportation management systems, businesses can view their shipment options to determine which company provides the best service, rates, and distribution for their customers.
Improve Inventory Planning
Maintaining healthy inventory levels is a primary determinant for supply chain profitability. If levels are too high, businesses must supplement increased storage costs from their bottom line. On the other hand, if levels are too low, they could lose potential sales, still risking their bottom line.
However, any expense required to procure a product affects its profitability, from shipment to holding fees. Therefore, companies that are able to minimize their inventory costs can secure their profits.
Sophisticated S&OP helps companies gain a holistic view of their inventory management so they can-
- Consolidate inventory shipments
- Find cost-effective vendors
Aside from specific business goals, S&OP also aims to simply align and improve visibility into the supply chain so businesses can better evaluate their performance. Without insights into the various processes, companies are unable to develop impactful strategies.
S&OP is the first step to gaining the full picture of the supply chain's inner workings. However, organizations that want to optimize their control must eventually outline the entire network and implement data management systems throughout the chain.
Steps to S&OP
The goal of S&OP is to align supply and demand across all operations to maintain sales and profits. This is only possible by completing six vital steps.
1. Sales Forecasting
First and foremost, businesses need to have an educated guess on future sales in order to determine how to fulfill the demand.
Forecasting software evaluates historical sales data to define trends and project future outcomes. Advanced solutions can even integrate with point-of-sale (POS) systems to analyze the health of different product lines, external market trends, and the inventory pipeline.
2. Demand Planning
By reviewing sales forecasts and product performance, companies can improve their ordering strategies, stock allocation, and shipment dates. However, managers must also look at the dependent and independent variables that could impact demand planning, such as-
When combining this data with historical performance metrics, companies can refine their insights and accuracy. With optimized inventory processes, businesses are able to meet customer demand and provide the best customer service.
3. Supply Planning
In this stage, managers from the finance, operations, and material procurement departments must evaluate their capacities to determine limitations. Any restraints regarding suppliers, machinery, and production lines should be optimized to withstand future demand.
By establishing a baseline production and capacity plan, businesses can prepare their operations for the worst-case scenarios. It is also essential that managers have access to real-time sales data so they can facilitate procurement orders as needed.
4. Pre-S&OP Meeting
This step focuses more on budgeting and requires collaboration from several departments-
Representatives from these departments are responsible for cross-examining demand and supply plans to determine the financial impact. Historical costs may also be examined to see the variance between projected and actual costs.
Depending on the accuracy, they may find that there must be some slight or significant changes to the S&OP in order for it to fit within the allotted budget.
The pre-S&OP meeting also identifies potential operational implications and gaps in the supply chain that could impact business strategies.
5. Executive S&OP Meeting
Once all plans are refined in the pre-S&OP meeting, it is time to hold the executive S&OP meeting.
In this stage, all stakeholders gather to assess the forecasts, plans, and suggestions from the previous meeting. All what-if scenarios are reviewed, discussed, and outlined, as well as backup plans.
After all of the details are ironed out, the finalized plan is made available on a centralized interface, such as cloud-based software, so all executives throughout the supply chain have access.
At this point, anything that wasn't addressed in the previous steps should be outlined and resolved.
With the final approval, managers can begin the implementation process. After the plan is implemented, the S&OP should be regularly evaluated to ensure it remains consistent, accurate, and effective.
Key S&OP Metrics
S&OP isn't a one-and-done task, but rather an ongoing process that is refined as time goes on. Therefore, businesses need a tool that allows them to quickly evaluate the performance of their operations.
Key performance metrics (KPIs) quantify different qualities, making it easy to actively monitor the processes. In S&OP, managers should focus on the seven primary KPIs-
- Demand Forecast Accuracy measures the difference between projected and actual demand to assess the predictive model's accuracy.
- Inventory Turnover is the rate that calculates how quickly products sell once they are introduced into inventory. This metric can also measure the accuracy of previous turnover projections.
- On-time Delivery analyzes the business's ability to procure stock, fulfill customer orders, and deliver items on-tine. This metric can also define bottlenecks in the supply chain.
- Order Accuracy reflects how well companies can fulfill customer requests, as many businesses sacrifice order accuracy for speed or service.
- Total Sales is a financial S&OP metric that calculates the total number of sales with each transaction, often used to assess financial health.
- Gross Margin calculates the net sales income minus the cost of goods sold (COGS), reflecting profitability. Although the total sales may reach targets, gross margin benchmarks ensure enough profits are generated to meet financial obligations.
- Working Capital Projections measures the accuracy of the forecasted working capital against actual available funds in the bank. If the projections are significantly off, businesses need to refine their predictive models.
In addition to these KPIs, businesses can also monitor other measurements, such as-
- Production plan adherence
5 Tips for Improving the S&OP Process
Once the operations planning is completed and KPIs are established, managers should proactively seek to improve their process to ensure it maintains its effectiveness. When reevaluating the plan, management should-
Start at the Top
S&OP is only impactful if the executives approve and take on the plan. Otherwise, the program may seem good in theory, but it is never actually applied. Without proactive stakeholders, operations further down the supply chain will lag as workers continue to seek approval for the plan.
Upper management is also responsible for setting the tone and work environment for the entire company. Therefore, if supervisors are unwilling to comply with the plan, employees will follow suit.
In other words, even a perfect plan cannot reach its full potential without participation from everyone, starting with the executives.
Clearly Define Objectives
Every plan starts with a goal and progresses to an outline of how one can achieve the goal.
Managers need to ask themselves-
- What is the organization trying to gain by S&OP?
- Is the inventory management optimized?
- Do supply chain costs need to be reduced?
- How accurate are the sales forecasts?
- How is the company's speed of service and product quality?
Whatever the objective may be, it must be clearly defined in the early stages of the S&OP process so managers can adequately discern what actions they need to take.
Understand Sales Numbers
Although there are many variables that go into sales forecasts, businesses that are able to improve their forecasting accuracy gain a significant advantage over competitors.
The more transactional data a company collects, the more accurate its forecasts become. With each purchase, forecasting software improves its algorithms to finetune predictions. This enables businesses to optimize their internal operations to balance supply and demand.
Plan for the Unknown
While it is impossible to create a plan for unexpected events, businesses can run what-if scenarios and develop appropriate responses. Every company should have a contingency plan in case they-
- Lose their biggest client
- Lose a contract with a primary vendor
- Discover malfunctions throughout the supply chain
In addition to alternate strategies, organizations should have extra resources available to carry out every operations plan.
Understand the Effect of Supply and Demand Fluctuations
The impact of supply and demand fluctuations runs deeper than inventory procurement. In fact, it can ultimately decide the financial stability and longevity of a business.
If companies do not understand the implications of poorly managed supply and demand planning, they can experience major financial setbacks.
Therefore, organizations should take the time to learn how market fluctuations can affect their internal workings.