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What is S&OP and Why Should Finance Care?

August 28, 2019 | By River Logic

The theory of Sales and Operational Planning (S&OP) goes back many years. In fact, the first attempts at S&OP were made before personal computers were even available. While theory has remained much the same, the practice has changed dramatically from a laborious manual intervention into an agile process supported by predictive and prescriptive analytics.

Initially, planning activities were centered entirely on metrics, such as:

  • Production volumes
  • Units sold
  • Inventory requirements
  • Input hours

At that time, there was no more than a passing reference to cost, revenue and profitability. S&OP processes were, and in some quarters still are, carried out independently of finance.

The exclusion of finance when performing S&OP means plans won't necessarily be practical, nor the best in terms of meeting the organization's overall financial objectives. It's also a factor as to why many organizations don't progress beyond Stage 2 maturity in Gartner's five stage S&OP maturity model.

What Is S&OP?

When considering this question, it's useful to step back in time to the days when businesses relied exclusively on paper processes. At that time, functional silos were powerful and visibility into the organization was non-existent. By introducing S&OP, it was possible to integrate the activities of functional departments, such as sales, procurement and manufacturing, to produce a unified plan that aligned their activities with that of the organization.

In this way, day-to-day operations are coordinated toward the same goal that in turn is aligned with the business' short-, medium- and long-term strategy. This implies that S&OP should be driven from the top and, by involving functional management in decision-making, allow the business to respond effectively to changes in demand, manufacturing output and supply issues.

The key thrust of an effective S&OP process is to make and review forward-looking decisions, allowing the business to adapt to changes in the markets, supply lines and manufacturing processes.

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How Traditional S&OP Processes Run

S&OP processes usually run on a monthly cycle and are based on the organization's current plan or budget. The steps typically followed for each cycle include:

  • A review of sales performance
  • Preparation of forward-looking sales forecasts for the next month, quarter and year
  • Formulation of a demand plan
  • Creation of a supply plan that takes into account manufacturing capabilities, sourcing constraints and inventory levels
  • A preliminary S&OP meeting that reviews information and makes recommendations
  • An executive S&OP meeting that finalizes the plan

The executive meeting reviews the recommendations and makes supply and operational decisions to implement the plan. Factors considered include:

  • Market demand
  • The introduction of new products
  • Products being phased out
  • Manufacturing capabilities
  • Supply constraints
  • Alternative scenarios

Shortfalls of Traditional S&OP

The traditional business model has irrevocably changed. Globalization means markets are diverse and supply lines longer. Numerous companies outsource production, especially of components. Demand is volatile and product life cycles shorter. In these circumstances, traditional S&OP processes often fall short.

For example:

  • S&OP based on manual processes is simply too slow.
  • The effort to collect and assimilate data takes too long and leaves little time for analysis and decision-making.
  • Organizational silos disrupt information sharing.
  • In many companies, lack of commitment leads to sporadic attendance at meetings.
  • There's poor integration between departmental and functional plans.
  • Overreliance on spreadsheets reduces flexibility, increases lead time and inhibits effective collaboration.

The exclusion of the finance team means little attention is given to the financial consequences of decisions. For example, the cost of ramping up production to meet anticipated demand may make products unprofitable. Additionally, outsourcing manufacturing to an offshore company could require a costly increase in inventory to ensure adequate stocks are on hand.

Underperformance of sales and operational planning processes relate closely to:

  • The degree of management commitment
  • How the organization collects and processes information
  • Changes in how the businesses operates
  • Poor communication and inadequate training that inhibits planning processes
  • Lack of understanding of what S&OP is all about
  • Exclusion of finance

Adding a New Dimension to S&OP by Involving Finance

When finance isn't part of the S&OP process, there's a disconnect between operational planning and the financial consequences of these decisions. On the other hand, incorporating finance brings S&OP into line with corporate financial objectives and adds weight to S&OP decision-making.

This becomes especially relevant at budget time because a forward-rolling sales and operational plan that incorporates financials will become the basis for the financial budget. This also means the S&OP and financial budget align and that the monetary impact of decisions made at planning meetings is measured.

Including finance furnishes a meaningful answer to the question of what is S&OP because the process becomes an integral part of the business, not an optional add-on. It means managers work with real costs, not standard costs derived at budget time. This subtle but important change affects decisions related to sourcing, production volumes, working hours and marketing, as choices are not based on theoretical figures.

How to Transform S&OP with Agile Software Applications

At first glance, the S&OP planning process is readily adaptable to a rules-based heuristic system that follows the methodical processes outlined above. This, in turn, implies that a logical approach based on a rules-based software solution would suffice. While there's merit in these concepts, most heuristics processes operate in one direction only, and, unless constraints are carefully specified, there's a significant risk that solutions won't be feasible, nor will they be optimized. The accuracy of a rules-based solution also deteriorates as the number of possible permutations increases.

On the other hand, optimization solutions based on linear programming and algebraic modeling have the capability to optimize S&OP. Various solutions exist, including packaged software and modeling platforms. Packaged solutions are good in well-defined situations but force organizations to align their business to the software model. Modeling platforms such as River Logic's Enterprise Optimizer® are different in that they allow customers to create their own business models that behave exactly as the business functions. Additionally, this type of software allows users to find the best solution for a given set of parameters as well as run what-if scenarios to establish viable alternatives. According to Gartner, River Logic's Enterprise Optimizer supports all levels of supply chain maturity, placing the company as a top visionary in its Magic Quadrant for Sales and Operations Planning Systems of Differentiation in 2019.

Benefits of S&OP optimization solutions that embrace finance include:

  • A true understanding of the financial implications of decisions
  • The ability to optimize solutions
  • An easy evaluation of alternative scenarios
  • Actionable information
  • Production of feasible plans
  • Fast turnaround

Developing an S&OP Integrated Business Plan

Integrated Business Planning (IBP) takes basic S&OP concepts and applies them throughout the organization. In many ways, IBP is an extension of S&OP because the underlying concepts are the same except that it includes all facets of the business, such as HR and finance. Finance gives depth to a sales and operation plan and provides answers that can be measured in terms of cost and feasibility.

Key factors for achieving S&OP and IBP maturity include a commitment to the concept along with a supporting software solution that provides the ability to collate data, analyze alternatives and deliver answers quickly so managers can make fully informed S&OP decisions. Learn more about River Logic's S&OP application and discover how it will allow you to move from Stage 2 to Stage 5 S&OP maturity.

Integrated business planning solution sheet

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