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Most discussions of sales and operations planning focus on the sales -- or demand management -- side. That's probably because sales is the more critical concern of the high-level executives who carry out the S&OP process and because operations planning is an established process that naturally flows from the demand plan: We know how to do it, the process is in place, and we just take the demand plan and run with it.
But that's not the right approach. S&OP should be more cooperative, with give-and-take from both sides.
Too often, the demand plan is considered to be a target and operations is expected to develop a plan to produce the product required to meet the expected demand. And more often than not, they do, which reinforces the validity of that faulty approach. In contrast, a well-established S&OP approach changes the conversation. Both supply and demand are expected to work together to develop a single plan that incorporates both a demand plan and a supply plan that together will maximize results for the company.
That said, supply is still expected to develop a plan to produce the product needed to meet demand. At the start, this is mostly a mechanical process, meaning that the ERP production-planning software develops the first-cut production plan. Supply planners then evaluate the plan using resource planning and rough-cut requirements planning applications to see how well the production plan uses available resources, and if there are any over-commitments or under-commitments that might make the first-cut plan unrealistic, inefficient or unprofitable. If, after making adjustments to the supply plan, all resource conflicts are resolved, the process is essentially finished. The executive S&OP team reviews and approves the plan and the business can move forward.
If, however, resource conflicts cannot be resolved, it is incumbent upon the supply planning team to propose adjustments to the demand plan to reflect the inability to produce all of the product needed to fulfill all of the demand. Failure to agree on a plan may result in late completions and product shortages along with higher production costs due to expediting and overtime.
If resources are not fully consumed, it's an indication that there are not enough sales in the plan. The demand team should be encouraged to increase the demand plan and initiate appropriate marketing and sales actions to boost sales to meet the adjusted plan. Production can advise the demand team about what would be the best -- most profitable -- products, quantities and timing to build into their revised plans.
Supply planning may also identify opportunities to improve efficiency and profit by recommending a change in the product mix or timing of demand. Once again, the supply planning team should bring this information to the attention of the demand planning team and encourage them to adjust their sales projections to better utilize the company's production capabilities and, by doing so, increase profit.
S&OP helps sets clear lines of responsibility
One of the most powerful features of S&OP is that it brings supply and demand together to develop a single plan that both sides of the business agree to. From that point forward, each side can then be held responsible for delivering to the plan, which -- at least in theory -- eliminates finger pointing when actual results are not as expected.
If there's a product shortage that leads to back orders or lost business, whose fault is it? Without the S&OP plan in place, blame would automatically be placed on production. Comparing actual production to the master schedule, which is tied directly to the S&OP production plan, it might become evident that production did what they promised. Comparing actual sales to the demand plan, however, might reveal that sales of some products exceeded the plan, which might ordinarily be considered a good thing. In this case, however, the backorders and lost business could end up costing the company more profit, and harm to customer relations, than are compensated for by the extra sales revenue.
Having the sales and production plans in place establishes a clear, neutral benchmark that both sales and production can aim for and reference when measuring performance. More importantly, the plan is the result of an agreement between supply and demand. As such, the S&OP process opens communication between these two, often conflicting, sides of the business and allows both to work toward the shared objective of meeting the needs of the marketplace in the most efficient and profitable way possible.
Read Dave Turbide's tip on the demand side of S&OP
See an S&OP case study
Get an excerpt from an S&OP book