BACKGROUND IMAGE: iSTOCK/GETTY IMAGES
Manufacturing, distribution and supply chain management are all about recognizing and satisfying demand. This imperative...
comes together in a process known as sales and operations planning (S&OP), where the executive management team creates and maintains a plan that states how the company will use its resources -- people, equipment, cash, inventory, warehouses, etc. -- to satisfy demand.
S&OP is a give-and-take process. The demand side develops a forecast and demand plan, and presents them to the supply planners. The supply team puts together a preliminary production, distribution and inventory plan to meet as much of the demand as is practical. Seldom is the initial plan ideal. The S&OP team then works on developing a "best" plan that makes effective use of the resources available to meet an optimum amount of the demand.
That last phrase -- "optimum amount of the demand" -- is a part of S&OP that is not well understood at a lot of companies. The forecast is not demand, and we all know that the forecast is hardly ever optimum. The forecast is most often a mathematical projection of past demand into the future -- the assumption being that demand will continue along the same pattern as before. But that thinking is naïve. There are external elements not reflected in past demand that may influence demand in the future: promotions and price changes, competitors' actions, changing customer tastes and preferences, demographics shifts, economic changes, technological developments, and more.
Demand planning is the process of making adjustments to the forecast to include all of these other factors, as well as the effects of how we plan to move inventory through the distribution chain.
In the S&OP process, a supply plan is developed that will meet that demand plan, but there will often be either a mismatch or some opportunity for using resources better if the demand was different in some way. In either case, the demand planning team should consider changes to the demand plan to better match what supply can do or would rather do -- and what it can do more efficiently or profitably. Any proposed changes to the demand plan will be fed back to sales and marketing to execute.
S&OP in motion
Actions taken to influence or change demand may include promotions, pricing changes, changes to commissions, changes to distribution (moving more or less product to certain regions, customers and channels), or changes in availability (making and distributing more of higher-margin products while limiting or eliminating quantities of lower margin products, or reducing the availability of a product to lower-margin or less desirable channels). Demand shaping, as it is called, is what marketing is all about -- with the cooperation and assistance of the sales team and distribution resources, of course. Marketing uses the tools that it has available -- product, price, promotion and placement -- to increase or decrease demand for various products in various markets to match an optimized supply plan.
Marketing is all about creating and influencing demand. Sales and operations planning ties marketing's actions directly to effective and efficient use of company resources. Together with the execution side of demand -- sales -- and the supply side -- production and distribution, marketing and demand planning provide the company with a coordinated action plan that helps it increase margin and profit, build better long-term relationships with desirable customers through better customer service, and reduce the waste of less than optimum resource use.
The most important aspect of S&OP is the coordination between supply and demand. With both sides of the business working toward the same goals, the entire company can properly focus its efforts toward satisfying customers and making a profit.
Follow SearchManufacturingERP on Twitter @ManufacturingTT.