Putting the “S” Back in the S&OP Planning Process

Sales & Operations Planning has been accepted more and more by both academia and practitioners as the way to balance demand and supply. In this article, Dr. Marcel Zondag who is an expert in the CPG industry will explain some ways to streamline the planning process.

For many companies, the implementation of a formal project like the Sales and Operation Planning (“S&OP”) process has not delivered the expected improvement in demand and supply integration. Establishing an efficient and effective process often seems to be unobtainable. Working with different companies as part of our S&OP research, we found that there is often a considerable separation between the demand-generating sales & marketing team and the demand-satisfying supply chain management and manufacturing functions, which are the main functional areas involved in the planning and negotiation process. This separation is not only structural, in so-called organizational silos, but also based on different Key Performance Indicators (“KPIs”) for each function. Furthermore, we noticed time and again that financial planning has become an “input” to the S&OP process instead of an “output” of S&OP’s original objective of matching the “voice of the customer” with the “voice of the supply chain.” Finally, most of the ERP systems used in the S&OP planning process are not well-equipped to deal with the inherent flexibility and constant modifications necessary to meet ever-changing customer requirements.

The S&OP Challenge
Most of the S&OP processes we initially map out as part of our research are top-down and rigid, not able to effectively and profitably fulfill customer requirements. Overly focused on efficiency and cost savings, i.e. on the “O,” the “S” in S&OP now seems to have become an afterthought. The mentioned rigidity leaves these processes overly fragile, frequently collapsing as a result of “unexpected” market fluctuations. Indeed, a 2012 survey by the Aberdeen Group found that reducing supply chain costs is no longer the biggest operations management challenge faced by supply chain professionals. External customer service requirements for supply chain speed, flexibility, and reliability are today’s main challenges; making an effective planning process even more a necessity. This conclusion was confirmed in a recent S&OP benchmarking survey, conducted by our research partner, Meridian Consulting Group. The results showed that 5 of the top 10 most important KPI’s for the S&OP process are sales/revenue-related (bolded below): 

- Topline volume growth 
- Orders shipped on-time and complete 
- Forecast accuracy 
- Inventory control targets
- Customer satisfaction 
- Profitability 
- Case fill rate 
- Production flexibility 
- Line efficiency 
- Management of margins 

Putting the “S” Back in Your S&OP Planning Process
The challenge, therefore, has become to (re-) design the process with a clear focus on demand management. Based on our research we formulated 3 crucial strategic planning guidelines for setting up or redesigning a company’s S&OP process.

1. Consider S&OP as a Core Commercial Process
The pressure to sell one more additional unit is not a product supply challenge; it is a demand management challenge. Only after listening to the “voice of the customer” and understanding the motivation that underlies customers’ procurement decisions can one consider the supply process capabilities needed to effectively and profitably meet customer demand. This means that the commercial functions of the company are first charged with providing comprehensive customer and market insights. Another way to think about this issue is to view the sales and marketing tactics employed by companies as a control lever for the magnitude and timing of customer demand, i.e. the demand signal used to plan all upstream supply chain processes. Also, we point out that it is equally important to develop these insights at a granular level. For example, aggregated sales data have a tendency to hide under-performance in delivery and fill rates at the SKU level.

2. Restore the balance between the “S” and the “O” 
Markets are dynamic, perhaps even more so in the current economic climate. The S&OP process is an effective tool to match the voice of the customer (as in the six sigma program) with the voice of the supply chain in an active fashion. In other words, the international business challenge most companies face is actually an S&OP-based opportunity to reclaim the flexibility that motivated the development of S&OP planning in the first place. That means that rigidity needs to be removed wherever it is found in the planning process and become lean. That can be as simple as changing the agenda, deliverables, and participants of planning meetings, or as complicated as changing data management and ERP systems.

3. Decouple financial planning from the S&OP process
Introducing financial objectives at the start of the S&OP process can lead to counter-productive decision-making due to removing the focus from capturing the voice of the customer. The risk is that decisions are made in order to “back-in” to financial performance measures, effectively turning the process upside down. Obviously, we are not advocating removing all financial goals and objectives from the S&OP process. We are however suggesting that financial planning and reporting are an outcome of the S&OP process only. If the company’s financial objectives are not met, the S&OP process can be re-run at that time until a more profitable balance between demand and supply is achieved.

About the Contributor:
Professor Marcel Zondag is a professor of the supply chain program at Western Michigan University which is ranked as one of the best programs in the nation.

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Last review and update: July 5, 2022
About the Author and Editor:
Ben Benjabutr is the author and editor of Supply Chain Opz. He holds an M.Sc. in Logistics Management with 10+ years of experience. You can contact him via e-mail or Twitter.