A few weeks ago, I launched a new blog series on sales and operations planning (S&OP). In that introductory post, I outlined a number of important topics that I plan to explore in more detail throughout the summer. To make sure everyone is on the same page, I want to review the basics, the foundation, which is… what exactly is S&OP? I’ve seen and heard so many different answers and perspectives in response to this question. Therefore, I think it is important to share what I feel are some leading practices and also how leading organizations think about S&OP.
First of all, S&OP is indeed a process by most academic definitions (Merriam-Webster Link), as it follows a series of steps and activities with a particular cycle or cadence. And there are certainly meetings that occur throughout the process, but S&OP is not a meeting. S&OP is so much more than a process or a meeting. Yes, I’ve seen organizations that think they are ‘doing S&OP’ because they have a monthly meeting, but in fact they are actually missing the point of S&OP.
If one thinks about the purpose of S&OP, it is to ultimately match supply and demand, while balancing the cost (supply) and service (demand) tradeoffs of the supply chain. But as most of us know, addressing or solving this tradeoff is not linear in any way. Organizations face a recurring flow of supply chain imbalances that require decisions. S&OP serves to guide that decision making across the organization, making sure everyone is well informed and that trade-offs are analyzed and addressed properly. As a result, S&OP can be thought of more as an operating model to help organizations make better business decisions.
Based on what I have observed at leading organizations, and also as a practitioner and former planner myself, S&OP is much more akin to an operating model or governance model for the supply chain than it is a process. A colleague of mine at Accenture years ago shared a very simple and crisp definition of an operating model, which I have always liked: ‘it’s the way work gets done in an organization’. My intent here is not to engage in a debate over fancy buzzwords or nomenclature, after all, every supply chain organization I’ve seen refers to S&OP as a process. However, what’s important to take away is that S&OP can be bigger and more powerful, and that requires a mind-shift to think about it as more than a process.
A number of misconceptions exist about S&OP and its role in managing the supply chain. Here is a simple comparison spectrum that I often use to clarify what S&OP entails.
|S&OP is not…||S&OP is…|
|Monthly Meeting||Governance or Operating Model|
|Historical Performance Review||Forward Looking Plan|
|Forecasting Process||Decision Making Process|
|Only Volume or Unit Focused||Both Volume and Dollar Focused|
|For Operations or Supply Chain||For the Entire Business|
|Metrics and Dashboard Reviews||Driver of Actionable Insights|
It’s important to think about S&OP more strategically as an operating model than as a process and this is the first step towards getting the most out of the ‘process’. In order to better understand how this mind-set is put into practice, I want to share a couple examples illustrating how leading organizations use S&OP to manage their business.
- Backbone of the Organization – One of the best S&OP processes I’ve ever seen was at a global high-tech consumer products organization. What’s interesting is that they didn’t call it S&OP or even have a term for the process. In fact, there wasn’t really a discrete process, it was simply the way the entire organization operated. Every department from sales, marketing, engineering, finance, and of course, supply chain followed a well-orchestrated, and integrated cadence every month. All the various sub-processes in the departments noted above connected and hinged around this underlying backbone in the organization.
The inertia of the organization, at all levels, revolved around supporting the cadence of this process, it was simply how they ran the business. There was a calendar with thoughtfully sequenced meetings; there was a well-defined core team and an extended team; the workforce had defined activities and came prepared to meetings; review meetings were well attended and they had a purpose with defined outcomes; and finally, the organization analyzed business trade-offs and made decisions. It was controlled and disciplined. It operated like a well-oiled machine. And, it was incredibly impressive to see in action.
- Financial Management Lever – A very powerful aspect of S&OP, when applied and used properly, is its ability to steer the performance of a business. One organization that did this well was a global consumer electronics company that operated across many competitive marketplaces and faced fluctuating currencies and foreign exchange rates. Operationally, planning the supply chain was fairly straightforward, but financially it was incredibly complex. As a result, this organization’s process not only looked at volume, but also dollars, which is something I often see in leading organizations. In addition to the standard reports that normally support the process, the S&OP team also had a financial income statement — just like the normal S&OP templates, but instead of units, there were dollars.
Revenue and margin were the two primary measures, with product mix, manufacturing locations, and currency rates as an overlay. What-if scenarios were performed to model different financial outcomes as the organization evaluated decisions and their impact on revenue and margin. The S&OP team would adjust manufacturing locations and allocate inventory to different regions and markets globally based on the financial performance objectives…either to drive more revenue, or to drive more margin. The S&OP process in this organization had a greater purpose than to simply balance supply and demand. It also supported operational hedging strategies via the supply chain and was used to drive the best financial outcomes.
I trust this post provided a different perspective – that S&OP is much less about process mechanics and more about the mind-set in an organization. I look forward to reading your comments on this topic and to see what other perspectives people have on S&OP and its definition. In my next post, I’ll explore the areas of ownership and some of the organizational implications of S&OP.