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A bedrock principle of Supply Chain Management is its recognition that all value-adding functional activities within an enterprise are interconnected. Once a company realizes this interdependence, the challenge becomes one of operationalization: how does the organization work this insight into their search for competitive advantage? The forward-thinking enterprise seeks to optimize the contribution of its entire talent pool and encourage a culture of collaboration.
The pace of change is frantic. To the swift go the spoils. Globalization, technological advancement, and empowered customers have made fast response to market developments evermore challenging.
Research firm The Aberdeen Group of Boston, MA has found that a formal process of Sales and Operations Planning (S&OP) was a key enabler in companies who were able to achieve best-in-class results in customer service levels, average cash conversion cycles, forecast accuracy at product family levels, and in gross margin rates realized.
North American businesses face three predominant pressures: to reduce supply chain operating costs, to improve the management of increasing demand volatility, and to improve top line revenue. Customers mandate faster, more accurate and more unique fulfillment as well as a need for tighter integration between planning and execution. Managing demand forecasts within an S&OP framework, and integrating the financial planning and budgeting processes within the S&OP process were seen to address these pressures.
Put simply, Sales and Operations Planning (S&OP) is a business process that facilitates the balancing of supply and demand. Occurring over a monthly cycle in five stages, it is cross-functional, involving the participation of staff from various business units within a company, including Sales, Marketing, Production, Distribution, Finance, and Product Development. S&OP is meant to bring together all the plans for the business into one integrated set of plans.
In his work, Orchestrating Success: Improve Control of the Business with Sales and Operations Planning (1988), Richard C. Ling devised a process that would improve upon the traditional “Production Planning” activity, which demands that Sales / Marketing devise a forecast and hand it off to Operations, who execute the plan through functions like Master Production Scheduling. He called his new process Sales & Operations Planning.
Unlike Production Planning, S&OP, requires that the barriers between Operations, Sales, and Finance families be removed – that a single comprehensive plan is developed in a collaborative manner. Forecasts are articulated at aggregate (product family) levels, rather than at item levels of detail. Conflicts that frequently arise between various functional areas within the business are reconciled before the plan is set to execution. In a “Production Planning” environment, sales plans and operations plans are sequential; in the S&OP case, sales planning and operations planning occur jointly, and collaboratively.
At each stage, the process requires collaboration: input from specialists throughout the organization, and communication to resolve the conflicts that will inevitably arise.
S&OP helps businesses manage change. It enhances the organization’s ability to make changes very quickly, since an agreed-upon game plan is already in place. Wallace puts it succinctly: “If things never changed, there would be no need for S&OP. It’s there because things change.