Sales and operations planning, or S&OP, is essentially an integrated business planning process, though some consider the latter more holistic and inclusive. In this blog post, we answer questions including what is S&OP, what it is used for and how it provides value to organizations.
S&OP is a process by which sales plans and business goals get aligned with all other functions in an organization and vice versa. Sales and operations planning can be understood as an umbrella term for integrated planning from sales plans to production plans to inventory plans and more, depending on organizational structure. While some argue that financial planning and analysis (FP&A) isn’t part of S&OP, others beg to differ, citing the importance of alignment in planning throughout the organization. This is also where integrated planning and S&OP most often intersect.
The integrated process of sales and operations planning helps business leaders with decisions regarding resource allocation by providing crucial insights from throughout the organization. Especially in a globalized world, where often production plants can be located in several different countries, a consistent aggregated data foundation is key for accurate sales and operations planning.
The origins of S&OP
Together with Walter Goddard, Richard Ling coined the term S&OP in their 1988 book “Orchestrating Success: Improve Control of the Business with Sales and Operations Planning.” Since then, the concept has been developed further by the original authors as well as others. It is generally described as a five-step process that includes:
- collection and preparation of data,
- demand planning,
- supply planning,
- plan consolidation for demand and supply balancing, and
- approval for plans by the Executive Board.
As mentioned above, some argue that FP&A is or should be included in the process as well. The terms supply chain management or supply chain planning are also often used when referring to the process of sales and operations planning.
Originally, the term Production Planning was used to describe what is now known under S&OP, as Mr. Ling mentions in an anecdote on his personal website, where he quotes a student from his management class he taught in Chicago in the early 1980s.
The process of S&OP
Every planning process has one key requirement – data. It must be available in a structured and consistent way and, ideally, be of high quality. This means that it shouldn’t be incomplete or have extreme values (outliers). That means the first step is accessing and preparing data.
What follows are tightly integrated steps which are continually measured in terms of performance. After data preparation comes demand planning, where planners need to constantly compare sales actuals vs. sales forecasts vs. plans. To align with marketing, these should also be synced to marketing plans for demand generation.
Next is supply planning where the question on how to meet demand should be answered. For this, production actuals are constantly compared to plan. Rated capacity as well as workforce capacity plays a big role here, which is why it is important to also have protocols in place to handle unforeseen shortages in supply due to production outages.
In the next step, supply and demand planning for all regions is consolidated and then balanced to be in sync. The goal is to validate planning from the preceding steps and aggregate it. This is also the step where FP&A plays into the process.
For the last step in the continuous cycle, Executive S&OP, actuals and plans are compared again on aggregate level and plans for exceptions are made. This is also the step in which potential issues must be discussed and eliminated. The frequency of the planning cycle highly depends on industry and produced goods and can range from weekly to monthly or quarterly.
The scale of S&OP can also vary significantly and ranges from country level, to regional (e.g., EMEA, Americas etc.), to global. The bigger the picture, the more complex are consolidation processes. For global sales and operations planning with short planning cycles, a planning platform is virtually inevitable.
Strengthening accuracy and collaboration in S&OP
Sales and operations planning is a complex process, and the planning cycles are typically shorter rather than longer. Starting from data preparation, for which many companies are already using a data warehouse that ensures consistency from sales plans and forecasts to demand and supply planning, planning software can be beneficial.
While many organizations already use some form of planning software, they’re often challenged by fragmented systems resulting in data silos and, therefore, inconsistent data. With platform solutions with integrated databases as a single source of truth, planning becomes unified, consistent, and collaboration strengthened. This ensures higher data quality and planning accuracy
The benefits of Platform as a Service (PaaS) for S&OP
- Collection, preparation, consolidation, and aggregation of data is faster and more accurate than with multiple Excel spreadsheets or a fragmented system environment
- Data consistency and quality is ensured through one SSOT, providing always up-to-date information to everyone across the organization, therefore supporting better collaboration
- Comparing actuals to forecasts and plan is faster and forecasts are easily adjusted
- Finance and sales planning with a tool that is independent from your ERP but seamlessly connects to it and has write-back capabilities makes sure that everything runs smoothly
- Easily run scenarios based on one variable model to forecast and plan for price changes of raw materials, changing demand, and competitive pricing.