Introduction to Sales & Operations Planning (S&OP)


Business planning goes by a number of names. The most common is Sales and Operations Planning but it is also know as Integrated Business Planning (IBP) and Sales, Inventory, and Operations Planning (SIOP).

S&OP is a formal management process that creates a unified business plan based on a consensus between an organization's sales, manufacturing, distribution, and financial functions. Collaboration among an organization's functions results in an integrated set of plans that all stakeholders understand and are committed to support.

Why Sales and Operations Planning?

The Sales and Operations Planning process is based on the very real premise that statistical forecasting alone can only take you so far. The Core DemandCaster platform is designed to produce item level forecasts by taking an items total history and projecting a demand forecast. We call this Forecasting 1.0 where there is a high dependency on the algorithms to generate a reliable result. Though the DemandCaster Core forecasts are reliable and accurate, they are unit based forecasts thus revenue and profit projections as well as marketing events are not a formal part of the process. This makes it less conducive to collaboration with sales, marketing, and finance. The focus of the DemandCaster Core platform is more on the supply chain planning side with inventory optimization, requirement planning, and distribution planning.

Forecasting 2.0 is what we consider to be Sales and Operations Planning which is supported by the Advanced Planning application. It is about demand and supply alignment by taking the forecasting process back to sales, marketing, finance and operations for their collective input and adjustments. Edits to forecasts can be made at any level of the hierarchy (customer, item, product class) and the changes roll top down and bottom up. Pricing may be modified to change revenue projections. Promotions and one time events may be layered in via Events. Most importantly actual to plan performance is tracked on an ongoing basis.

Where the real value and performance is derived is via collaboration. This is because all parties are aligned using the same set of data. As a result, excuses begin to go away and accountability is driven. Studies have proven that high performing S&OP driven companies average 15% less inventory, 17% stronger perfect order fulfillment and 35% shorter cash-to-cash cycle times, while having the tenth of the stock-outs of their peers.

Ultimately, the Sales and Operations Planning process facilitates Forecasting 3.0 which is the inclusion of other market related information supported by the Market Forecast Manager application.

S&OP Business Model

Sales and operations planning is typically led by senior management and is most often executed monthly.

It is an iterative process in which results from one planning cycle are compared with the next to give senior management trends within their business. Participants evaluate time-phased projections for supply and demand to ensure that the tactical plans in all business functions and geographies are aligned and in support of the company's strategy.

With traditional "silo-based" companies, sales, manufacturing and financial functions often compete against each other. Without a consolidated plan, small problems can quickly grow into much larger issues. Using Sales and Operations Planning reports and measures, these problems can be quickly identified and proactively addressed. Plan over plan (waterfall) reports as well as error measures are provided to identify the largest changes automatically. With the high-level differences identified, further detail and understanding of the underlying causes are analyzed through various views and reports.

S&OP Business Model

S&OP Benefits

Some of the benefits of an effective sales and operations planning process include:

  • Increased customer service levels
  • Improved profitability
  • More products to increase revenue
  • Lower inventories and obsolescence
  • Reduced lead times
  • Quicker responsiveness
  • Top-down management control
  • Predictable operating performance for shareholders

In addition, a sales and operations planning process should also help to answer the following basic questions:

  • How does projected demand compare to projected supply?
  • What are the projected resource requirements to meet both service and cost targets?
  • What actions are required to ensure the appropriate levels of resources are available when needed?
S&OP Benefits

Aggregate Level Planning

One of the primary benefits of S&OP is the planning structure. Whereas most forecasting processes generate forecasts using an items entire history, the S&OP is typically context driven where plans are driven down to an item within the context of a market or customer. In addition, planning is focused at an aggregate level to focus decision makers on the big picture.

  • Entire groups or product families are reviewed instead of looking at a single product.
  • These aggregated groups have sales order history and marketing characteristic with similar behaviors.
Aggregate Level Planning

Demand Planning by Location

Often there is confusion around location based planning. The multi-location in DemandCaster is related to the distribution of items - i.e. warehouse to warehouse movement as well as ship from logic. This allows the system to set inventory by location. 

Demand Planning by location is not tied to this since we are not forecasting by warehouse location but rather a definition of geographic location that can be pulled from the sales record. At times the warehouse location and forecast location are one in the same but most often they are not since distribution networks tend to be much more fluid. How you get the product to the customer is a different question from where the customer is located that you are selling to.

This is why DemandCaster performs a function called Demand Translation that converts the consensus Demand Plan to a Supply Plan. If all of a customers forecast is delivered from a single warehouse location, then all of its forecasted demand will be fulfilled from that location.

Demand Planning by Location

When you design and roll out an S&OP demand and supply planning process, you have to answer some basic questions. The answer to these questions should form part of the forecast agreement with the Supply Planners, who are the major customers of the demand plan.

Among many such questions to be addressed, one important question is what to forecast and how the forecast should be structured.

  1. The Demand Plan is typically executed in units but what units - cases, weight, length. Since there is an aggregation process, you must define a standard unit of measure that converts the selling units to a standard demand plan units (if there are multiple selling units). This is done via a conversion factor that can be added to the DemandCaster data feed.
  2. Should the demand plan be converted into currency - dollars, rupees, Euros, pound sterling? If so what it the process to state as a revenue forecast? And who will use such a revenue forecast? DemandCaster automatically builds the revenue forecast using an average selling price or customer selling price based on a single currency basis.
  3. What should we use to measure and forecast demand - shipments or orders? This is a very important question and can generate vastly different results. DemandCaster shows the historical demand in shipments as a default, however orders may be used in the background to drive the forecast. A critical question that should be determined is if returns and credits should be included.
  4. At what level(s) of the product hierarchy should the forecasts be run and how should they be disaggregated to the item level.

General S&OP Steps

While the sales and operations planning process can differ greatly between organizations, there are specific elements that are common at virtually every organization. A typical sales and operations planning process can be described in the following major steps. This structure was developed by Wallace & Stahl

  1. Data Gathering/Management: Collect information on past sales, analyze trends, and report forecasts. This happens automatically via the regular data upload process and built in reports. Run Pareto analysis to assign forecast parameters (i.e., item vs. group). Manage new items and discontinue old items.
  2. Demand Planning: Validate forecasts, understand sources of demand, account for variability, and revise customer service policies;  Layer on promotion plans, one time events, and new product and customer launches.
  3. Supply Planning: Assess the ability to meet demand by reviewing available capacity, inventory, and scheduling required operations. Set inventory targets and plan supply by level loading and/or demand chase.
  4. Reconciliation of Plans - Pre S&OP: Match supply and demand plans with financial considerations.
  5. Finalize and Release - S&OP: Finalize the plan and release it to implementation.
General S&OP Steps

The DemandCaster S&OP Workflow

DemandCaster process follows the same Wallace & Stahl workflow. A simple progress bar at the top of the S&OP module identifies progress along each step of the process.

  1. Step 1: Data Gathering is handled by the upload process and Revenue and Statistics steps.
  2. Step 2: Demand Planning is handled in the Demand Planning step.
  3. Steps 3 and 4: Once the Demand Plan is approved, the Supply Plan step which includes the Requirement Review step which renders of Demand and Supply through a requirement plan to understand its impact on material and capacity. This information is used on the Pre-S&OP Meeting.
  4. Step 5: The Approval step follows the S&OP meeting. Once the plans are approved by management, the plan is approved in DemandCaster to drive the day to day requirement plan in DemandCaster and/or your ERP. This approved plan is the Master Production/Purchase Schedule (MPS).

A description of the steps are provided in the article Demand and Supply Planning Process Steps.

The DemandCaster S&OP Work Flow

S&OP Model Example

The following is a simple illustration of the work flow assuming a level loaded supply/production plan:

  • The Demand Plan is the consensus forecast for an item.
  • The Inventory Plan starts with a level of inventory and is extended to a target ending inventory.
  • The Production Plan = Demand Plan plus change in beginning and ending inventory divided by the number of periods. In the example above the calculation is 847/7 = 121 units per period.
S&OP Model Example

Approved Plan - Master Production Schedule

The image below is a sample of the MPS that is generated upon running the Supply Plan. The example exhibits a level loaded supply plan.

Approved Plan - Master Production Schedule


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