WORDS FROM WALLACE
S&OP – What Does It Mean?
What is Sales & Operations Planning all about? Everybody’s talking about
it, but few seem to have a good handle on what it means. So, to get us started,
let’s look at a workable definition.
Sales & Operations Planning is a decision-making process:
• to balance demand and supply
• to align volume and mix, and
• to integrate financial and operating plans
The first two bullets identify what we call the “four fundamentals”: demand and
supply, volume and mix.
The Four Fundamentals
When demand and supply aren’t in balance, bad things happen: missed shipments, unhappy customers, too
much inventory, pressures on margins, and on and on. One major goal therefore
is to get demand and supply in balance and to keep them there. Have early warning
capabilities to alert people that they’re getting out of sync. Make the production
rate adjustments early so that they can be small, rather than making later and
much larger corrections.
The other two fundamentals are volume and mix. Volume refers to product families
and aggregate resources; mix is SKUs and individual customer orders. If volume
– rates of sales and production – is planned effectively, it’s much less difficult
to deal with mix problems as they inevitably arise. On the other hand, if volume
is not planned well, then mix issues become substantially more difficult to cope
with. So smart companies plan their volumes first, and spend enough time and effort
to do it well.
Back to the four fundamentals: demand and supply, volume and mix. Shipping product
to customers with world-class reliability and speed requires that all four of
these elements be well managed and controlled.
The New Meaning of Sales & Operations Planning
Originally, the term Sales & Operations Planning referred to an executive-centered
decision-making process focusing on volume issues. This process utilizes techniques
for Demand Planning (forecasting) and Supply (capacity) Planning to accomplish
its mission.
However, there’s been a terminology shift in this field recently: the meaning
of Sales & Operations Planning has broadened. Today, many people view S&OP
as dealing with mix in addition to volume. Thus it now can include Master Scheduling
and other mix-related tools such as customer order promising, supplier scheduling,
plant scheduling, distribution replenishment, and more (sometimes done via the
use of Advanced Planning Systems).
Bob Stahl and I have watched this development, and we endorse it. However, this
raises a problem: since Sales & Operations Planning now means more than the
executive process, how will the executive process be identified?
Well, consistent with the principle of keeping it simple, we call it Executive S&OP. Therefore, Sales & Operations Planning – the larger entity – has the following
component parts: Executive S&OP, Demand Planning, Supply (capacity) Planning,
along with Master Scheduling and related detail-level tools for the managing of
mix. See Figure 1 to the right.
Here’s a key point: Executive S&OP is the heart of Sales & Operations
Planning; when that critically important piece is missing, much of the power of
the total process goes away.
How Is Your Company Doing With Sales & Operations Planning?
So questions arise: how well is your company using these tools within Sales &
Operations Planning? How can a company assess its effectiveness in balancing demand
and supply across today’s extended supply chains? What should it do to improve?
Well, we don’t think you need to bring a team of consultants into your company
to do that evaluation. You know your company – its customers, its operations,
its people – better than they ever will. Regarding the S&OP processes, the
outsiders may know them better than you do (and then again, they may not).
So the issue is to transfer the S&OP process knowledge to the people who
are already experts in the company, and that’s you. Responding to this need, Bob
and I have just completed a new publication: Sales & Operations Planning: The Self-Audit Workbook.
For the major components of Sales & Operations Planning – Executive S&OP,
Forecasting, Master Scheduling – it contains checklists (click for sample), backed up by the principles (click for sample) that underlie the checklist items. These checklists and principles are in hard
copy in the workbook and also in Excel files on an enclosed CD. For more information, simply click on the picture to the upper right.
Thanks for listening,
Tom
Tip from Tom: Are you providing your contract manufacturers and suppliers of key components
with valid and timely information of your future needs? Contract Manufacturers
and suppliers of key components have capacity issues just as do your own plants.
Thus they need timely, valid information on future demand for their capacity
