Show Me the Money: Linking the S&OP Shipment Plan to the Financial Revenue Plan.
Updated: Nov 17, 2022
A printable PDF of this article is available here.
S&OP is all about “Units”… or is it? Linking the S&OP plan to the financial plan opens a whole new set of management opportunities and at the end of the day the Revenue Plan is important to management, isn’t it?
The S&OP family plan must be stated in units rather than Revenue. Only three sections of the 5-Section Sheet can be stated in units and revenue: Bookings, Shipments and Backlog. It does not make sense to look at the Supply (Production) plan or Inventory plan in terms of Revenue dollars1,2. While all five sections of the 5-Section Sheet must be in common units it is possible, in fact desirable, to develop a view of the first three sections in revenue dollars as well. This is the first step in developing a complete linkage between S&OP and the financial plan.
In this article I will focus on how to convert the Shipment plan into revenue dollars. Similar logic can also be applied to the Bookings plan and the Backlog plan. These conversions should be done at the demand stream level. I have used two demand streams in this article: Flow Demand and Abnormal Demand1,3. The Flow Demand Plan is based on historical data and the Abnormal Demand Plan is based on specific opportunities typically taken from an opportunity management or CRM tool.
Let’s look at Flow Demand first. The following chart shows the future plan for Flow Demand:
In this chart we see the total shipment plan is 1,000 units per month for the next 12 months, with M1 being the first month of the plan. This total is made of the aged backlog, (open customer orders bucketed by promise date) and the forecast shipments. Notice in the first period, M1, there is no forecast as the total shipment plan is made up by customer orders in the backlog.
The simplest approach to converting this “Units” plan to “Revenue” is to multiply it by an Average Unit Price or AUP. If we used at AUP of $200, then the “Revenue” plan derived from this “Units” plan would look like this: