Updated: Nov 8
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S&OP relies on the balance of demand and supply. The graphic below is a great visualization on what the S&OP process tries to achieve. But the image doesn’t tell you HOW. Let’s walk through how you can achieve this.
Instead of thinking about just balancing demand and supply, think about S&OP as developing a plan to manage between an external or unconstrained view of the business and the internal or constrained view of the business.
The line in the middle of the diagram separates the external and internal views. Above the line is the market or customers. This is the unconstrained view or external view of your business. What will customers take of your product or service. This can be influenced, through pricing, marketing, promotions, product, etc., but ultimately the customers control what they want to buy, when they want it, and in many cases how quickly they would like to have it, with no regard for the business’s ability to supply or their constraints.
Below this line is the constrained or internal view. This is what can be produced or supplied. This output is constrained by investment in equipment or capacity, inventory levels, staffing, supply chain capability etc. You can think about it as the things you control. The decisions you have made or need to make based on your strategy and what you think the demand looks like above the line.
So, S&OP is then about getting the best possible view of what is above the line (our unconstrained demand) and determining how to either deliver this with current capabilities, or how to change capability to meet this demand.
To make S&OP really work, there are three key points.
These three elements work to straddle the line and help balance between the external (unconstrained) view and the internal (constrained) view.
1. A good process
A good S&OP process uses the standard approach of a monthly S&OP process. The process is the series of meetings that occur during the month leading up to the Executive S&OP meeting. These steps help you move between the external view of the business and the internal view.
The first of these meetings is the Pre-S&OP Demand meeting. This should clearly be “above the line”, an unconstrained view. The question “What does demand look like?” is answered here, and the unconstrained demand plan is agreed on.
Responsibility and Accountability for this view of demand lies in one or a combination of the following areas of the organization: sales, marketing, or in some cases product management. It needs to be based on reality. To avoid constraining this demand right from the beginning, operations should not be running this meeting. They can participate, but the goal is to develop the external unconstrained view.
The second meeting is the Pre-S&OP Operations meeting. This includes all aspects of supply including Supply Chain. This meeting is below the line – a constrained view. Based on the input of the new unconstrained demand, you can now determine if you can meet that demand or if you are constrained. If you can’t meet unconstrained demand, you need to come up with the constrained shipment plan before moving to the next meeting. If you can meet unconstrained demand, then you can go to the next step without changing anything.
In the third meeting, the Pre-S&OP meeting, the team determines how to balance any constraints against the unconstrained demand. This may involve decisions around allocation and future capacity decisions. This meeting clearly sits on the line between the external and internal view. This really is the working meeting where the approach is agreed on, and any decisions that need to be moved to the executive meeting are identified.
The fourth and final meeting in this monthly process is the Executive S&OP meeting. This is below the line, because it is either where the final plan fits within current constraints and is agreed on, or adjustments are made to meet those constraints.
So, having a good process with clearly identified responsibilities, accountabilities, and meeting outcomes is critical to making S&OP work.
2. Family Structure.
This is the second key to making S&OP work. Family structures are the collection of products that are put together to provide the level of granularity for S&OP decision making. They need to start below the line and be defined by constraint. This is very important.
The constraint view of families will correlate to specific capabilities. Most typically this is linked to a production line or cell in a plant, but in some cases, this may be a specific material that sets the upper limit of supply. In services this may be tied to a specific type of resource.
In order to balance the plan, you need to have a clear understanding of what your current constraints are. Are they right sized, or do they need to be changed? If you can’t build it, you can’t sell it.
Changing your supply level, or capability, typically means changing your constraints. Determining whether this is necessary requires aggregating the demand plan and viewing it in aggregate by the constraint.
You need to start at the constraint level and also need to be able to look at the demand from the market view. This is the above the line or unconstrained view.
To do this, you can segment the family demand into demand streams, or a more market-facing view. These demand streams may be by a specific kind of business, sales channel, sales geography, or whether your go-to market strategy is make to stock, make to order, configure to order, or engineer to order.
Demand accuracy measurement is at the demand stream level within the family and should be aimed at improving demand planning, driving specific go-to-market strategies, tracking the results of these strategies, and ultimately assigning accountability for demand accuracy and performance.
Both the market view and the constraint view are needed for S&OP, but the basis for families should be the constraint view, then further broken down by demand streams to achieve the market view.
3. Data and Data Visualization
An effective S&OP process is one where the process is both linked to your planning and execution systems (ERP) AND provides feedback on the validity of the plans in these systems. Data is key to these relationships. Having the right data at the right level of granularity is both important and necessary. S&OP data will highlight processes that are broken and drive accountability.
Over the years we’ve developed this standard visualization through something called the 5-Section Sheet. This is the visualization that we recommend using to pull together the supporting data and present the story for the family.
We call it the 5-Section Sheet because the five elements of data that are necessary to support S&OP decision making are all pulled together in one place. These are:
Bookings – or order in flow. What is our incoming demand?
Shipments – or order outflow.
Backlog – the buffer between bookings and shipments.
Production – what is our production plan and where is it relative to our capability?
Inventory – the buffer between shipments and production.
The 5-Section Sheet is simply 5-sections of data shown at the right level for planning and discussion for the Executive S&OP meeting. This gives everyone the right view to see the story of what’s actually happening in the business and gives the team the ability to make decisions in the future.
It is important to pull all this data together into one view to avoid disconnects between what is presented by sales and what is presented by operations. The “math” needs to make sense.
For example, the formulas below force a discussion around reality. If the sales plan is entirely disconnected from the supply plan the difference will show in one of these numbers.
Previous Backlog + Bookings - Shipments = Future Backlog OR Previous Inventory + Production - Shipments = Future Inventory
A standard presentation used across your S&OP process is also very important. Everyone who interacts with the process learns how to use the same tool, eliminating the need to translate what is being presented as you move from one family to the next. A standard format means also means the process is more sustainable as people move in and out of roles and new people come into the organization. You have a common way of speaking about S&OP and the story behind each family. This also includes your executives.
Each of the sections in the 5-section sheet includes the current month’s plan and the previous month’s plan. This helps identify how much the plan is changing month to month, and where in the horizon the plan changes are being introduced. Is most of the volatility in the next couple of months, or is it somewhere in the future?
Actual data compared to the last plan is also included in each section of the 5-Section Sheet. The comparison of the two numbers includes a tolerance level that identifies whether or not you are in control of the business. We typically will show the last three months, but access to more months of actuals history is recommended to give a more complete view of how “in control” the business is.
Finally, we also include some summary information for each section of the plan. Year to date numbers, and current year expected numbers for shipments, bookings, and production indicate where you are at compared to your fiscal year plans. Are you headed in the right direction? Is there enough year left to make it to your final plans? A rolling 12-month view, which is the next 12 months, gives a directional indicator on where the business is going.
To support the balancing of the above the line external view and the below the line constrained view, the level of granularity for the 5-Section Sheet data will be different. Bookings, Shipments and Backlog should be tracked at the demand stream level. This means plans and actuals can be seen at this level to help improve accuracy and to hold the team accountable. Below the line, data is summarized at the family level, which is how it is presented in the executive S&OP meeting.
These are the three key fundamental build blocks to making S&OP work and really work effectively. They come together and help you balance between the unconstrained or market view of the business and your constrained or internal view of the business, and support S&OP decision making.
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