Updated: Oct 25
The APCIS/ASCM dictionary defines S&OP as “a management decision making process that provides management the ability to strategically direct their business to achieve a competitive advantage on a continuous basis”.
The first important take away from this definition is the use of the word management. S&OP is a management decision making process. What does this mean? It means it is a process for senior management (the president, CEO, COO, or Genral Manager) to direct the business. Therefore, the process needs to work for them and provide a “picture” or a “story” of what is going on in the business. This allows them to direct resources and hold these resources accountable for setting and achieving the plans. Simply put, if management is not running the process, S&OP is falling short.
The second important take away is the use of the phrase “strategically direct”. In some definitions, the phrase “develop tactical plans” is also used. Both are important, since S&OP should be the process where these two concepts come together. Strategic direction is important as it involves higher level strategy such as product development, market penetration, rationalization, and market growth. It also ensures that the execution strategies for demand fulfillment (think make to stock versus make to order, or lead-time reduction), and production execution are aligned. Strategies should be defined and documented, and execution aligned with the strategies.
So, S&OP is a management process that links strategy and execution. How does this work? The diagram below shows where S&OP sits in the planning process.
Starting at the top is the Strategic plan. This is typically a three-to-five-year strategic plan that covers the overall financial objectives, growth, and product strategy. It is often at high level but may be broken down into individual families. In fact, it should be broken down into families to link it to the S&OP plan.
The plan that comes out of the strategic plan is the S&OP plan. This is where strategy becomes more specific. The horizon will not be as long but should be a minimum of a rolling 12-month plan, and at the product family level.
The other thing to note about S&OP versus the strategic plan is that the S&OP plan is updated monthly. The plan is put together, then work is done to execute the plan. In the following month, performance can be evaluated, assumptions can be reviewed, the plan can be adjusted, and then executed again.
The two important linkages coming out of the S&OP process are the demand plan and the production plan or master schedule. It is important to note that there are two-way arrows between the S&OP process and the demand plan and production plan. This means that S&OP both “informs” and is “informed by” the demand plan and the production plan/master schedule. This is a very important characteristic of the process. S&OP, as a decision-making process, relies on the input from the demand plan, but the process also evaluates the accuracy and effectiveness of the demand and provides input back to the demand plan.
The demand plan is the sum of the unconstrained demand for the product family. The sales organization is typically accountable for this plan, and includes a forecast, however it may also include other inputs such as calculated demand from other sources.
The supply plan is generated within the S&OP process to balance the demand plan. This is represented by the arrow pointing to the Master Schedule. The supply plan is constrained by capability and represents the flow rate, or the build rate for the family. The S&OP process should highlight if there is an imbalance between demand and capability, in either the short or long term. If demand exceeds capability, buffers such as lead-time (the ability to extend lead-time and therefore increase backlog), inventory (the ability to meet excess demand using inventory) or upside flex for production can all be used. These are strategies that are managed as part of S&OP. They are documented, understood, and monitored as part of the process.
One more takeaway from this diagram is that there is an important link between the budget or financial measurements and S&OP. The S&OP family plans should be in units, however by converting them to dollars they provide important feedback to the budget process. Once again, you will notice the two-way arrow between the budget and S&OP. The budget process provides important directional input to the S&OP process to validate if the current year plans are in line with financial expectations AND the S&OP process, which should extend beyond the annual budget cycle (recall the 12-month rolling plan). This will also inform the budgeting process for the following year.
So, what are the outcomes of the S&OP process? If the process is working well, what should be happening in and through the process? Richard Ling, one of the original thought leaders in S&OP put it as: S&OP is managements’ handle on the business. This is a great summary of S&OP as a management process, run by and for your senior executives. It works for them to manage the business. There are five outcomes of a successful S&OP process to look for:
1. The process sets the flow rate for the business.
To balance between demand and constrained supply, you must use buffers (lead-time, upside flex, inventory) and know how you’re strategically planning to use them. Buffers manage imbalances, fluctuations, and differences between supply lead times and expected customer lead times. Decisions around changing any of these variables in how the business is managed and capability should be highlighted, monitors, and driven out of the process.
2. The process should provide a clear link between strategy and execution.
The planning diagram could be extended further, to include new product introductions, product rationalization, and even expanding to new markets. As an executive, S&OP plans should be balanced against long term strategies and provide feedback on the actions being taken to get there. Are they working or do they need to be adjusted? S&OP should also provide feedback on the family strategies around production and demand fulfillment. A great example is expecting that reducing lead time will impact demand. S&OP should show if lead-time is reducing and if this is having the desired impact. Strategy is linked to execution and informed by feedback.
3. S&OP establishes clear accountability for pIans.
An executive that’s out of the process should be able to see whether or not the plans are being met. An important part of the process is looking back at the previous month and seeing how performance compares to the plan. It should be clear who is accountable for each part of the plan; bookings, shipments, and production, along with who is responsible for developing and delivering the plan. By establishing accountabilities, executives can better ensure that the organization is aligned to deliver the objectives for the family, and ultimately the business.
4. S&OP is a regular and repeatable management process.
It should be regular in that it happens monthly. There is a process that leads up to the monthly executive meeting, and people come prepared to the executive meeting knowing what is expected and what their role in the process is. The work of running the business happens every day. S&OP is the step back from the day-to-day busyness, to evaluate whether promises are being delivered on, and if it is working to move the business to their longer objectives.
5. Measurable results are occurring from the process.
Here we are looking for better business results, such as improved customer service, reduced inventory levels or reduced expedited freight costs, etc. The process should also improve the effectiveness of the organization, which should also be measurable. This comes back to measuring performance against the plans. Start one month out: can we put together a plan for production and deliver that plan by the end of the month? If not, why? Use this look-back to drive improvements into the ability to plan for demand and supply variability, and improve assumptions and risk management.
These are the key points on what S&OP is and how it can transform your business. To find out more about S&OP and its benefits, subscribe to our newsletter:
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