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Sales and Operations Planning(S&OP)- An Overview

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Sales and operations planning (S & OP) - an overview

Publication History
Received: 11 February 2016
Accepted: 29 February 2016
Published: 1 March 2016

Citation
Pawan Kumar GD. Sales and operations planning (S & OP) - an overview. Discovery, 2016, 52(243), 564-571

564
Page
 SALES AND OPERATIONS PLANNING (S&OP)-AN OVERVIEW
G.D. Pawan Kumar

Assistant Professor,
Mahatma Gandhi Institute of Technology, Gandipet-75
gdpawan@gmail.com
Abstract

Sales and Operations Planning (S&OP) is an offshoot of production planning and owes its evolution to practitioners of
operations management. It is looked at as an extension of aggregate planning and is considered as an integrated decision making
process which connects strategic and tactical goals of an organization. Conceptually, the parameters of demand, supply, volume
and mix are treated as four fundamentals of S&OP. As a rule, manufacturing activity is concerned with translating the demand
plan into supply plan and as such demand is considered the first half of equation and supply plan as the other half. One of the
main objectives of S&OP is to balance demand–supply in an organization. Due to reduced product life cycle (PLC), disruptive
technologies, global competition and increased customer demands, markets have become volatile, uncertain, complex and
ambiguous (VUCA) putting organizations under tremendous pressure to sustain and improve competitive advantage. Normally,
S&OP is considered as a monthly process with cross-functional activity, driven by a single plan with designated participants to
develop a consensus supply plan aligned to firm’s business plan. Basically, the process has five stages comprising data
collection, demand planning, supply planning, preliminary meeting and finally executive S&OP meeting. With top management
involvement, a well designed and implemented S&OP could provide competitive advantage in terms of higher productivity
with stable production, better demand-supply balance, improved customer service and better visibility of future opportunities.

Keywords: Consensus, Cross-functional, Demand, Markets, Operations, Supply

1. INTRODUCTION

In many businesses like retail, packaged goods, pharmaceutical, industrial sectors etc, we have dissatisfied
customers, high inventories, cash flow problems, missed annual business targets, imbalances in demand and supply
and other issues which keep cropping up at regular intervals putting lot of stress on the organizational system due to
VUCA markets.

It is a known fact that when demand surpasses supply, manufacturing may fail to provide the required volume and
consequently, customer service may be affected. Alternatively, when supply exceeds demand, inventories could
increase resulting in cut in production, plant shut downs and lay-offs reducing the competitiveness of the
organizations.

The above two scenarios could be avoided if a proper balance between demand and supply is planned and an
advance warning system is put in place to avoid the imbalance (Vollmann et al, 2005).

As organizations have to match supply with sales orders, the term S&OP has come into use to refer to that process
that helps organizations to keep demand and supply in balance. The premise of S&OP is that customer service and
inventory are ‘resultants’ and to effectively manage them the drivers- demand and supply, have to be managed to
have competitive advantage.

2. EVOLUTION OF S&OP
A typical manufacturing cycle is initiated by production planning activity with master production scheduling (MPS)
providing a plan for manufacturing of components and sub-assemblies that go into a final product. MPS, in turn, is
based on both forecasts as well as actual orders received from customers.
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With increase in variety and volumes, information technology was used to capture the required input parts that form
the finished product. This information system was called as material resources planning (MRP). It was an effective
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method for arriving at dependency demand with major advantage seen in terms of reducing inventories and thus
saving invisible costs which ultimately impacted the product cost (Buffa & Sarin, 1990)
As production volumes, mix and complexities increased to match customer demands, MRP evolved into
manufacturing resource planning (MRPII), a system that tied the basic MRP system to the firm’s financial system
and also to other core supporting processes (Krajewiski et al, 2008). However, it failed to achieve performance
improvements in demand management due to more emphasis on supply side of business and less integration of
sales, marketing, manufacturing and management functions (Ling and Palmatier , 1987). It is also believed that
conceptually, S&OP evolved from aggregate production planning (APP) in the early 1950s to MRP II in the mid-
1980’s (Thome et al, 2011).

It is reported that S&OP was created in the late 1980’s by Dick Ling when MRP II was in vogue and was seen as a
driver whose principal focus was to make MRPII to work. At that time S&OP was a breakthrough concept, as it
forced sales, marketing and manufacturing to agree once a month to ‘one set of numbers’ for sales, production and
inventory (Ling and Coldrick, 2009). Further, Calderon (2006) observed that supply plans without reasonably good
demand plan was futile and that S&OP viewed both these aspects of business in a seamless way.

The principal focus of S&OP during the 1980’s and 1990’s was how to get a good operational foundation in place
to evaluate demand and to ensure that sufficient resources are in place across the business to meet the same.
Wallace and Stahl (2008) clarified further that the coordination between the sales planning and production planning
has morphed into S&OP with both working together to achieve required output and opined that it is a lubricant
between different partners in supply chain that makes it to function harmoniously with minimum supply chain
disruption.

3. FUNDAMENTALS AND THE ROLE OF S&OP

Association of Operations Management(APICS)defines S&OP as a, “process that provides management the ability
to strategically direct the businesses to competitive advantage on a continual basis by integrating customer focused
marketing plans for new and existing products with the management of supply chain”.

S&OP is considered as a set of processes that enable a company to respond effectively to demand variability and
take timely decisions which could have direct impact on profitability and customer satisfaction (Majumdar &
Fontanella, 2006). Further, it is essentially seen as a value chain and an enterprise-wide risk management process
(APICS and Protiviti, 2008)

Moreover, Thomé et al (2011) opined that S&OP is a tool that unites different business plans into one integrated
set of plans. Its main purpose being twofold:

(1) To balance supply and demand

(2) To build bridges between the business or strategic plan and the operational plans of the firm.

The latter point is also emphasized by considering S&OP as a facilitator and integrator of strategic and tactical
planning components of an organisation (Wallace& Stahl, 2008). Lapide (2004), who popularized S&OP in early
2000’s, observed that companies that fully embrace S&OP process gain competitive advantage by meeting
customer demands at the highest levels by maintaining reduced inventories and minimised supply chain operating
costs.

As per Ferreira (2006), S&OP is positioned at the centre of the supply chain that extends backward to suppliers and
to customers in the forward direction with the support of technology enablers like enterprise resource
planning(ERP), data warehousing, supply chain etc and the organizational enablers like structure, skills &
capabilities, training, metrics, incentives etc

An approach of integration of functions with S&OP is provided by Krajewiski et al (2008) in the figure: 1, which
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shows the relationship between annual business plan (ABP), S&OP, operations strategy, forecasting, constraint
management, resource planning and scheduling.
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The bi-directional arrows signify the iteration process indicating that, if S&OP cannot be developed to satisfy the
objectives of the ABP, the same (ABP) needs to be adjusted accordingly. Similarly, if a viable MPS cannot be
developed, S&OP would need suitable adjustment.

Annual Business
Plan
Operation Strategy

Sales & Operations Planning

Sales Operations Constraint
Forecasting
Plan Plan Management

Resource Planning (Manufacturing)

• Master production Schedules
•Materials requirement planning

Scheduling
•Employee and Equipment Schedules
•Production order schedules
•Purchase order schedules 7

Fig 1. S&OP Integration with other Plans

Source: Adapted from “Operations Management-Processes and Value Chains”, Krajewiski et al, 2008, PHIL P Ltd,

Milliken (2007) and Lapide (2004) identify S&OP as a cross functional process for collaborative decision making.
It has a ‘Planning Horizon’ of 15 to 18 months with the longer period being considered for implementation of
capacity expansions, if need arises (Wallace and Stahl, 2008 and Thome et al, 2012).

As regards company-wide planning, it is done on highly aggregated basis and at S&OP levels , it is planned at
family, sub-family and model level. Finally, at the level of manufacturing and execution, it is done meticulously at
SKU level. It is to be noted that, the four fundamentals of S&OP are demand, supply, volume and mix. Volume is
concerned with how much to make of the product families, whereas, mix determines which individual products to
make for which customer.

4. PROCESS OF S&OP
S&OP is considered as a set of management practices or as a bundle of interrelated management practices within
the firm and supply chain. Justifiably, it is a complex construct which can be measured as a management and
planning process covering frequency of meetings, trust and confidence of designated participants, agenda, etc
(Thomé et al 2012).

S&OP comprises series of steps with monthly meetings involving designated and empowered participants from
functional departments. Regular monitoring and evaluation of results is done with the help of information
567

technology (Lapide 2004 , Grimson and Pyke 2007).

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 5. STAGES OF S&OP MODEL
Wallace and Stahl (2008) describe S&OP as a five step business processes that enable companies to keep demand
and supply in balance. Moon & Mentzer (1999) on the other hand defines S&OP as a four step mechanism
consisting of demand meeting, supply meeting, partnership meeting and executive review session.

A typical S&OP model is shown in the figure:2 having five stages comprising

1. Historical data generation 2.Demand planning 3.Supply planning 4. Pre-S&OP demand & supply meeting and
5.Executive S&OP meeting. These have iterative relationship with performance metrics to meet ABP in financial
terms and customer service in terms of order fill rate, on-time delivery, cost reduction etc; which ultimately
determine the competitive edge of the company.

A. Stage 1: Historical Data Generation

The S&OP process is initiated by the sales planner at head office in the first week of each month - around 3rd /4th,
by gathering data on historical sales, production, inventory etc from plants and warehouses to which direct
customer orders are added to arrive at basic demand plan/forecast . The same is compared with planned sales figure.

Fig 2. S&OP Stages and Process

Source: Milliken L. Alan, “Sales and Operations Planning -Two Decades of Learning at BASF”, 2007
B. Stage 2: Demand Planning

At this stage, various inputs based on industry growth, domestic business intelligence, impact foreseen from
marketing promotions, trade association guidance, competition activities etc are considered to update the forecast
568

which becomes the company’s monthly demand forecast/plan (CMF). This exercise is completed by 7 th of each
month covering next 15 to 18 months. The same is passed on to manufacturing department for preparing supply
plan.
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It is to be noted that demand planning is the responsibility of sales and marketing department as they are close to
the customers and hence need to take “ownership” of the exercise and accuracy of the plan.

C. Stage 3: Supply Plan

The process starts around 10th of the month and at this stage, the CMF is reviewed by the production planner(s) of
plant(s) and purchase manager(s). The availability of raw material (RM), in-house capacity and at vendors,
workforce and other relevant issues are reviewed. If the demand is within the available capacity boundaries, then
the supply plans go through unhindered. If not, plans are reworked to meet the demand. All functional plans are
worked out based on the CMF. The output would be supply plan in terms of product and product-family.

The participants in this stage comprise planners from sales and plant, members from purchase, engineering,
production and cost accountant. The output document of supply planning becomes the input for the next stage, that
is, Pre-S&OP balancing of demand-supply meeting.

D. Stage 4: Pre-S&OP Balancing of Demand/Supply Meeting

This meeting is planned around 18th of every month and held to sort out major unresolved issues of previous
meetings along with balancing of demand with supply. This meeting is attended by a cross functional team(CFT)
consisting of sales planner, production planner, executives from production, purchase, finance, logistics and other
departments depending on the requirements

The output documents would contain recommendation on major issues like increasing or decreasing the sales plan
and /or production plan and other critical resources to attain competitive advantage in terms of higher customer
service levels (timely delivery in full quantity – both in volumes and mix). Further, ‘What-If’ scenarios are worked
out and best plans are recommended. Issues which are not resolved and where agreement is not reached among the
CFT members due to serious concerns of delivery, capacity etc, become part of agenda for the next Executive
S&OP meeting.

E. Stage 5: Executive S&OP Meeting

It may be noted that Executive S&OP meeting is not a platform for discovering problems but rather a ‘Decision
Making’ and ‘Direction Setting’ meeting (Wallace and Stahl, 2008). It is held in the last week of the month at the
chief executive level. The agenda of this meeting is prepared by the Pre-S&OP team members. This meeting is
compulsorily attended by heads of sales, production, engineering and finance, product/ sales managers and sales
planners.

A number of relevant decisions like expenditure on resources are authorized. CMF vis-a-vis ABP is discussed and
changes, if required, are authorized. Strategies and policies to balance demand and supply are decided. If the
resulting business plan does not meet declared financial goals, company has to iterate back to the forecast and
investigate what else can be done to increase the demand and also what efforts are required in production to
enhance capacity so that the plan could be met. At the end, the output of the meeting becomes the ‘Approved
Consensus Plan’.

Each product family that is discussed is presented as a single page summary and as the number of products
increase, software systems could be used in collating data in required formats to facilitate decision making. The
minutes of the meeting is prepared diligently and sent out within a day or two to all the concerned executives for
effective communication and implementation of the decisions taken in the following month. This cycle is repeated
every month.

For large, multi-product organizations, Reekie (2005), opines that ‘exception management’ is the key to successful
569

implementation of S&OP process as it is impossible to resolve issues for thousands of products on monthly basis.
The practical solution would be to prioritize and focus on issues falling beyond pre-defined boundaries set by the
company.
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 6. BENEFITS OF S&OP
The survey result of Colleen Crum, a Managing Principal of Oliver Wight Americas as reported by Schorr (2008)
showed that the benefits of using S&OP included

a) Increased forecast accuracy by 18-25%

b) Increased sales revenue by 10-25%
c) Increased on time delivery by 10-50%
d) Inventory reduction by 18-46%
e) Safety stock reduction by 11-45 %
f) Increased productivity by 30-45%

7. CONCLUSION
The disciplined stage-wise approach is the backbone of S&OP. The consensus decision by various functional heads
coupled with longer horizon plan of 15 to18 months along with management involvement makes S&OP
framework a very successful tool to balance supply with demand, thus, providing competitive advantage to the
organization in terms of increased revenue and productivity, reduced inventory, improvement in on-time delivery
leading to enhanced customer service and sustained growth of the organization.

REFERENCES
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www.apics.org. Accessed on 24.12.15
2. APICS and Protiviti “Sales and Operations Planning : Aligning Business Goals with Supply Chain Tactics”,
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26.12.2015.
3. Buffa , Elwood S and Sarin, Rakesh K “ Modern Production /Operation Management”, John Wiley and
Sons(Asia) Pte Ltd,1989, Singapore.
4. Calderon, Filipe, “Implementing S&OP Process in a Multinational Automotive Supplier”, Industrial
Engineering research paper, 2011.
5. Ferreira John, “The Integrated Planning Process, Tale of a CPG Turnaround, Successful Sales & Operations
Planning: Lessons Learned”, (2006), Forum, Second Quarter.
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framework", The International Journal of Logistics Management, (2007)Vol. 18 Issue: 3.
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