S&OP is the most impactful thing you can do in your business.
Noel Thomson Supply chain advisor New Zealand Trade and Enterprise
20 Oct 2022 - 5min read
S&OP is the most impactful thing you can do in your business
S&OP planning is a framework surrounded by a strong process. The beauty of this framework is that you can apply it to whatever the priorities are for your business.
If your focus is global, this could be:
inflation pressures
shipping
managing supply risks
responding to softening demand.
Noel Thomson is a global supply chain expert and an NZTE supply chain advisor. He is CEO of Synergic Technologies, which provides supply chain technology solutions to ambitious New Zealand businesses.
Noel has 30+ years’ experience in supply chains, manufacturing and technology, and has helped many businesses implement supply chain planning, including Fonterra global operations.
Here, Noel shares his insights on how sales and operations planning will help you protect your business from risk and identify opportunities to increase your profits.
S&OP planning and processes
S&OP planning helps you cope with disruption
For around the last 20 years, things have been ticking along with relatively low major supply chain pressures. Because of the COVID-19 pandemic, supply chain disruptions have escalated by 300-400% (Federal Reserve Bank of New York Global Supply Chain Pressure Index, Sep 2022). The pandemic has changed the supply chain industry, particularly logistics.
International Data Corporation's global data survey on supply chains revealed that:
demand has become very unreliable
suppliers have become less reliable and have experienced cost increases, from freight, inflationary pressures and supply shortages
factories have had to close due to COVID restrictions
there have been transport delays and cost increases in transport.
You need to be able to look beyond your own business and plan for current and future disruptions.
The fundamental goal of S&OP planning is to grow your profits by driving volume through demand and supply plans.
Supply chain resilience involves 3 key factors:
Having visibility across your entire supply chain.
Putting some intelligence around it and understanding what it means, including the impacts.
Being agile so you can react and change your network and plans. You want to be able to collaborate with your customers, suppliers, manufacturers, third-party logistics etc.
Companies that achieve good S&OP processes have:
more effective collaborative planning across the business
earlier booking of scarce capacity at key suppliers
more accurate handling of sales for marketing promotions
quicker response to unexpected disruptions in your supply chain.
Aberdeen group did some research around S&OP effectiveness. It found that businesses that are more mature in S&OP have:
16% better service level. For your customers, that’s huge.
18% higher forecast accuracy.
37% better cash-to-cash cycle than those who don’t do S&OP planning. That's an important number, especially as businesses are investing more in inventory.
Example 1: Implementing an S&OP framework
Noel Thomson worked with a New Zealand sports company that now has an efficient S&OP process in place. The company initially felt that the long lead time for manufacturing and to source materials was disappointing its customers.
After going through S&OP planning, management realised they actually had a capacity constraint in production. This was the result of a decision made when operations were set up, and it was holding the business back.
S&OP is all about planning, visibility, and looking forward. This business didn’t change its systems. It just implemented some smart insights from the operations manager and analysts in its sales team, and built some tools using Excel.
The company started assessing its unconstrained demand. For the first time, it looked at its potential sales and was shocked at how much it was being held back by capacity. Management decided to invest in capacity increase, grow the company’s offshore manufacturing plant, and S&OP process, and look at its unconstrained demand. This is what they now call demand sensing – having advance notice of what customers will buy and feeding that into their capacity plan.
The results for this New Zealand exporter are:
record sales
a 34% reduction in lead time to customers
the ability to let their sales team go out and sell more products – rather than holding them back.
How to do S&OP planning
The goal of S&OP is to balance the demand for more inventory to generate sales, with less inventory to save costs and working capital. Balancing these creates improved profits. An imbalance will see your profits decline.
Good S&OP is achieved through the behaviour of your executive management and team leaders, and their familiarity with S&OP (sometimes called maturity). It’s also about time spent doing S&OP planning, using this framework and process.
When you meet you make decisions
With S&OP planning, there are 4 key meetings, plus a product review. Between the meetings are planning and activities to set and review sales targets, and the impact of your discounts and promotional activities. You’ll also identify and do analysis of slow-moving stock, and other things.
At your S&OP meetings you agree, align and get consensus on decisions in a cross-functional team.
This can be tricky because you’ve got heads of sales, finance, marketing, operations, supply chain, etc. They’re all good at their own functions, but you’re asking them to collaborate cross-functionally and get on board with the same decision.
A challenge might arise when your salesperson wants more inventory and your logistics manager is reluctant to spend money holding inventory and writing it off.
Senior management needs to own and sponsor S&OP, not only to get engagement and buy-in but also to ensure decisions are made.
Use your S&OP data to integrate your plans and align decisions
Data provides fact-based foundations for the insights needed in S&OP decision making. S&OP sets working capital commitments, labour costs, production output, spend on materials, and more. These decisions are risky if they’re made on just opinions, without sound data.
Gather data from these areas of your business
S&OP decision-making systems:
Resolve escalations (what needs to be resolved?)
Review scenarios (in the COVID era, scenario-planning is vital. Identify key areas where agility is required – you don’t have to be agile everywhere)
Adjust your strategy
Check the budget (so you can deliver to your promise to shareholders)
Approve the one plan
Planning systems
Business intelligence (your KPI) measures and reporting
The above are all based on your transactional systems of record. These records include your sales, customer requirements, inventory, purchasing, etc.
Example 2: Putting an S&OP process in place
Noel Thomson worked with a New Zealand food and beverage company that created new KPIs and a deck of insights to take to its board whose members are highly active in decision making.
The company’s management meet regularly and board meetings take place every second month. There is now a suite of insights to help management run the company and make decisions.
An advanced Excel tool was built for under $20,000 and provides the platform and systems for planning and decision making at S&OP meetings.
The result of this is:
They’ve grown their business significantly. They’re exporting a container every week or two to Australia. Prior to that it was once a month.
They identified they had an operations constraint. They’re now looking at going to a 24-hour, 4-day-a-week operation, which means a 60% capacity increase without investing in more equipment.
How much do I need to invest in S&OP systems?
Invest in what you can afford and what ensures ROI. Build systems that fit your enterprise architecture and that work for you.
There are some really sophisticated tier 1 S&OP systems like SAP, e2open and D365. However, they can be very expensive.
If you have annual revenues of up to $50 million, Excel will probably be fine for your S&OP systems, provided you build principles of good supply chain planning into those algorithms.
Many businesses with $10-$20 million annual turnover have good transitional record systems, so don’t have to make too many changes. It’s about extracting the data points to put into a plan to make decisions. This can often be done in Excel or a subscription SaaS-type product such as NetSuite or StockTrim.
How can I tell if our S&OP planning is working?
What you measure depends on your business priorities. When you measure things, you want to be able to roll up to a level of categories, families and channels, and drill down so you can understand the insight behind what's being asked.
Examples of KPIs you might measure
Customer service – delivering on time to your customers, making sure your decision making aligns to improve your customers’ experience.
Total sales, forecast value at revenue level (most S&OP would look at this)
Reducing cancelled orders, back orders or lost sales opportunities
Total inventory
Your labour hours and factories
Utilisation of assets
Financial numbers. Because your fixed cost minus your variables is what you’re trying to affect in your planning process
Look at your trends
Take a helicopter view and see how you’re progressing over time.
S&OP is the ideal continuous improvement cycle. Teams meet regularly, review performance, and make action plans to drive towards the common goal. This makes managing the trend important, especially where S&OP connects operations to your business’s strategy.