Picture this: You’re reviewing your business’s monthly production, sales, and profit. While analyzing the data, you consider how much to increase production next month to meet anticipated market demand.
This process, essential for optimizing business performance, is known as sales and operations planning.
What is S&OP?
Sales and operations planning (S&OP) is a management process that synchronizes various parts of a business toward the goal of matching future output with expected demand.
Although the focus is on sales and business operations, all teams and departments, including procurement, production, finance, marketing, sales, and human resources, have critical roles to play. This process, usually done monthly or quarterly, creates a tactical sales and operations plan that can be used to make decisions for maximizing efficiency and profit.
S&OP establishes a data-driven approach to sales and production goals, instead of relying on best-guess estimates. It improves collaboration among departments and teams, shortens financial planning time, streamlines decision-making, and boosts profitability. S&OP has a built-in feedback loop: The plan for the next quarter is driven by analysis of results from the previous quarter.
How to use the S&OP process
- Review current period
- Forecast demand
- Forecast supply
- Preliminary S&OP meeting
- Executive S&OP
- Implement the plan
All the departments in your business must simultaneously do their parts in S&OP. This process usually moves in the following stages:
1. Review current period
The review includes a look at:
- Your products and their life cycles
- Trends in customer demand or changes in the market
- Inventory and production capacity
- Production, shipping, and storage costs
- The state of the economy, inflation, and regulations
The results of the current period review will influence your S&OP for the next period.
2. Forecast demand
Forecasting demand for the next period starts with looking back. Did sales meet the demand forecast? If not, why, and how?
You might also look back further than the previous period for possible patterns such as seasonal sales fluctuations. Consider any changing market trends in customer tastes and preferences or a significant turn in the economy.
3. Forecast supply
Supply analysis and forecasting is typically done alongside demand analysis. When supply chain planning, consider whether your business had a production surplus or shortage in the recent period. If there was a surplus, how much do you have in inventory for use in the next period? What are inventory storage costs?
Conversely, if you had a shortfall, was it because of lack of materials? A supply-chain breakdown? Either way, your supply planning should be as accurate as possible as the S&OP process moves ahead.
Consider events that can affect your current supply plan, such as a major bottleneck in supply chains or new trade restrictions.
4. Preliminary S&OP meeting
The preliminary S&OP is where collaboration and consensus-building begins. After reviewing demand and supply forecasts, leaders from different parts of the business may meet to outline how their departments will contribute to meeting S&OP objectives.
5. Executive S&OP
The business owner, or for large companies, senior executives, review the plan for final approval. They may analyze any possible risks to the plan to test its strength, before approving, or submitting it to the chief executive for approval.
6. Implement the plan
After the business owner, or executive signs off, teams go into action on their assigned tasks. For example, the marketing department might roll out a new advertising campaign based on an S&OP target of 10% sales growth. At the same time, the procurement team might send out bid requests to suppliers and begin purchasing additional materials to meet the S&OP target of a 10% production increase.
Tips for effective S&OP
- Define your metrics
- Use the right software
- Designate a leader
- Knock down silos
- Plan for contingencies
- Keep complete records
S&OP has a lot of moving parts and keeping them synchronized is essential. Here are some tips for keeping matters on track.
Define your metrics
All businesses share some basic metrics, such as profit margins and sales growth rate. Beyond those, it’s important to focus on metrics most relevant to your business type. Keep it simple, and use easily tracked industry metrics that all your teams can understand and share.
For example, a manufacturing business S&OP might focus on reducing per-unit production costs. An online seller of home furnishings might use S&OP to expand its product line while speeding up average order delivery time. And because S&OP involves making forecasts, it pays to review results against the forecasts.
Use the right software
Programs designed for S&OP can dynamically update your business’s operating and sales data, making period-to-period planning much more accurate and efficient than spreadsheets alone.
S&OP software programs that are cloud-based and cross-functional are accessible for all teams, making it easier to coordinate and collaborate by sharing data, documents, and summaries of S&OP meetings.
Designate a leader
If it’s a group effort, the S&OP needs someone to lead, marshaling the teams and keeping the planning process moving. If not the business owner, the point person typically has some experience in sales and operations, and typically is given enough authority and responsibility to drive the process forward.
Knock down silos
In any organization, silos are the antithesis of collaboration. It happens when teams hoard resources, fail to share information, or use separate software systems that aren’t compatible with each other. A good S&OP process uses shared software across teams, and the S&OP leader ensures participation. Otherwise, there’s a risk of effort being duplicated.
Plan for contingencies
The future is, of course, unknowable. S&OP can help take this into account by including plans for responding to unforeseen events. For example, consider how a supplier delay might affect production, or how a sharp turn in the economy would change customer demand. Planning for contingencies can give you flexibility in the S&OP process.
Keep complete records
Because S&OP is a continual process with a feedback loop, using past results to plan for the future, it’s important to maintain detailed records of each S&OP cycle. This should include summaries meetings as well as agendas, agreements, and actions. The result is that everyone involved has a common historical reference for comparing forecasts against the business’s actual performance.
S&OP FAQ
What are the basic purposes of S&OP?
The goal of the sales and operations planning process is to align all of a business’s various parts to achieve a specific objective, typically to increase output to meet sales projections.
What are the fundamentals of S&OP?
The fundamentals of S&OP are to align demand, your supply chain, production capacity, and financial resources to support executive decision-making for a business’s growth and profitability.
What is the difference between S&OP and MRP?
S&OP develops a production and sales plan for a company, which is then used to create a materials requirement plan, or MRP, for all materials and components needed in production. MRP includes taking inventory of available materials, calculating the amount of extra materials needed to meet the production plan, and scheduling the appropriate materials purchases.
