S&OP

What is S&OP (Sales and Operations Planning)?

Sales and Operations Planning (S&OP) is a strategic business management process that ensures a company’s operational plan aligns with its sales forecasts and overall business strategy. Leadership and executive teams use it to balance supply and demand by integrating business planning on multiple levels, including sales, marketing, production, and finance.

Companies use S&OP to:

• Improve customer service
• Reduce inventory costs
• Optimize resource utilization
• Enhance cross-department collaboration and communication
• Improve their high-level decision-making processes

It enables better decision-making by providing a comprehensive view of the business and its market environment. This process is particularly vital in industries where supply chain management is complex, like B2B manufacturing, wholesale, retail, and consumer packaged goods (CPG).

Synonyms

• Sales and operations planning
• Integrated business planning (IBP)

Overview and Importance of S&OP

How S&OP Works

S&OP is essentially a framework for aligning and coordinating sales processes, internal operations, and downstream supply chain functions. Senior-level executives usually manage this process, which involves the following components:

1. Demand planning. This involves forecasting customer demand for products or services. Demand planning takes into account historical sales data, market trends, and other external factors like economic conditions or competitive landscape.
2. Supply planning. This step ensures the organization has the necessary resources (like raw materials, labor, and manufacturing capacity) to meet the forecasted demand. It involves inventory management, procurement planning, and capacity planning.
3. Supply and demand integration. Integrating the information they’ve gathered from supply/demand planning is what enables supply chain planning. Stakeholders can determine the optimal inventory levels without overproducing or understocking products.
4. Executive review and decision-making. Senior management reviews the integrated plans and makes strategic decisions to align the plans with the company’s overall objectives. Examples include decisions about investments, new product launches, and adjustments to marketing strategies.
5. Implementation and monitoring. After the decisions are made, the plan is implemented across various departments. Continuous monitoring is crucial to ensure that the plan is on track and to make adjustments as needed.

Executive S&OP Meeting Attendees

To get each department on the same page about the company’s overall supply chain management strategy, members from different departments have to come together in an executive S&OP meeting. The typical S&OP meeting room includes people from:

• Executive management. Depending on the size of your company, this might just be your CEO. Or, it could be several members of your C-suite, including the COO and CFO. These are the ones who run the meeting and hold everyone accountable for the plan that ultimately sees approval. They also have final say when it comes to conflict resolution and plan execution.
• Department leaders. A manager from each respective team (sales, marketing, finance, operations, supply chain) speaks to their department’s performance and enforces the decided-upon business processes.
• Demand planner. This is someone from your team who can perform statistical analyses and develop accurate forecasts. They present all the info related to consumer demand.
• Supply planner. This is a member of your production/operations team. They present similar (sometimes overlapping) information as your demand planner, but they’ll also look into your supply chain, inventory levels, and ordering history.
• Operations leader. Your ops leader presents actual vs. forecasted inventory data. They work alongside your operations and production teams to come up with a feasible production schedule.

The above list represents the essential stakeholders in the S&OP process. Depending on your exact business structure, you’ll also have leaders from sales (or sales ops), marketing, human resources, finance, engineering, and product teams.

Why S&OP Matters

Operational planning is critical to long-term financial health and scalability because businesses have lots of moving parts. S&OP’s main purpose is to bring together otherwise disparate teams (sales and operations normally don’t even work in the same location).

Other than alignment, companies use sales and operations planning to:

• Improve the end-to-end customer experience
• Balance their supply and demand
• Facilitate transparency, data sharing, and collaboration across departments
• Optimize their inventory management processes
• Create budgets, financial projections, and quotas
• Increase forecast accuracy
• Develop a better understanding of the product lifecycle

How often different teams get together for this initiative depends on how often they update their sales and demand plans. Some companies operate on a quarterly or seasonal basis. Younger companies generally revisit it more frequently, while mature companies with strong supply chain relationships might plan annually for several years in advance.

S&OP frequency also depends on your company’s plans for future growth (a new product launch or scaling period would require special consideration). Organizational changes, like a new supplier or international market entry, would also require an additional S&OP meeting and adjustments to the current plan.

Benefits of S&OP

Improved Forecasting Accuracy

Gartner research finds that bad data costs each company roughly $12.9 million every year. The lack of a unified source for all the information that goes into supply/demand and financial planning is what makes it so difficult.

What makes it harder is the fact that different types of data represent different things entirely. Sales data and product data are both visually and objectively different from each other, which makes it hard to extract them and tell the full story.

System integrations (CRM, CPQ, ERP, billing) improve this by sharing sales, revenue, and product data with one another. But the fact remains that these departments work apart from one another.

The purpose of S&OP is to facilitate collaboration between revenue-generating and product-producing teams. When they can all verify data accuracy from all angles, they can make better predictions about future consumer demand.

This, in turn, facilitates budgeting, financial forecasting, accurate inventory management, and a better understanding of the product and customer lifecycle. With accurate data, business leaders can make high-level decisions about growth, investments, and product development with confidence (and communicate them to investors if they have to).

Optimized Inventory Levels

When it’s all said and done, inventory carrying costs will total roughly 20% to 30% of that inventory’s value. So, high inventory turnover equals better margins and healthier cash flow. In layman’s terms, profitability.

When companies understand market trends, their company’s consumer demand (on a per-product basis), lead times, and supply chain responses to change, they can order appropriate levels of inventory. This helps them avoid overstocking, reduce holding costs, and prevent stockouts.

Enhanced Customer Service

An effective S&OP process ensures the right products are available at the right time and place, which improves the company’s ability to produce the goods its customers need. Customers experience less waiting time and more reliable service, strengthening their trust in the business and fostering long-term relationships.

Better backlog management is another result of S&OP customers benefit from. With accurate forecast information, businesses can prioritize orders and allocate inventory efficiently, ensuring customers receive what they need when they need it.

Cost Reduction

Aligning production plans with sales and demand forecasts helps companies optimize their capacity utilization while reducing unnecessary production costs. This also positively impacts the bottom line, improving company profitability and potentially offering more budget for business/product development.

By getting all the company’s departments on a unified plan, companies can eliminate duplicate efforts — for example, ordering excess inventory because Sales didn’t know Operations already had enough product in stock. This eliminates distribution inefficiencies and unnecessary expenses.

Cross-Functional Alignment

Perhaps the most critical benefit of S&OP is the fact that it brings together teams that typically work separately, S&OP encourages cross-functional understanding and communication. This facilitates a better understanding of how each department impacts one another, strengthens relationships, and enhances the company’s overall performance.

On a macro level, well-aligned teams have individual goals that support the larger objectives of the company. Companies with strong internal coordination grow revenue 58% faster and are 72% more profitable.

Quick Response to Changes

In a dynamic business environment, change is constant. The S&OP process offers a decision-making framework that considers both sales and operations perspectives.

S&OP team members regularly review and incorporate changes in market trends, customer demand, supplier capabilities, and internal operations into their plans. This allows for real-time adjustments to strategies, ensuring alignment with the evolving business environment.

The collaborative nature of the S&OP process fosters information sharing across departments, promoting quick identification, understanding, and response to changes. With your departments already united, there’s no need to frantically organize a committee. You can jump straight to effective, timely decision-making.

Financial Integration

While not a direct function of S&OP, finance operations go hand-in-hand with sales and operations planning. Finance departments rely on. unbiased sales and operational data to develop budgets, communicate projections to investors, and report on company performance.

S&OP provides timely and accurate data that finance departments can use to make high-level financial decisions. With an accurate demand plan, it also helps them determine when to allocate funds to certain areas (e.g., production vs. marketing), so the company can stay ahead of the curve.

Risk Management

S&OP gives companies a structured approach to foresee and respond to potential disruptions. By integrating cross-functional insights, it identifies supply chain risks, demand fluctuations, and market changes. S&OP’s regular review cycles enable proactive adjustments to plans, which allows companies to be agile in their response to uncertainties.

Inputs and Outputs of Sales and Operations Planning

In order for the S&OP process to benefit companies the way it’s supposed to, certain inputs are required from different team members.

Inputs

• Historical sales data
• Sales forecasts
• Current and past market data
• Trends analyses (e.g., seasonality)
• Inventory levels and history
• Customer orders and forecasts
• Product portfolio
• Upcoming business changes and initiatives
• Marketing plans
• Supply chain constraints

Outputs

• Executive summary and action items
• Sales plan
• Supply and demand plans
• Integrated business plan
• Resource allocation plan
• Production schedules
• Inventory levels and targets
• Financial projections and budgets
• Sales targets
• Risk management procedures
• Performance metrics

Steps in the Sales and Operations Planning Process

1. Gather and manage your sales, supply, and demand data.

Before any department can meet with the others, they need to gather their own data. Each team will have its own processes for gathering it, but they will all focus on past successes, trends analysis, plan success rates, and accuracy (plus variables that could impact it).

• Sales will get its data from CRM, customer orders in CPQ, sales forecasts, and in-house data (e.g., product performance reports).
• Operations gets most of its data from ERP and its warehouse management system (WMS), including inventory levels and production reports.
• Marketing generates its own data from marketing automation tools, web analytics, and social media insights.
• Supply chain teams will have their logistics data — for example, supplier capabilities, lead times, transportation costs, and other supply-side factors.
• The finance department gets information about total product sales, top-line revenue, and budget from sales and RevOps software.

Once they’ve organized their individual information, each team will format it into forecasts to present to the demand planner. Ideally, your company’s software can handle this for you automatically, on an ongoing basis.

2. Plan for demand.

Once your demand planner is looking at all the forecasts in a digestible format, the next step is for accounting/finance to validate their accuracy. Once they account for variability and margin for error, the demand planner can start working on the plan.

A demand plan includes:

• Customer support policies
• Promotions and discounts
• New product launches
• GTM initiatives
• One-time events like a trade show
• Channel changes

Although the demand planner handles this step, sales and marketing teams should weigh in on it since they can provide insights on customer behavior and market trends.

3. Plan for supply and production.

The head of supply will use the demand plan to create a high-level production plan. This phase includes:

• Inventory targets
• Raw materials needs
• Safety stock
• Production methods
• Production volumes per product and volume changes
• Changes in inventory
• Production scheduling

If they have any, they’ll also include pre-launch logistical changes. This could be for a new product launch or an event with increased demand. They’ll also check on supplier capabilities and lead times to ensure they can keep up with the production schedule.

4. Reconcile the plan with a pre-S&OP meeting.

Involvement from the finance department is crucial here. They ensure the proposed supply and demand plans align with the company’s budgetary constraints. They also provide insight into the available financial resources and the potential impact of the plans on the company’s financial health.

If the reconciliation process uncovers expensive challenges or obstacles, the finance department plays a key role in evaluating whether these costs are feasible within the current budget. They assess the financial implications of these obstacles and help in decision-making.

In cases where certain aspects of the plan are too costly, the finance team helps determine whether it’s more viable to defer these aspects to the next fiscal year.

5. Hold the executive S&OP meeting.

All key stakeholders and department heads should participate in this meeting, which is usually held on a monthly or quarterly basis. During this meeting, they will review the reconciled plan and make any necessary adjustments.

The output of this meeting includes:

• A finalized sales plan
• An integrated business plan that aligns with company goals
• Resource allocation details (e.g., budget allocations)

6. Hold a monthly review.

In order for S&OP to be effective, it needs to be an ongoing process rather than a one-time event. Monthly reviews should include:

• A discussion of current performance metrics
• An evaluation of any changes in the market or business environment that could impact the plan
• A review of inventory levels and sales forecasts to identify any discrepancies
• A check-in on progress towards achieving targets and goals

Monthly reviews keep sales and operations plans on track post-implementation.

S&OP Metrics

We can broadly categorize S&OP metrics into two groups: supply and demand metrics, and financial metrics.

Supply and Demand Metrics

1. Forecast accuracy — How closely supply and demand forecasts reflect actual sales.
2. Order fulfillment rate — The percentage of customer orders fulfilled on time.
3. Inventory turnover — The rate at which inventory is sold and replaced over a particular period (generally, the faster, the better).
4. Capacity utilization — The extent to which the organization uses its production capacity is being used, up to its maximum amount.
5. Supplier performance — quantitative and qualitative measures of your suppliers’ reliability and quality, including on-time delivery and quality of materials supplied.

Financial Metrics

1. Gross margin — Your company’s overall financial health: the difference between sales and the cost of goods sold (COGS).
2. Operating expenses — The costs associated with running your sales and operations processes, including selling, logistics, warehousing, and production costs.
3. Return on investment (ROI) — How profitable your sales and operational processes are before and after planning and implementation.
4. Cash-to-cash cycle time — How long it takes from purchasing raw materials to receiving cash from sales (efficiency of cash flow through the supply chain).
5. Budget variance — The difference between the budgeted and actual costs, indicating the accuracy of financial planning in the S&OP process.

Best Practices for Effective S&OP

When it comes to collaboration between multiple departments, it starts from within. You have to create a culture of communication and shift the focus from individualistic teams to a collectivist environment.

Here are a few best practices to live by when it comes to S&OP:

• Roll out cross-department training for sales and ops teams.
• Eliminate communication gaps by setting reasonable expectations for response times and correspondence.
• Assign team ownership and oversight to one executive member to prevent communication breakdown.
• Establish proactive monitoring processes to identify potential conflicts in supply and demand before they become major issues.
• Develop a clear escalation process for resolving discrepancies between departments.
• Create a system for tracking and evaluating performance metrics regularly to ensure continuous improvement.
• Use technology to streamline and automate the S&OP process, improve efficiency and accuracy, and reduce human error.

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