5 Steps of S&OP to Achieve an Integrated Business Plan

Understand the Framework, Key Activities, Inputs and Outputs of S&OP with SAP IBP Approach

By Venkata Ramana Nethi, CSCP, CPIM; MGR IT Build-Run Operations & Quality, Schlumberger

Sales and operations planning (S&OP) is a set of decision-making processes that regulates and coordinates overall capacity, inventory levels, and lead times across engineering, projects, manufacturing, finance, supply chain, and operations based on forecast information about the market. It focuses on changes from the previous plan and links that with the strategic goals of cost and lead time reduction to determine suitable capacity adjustment actions.

Building blocks supporting S&OP include demand planning, supply planning, and inventory planning with an objective to balance by using strategies and capabilities in place to identify, prioritize, and manage risks and opportunities across their entire supply chain processes. Complexity of the processes depends on the size and nature of the business.

The S&OP concept and methodology, regardless of industry, has been around since the 1980s; however, with new advances in technology it has become more transparent and agile, adopting and delivering nearly accurate results in dynamic environments to achieve balance.

This article will provide the framework and key concepts to using SAP Integrated Business Planning (IBP) for Supply Chain toolset to effectively balance demand and supply and attain financial targets.

In this article you will learn:

  • The framework and the five essential steps of the S&OP process
  • Key activities involved, inputs and outputs of S&OP building blocks of data gathering, demand planning, supply planning, pre-S&OP, and executive S&OP meeting
  • Examples and benefits of S&OP using SAP IBP

Five Essential Steps of S&OP

Five essential steps cover the end-to-end processes in S&OP. Each step is usually performed by different teams with a defined calendar on a monthly basis.

  • STEP 1: Data gathering—review sales history, data cleansing, and finalize statistical forecasting models
  • STEP 2: Demand Planning—to conclude with a consensus forecast
  • STEP 3: Supply Planning—to finalize capacity and material constraints
  • STEP 4: Pre-S&OP meeting—to determine recommendations and agenda for executive meetings
  • STEP 5: Executive S&OP —to provide a plan of action for the organization

S&OP Fit in the Planning Framework

Sales and operations planning encompasses a decision-making process that determines and coordinates overall capacity, inventory levels, and lead times across engineering, projects, manufacturing, finance, supply chain, and operations based on demonstrated and forecast information about the market. The primary objective of S&OP is to balance the impact on inventory, service levels, and profitability and effectively balance demand and supply and attain financial targets.

Figure 1 showcases where S&OP operates among the planning levels; S&OP focuses on changes from the previous plan and links with strategic goals of cost and lead time reduction to determine suitable capacity adjustment actions.

Figure 1—S&OP Fit in Manufacturing Planning and Control Hierarchy (APICS)

Figure 1—S&OP Fit in Manufacturing Planning and Control Hierarchy (APICS)


S&OP – Activities and Calendar

Executive management involvement is essential for effective S&OP. Figure 2 represents the inputs, outputs, main steps, decision points, and compliance monitoring points of the process described in this article.

Figure 2—S&OP Activity Diagram

Figure 2—S&OP Activity Diagram


A structured monthly calendar showing dates, times, and the actual names of people who interact with the process creates accountability so each step should be planned with a pre-defined calendar to perform required activities at least one year in advance to bring all the possible inputs that contribute to the process as expected. The output of Step 1 becomes the input for Step 2. This process flow continues through Step 5 on a periodic basis. Figures 3a and 3b represent examples of S&OP calendar with key activities at high level but in reality it should have more details with names of departments and people responsible for each step.

Figure 3a—S&OP Calendar, All Steps in the Same Month

Figure 3a—S&OP Calendar, All Steps in the Same Month (example illustration)


Figure 3b—S&OP Calendar, Step 1 in Last Week of Previous Month

Figure 3b—S&OP Calendar, Step 1 in Last Week of Previous Month (example illustration)


S&OP Objectives

Decisions are made to resolve the issues at various levels of the planning and execution stages; given that the demand planning team can solve the problem by adjusting the customer commitments, then there is no need to proceed to the next level. Similarly, if the supply planning team is able to satisfy the required demand then it can be closed. If not, the issue gets elevated to the next level pre-S&OP meeting for resolutions and then to regional S&OP meeting or executive S&OP meeting for resolutions.

Often people from different functional areas, such as finance, are involved at executive-level meetings; so the information must be presented both in units and dollars which is familiar to all the participants.

The overall objective is to deliver the right product quality and quantity at the right time and cost. A good planning and control system should help answer the following questions during priority planning:

  • What are we going to make?
  • What does it take to make it?
  • What do we already have?
  • What do we need and when?
  • What are the underlying assumptions?

The five essential steps leveraging SAP toolset are summarized in the following sections.

S&OP Step 1: Data Gathering

The objective is to minimize the number of product families while capturing the unique attributes of a product and maintaining a manageable population of families.

A successful demand planning process relies on accurate data inputs. Companies should cleanse and update master data, gather historical demand history material, location, and customer dimensions, and investigate the market indicators which impact your adjustments to either reduce or increase the actuals to suit the market conditions. Cleansing of the data is critical to generate statistical forecasts based on the historical demand.

Industry leaders proactively plan for new products using leading indicators and demand signals such as market activity, competitors, or product application trends. Instead of waiting for demand history to build up, companies should proactively estimate market potential and communicate the same with other stakeholders to enable preparedness. At a minimum, if the new product/service replaces an older product, it is clearly flagged in the system so that older product’s demand history can be utilized for market planning of the new product.

S&OP Step 2: Demand Planning

Demand planning is a process typically owned by sales to develop an unconstrained consensus view of forecast, customer orders, and other anticipated demands over a set horizon.

This multi-step process entails statistical analysis, market intelligence, and stakeholder consensus. Different views on demand must be reconciled into a single and agreed-upon sales forecast; then, reviewed and authorized by the senior sales executive(s).

The sales forecast should be created in units first and then translated into dollars. A formal demand review meeting should be held monthly or quarterly based on product lead time to review and validate consolidated forecast, documented outliers or exceptions, metrics, and lessons learned.

Demand management is the process within a business that has the responsibility for the planning and control of all demands for products and services.

Key activities involved include the following:

  • Historical data management, including manual adjustments, outlier management, adjust missing values
  • Generate statistical forecasting which involves selection of models relevant for the product history
  • Consensus planning with sales and marketing inputs with relevant promotional factors
  • Publish forecast to execution system on periodic basis.

Inputs include the following:

  • Product families and subfamilies
  • Clear demand streams by sales history and existing orders (backlog and pipeline)
  • Statistical input using time series models
  • Market intelligence and economic indicators with pre-defined translations
  • Product roadmap input
  • Forecast hierarchy, planning horizons mapping to the manufacturing strategies (ETO, MTO, ATO or MTS)

Outputs include the following:

  • Consensus forecast for a 12-month rolling, unconstrained demand plan
  • Minutes of demand meeting detailing all decisions made
  • Sign-off by S&OP leader or demand manager

SAP IBP S&OP – Demand Views

Figure 4 show an example of the SAP IBP view of demand planner to review history, generated statistical forecast by customer, product, and location combinations.


Figure 4—SAP IBP S&OP - Demand Views

Figure 4—SAP IBP S&OP – Demand Views (example illustration)


Figure 5 shows an example of the SAP IBP view of demand plan compared to finance plans.Figure 5—SAP IBP S&OP Demand Plan Comparing Financial Targets in Monthly Time Buckets

Figure 5—SAP IBP S&OP Demand Plan Comparing Financial Targets in Monthly Time Buckets


S&OP Step 3: Supply Planning

Step 3 is a process owned by operations, with the function of setting planned rates of production (both in-house and outsourced) to satisfy the demand plan and to meet inventory and order backlog targets.

Supply planning includes planning based on supply capacities (production, transportation, etc.), inventory levels, maintenance planning, and supplier planning. However, leading S&OP organizations extend this with supply opportunities and risks that take management options and market uncertainties into account.

Inventory review can happen either as part of demand review, supply review, or as a standalone inventory review. The key is to review the proposed or planned inventory targets and adjust the targets as required to support specific customer, product or location strategies.

Conventional inventory planning includes projections based on the demand and production plan, which are made into the future to see the development of stock versus target stock, safety stock, etc. Evaluate scenarios for building strategic stock to leverage demand opportunities and mitigate risks, which allows balancing of these inventory costs with the potential benefits.

This multi-step process, owned by manufacturing and supply chain, must involve capacity analysis, planning horizon, supply-based intelligence, mitigation options, and stakeholder consensus.

Key activities involved include the following:

  • Supply planning simulations on forecasts, orders, and inventory or safety stock targets
  • Simulate either constrained or unconstrained production and distribution plans, using heuristics or optimization-based algorithms
  • Determine safety stock levels considering various parameters like target service level (customer)
  • Forecast error and bias
  • Understand the value impact of these quantity key figures (financial side)
  • Multi-stage inventory optimization and setting target Inventory levels via service levels, safety stocks
  • View results in user-friendly analytics, seek areas of improvement and publish final Inventory plans
  • Scenario planning and comparison of the results

Inputs include the following:

  • Initial inventory status and average demand intervals at the product families and subfamilies level
  • Global demand plan mapped to the planning strategies
  • Rough cut capacity (internal and third party), flex capacity picture
  • Inventory Position (including targeted service levels)
  • Engineering and project management capacity for ETO products
  • Top constraints (internal and external) and assess potential options to improve
  • Lead times, lot size parameters
  • Forecast hierarchy, planning horizon & manufacturing strategy (ETO, MTO, ATO or MTS)

Outputs include the following:

  • Develop a true picture of global constrained supply, including current inventory and engineering capacity
  • Highlight constraints driving unsupported demand
  • Gain consensus with supply side (manufacturing and out-sourcing) on supply capacity outlook
  • Global supply plan consisting of a single set of enterprise-wide consensus numbers representing what can be achieved
  • Constraints prioritized based on business impact with heat maps on capacity utilizations
  • Minutes of supply meeting detailing all decisions made
  • Approvals from S&OP leader, manufacturing managers and distribution locations 

SAP IBP – Supply Planning Views

Supply planning generates various what-if supply scenarios, including supply uncertainties that have either a potential positive or negative impact. Once these factors are identified, they are assessed and possible responses to leverage or mitigate these factors are evaluated. Leading organizations particularly add value by combining the effects of these scenarios with other supply and demand factors and assess the overall financial result.

Figure 6 show an example of the SAP IBP S&OP view of supply situations by location and product in monthly time buckets.

Figure 6—SAP IBP View of Supply Situations by Location and Product in Monthly Time Buckets

Figure 6—SAP IBP View of Supply Situations by Location and Product in Monthly Time Buckets


Figure 7 shows an example of the SAP IBP S&OP view of stock projection by location and product combinations in monthly time buckets.

Figure 7—SAP IBP S&OP Supply View Including Stock Projection by Location and Product Combinations

Figure 7—SAP IBP S&OP Supply View Including Stock Projection by Location and Product Combinations (example 1)


Figure 8—SAP IBP S&OP Supply View by Location and Product Combinations

Figure 8—SAP IBP S&OP Supply View by Location and Product Combinations (example 2)


Figure 9 shows an example of the SAP IBP view of capacity views and heat maps of resources in monthly time buckets.

Figure 9—SAP IBP View of Capacity Views and Heat Maps of Resources in Monthly Time Buckets

Figure 9—SAP IBP View of Capacity Views and Heat Maps of Resources in Monthly Time Buckets


S&OP Step 4:  Pre-S&OP meeting

The purpose of step 4 is to review supply vs. demand and resolve issues within the level of authority. The preliminary session prior to the executive meeting is where key members from sales and marketing, manufacturing, supply chain, finance, and new product development come together to develop the recommendations to be made at the executive S&OP session. The risks are identified in achieving financial goals given the demand plan and supply constraints, understanding the root causes, and reviewing existing/generating new options for risk mitigation.

Review inputs and outputs of models to assess accuracy and completeness and to formulate appropriate recommendations for actions to be considered at the S&OP meeting.

Key activities involved include the following:

  • Managers representing manufacturing, engineering, sales/marketing, purchasing, planning, finance, and accounting participate to develop a global supply-demand balanced plan for the enterprise, including final financial impact
  • Define options to address key unresolved issues/unsupported demand
  • Develop, where appropriate, scenarios showing alternate courses of action to solve a given problem

Inputs include the following:

  • Demand plan
  • Supply plan
  • Balancing options

Outputs include the following:

  • Balanced plan which a “buildable, shippable” plan for a rolling period of 12 – 24-months
  • An updated financial view of the business
  • Specific action items to address demand/supply balance to be escalated to the executive team
  • Minutes from the pre-S&OP meeting detailing all decisions made
  • Clear agenda for the S&OP executive meeting
  • Increase end-to-end network visibility combining planning, execution and network data
  • User defined alerts and performance management analytics

S&OP Step 5: Executive S&OP meeting

The executive S&OP meeting is required to ensure process sustainability. This meeting shall provide a standardized forum and arrive at a business “game plan” to help manage and allocate critical resources which meet the needs of the customer at organization’s optimal cost, and to facilitate decision-making and issue resolution in supply/demand balancing.

The executive portion of the overall S&OP is chaired by the head of the segment or organization (typically president or CEO). Its mission is to provide executives a balanced plan at the aggregate level for final approval and a report on performance. The executive S&OP includes the functions of demand planning, supply planning and the pre-S&OP meeting, occurring on a monthly or quarterly cycle depending on product lead time as described in the executive summary and displaying information in both units and dollars.

Key activities involved include the following:

  • Review key metrics and progress against targets
  • Review open issues from pre- S&OP meeting
  • Recommend solution to supply demand imbalance
  • Review financial implications of decisions made
  • Agreement on the tactical and strategic plans

Inputs include the following:

  • Outputs of models and the recommendations from the pre-S&OP meeting for the purpose of approving the course of action
  • Recommendations from the senior managers representing manufacturing, sales and marketing, purchasing, planning, finance and accounting
  • Balanced plan
  • Updated KPIs from prior period
  • Specific items to be escalated to executive team for decision

Outputs include the following:

  • Approved plan, tied to financials and approved by the executives to act as a guide for execution
  • Additional actions to address demand/supply misalignment
  • Provide executives a balanced plan and dashboard report on performance
  • Proactively advise executives about potential “un-knowns”
  • Provide insights and indicators for addressing near-term trends
  • Conclude with actions required to achieve supply/demand balance longer-term

Factors to Sustain the Model

Follow a standard protocol—Meetings should start and end on time, executives must make time to attend meetings in person and alternative representation should be the exception.

Set expectations for all the stakeholders—All the participants must review the pre-S&OP meeting summary and come prepared to discuss the issues and make relevant decisions. In general, decisions are made with group consensus and owned by all the participants but when a consensus cannot be reached then the S&OP leader (president or CEO) will make the final decision.

Forum to make decisions should be clearly defined—Executive S&OP meetings should be the only forum to finalize supply and demand balancing decisions aligned with business strategy.

Publish post-meeting minutes without fail—Approved plans drive ERP systems through master scheduling and material requirements planning. Decisions should be documented and communicated to all the attendees as well as any affected key stakeholders.

Tradeoffs Depend on the Manufacturing Strategy

Product nature and manufacturing strategy drive tradeoffs. Therefore, attaining balance requires extensive analysis when there are mixed production strategies.

Research shows that organizations with effective S&OP processes will be able to proactively manage these tradeoffs better compared to the ones who run the manufacturing in reactive mode.

Here are the most common situations organizations have encountered:

  • On the products in make-to-stock higher customer service is often required with a tradeoff of lower finished goods inventories
  • On make-to-order or engineered-to-order materials the higher customer service, and often smaller customer order backlog, is always expected to avoid stagnant inventory with trade off on shorter lead times
  • On assemble-to-order materials the higher customer service and quicker responses are needed to have enough assemblies in stock to deliver the products with short notice with trade off on lower component inventories
  • Shop supervisors or managers in a manufacturing plant always expect more stable production rates and less overtime, leading to higher productivity and better visibility into future resource problems, but they are constantly needed to adjust these to suit customer needs

Supplier Collaboration

SAP IBP allows integration with SAP Ariba for supply chain collaboration with the ability to send the forecast to suppliers who are on-boarded so that they can commit and send a signal back to SAP IBP with the stock on-hand so that this can be published in SAP IBP. This is optional, but recommended, to integrate key suppliers for better visibility.

The benefits of supplier collaboration include the following:

  • Enhanced teamwork within all functions
  • Greater accountability regarding actual performance to plan
  • A better demand/supply balance across the company’s supply chain
  • The establishment of “one set of numbers” with which to run the business
  • The ability to match objectives to processes
  • Adoption of integrated value chain perspective
  • Replace inventory with information
  • Account for variable elements in new product introduction and promotion cycles
  • Align business objectives via KPIs
  • Technology links people and process together

What does this mean for the SAPinsider Community?

Information mentioned in this article is applicable to small-, medium- and large-sized organizations. Management consultants must have a thorough understanding of these components to leverage SAP IBP and deliver the desired results for effective decision-making process.

  • Planning implementation is a journey. Full realization of the benefits will occur over a 2-3-year span. Developing competencies is a long-term goal; measure the success with relevant KPIs moving in the right direction. The implementation should consist of planning, training, coaching, deployment, and follow up to ensure sustainability of the process based on best practices to drive correct behaviors required for process sustainability and incorporate new concepts as they evolve.
  • Adopt an ideal supply chain solution toolset. It is important to find new ways to meet customer demands and the solution should provide a means for better management of customers, suppliers, and internal processes in today’s digital world of unpredictable behaviors with frequent disruptions. Cloud-based solutions provide an advantage at the tactical level by integrating the value stream and providing value proposition in this competitive global marketplace. Organizations will see improved customer satisfaction and shareholder value by reducing transaction and inventory costs with a means of improving competitive advantage. Most of the implementation effort is changing the mindsets of the people. Finalizing processes constitutes about 80% of the S&OP implementation team’s time and the remaining 20% of time is spent trying to fit people and processes with the right technology to make the process work and motivate people as well.
  • Changes in supply and demand are never ending. S&OP is a key component of an overall supply chain planning process in which sales, marketing, and operations balance forecasted product demand against available production capacity and inventory. This analysis is done in order to maximize profits by activating the five-planning levels (lead times, capacity, material planning, inventory, labor). This can make the difference in responsiveness and results. Document and implement action items from S&OP meetings including inventory build strategies, capacity/resource investments, performance improvement targets, and product introductions, resources deployment and implement investments.
  • Follow the schedules and invest time on training. Set the agenda with a calendar for the year. S&OP meetings must be held on long-term trends of sales, revenue, backlog, inventory levels, inventory turns, and lead times need to be reviewed to help informed decisions on capacity changes in supply chain development. Effectively training process owners and champions to use tools and techniques is essential.