By Venkata Ramana Nethi, CSCP, CPIM; MGR IT Build-Run Operations & Quality, Schlumberger
Sales and operations planning (S&OP) functions live at the tactical level of the planning hierarchy in an environment that synchronizes demand, inventory, and supply plans and considers profit objectives. S&OP decision outcomes serve as inputs to the master scheduling and material requirements planning process and with a feedback mechanism within the subcomponents of demand planning, supply planning, and inventory planning. Since the 1980s S&OP has been progressively gaining attention across all businesses.
S&OP has been discussed in multiple forums over the years because of the value it delivers to the organization as whole. In recent years it is on every company’s to-do list to improve this function, or else risk sustainment in today’s dynamic market conditions. S&OP knowledge is no longer optional; it’s a must-know topic for the managers or executives who participate in demand and supply planning processes to achieve balance as shown in Figure 1.
- Balance demand and supply
- Integrate financial planning and operational planning
- Link high-level strategic plans with day-to-day operations
Figure 1—Sales and Operations Planning Objective is Balance
In this article you will gain an understanding of:
- Key business drivers impacting S&OP processes
- People, process and technology as foundation pillars
- Stakeholders affected by decisions of S&OP process
- Business-friendly features to consider in the toolset
- Internal and external factors drive S&OP and ways to sustain to deliver value to your customers
- How to create a business case to justify an implementation of SAP IBP and S&OP, including business case, vendor selection, etc.
- Factors to consider when selecting a partner to implement SAP Integrated Business Planning for Supply Chain (IBP)
Here are the key forces to investigate from your organization’s perspective. Scale of each depends on the nature of the business (Figure 2).
Figure 2 — Organizational Forces and Their Influence on Sales and Operations Planning
People, Process and Technology
People first and then define the processes and use right technology with governance for issue resolutions to support the collaborative platform with alignment and engagement across the organization, as shown in Figure 3.
Figure 3—Integrated View of People, Process, and Technology with Governance in Place
People Come First with Role Based Access
Organizations should identify the individuals including executives and managers from demand planning, supply planning, inventory specialists, manufacturing, finance, and IT with skills and compassion to contribute and succeed on the transformation projects. Companies should invest in training to learn how to leverage technology and deliver successful outcomes. Encourage development of cross functional teams for reporting and using S&OP outputs as a driver to develop individual departmental goals. When required involve experts from the industry to drive change management and realign the organizational structure so that you can monitor and measure the performance effectively.
Process with Documentation and Management Buy-in
Organizations must invest in continuously improving the processes to achieve operational excellence and the outcomes should be aligned to the core mission, scope, and managed with governance. Companies should develop a mechanism using accurate technology to allow information to flow across the processes including internal and external signals to drive effective decisions at each step in the process. Examples include demand and supply reviews, forecast vs. actual comparison.
Technology is an Enabler
Organizations should choose the right technology to solve specific issues, instead of the best on the market. Look into the future road maps from the product owners and features like scalability, advanced planning with algorithm based what-if simulation capabilities, connectivity, user-friendly interfaces, optimization engines, automation, alerts and exception management, reporting with visual charts, integration to other systems, data integration and machine learning capabilities, workflow management, collaboration of both internal/external stake holders and mobile apps to support S&OP processes, always involve end users during the selection of tool.
Organizational Strategic Drivers
The corporate leadership teams role is not policing the process, instead their focus should be on empowering and mentoring teams to achieve company objectives at all levels. Organizations should focus on performance management, processes which enable continuity embracing risks, and success factors to perform in this competitive world.
Organizations must create leadership positions to effectively manage performance. Performance management shows how people at all levels are working together to make things happen; but how? By changing the mindset. This is where organizations have a key challenge and spend time and energy. A company’s goal should be on creating value and aligning teams. Value is about what we do as organizations and people work around similar nature of job, executive teams should encourage employees to try and challenge themselves, trust and empower teams work, trying to work differently to see the change in tone.
To improve performance there must be a behavior change. For example, in the past, four or five approvals were required to purchase items. Today only a single touch is required, and for frequently purchased Items approvals are no longer required. Additional items of interest include: How do you approve? How organizational structure will challenge status quo? This places value on the steps involved, while, embracing a new mindset. How can we do this more efficiently?
An example of doing things more efficiently is the use of massive spreadsheets. The spreadsheets are prepared to review with suppliers, which can be a difficult task to provide a constructive summary. Procurement teams now understand the variability of demand, so now we know what issues or products changed and specific hand full of part numbers (may be 100-500) to discuss and not the entire list of potentially thousands of material numbers. This helps suppliers better align with your landscape by reviewing the next three to four months of rolling forecasts and incorporate forecast accuracy as key measure to drive S&OP success and again visibility is the required to improve the sub optimal processes.
The building blocks of S&OP excellence is to align the objectives internally, simplify the processes and eliminate the difficult to implement ones at the beginning and deploy the ones which create value to the supporting functions, as shown in Figure 4.
Figure 4—Performance Model and its Influence on S&OP Functions
Enable Comprehensive Plan for Minimal Operational Disruption
In today’s economy a variety of risks can affect a plan of action; including supply interruption risks such as purchase price, inventory and obsolescence, regulatory and compliance, information privacy and security, customer satisfaction and service levels, contract compliance and legal risks, process inefficiency, employee and third-party fraud, product introduction and cycle time, human resource skills and qualifications, project management, corporate culture and change management.
For example, the COVID-19 pandemic outbreak trembled supply chains across the world so badly that the weak links in the value chains are almost broken and new links need to evolve to sustain the value chains. Organizations should be prepared to manage the risks to remain steady, resilient, and ready to deliver customer performance with minimal disruption. Using a risk matrix will assist in risk assessment: to define the level and likelihood of an event and to identify the severity of the consequence of an event to minimize the impact on supply chains.
A company’s overall target is to gain competitive advantage, one of the effective methods is to adapt processes to allow the flexibility and responsiveness required to meet your customers operational requirements. A comprehensive management plan will help guide operations in this ever-evolving environment.
S&OP Success Factors
Deploying an S&OP process is one of the key items on every organization’s to-do list, so having executive level involvement is important to deploy and sustain in an ever-changing market. Here are some key success factors to achieve excellence in S&OP.
Unbiased forecast should be the starting point. Always use graphical representations to easily understand the changes and issues that need to be focused on. A collaborative culture should share accountability on the process outcomes. Clean master data, relevant lead times, trade-offs and underlying assumptions must be articulated clearly and evaluated with appropriate rolling horizon for the product lines. These should be the inputs into the SAP IBP tool set to support sales forecasting and scenario planning based on facts.
Avoid manual workarounds. Instead ensure an integrated tool is used for each step of the process and define the metrics which can be shared across key business areas via KPIs with incentive plans.
S&OP manager must focus on success factors like structured meeting agendas. Cross-functional teams who perform pre work a week before to support the meetings should be empowered to make decisions. Managers must create an environment that fosters trust among the teams and encourage change management to adopt the new business scenarios. Finally, the staff involved in the demand and supply planning meetings must commit to the procedures and processes defined in the planning tools (e.g., SAP IBP S&OP). Meeting’s agenda should cover all the inputs including macroeconomic indicators to ensure balance.
SAP IBP – High Level Thinking
Here let us review the enablers and its significance towards successful S&OP journey with an objective to develop a plan that will drive and focus the business for the near and long term, and define specific actions required to improve supply chain performance; SAP is investing a lot to meet customer needs and succeed using SAP IBP as a platform to build solutions to support processes and people.
Define Your Road Maps to Digitalization
In today’s world the organizational objectives should align to the customers view so your strategies can help customers to achieve their objectives; applies all the way to 2-3 tire supplier in the value chain.
Digital solutions are the way your customers understand the efficiency with a huge focus on the future, improve capability in-house to develop and external inputs. The major change today is that the functions are replaced by platforms to optimize the network to deliver value with simplified user interfaces.
Digitalization on every possible activity is what focused to minimize the errors and improve transparency and visibility across end to end processed, artificial intelligence (AI), analytics, with strong digital eco system of connectivity and the data is foundation of the house; that data governance and integrity is critical to embrace to show on how do you make difference to customers to achieve their objectives.
Standardize Your Exception Management Processes
Adapt the tools which gather information and obtain accurate numbers and provide analysis for exception management which should be the focus and let the orders having green light (no exceptions) to flow through the processes. Remove the low value-added activities by simplifying and automating the processes and eliminating the approvers.
Control tower enables users to create custom alerts, directing their attention to issues in the plan, and to leverage case management to investigate problems and assign tasks.
Leverage Advance Algorithms, AI, IoT to Support Demand Planning
Customer expectations constantly change, so it is almost impossible to track each expectation and translate as input in your S&OP processes. In the digital world the forecasts need to be more granular and accurate so organizations can fulfill a customer specific need. Inventory levels should be monitored and managed to make sure the right product is at the right place at right time in right quantities. AI, IoT, and machine learning algorithms assist demand management teams to remove the noise and help to predict the future requirements by demand sensing to drive forecasting.
Choose Optimum Level of Aggregation on Both Product and Time Buckets
Figure 5 displays the levels of aggregation of data to support the levels in the planning hierarchy; S&OP should always be at the product group level and have ability to drive forecast to individual material numbers required to set up product groups to forecast with proper translations by product nature and may be by region, brand or market segment.
Figure 5—S&OP Fit in the Planning Hierarchy (focus on product groups on monthly basis)
Mater Data and Planning Horizons
Operating rhythm should be to simplify and standardize the planning horizons (depends on the lead times) and master data (lot size, service levels) supporting the medium to long range planning processes of demand and supply planning so that the outcomes assist in the effective decision-making processes.
Know What Market Indicators in Your Demand Planning Processes
Organizations roadmaps for digitalization should be aligned with the external factors which influence S&OP processes, so understand the future directions and market indicators like customer’s value drivers and actions into your S&OP process, sometimes this may need complex translations and through understanding to decode the inputs including macroeconomic conditions.
Discover What is Un-Known
Demand management is the most complex in every organization so you should always maintain good relations with the industry experts and review research reports from product owners to understand how similar companies are managing the S&OP processes and their commitment to the processes so it can be an guideline for you to tailor to your organizations and generate successful out comes.
Typically, during SAP IBP implementations, it is very common that some of the stakeholders are missed out during finalization of the business requirements from demand, supply and inventory teams and impact to others who will be affected. It is required that the consultants from the project teams should ask explicitly to make sure all are covered and involve as required during scope definitions.
Most common participants during requirement gathering are business representatives from sales, marketing, finance, supply chain and few key people from information technology who understand SAP system data flows.
Know Who are Affected by S&OP Decisions
S&OP decisions affect not only sales (owner of the forecast) and manufacturing teams but also Engineering, Finance, Materials (Inventory Management and Purchasing Activities) product or business Development, human resources and Information Technology so that each departmental decision is aligned to business strategy, as shown in Figure 6.
Figure 6—S&OP Information and Decision Process Influence Stakeholders
Roles and Responsibilities
Responsibility assignment matrix clarifying and defining roles and responsibilities in cross-functional processes must be defined across various activities involved in the sales and operations planning. Table 1 is an example and can be enhanced to suit your organization.
Table 1—S&OP Roles, Responsibilities and RACI Matrix
Features to Consider on S&OP Toolset
The most common method of managing S&OP is via massive spreadsheets to analyze the data and summarize it to the product group level and develop graphical charts to showcase or discuss during monthly meetings. Many organizations implemented Advanced Planning and Optimization (APO) demand planning and supply network planning solutions to perform simulations; but it still lacks the required functionalities so you will end up using spreadsheets in some or other area.
SAP IBP is one of the latest tools available to mitigate such gaps and address the business needs, here you can see the key features to look at for gap/fit analysis and can use as a guideline.
It is an imperative need in today’s environment to have a product like SAP IBP where the tool is designed as platform rather than functionality based. New features are delivered on a quarterly basis with minimal testing and training to support planners. Organizations that already have SAP APO to support simulations should understand that is in the decline stage of the Product Life cycle and it is recommended to transition by 2025 (might extend due to market conditions). There will be a huge development effort required to suit the ever-changing business needs.
One of the most important features of any planning tool is how a user can perform the activity with minimal clicks and the representation of data either in tabular or graphical formats. SAP IBP’s Microsoft Excel user interface is a navigational-based approach which improves the productivity of planners, conversely the SAP APO planning tool is designed to be rigid on navigation with limitations on display of tabular data in graphical representations in demand and supply planning user Interfaces
Assess Integration Capability with Other Systems
Companies should compare demand plans to financial budgets before arriving with the consensus forecast to drive material requirement planning; most of the customers struggle to perform this task in SAP APO due to poor integration capabilities with even other SAP tools like Could for Customer(C4C) and SAP Ariba.
Planning tools especially need to have a seamless integration with non-SAP systems and home-grown tools with standard connectors or with minimal development effort so that planning dimensions are flexible, including customer, budget plan, and brand.
Planning Alerts and Collaboration
Real time alerts are an important feature to include in the S&OP planning tools to understand where the process need review so users can fix the issues with agreed list of actions. Alert notifications help to proactively review the upcoming activity at both detail and aggerated reporting possible, including dashboards. Executive management require heatmaps (color coded view to narrow down focus areas) tailored to business needs for effective decision-making process.
Know the performance measures to drive excellence (KPIs)
Selecting the right KPIs to measure and monitor performance is essential to achieving business goals, below are most commonly used to measure S&OP process outcomes.
In demand planning, the key measures are forecast accuracy %, forecast bias, deviations comparing financial budgets and forecast value; in supply planning the key measures are adherence to the plan, service levels, and capacity utilization. In inventory planning, the key measure are inventory turns, days of supply and value of inventory in excess or obsolescence. These measures should be aligned to the organization’s annual operating plans.
A few more KPIs are also recommended to monitor, are Order Fulfilment Lead Time (Days), On Time Delivery %, Conformance to Plan %, Inventory allocation to the key customer. The relevancy of these depend on the nature of the business and product life cycle.
Simulation Capabilities on S&OP Planning Runs
To make effective decisions during S&OP executive meetings, the business needs to have information on the planning scenarios which can be compared as required. Generally, the demand and supply planning managers come up with pre-defined scenarios and present at S&OP meetings, however, it is also required to run a specific scenario in real time so executives can make “make vs. buy” decisions. For example, in SAP APO to complete a planning scenario may take around 2-4 days due to limited flexibility and technical architecture and the same can be achieved 6-8 times faster in SAP IBP if the system is set up efficiently most customers are now preparing to move to cloud solutions.
Select the Right Partner to Deliver Value
Organizations should become familiar with the most common behind the scenes building blocks of S&OP and assess where they stand on these in delivering value from the S&OP processes. Assess where you currently are on these components because they will play a major role to begin the successful SAP IBP road maps and valued projects results which drive operational excellence. Companies should understand how SAP IBP as a technology supports effective decision-making process at strategic level.
Involve experts from the industry, consulting partners who deliver value added solutions to understand the gaps and always begin with the scope which can be delivered in realistic timelines and sustained for at least 1-2 years; it is obvious that planning needs might change due to market conditions so quick wins will boost morale and help to manage the planning solutions. In this process, perform the activities below before finalizing the project charter:
- Assess internal teams’ level of expertise before you kick start and invest on training to understand the SAP IBP tools capabilities and road maps via webinars and learning hubs.
- Internally develop a rough-cut requirements document which can be used for request for proposal, with clear business value proposition including return on investment (ROI).
- Scan the market for possible vendors that could match your requirements. Sometimes this is easy with well-known vendors.
- Conduct inhouse demos or proof of concept on 1 or2 critical business scenarios with the vendor to understand their capabilities and help gain management buy-in.
- It is crucial to onboard the right supply chain team members with desired level of expertise.
Implementing S&OP projects require some level of expertise from the consultants to understand the business scenarios. Conducting a thorough analysis will help with choosing the right partner to deliver value. Avoid some of the most common mistakes such as judging solely based on the proposal, assuming that the vendor understood just based on the requirement document instead, have a couple of meetings to confirm they are on the same page with what is expected.
To achieve optimum results that are sustainable there should be an environment where everyone can demonstrate ideal behaviors. This environment is built on guiding principles which lead to ideal behaviors that are required to generate results. These principles are the fundamentals necessary for process sustainability. It requires commitment to detail at all levels of the company. Just as operators have standard work for their value adding activities all levels of plant management need predictable, repeatable standard activities that enhance problem solving leading to continuous improvement.
Standardize your work procedures — A way to standardize is to put SDCA (standardize-do-check-act) in action. It seeks to determine if standards are being followed and whether they are enough. It provides a structure and routine that helps leaders shift from a sole focus on results to a dual focus on process.
Implement visual controls to monitor performance — Tracking charts and other visual tools reflect actual performance compared with expected results. Employees at all levels who are surrounded by visual reminders of the mission and the metrics typically do not readily ignore or avoid them.
Accountability for the key processes is a must — The accountability process is a vehicle for ensuring that focus on the process leads to improved actions. The structure of the accountability process is straight forward –a series of brief regularly scheduled meetings to review previously assigned actions for improvement. It should create an environment where team members are encouraged to raise and address issues as they occur, preventing larger problems from developing.
Leadership discipline is essential — To establish and maintain the integrity of the Sales and Operations Planning processes and strike a balance between the teams, it is very important that Involvement and motivation starts at executive level and filters down to all levels. It should exhibit commitment to focus on explicitly defining the process and discipline adherence to them.
S&OP vs. SIOP?
Organizations that have both manufacturing and distributions of the product must consider inventory as critical component so need to look into the trade-off scenarios between working capital and service capitals across the value chain, right from production to all the way to deliver the product to the end customer so Inventory Is one of the best way to access the working capital driving as active input into the S&OP process.
Inventory is often managed as part of supply plans however ‘Inventory’ represent the cash so it is critical to the organization’s success so in recent times it is important that the understanding of inventory at all levels is required to apply appropriate strategies to ensure that customer demands are met with the highest possible service and the lowest possible working capital investments to balance resulting into Sales, Inventory and Operations Planning (SIOP), in either case the process, objectives remain same.
In simple terms, making inventory an input into what becomes an SIOP process means actively considering the trade-off between working capital and service levels, and making decisions based on that about how you are going to service your customers. Most of the companies are now looking into the options to optimize inventory in current state and trying to get projections for future requirements by adding inventory optimizations algorithmics with objective to improve inventory turns.
Understanding of an organization’s internal drivers and key components which affect the S&OP is vital to the successful implementations, where some introspection is required, may be accomplished with a SWOT analysis to understand the maturity levels and strength of the influencing factors.
Keep it simple during your assessments and understand its importance to your organizational processes and compare with benchmarking reports, invite outside experts to review before you finalize action plans with appropriate techniques and training needs; with this picture in mind let’s move to see the focus areas and its significance.
Benefits of S&OP include:
- Balance demand and supply while providing organizational visibility and alignment
- Process stability drive predictable outcome and early detection of capacity utilization
- Respond to daily disruptions through what-if analysis to change supply plans and reschedule demand
- Clear organizational structure with defined roles and responsibilities to plan effectively
- Use dashboard analytics to generate visible metrics to monitor and measure the business-critical processes
- Better people competency models to ensure continuous growth throughout the organization
- Improved delivery performance, schedule attainment, improved capacity utilization, improved communication and resilience in planning to achieve operational excellence
- Better understanding of the whole value chain helps to collaborate with vendors, and customers to sustain in ever-changing market conditions
What Does This Mean for the SAPinsider Community?
Standardization should be the theme. The process to develop tactical plans based on setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned level of sales (sales plan or forecasts) while meeting general business objectives of profitability, productivity, competitive customer lead times, as expressed in the overall business plan. Establish production rates that will achieve management objectives of satisfying customer demand through effective material and capacity management. Activities of planning, production control, master production scheduling and material requirements planning should be synchronized to achieve optimum results.
Process sustainability should be the focus. One of the biggest obstacles to an effective sales and operations planning is the lack of a unified approach such as, the owner of the process should be at the highest level or at least in a strong executive cross functional team. One of the most common reasons why S&OP fails is due to lack of knowledge of customer and supplier actions. To summarize the information (not detailed level) to use in capacity decisions, through understanding of the levels discussed in this article and having an action plan for continuous improvement is how successful organizations embrace their culture.
Identify and removing low value-added activities is the key. By simplifying, automating and removing the non-value-added activities this improves process efficiency; for example, 90% of meetings are not value added and 10% really make difference so focus on what matters when developing the demand, inventory and supply planning process in SAP IBP. Mindset should be what can I drop and how to maximize the value in generating consensus forecast to execution level activities by working together in value streams is the one way.
Watch out the macroeconomic conditions relevant to your industry. Factors which are not in your control but affect your S&OP must be included during demand planning, supply chain management encompasses a network of resources and processes from the sourcing of raw material through delivery of a product to the final customer so monitor the external factors affecting vendors, manufacturing facilities, logistics providers, internal distribution centers, distributors, wholesalers which can either directly or indirectly influence your S&OP decision making process.
Organizations constantly redirect and realign objectives. S&OP tool set should support the pace of changes in the business objectives, a lot of effort goes into engaging people, processes and investing in training to review latest cloud technologies supporting your key performance objectives. SAP is investing a lot on IBP so S&OP managers should try to review the road maps and the outlook from the SAP product development teams.