It's time to face reality: most companies will struggle  at planning.

Sales have aggressive targets to achieve. Operations have hard constraints on how to do that. Finance, meanwhile, is often based on unrealistic numbers. This disconnect results in millions of dollars lost in missed sales, excess inventory, and unutilized capacity.

The answer is not another software solution or new spreadsheet. Instead, it's to implement a disciplined Sales and Operations Planning (S&OP) process that actually works.

This is not a theoretical concept; it's a practical approach to closing the gap between desired outcomes and actual outcomes.

What is and What is Not S&OP

S&OP is not just a schedule of monthly meetings; it's the operational peace agreement for your organization.

S&OP is a structured five-step monthly cycle that brings together sales, operations, finance, and leadership to agree on a single version of the truth. At the end of the monthly S&OP cycle, there is one integrated plan that has been agreed to and has the backing of all departments.

In many companies, departments operate in silos and frequently need to develop plans on an urgent basis based on conflicting data coming from various departments. This can be exhausting for everyone involved.

The S&OP Process: A Step-by-Step Guide

S&OP processes often fail because they tend to be too complex, and there is a lack of accountability for executing against the S&OP plan within an organization. Rather than debating how to get to execution, this streamlined and proven approach helps organizations move from debate to execution within a single monthly cycle. The establishment of a single source of truth, accomplished by creating a unified view combining the ERP, CRM, and inventory systems, allows teams to have an immediate view of product performance, including identifying which products are growing, which are on a downward trend, and which are not selling at all. It also provides an accurate view of inventory across all sites regarding on-hand, in-transit, and committed inventory levels, and provides visibility of product lifecycle status, including the health of product launches and retirement plans for aging products.

Why this step is essential

A business cannot effectively plan for its future without having an accurate understanding of the company's current state based on factual data. This stops unnecessary arguments at the start of most meetings regarding who has the accurate data to support their argument.

Forecast Demand (Realistically)

This is often where the breakdown in most demand plans occurs. An effective demand plan must be based on data and analytics, but also on actual market intelligence, rather than being based solely on a narrow view of the future that is full of optimism or based on some arbitrary statistical model that does not take into consideration what is currently going on in the market.

How this is accomplished

The process for accurately forecasting demand involves a two-tiered level of forecasting, starting with a statistical baseline forecast. This is a forecast based on an algorithmic generated analysis of historical shipment or sales data, cleansed of one-time anomalies. After obtaining the statistical baseline forecast, the next step is to overlay the forecast with the commercial intelligence that comes from the sales, marketing and product teams, such as promotions being planned, moves by competitors, new customer acquisition or shifts in sales channels.

The Key Discipline

Once you have the two forecasts developed, they need to be reconciled. If there is a significant deviation from the statistical baseline with regard to commercial inputs, there should be tangible evidence documenting the reason(s)/reason for the significant deviation. For example, if the reason for this is due to the launch of a national TV campaign in Q3, this evidence can be used as the basis for the forecast; or if a significant competitor has exited the market. Documentation of these tangible reasons for deviations provides accountability and removes guesswork from forecasting by turning it into a well-informed estimate.

Evaluating Supply Against Demand

Now, please be brutally honest in answering this question: Based on your forecasted demand, what portion of your total production, shipping, and delivery capabilities can you realistically deliver? This is where your operational limitations will be in conflict with your commercial objectives.

How you're going to do it

You'll model your supply plan against your demand forecast in real-time. This can be done by performing simulations to answer critical questions regarding your capacity related to production lines, labor, and machine hours. You will also need to assess the availability, lead times, and risks related to your Raw Material(s) and Component Materials. Finally, you will need to determine whether you have enough warehouse and transportation capacity to support the volume of business you'll be conducting.

The Output of this process is a gap analysis. The Gap Analysis will allow you to track and document surplus (i.e., where supply exceeds demand and your risk of having excess inventory) and shortfalls (i.e., where your demand exceeds your supply and your risk of lost sales). It's not intended to produce a perfect supply-demand match at this stage; however, it is designed to identify the most critical mismatches that need to be brought to the attention of Executive Management for further attention and decision-making.

The Pre-Meeting Working Session Preparation

The 60 to 90-minute working session is at the heart of the entire process. Prior to the Executive Management team meeting, departmental leaders (including Sales Operations, Supply Chain, Manufacturing, and Finance) need to be aligned with one another. 

The Focus of the agenda is as follows: A review of the demand/supply gap analysis will be the first item on the agenda. After that, the 'state of the union' approach for the different departments will occur. For example, if the Marketing department needs 10K additional units for a promotion and Production says they can only manufacture 5K units without overtime, there will be a conversation to discuss how to resolve such conflicts. 

Finally, Leadership will arrive at their two to three concrete scenario plans. These may include: 

Scenario A - Accepting Supply Constraint, Re-Placing the Sales Target, and Protecting Margins;

Scenario B - Authorizing Overtime or Expedited Freight to meet full demand with a corresponding P&L impact; and 

Scenario C - Delaying a lower priority product run and redistributing production capability.

The reason this step is non-negotiable is that it puts accountability on the shoulders of Middle Management for driving the solutions to issues identified in the analysis, and provides a structure for the Executive Call to be a forum for decision-making rather than for problem solving. This alone will probably reduce the time executives need to meet and greatly enhance their effectiveness.

The Executive Decision

This is the 60 minute governance meeting where strategy is defined. In this meeting, leadership does not go over the same data again, but rather makes a series of strategic tradeoffs and allocates scarce resources.

THE Effective Executive S&OP Meeting

 This meeting begins with the executive reviewing the scenario that was recommended in the pre-meeting, and evaluation of the financial and strategic impacts of each scenario. The executive then makes the final call for the integrated plan and, as a part of that planning process, allocates funds, budgets, and manpower to the new operational plan for the next business cycle and which resources to utilize to bring your products to market loosely tied to your financial performance indicators, sales targets, and operational planning so you can effectively bring your products to market.

How This Works

Companies that excel at this will not just weather uncertainty; they will thrive through uncertainty. The immediate benefits are tangible and quantifiable: Lower rates of inventory shortages and overages (20%-30% less), on-time customer deliveries that result in an increase of customer satisfaction; and financial forecasts that are more accurate, resulting in a less stressful job for CFOs. Finally, it enables companies to adapt to market changes more quickly since everyone is working from the same data.

More importantly, it helps foster a culture of accountability as opposed to blame. If a company fails to meet its plan, the company will fix the process—not hold people accountable.

How To Begin (Simply) with S&OP

If you are uncertain of where to begin with S&OP, you should first establish commitment by obtaining the commitment of your leadership (executive sponsor). Second, you should select one product line and conduct a pilot; then scale. Focus on developing the S&OP process before choosing consulting or software tools (e.g., start with an Excel spreadsheet). Emphasize using "good enough" data instead of letting the quest for "perfect data" impede progress. Lastly, schedule consistent, recurring meetings regarding S&OP.

The Bottom Line

S&OP is not about adding another layer of paper to your business. Rather, it provides a single version of the truth that your organization can execute against. Once sales, operations, and finance share a common plan for executing their objectives, you will no longer have to guess where your company will be in five years. You will manage its destiny. 

With the shift from Annual to Continuous planning, your business processes should not have to adapt to the tool, instead, the tool should adapt to your business needs. With Pigment, planning is easier, flexible and ever-evolving, just like your business. For more information on how Pigment can help your team, contact us or check out some of our other blogs here.