In recent years, interest in Sales and Operations Planning (S&OP) has steadily increased in industry and commerce. S&OP is not necessary for every company, No S&OP process should be built, as long as three homework tasks are not done.
The core idea of S&OP is to harmonise the market needs that a company has to satisfy (demand side) with the possibilities of material supply on the part of procurement and production (supply side) in day-to-day business.
The necessity of an S&OP must always be examined if the supply side is unable to provide the quantities of material required by the demand side at the required dates for a longer period of time or in general. However, lack of material availability alone does not necessarily require to set up an S&OP process. It may be sufficient,
- to adjust the “logistical business model” correctly,
- Improve the quality of machine-based demand forecasts,
- Set planning and scheduling parameters correctly in the ERP system.
If one or more of these three components are lacking, it makes more sense in terms of material availability and required stocks to do this homework first before setting up an S&OP process. If these foundations are laid correctly, the supply side may already be able to satisfy market needs and the effort of installing an S&OP process can be avoided.
A true S&OP process always means shortage management
If substantial availability problems still exist after these measures, an S&OP process can help to set the right priorities to reduce the damage to customers, to the market or to your reputation. A true S&OP process is always struggling in some way with one or more lacking resources. Primarily it is material, manufacturing capacity, warehouse capacity or liquidity, which ultimately result in the market not being fully served. For sales, this requires decisions on which customers and products to prioritise. Depending on the given bottlenecks, these decisions have repercussions on procurement, production, finance or logistics and must therefore be coordinated. An S&OP process structures the preparation and coordination in terms of time and content.
A complete S&OP process includes the following tasks, which should be run through monthly if possible:
- Determine market needs
The future market needs are determined as accurately as possible
- Feasibility checks
It is checked whether production and procurement are able to meet the expected market demand largely on time and in the right quantities. For this purpose, the total market requirements (unconstrained forecast) are planned “against unlimited capacity”. The result points to insufficient resources, mainly due to missing storage capacities, missing production capacities, insufficient staffing, an insufficient supply of materials from suppliers or a lack of liquidity.
Resource expansion or balancing
If the required resources can be expanded economically or are sufficient after all by bringing forward procurement quantities and production quantities, the reconciliation process is already complete here.
Often, after a resource expansion, the feasibility check has to be re-run to be sure that the shortage has been eliminated completely.
- Prioritisation of needs
If resource bottlenecks cannot be sufficiently expanded to meet all anticipated market needs, priorities must be set within or between customers, distribution channels or distribution companies, or distributed quantities must be quoted. These reconciliations primarily concern the different sales departments. However, the involvement of procurement and production may become necessary if compromises are found on the distribution side that have consequences for the supply side.
- Adoption of the final demand plan
The jointly agreed demand plan must finally be made available for the further planning processes in procurement and production. It is important for the success of an S&OP process that all parties involved, demand side and supply side, adhere to the agreements made.
The challenge of looking at resources
Resource alignment can be carried out at different levels of detail. If capacity planning is done on the basis of individual capacities and detailed work plans, you get a very detailed picture of which capacities are still stuck despite possible adjustments. However, very often the result is so detailed that it is difficult to recognise the correct consequences; the wood cannot be seen for the trees, so to speak.
Alternatively, the congestion situation can also be viewed in condensed form. In this case, you concentrate on the bottleneck capacities, critical work processes and usually only consider product groups. However, a comparison with existing stocks levels is no longer possible and backlogs can at best be roughly taken into account. You are in a world of gross planning then.
Does an S&OP process offer any flexibility at all?
A jointly approved demand plan that is updated and fixed every month – this doesn’t exactly sound like agile production. An S&OP process brings calm to procurement and production plans by avoiding ongoing rescheduling. This increases efficiency at the expense of short-term flexibility. However, the flexibility that short-term rescheduling supposedly enables, hardly leads to improvements in a bottleneck situation. Very often one problem can only be solved by causing another problem. A characteristic feature of bottlenecks is precisely a lack of flexibility.
Some companies try to keep a small degree of flexibility by keeping a certain amount of material stock or production capacity free. This approach however means that some still realisable customer or market needs are not served in order to be able to meet other spontaneous demands. From a sales perspective, this can make sense if it allows to win new customers without losing existing ones and the bottleneck situation is only temporary so that the existing customers can be served again in the short to medium term.