Long advocated by expert observers of the supply chain scene, the Sales and Operations Planning process (S&OP) has reached a point of broad adoption.
A recent study performed by The Hackett Group indicates that almost 70 percent of study participants have implemented an S&OP process.1 However, the study also reveals a wide gulf between S&OP top performers and those that merely practice S&OP.
Not only do top performers apply S&OP best practices to a far greater extent, they also have begun to take the next step of integrating their S&OP and financial planning processes to drive true integrated business planning. As a result, top performing organizations find that S&OP is 68 percent more effective at driving benefits than it is for other organizations.
This article outlines study findings, provides key insights on challenges and opportunities, and offers a path forward for those seeking to join the ranks of S&OP top performers.
Let’s begin with a definition. We define Sales & Operations Planning as a collaborative decision-making process used to develop and align time-phased demand, supply, and financial plans in support of the overall business plan. S&OP is, by its nature, a cross-functional process that involves individuals from sales and marketing, supply chain, finance, procurement, logistics, and even R&D and capital projects.
S&OP Has Entered the Mainstream
First emerging well over 30 years ago, S&OP has moved from business buzzword status to mainstream adoption among the world’s large supply chain-focused organizations. A current Google search turns up over 860,000 entries and a search on professional networking site, LinkedIn, finds more than 16,000 individuals who list the term “S&OP” in their profiles.
Reflecting S&OP’s new mainstream status, The Hackett Group’s recent study finds that almost 70 percent of respondents have adopted an S&OP process with defined steps, milestones, and reviews that are executed on a defined monthly cadence (Exhibit 1). Only a small fraction of study respondents claimed “very limited or no adoption of S&OP.”
Overall, these study findings are highly consistent with what we see on a day-to-day basis among our client base; the vast majority of our large clients with physical supply chains have implemented a formal S&OP process. And even among companies that have not deployed S&OP enterprise-wide, many apply S&OP to some degree in their business.
Benefits of a Mature S&OP Process
The appeal of S&OP lies in its ability to drive dramatic improvements in key business performance metrics. Our experience indicates that effective use of S&OP can help grow the top line of the business while reducing operating costs and reducing inventory required (see Exhibit 2). Few business improvement initiatives match the economic return that implementing an effective S&OP process can generate.
Our study identified a group of S&OP top performers based on their ability to maximize benefits of S&OP and operate the process more effectively. Our findings show that these top performers have realized that to truly maximize benefits of S&OP they must go beyond simply implementing a basic S&OP process and conducting meetings on an ongoing basis.
These companies develop highly mature S&OP processes that leverage key best practices and as a result, realize significant performance improvements and create an opportunity for competitive advantage. Our study findings indicate that top performer companies’ mature S&OP processes are 68 percent more effective at delivering benefits than are those of other organizations.
Our study has identified a dozen key best practices that differentiate S&OP processes of top performers from those of other organizations. (See sidebar on page 35 titled “12 Best Practices of S&OP.”) These best practices fall into three groups: Process, Organization, and Tools/Data. While adoption rates of the practices across these groups differ, the study indicates that top performers consistently adopt best practices at a higher rate than do other organizations.
On the whole, top performers adopted these S&OP best practices at a rate that is 52 percent higher than that of other organizations, developing more mature S&OP processes and delivering superior benefits.
When it comes to S&OP process best practices (see Exhibit 3), almost all top performers report having an S&OP process that is formalized in the organization with defined steps, milestones, and reviews that are executed on a defined monthly cadence. Top performers also report developing a single consensus demand plan that is used as an input to S&OP.
In addition, these organizations develop a robust supply plan that defines the manufacturing and supply operating activities required to meet demand and highlights supply constraints as well as situations where key parameters cannot be met (e.g., capacity utilization, inventory levels, operating cost levels).
Top performers also gear their S&OP processes to look out over a horizon of at least 18 months, producing an integrated business plan that balances supply and demand to meet targeted business objectives over that timeframe. Organizations that are not top performers lag in each one of these best practice capability areas.
Another trait of the top performers is to aggressively adopt organizational best practices (see Exhibit 4), surpassing adoption rates by other survey respondents by 44 percent. In our experience, organizational effectiveness is a key ingredient to S&OP success, enabling ongoing governance and continuous improvement of the process.
Almost all top performer organizations report participation by sales, marketing, demand planning, supply planning, finance and procurement functions in their S&OP process. They also report that their S&OP processes are owned by senior leadership.
Effective ownership by senior leadership typically includes the following elements:
Top performers also set formal performance targets and assign accountability for achieving those targets. The targets are typically specific quantifiable goals with defined timeframes in areas such as working capital improvement, cost reduction, customer or product growth, forecast accuracy improvement, supply gap reduction, and process participation.
Top performers also have developed the organizational discipline to stick to and carry out decisions reached as part of their S&OP processes.
In organizations that lack such discipline, inevitable day-to-day firefighting and changes in business priorities provide excuses for lack of follow-through and failure to execute on decisions and actions defined in S&OP.
As a result, S&OP effectiveness can be severely limited.
Top performers also are significantly ahead of other organizations in system enablement of S&OP (see Exhibit 5), reporting adoption levels that are 66 percent higher.
Most top performers have system/tool capabilities in place to produce trend reports, exception reports, and performance dashboards to support Integrated Business Plan review and ongoing improvement.
They have the tools and systems needed to bring together and reconcile demand plans and supply plans at a granular enough level to identify gaps and imbalances between those plans. They also have put in place tools and systems to conduct what-if modeling in order to evaluate and resolve those supply/demand gaps and imbalances.
Once they produce an Integrated Business Plan at the conclusion of the S&OP process, they are able to feed the plan directly into their Enterprise Resource Planning (ERP) and Enterprise Performance Management (EPM) systems.
While top performers are substantially ahead of other organizations in this area, systems tools and data capabilities remain the weak link of their S&OP capabilities. In our experience, even top performers struggle to build robust S&OP tools and data.
One key reason is that ERP packages and other enterprise tools do not come configured to effectively support S&OP “off the shelf.” To overcome this system support gap, top performers work over time to develop operational and performance reporting, data interfaces, tools to reconcile and align demand and supply, as well as tools that enable modeling of what-if scenarios.
The lack of off-the-shelf ERP support for typical S&OP requirements also means that the systems and tools developed—even those of top performer organizations—are often homegrown using Microsoft Excel and Access.
A number of packaged solutions have recently emerged that provide key functionality to enable and automate S&OP activities such as planning, reporting, and analysis. As these solutions are more widely adopted and as ERP packages add S&OP related functionality in the coming years, we anticipate further adoption of best practice capabilities of the tools and data associated with S&OP.
Integration with Financial Planning
A traditional, limited, definition of S&OP focuses on balancing the organization’s supply and demand and resolving supply disruptions and shortages. In our experience, organizations with immature S&OP view the process in this limited way. In fact, our study indicates that outside the ranks of top performers, 75 percent of organizations execute this traditional “blocking and tackling” version of S&OP.
Top performers, however, have realized that S&OP can play a role that is much more valuable than that of balancing supply and demand. They believe that S&OP can serve as a process for business management and optimization. These companies have integrated their S&OP and financial planning processes, enabling true Integrated Business Planning. In effect, they have identified a thirteenth best practice that builds upon the first 12.
Our study indicates that almost 88 percent of S&OP top performers have integrated S&OP and financial planning as compared to only 25 percent of non top-performers.
The 250 percent difference in rate of adoption of Integrated Business Planning is truly striking. In our experience, organizations that have adopted this capability have been able to realize the greatest value from S&OP.
Adopting Integrated Business Planning enables top performers to link business execution activities (sales and marketing, manufacturing, and procurement as well as other functions) across functions and to better align them with the organization’s business plan.
Exhibit 6 depicts the components of the end-to-end Integrated Business Planning process. With the degree of integration that this process provides, senior leadership has the ability to understand impact of decisions on the business as a whole and can take steps to “optimize” business performance.
Enabling Integrated Business Planning relies on a number of key building blocks. Top performer organizations typically bring together the following elements to support an Integrated Business Planning environment:
For top performer organizations, this shift toward integrated S&OP and financial planning processes has coincided with a dramatic change in the role that finance plays in the organization.
Finance’s traditional role has been to “record the numbers”, keep score of performance relative to the budget, serve as the source for financial data (costs, pricing, and so forth), and conduct analysis to answer the organizations questions about performance.
The finance role that is emerging is to “Lead the organization in making the numbers.” This new role entails the following: coordinating the overall Integrated Business Planning process; defining priorities and targets for key business metrics; driving business decision-making; and supporting a broader range of what-if analysis to support cross-functional business decisions.
Capability Gaps of the Lesser Performers
Turning now to the lagging companies, our experience indicates that organizations that are not S&OP top performers struggle with a number of gaps, hampering full adoption of the S&OP process and limiting benefit realization.
The study confirms this experience; non-top-performer organizations reported facing ten major S&OP capability gaps, as shown in Exhibit 7. Among those, a majority of respondents reported five or more gaps in their S&OP capabilities. The gaps cited most frequently are limited what-if modeling, a short-term focus, and inaccurate demand forecasts.
Case Study of an S&OP Top Performer
The following case study highlights many of the best practices associated with putting a successful S&OP into action. The company, a $1billion-plus manufacturer, faced a set of business and operational challenges. The external business environment was unfavorable, with weak customer demand and rising costs. At the same time, the organization experienced many of the typical capability gaps resulting from an immature S&OP process.
The supply chain was unstable, providing poor customer service levels while operating inefficiently. In particular:
Furthermore, financial performance surprises were routine, frustrating senior leadership and precipitating a monthly game of “whack-a-mole” that included chasing and firefighting the latest set of issues.
Facing pressure to improve business performance, the organization’s senior leadership team initiated a project to put in place world-class Integrated Business Planning/S&OP capabilities. The effort consisted of three phases:
Phase 1: Preparation
The organization took action to rapidly stabilize its supply chain environment, identifying and addressing underlying gaps and disconnects in demand, supply, and financial processes and tackling major issues and risks for specific products to stabilize the business.
The organization designed and implemented S&OP capability improvements in each of the 12 best practice areas in process, organization, and tools/data. Examples include:
The organization integrated its S&OP and financial planning processes, creating a single monthly process for Integrated Business Planning:
Phase 2: Conduct Pilot Cycles
Phase 3: Implement Continuous Improvement
The project yielded exceptional results, providing senior leadership with the tools to better manage the business and driving substantial operational and economic improvements.
Customer service fill rates rose from 4th quartile to 1st quartile in four months, consistently achieving targeted 98.5 percent fill rates.
Simultaneously, finished goods inventory was reduced by 10 percent. Expediting was substantially reduced enabling reduction in raw material and packaging costs.
Finally, the improved stability of the supply chain enabled management to redesign and rationalize the manufacturing network, reducing overhead costs by 10 percent.
How to Become an S&OP Top Performer
Achieving S&OP top performer capabilities and performance requires a focused effort, dedicated, knowledgeable resources, and at least six months.
Such a project is typically comprised of three phases: Preparation, S&OP Pilot Cycles, and Continuous Improvement. Exhibit 8 provides a sample implementation approach.
In many organizations, an initial S&OP assessment reveals gaps, breakdowns, and individual supply, demand, and financial and business plans that are ineffective and can complicate or prevent implementation of overall S&OP capabilities. In these organizations, an additional triage and stabilization step may be necessary to address gaps and disconnects and establish a starting point for developing an Integrated Business Planning process.
Once the current S&OP environment has been stabilized, the typical next step is to develop the future state design. This design should, among other changes, put in place the 12 key best practices across S&OP process, S&OP organization, and S&OP tools/data (see below).
12 Best Practices of S&OP
Processes
1. A formal, defined S&OP process.
2. A single consensus demand plan.
3. S&OP that looks out over a period of 18-plus months.
4. A supply plan that defines requirements to meet demand and highlights constraints.
Organization
5. Cross-functional participation in S&OP.
6. S&OP process is senior-leadership owned.
7. Formal targets with accountability are in place.
8. Discipline in the organization to adhere to S&OP decisions.
Tools/Data
9. S&OP reporting and performance dashboards.
10. S&OP plans fed directly into core WERP and EPM systems.
11. Ability to reconcile demand and supply plans and identify gaps and imbalances.
12. Ability to conduct what-if modeling supporting S&OP decisions.
Once a critical mass of process, organization, and tools/data capabilities are in place, the next step is often to execute a series of monthly pilot cycles, putting into action the new S&OP design. Pilot cycles allow for trial and error and course corrections. They also help build the organization’s comfort level and “muscle memory” to enable sustained execution of the process.
Once the pilot cycles are completed, organizations typically transition to a mode of continuous improvement that focuses on measuring performance, addressing issues and gaps, and executing further improvements in S&OP capabilities on an ongoing basis.
As top performers have experienced, a mature, best-practice-based S&OP process is a very powerful mechanism for managing the business and maximizing performance. Through a strong governance process and continuous progress, these improvements can be sustained over time, leading to a significant competitive advantage for the organization.
Len Prokopets is a Principal in the Strategy and Operations practice of Archstone Consulting, a division of The Hackett Group.