How and why does S&OP impact company performance?

S&OP : the essential planning tool

When I think about the S&OP process and its def­i­n­i­tion, one thought comes to mind: ” Before the present era, nev­er had so many skilled and edu­cat­ed men direct­ed their atten­tion to research […], nev­er had such con­sid­er­able cap­i­tal been deployed […], nev­er had so many results of exper­i­ments and obser­va­tions so accu­rate­ly described all these detailed oper­a­tions. This under­pins the supe­ri­or­i­ty of the cur­rent era […]. “(John St Clare, Code of Agri­cul­ture, 1818).

In the 21^st cen­tu­ry, con­nect­ed and with imme­di­ate infor­ma­tion, “not know­ing” is con­sid­ered intol­er­a­ble. More than in oth­er eras, we think we can mas­ter and con­trol every­thing with cer­tain­ty. Yet there is no such thing as absolute cer­tain­ty, and it is uncer­tain­ty itself that offers the oppor­tu­ni­ty to act, to take risks mea­sured against his­tor­i­cal data, obser­va­tions and experience.

At com­pa­ny lev­el, con­stant­ly seek­ing to con­trol risks in order to achieve the best pos­si­ble bal­ance between work­loads (demand) and capac­i­ties (sup­ply), fore­cast­ing is essen­tial if we are to take con­trol of our own sit­u­a­tion in the face of com­pe­ti­tion. Sta­tis­ti­cal fore­cast­ing mod­els of demand vari­abil­i­ty sup­port this risk man­age­ment approach and pro­vide food for thought for com­pa­ny man­agers. These fore­casts then feed the plan­ning process. Plan­ning is an essen­tial stage in any action, and action is essen­tial if we are not to be in a reac­tive situation.

What no orga­ni­za­tion wants is to have to react rather than act, as this makes busi­ness man­age­ment more com­plex. The S&OP con­cept is an effec­tive tool that has already proved its worth in terms of good plan­ning, busi­ness man­age­ment and serves com­pa­ny’s finan­cial interests.

What is S&OP? Definition

S&OP stands for Sales and Oper­a­tions Plan­ning,it is a glob­al tac­ti­cal plan­ning process for sales and oper­a­tions with a medi­um- to long-term focus. which aims to bal­ance loads and capac­i­ties. It is reviewed on a month­ly basis and brings togeth­er all the com­pa­ny’s depart­ment man­agers (pro­duc­tion, logis­tics, sup­ply chain, sales, finance, etc.). The depart­ment respon­si­bles in charge com­pare and val­i­date togeth­er sce­nar­ios for a set of aggre­gat­ed data (prod­uct fam­i­lies — max­i­mum 20), for a defined time­frame (often 12 to 24 months) in a tar­get­ed geo­graph­i­cal area, with­in the set bud­get. Ide­al­ly, it includes sup­pli­ers, sub­con­trac­tors and cus­tomers, both upstream and down­stream. The S&OP process sup­ports the change man­age­ment essen­tial to its suc­cess, thanks in par­tic­u­lar to the devel­op­ment of a com­mon lan­guage and greater col­lab­o­ra­tion between departments.

At the insti­ga­tion of the exec­u­tive man­age­ment and the watch­ful eye of the finance depart­ment, S&OP requires all depart­ment man­agers to coor­di­nate their efforts to find the right match between cus­tomer demand and avail­able resources, between demand fore­casts and oper­a­tional capac­i­ties. The S&OP is the trans­la­tion into of the vision into achiev­able and prof­itable action plans, objec­tives and strate­gic devel­op­ment projects set by the com­pa­ny’s man­age­ment. Its cen­tral­ized design is known, shared and then exe­cut­ed in a decen­tral­ized way in all depart­ments. From S&OP will flow oth­er, more oper­a­tional plans (MPS, MRP, Sched­ul­ing) which will also be use­ful for busi­ness management.

What is the S&OP cycle?

S&OP is an iter­a­tive process, a cycle that must be repeat­ed reg­u­lar­ly. Dur­ing the meet­ing, the sce­nar­ios planned the pre­vi­ous time are com­pared with the observed real­i­ty to assess their rel­e­vance. We also need to val­i­date the plan­ning for the com­ing peri­od. It’s worth adding that, just as man­age­ment is involved in start­ing up an S&OP process, it’s vital that they take part in the month­ly reviews to arbi­trate the deci­sions to be taken.

S&OP needs to be repeat­ed sev­er­al times to ensure that the deci­sion-mak­ing play­ers with­in the orga­ni­za­tion have a more homo­ge­neous knowl­edge of the orga­ni­za­tion, and that fore­casts and plan­ning are more accu­rate. In oth­er words, S&OP will bring increased fore­sight and dis­cern­ment to pre­dict future events. This plan­ning process can’t cov­er every pos­si­ble sce­nario, but it does pro­vide flex­i­bil­i­ty and agili­ty, just as it enables us to be armed in the face of uncer­tain­ty: the reed bends but does­n’t break.

Find out more about S&OP in the ALOER White Paper: S&OP in SMI/SMEs (in French)

Company resilience impacted by current events

What is the VUCA world?

The acronym VUCA stands for Volatile,Uncer­tain, Com­plex and Ambigu­ous. This 90s con­cept attempts to describe a world under­go­ing strong soci­etal, eco­nom­ic, tech­no­log­i­cal and envi­ron­men­tal change. It’s true that these changes are tak­ing place more rapid­ly and are ampli­fy­ing. They are increas­ing­ly dif­fi­cult to inter­pret and pre­dict. Now more com­plex to ana­lyze and under­stand, and some­times, to top it all, contradictory.

Against this back­drop VUCA con­text, chang­ing geopol­i­tics, cli­mat­ic inci­dents and many oth­er unfore­seen dis­rup­tions are hav­ing a major impact on val­ue chains. Nev­er­the­less, the com­pa­ny and its play­ers still have to resolve the supply/demand equa­tion. There’s def­i­nite­ly noth­ing very excit­ing on the agen­da, in a sit­u­a­tion of imbalance.

If demand exceeds sup­ply, the com­pa­ny suffers :

• a drop in its ser­vice level,
• high­er mate­r­i­al costs due to shortages,
• irreg­u­lar excep­tion­al pro­duc­tion and spe­cial transport,
• low­er prof­it margins.

Con­verse­ly, when demand is low­er than supply :

• stocks are increasing,
• the effi­cien­cy of the pro­duc­tion appa­ra­tus falls,
• human resources become under-utilized.

S&OP in a VUCA world

To counter the imbal­ance between sup­ply and demand, com­pa­nies need to be resilient, agile and adapt­able. Let’s trans­form the acronym VUCA into Vision,Under­stand­able, Cus­tomer and Agili­ty, one of its pos­i­tive ver­sions. We under­stand that the new mean­ing of this acronym is very sim­i­lar to the objec­tives of S&OP.

S&OP to the rescue of cash?

As already men­tioned, S&OP is designed to pro­vide con­crete sup­port for the strate­gic vision defined by man­age­ment. It helps you to bet­ter iden­ti­fy, under­stand and man­age the issues fac­ing your busi­ness sec­tor. This vision brings clar­i­ty and thus renewed con­fi­dence for the com­pa­ny’s play­ers, as they fol­low a guide­line. It helps us to focus on our cus­tomers and serve them bet­ter. Repeat­ed month­ly S&OP review meet­ings enable: a bet­ter under­stand­ing of results, and there­fore bet­ter adjust­ment of busi­ness man­age­ment. How­ev­er, S&OP will have to attempt to plan for com­plex sce­nar­ios that have hith­er­to received lit­tle or no consideration.

S&OP enables bet­ter over­all man­age­ment of the iden­ti­fi­ca­tion, arbi­tra­tion and res­o­lu­tion of prob­lems, always with a view to achiev­ing the ambi­tious strate­gic objec­tives set by man­age­ment and ensur­ing the com­pa­ny’s opti­mal oper­a­tion. S&OP inevitably pro­vides vis­i­bil­i­ty, so that we can act with com­plete con­trol in this VUCA envi­ron­ment. Mas­ter­ing uncer­tain­ty becomes a weapon, a “decep­tion maneu­ver” to become unpre­dictable and cre­ate doubt among com­peti­tors as to our inten­tions. It con­tributes to the com­pa­ny’s sin­gu­lar­i­ty: “I act, and my com­peti­tor reacts!

S&OP also benefits finance

As men­tioned and explained in the def­i­n­i­tion, the finance depart­ment is essen­tial to the S&OP process in order to com­pare and val­i­date sce­nar­ios against dif­fer­ent finan­cial indicators.

Con­verse­ly, S&OP also serves finance. It plays a con­crete role in improv­ing logis­tics per­for­mance mea­sure­ment indi­ca­tors (OTIF, ser­vice costs, stock cov­er­age, over­all rate of return, cap­i­tal employed). More specif­i­cal­ly, it has a ben­e­fi­cial effect on the com­pa­ny’s Work­ing Cap­i­tal Require­ment (WCR).

WCR per­for­mance has a sys­temic impact on cash flow, sales and mar­gins, through the con­ver­gence of mul­ti­ple coor­di­nat­ed deci­sions by the com­pa­ny’s var­i­ous depart­ments. Ser­vices which, pre­cise­ly, orga­nize them­selves togeth­er dur­ing the S&OP process, pro­ject­ing them­selves through mul­ti­ple, flex­i­ble sce­nar­ios in search of opti­miza­tion of cap­i­tal man­age­ment (inven­to­ry, cash, cred­it), mar­gins (speed of cash gen­er­a­tion), cus­tomers (mar­ket share, sales, quality).

To make it eas­i­er to esti­mate over­all costs and antic­i­pate key busi­ness deci­sions, or at least the risks that the com­pa­ny might incur, each of the sce­nar­ios takes into account the three com­mon account­ing dimen­sions of WCR by simulating :

• val­ued inven­to­ries and pro­duc­tion (raw mate­ri­als, work-in-progress, fin­ished goods),
• cus­tomers (sales vol­umes, receivables),
• sup­pli­ers (pur­chase quan­ti­ties, debts),
• exchange rates, vari­a­tions in mate­r­i­al costs and upstream/downstream trans­port in the sup­ply chain.

Contributing to a good ROI

Last but not least, S&OP serves finance more broad­ly by reduc­ing the vari­abil­i­ty of return on invest­ment (ROI). The rela­tion­ship ∆ vis­i­bil­i­ty -> ∆ vari­abil­i­ty -> ∆ return on invest­ment, demon­strates that with bet­ter vis­i­bil­i­ty, vari­abil­i­ty (between real­ized sce­nar­ios and real­i­ty) is reduced. S&OP pro­vides this vis­i­bil­i­ty, result­ing in a con­trolled ROI for greater agili­ty and com­pet­i­tive­ness.

How­ev­er, the objec­tives of sup­ply chain and finance remain quite antag­o­nis­tic when it comes to WCR. The sup­ply chain does­n’t like to see it reduced, because of the risk of short­ages of fin­ished prod­ucts or sup­pli­ers, for exam­ple, or a drop in oper­at­ing mar­gins. On the oth­er hand, finance does­n’t like to see it increase, as it means an increase in the cap­i­tal expen­di­ture of finan­cial resources, a reduc­tion in invest­ment capac­i­ty or an increase in the risk of stock obsolescence.

The WCR or cash flow gap, result­ing from the com­pa­ny’s cur­rent activ­i­ty, and the man­age­ment of sup­ply chain plan­ning through S&OP are there­fore close­ly linked. Arbi­tra­tion by the com­pa­ny’s man­age­ment will then be deci­sive in find­ing the right bal­ance once again.

What are the benefits of S&OP?

S&OP, as an iter­a­tive process of glob­al tac­ti­cal plan­ning of sales and oper­a­tions, enables prof­itabil­i­ty tar­gets to be reached thanks to deci­sions tak­en col­le­gial­ly by the heads of the com­pa­ny’s depart­ments. It enables every­one to speak the same lan­guage at last, and encour­ages com­mu­ni­ca­tion between depart­ments and the inte­gra­tion of teams, i.e., greater cross-func­tion­al­i­ty and trans­paren­cy. The clear-sight­ed­ness and dis­cern­ment it brings enables to face up to a volatile, uncer­tain, com­plex and ambigu­ous envi­ron­ment with vision, under­stand­ing, cus­tomer focus and agili­ty. It improves per­for­mance, vis­i­ble through logis­tics indi­ca­tors but also through WCR man­age­ment. S&OP clear­ly helps to increase vis­i­bil­i­ty by reduc­ing vari­abil­i­ty, thus improv­ing the man­age­ment of the com­pa­ny’s busi­ness and its ROI. It enables you to man­age your busi­ness effec­tive­ly and “not let your­self be man­aged or sub­mit to the mar­kets”, and to con­vince your finan­cial stake­hold­ers and decision-makers.

” [Vic­to­ri­ous gen­er­als adapt] plans to cir­cum­stances. Oth­er armies try to adapt cir­cum­stances to their plans ” (George Pat­ton, Gen­er­al Pat­ton’s Secret Note­books, 2011).

S&OP is there­fore also the art of mak­ing deci­sions with impre­cise or even false data. These data are biased, incom­plete and often inac­cu­rate, as they try to dis­tin­guish a dis­tant, blurred future. Ratio­nal­iz­ing this data with expe­ri­ence, feel­ing and intu­ition is essen­tial to humbly achieve the best pos­si­ble S&OP.

ALOER Con­sul­tants helps com­pa­nies set up their S&OP process.

Arti­cle writ­ten by Fan­tin Richard

Fan­tin Richard devel­oped his inter­na­tion­al expe­ri­ence in the auto­mo­tive indus­try fol­low­ing a dual aca­d­e­m­ic train­ing in Sup­ply Chain Man­age­ment and Inter­na­tion­al Busi­ness. Skilled in project man­age­ment, sup­ply chain assess­ment, change man­age­ment, train­ing and team man­age­ment in mul­ti­cul­tur­al and mul­ti­lin­gual con­texts and at var­i­ous lev­els of the sup­ply chain, he pays par­tic­u­lar atten­tion to the coher­ent and sus­tain­able devel­op­ment of activ­i­ties in their three dimen­sions: eco­nom­ic, social and environmental.

Dis­cov­er our con­sul­tants’ team

Press con­tact Chris­tine Ing­lessi — +33 6 38 26 15 64 — Press con­tact contact@aloer.fr