If you are a president or plant manager of a manufacturing company, you have likely heard the buzz word “S&OP” thrown around a few times. If you are the curious type, you’ve probably even gone a step further and decided to do a couple searches to see what this S&OP thing is all about. And if you are like most people, after diving into a few articles you quickly realized that you had crossed over into what seems like an alternate universe full of unfamiliar theories, concepts, etc. and it’s at that point that you decided to retreat and move on with your day.

I don’t blame you; I’ve fallen down the S&OP rabbit hole a few times myself. It can be very daunting to get your head around the whole thing and how it can help your company. That’s why I’ve written this article, to collate the information from the many trips down the rabbit hole I’ve taken into a plain English explanation of what this whole S&OP thing is and the benefits it can bring to your organization.

First, why do we even care about S&OP? Well, to boil it down as much as possible, on top of all the production process efficiencies you undoubtedly focus on already, S&OP can bring additional improvements to your organization to compound those efficiencies into greater performance.

“Typical” or “Expected” results after 12 months from executing a basic S&OP program include:

• Forecast error reduction (20-25%)
• Inventory Reduction (3-5%)
• Inventory Turns Increase (5-10%)
• Service Level Increase (5-10%)
• Top Level Revenue Increase (2-5%)
• Gross Margin Improvement (up to 20%)

Those are bold proclamations, but in my experience it’s hard to ignore something that could improve gross margins up to 20% while also increasing revenue and service levels.

So, what is S&OP really?

In its most basic explanation, it’s a process or set of activities that brings sales, operations and finance roles together with the goal of balancing demand (sales) with supply (production/supply chain) to drive an aligned plan over a 12 to 18 month time horizon.

So, what does that mean?

Let’s break it down into three main sections

• Demand planning
• Supply planning
• Alignment with Financial plans/budget

Demand Planning

Demand planning is simply what your company expects to be able to sell over the course of the next 12 – 18 months. This process can get quite involved and complex, or it can remain simple.

Demand planning seeks to answer the following questions:

How many orders do we already know about that are committed?

How many orders do we anticipate receiving based on input from our sales team?

Are there new products being introduced and how much of those can we expect to sell over the next 12 –18 months

Are there any upcoming marketing efforts that we expect to further increase sales of certain products over the next 12- 18 months?

The means by which companies answer these questions and the level of detail they go to in their answers varies, but at the end of the day you are just trying to make educated guesses on month by month or quarter by quarter projections of unit volume of sales of your products.

Supply Planning

Supply planning is the process of gathering the information on production capacity (machines and labor) as well as ability to procure the materials needed for production and then comparing it to the demand plan to determine whether the capacity is there to be able to execute on the demand plan.

Supply planning seeks to answer the following questions:

Do we have enough capacity from a factory/machinery perspective to execute the demand plan?

Do we have excess capacity that sales/marketing should be aware of so they can get more aggressive in filling capacity?

Do we have enough labor to execute the plan?

Are our suppliers able to satisfy our material needs based on the plan?

The result of supply planning is an understanding of where there are opportunities to go after additional sales to fill capacity on the demand side or whether adjustments need to be made up or down on the production side to more closely align to demand.

Balancing demand with supply is the overall goal of this step and S&OP in general.

Alignment with Financial plans/budget

After the group has balanced demand and supply to their liking, the last major final step is aligning these plans with the organization’s operating budget. This is where plans made in the previous steps are compared with the budget to determine the feasibility of the plan.

It’s great that in the Supply/Demand meetings it was decided to hire 25% more staff and make large equipment investments to meet demand, but does that align with the company’s overall financial situation and strategy?

Overall, this process is typically run on a monthly cadence with the various activities being run in the order above. Demand -> Supply -> Alignment with Finance and overall Strategic Plan for company.

As the process iterates, the actual results from the previous month are documented and go-forward forecasts and plans are adjusted to represent the current information available.

As you can see with the main three areas above, they build on each other and ultimately drive consensus across the organization, and really it is that consensus that makes it so valuable. To arrive at consensus, there must be collaboration, and that is what the process drives when done correctly. No plans are made in a silo without respect to input from other parts of the organization and ultimately allows everybody to be rowing in the same direction.

The “SOP Hole”

Without processes in place to break down the silos of communication/collaboration between Sales and Production, you end up with what we refer to as the “SOP Hole” for lack of a better term. This hole is where a great deal of profitability is lost in many manufacturing organizations. Without sales and production being in lock step and having a process by which they continuously improve their coordination with each other, you end up with issues on both extremes of the supply/demand see-saw. It’s a problem that may not even be noticeable in many organizations because you have been dealing with it for so long. However, the situation can be improved, and helping manufactures improve the collaboration between sales and production is one of our main focus areas. There is no magic bullet, but putting the processes and tools in place to facilitate this collaboration can have a profound impact on your business.