Whats S&OP?
“By driving the brand we can become the market leader, and achieve another target of the strategy we proposed last year,” were the closing words of the Marketing Director in his presentation to the Sales area. The sales team was clearly excited with the idea of having, at long last, the tools that would drive their winning product to the leadership position in its category.

At the same time, in another office of the same company, the Director of Operations was reviewing the production and inventory plans for this brand: “they look good, the sales levels have been very regular and this will cover demand, enabling us to maintain our expenses and investments at healthy levels, just as we had outlined in our strategy.”

Several months later, a meeting between the commercial and operations areas was ready to explode, with the Sales area complaining about poor service levels and Operations tryng to justify its performance in the light of unclear commercial trends, arguing that even if the company had known what it wanted to sell, the demand would have been impossible to meet with the existing rated capacity.

Sounds Familiar?
S&OP, or Sales & Operation Planning, is a concept born more than two decades ago, but which has attracted lots of attention by top-level executives in recent years. Its relevance is due specifically to the fact that S&OP promises to resolve situations like the one you’ve just read, by aligning demand and supply. Nonetheless, as the process evolved, the world has understood that its scope is much extensive, and that well executed S&OP can become a core process in the integrated management of a business.

For the purposes of this discussion, let’s define S&OP as “an integrated business management and decision-making process aiming to balance demand and supply and align commercial, operative and financial plans to the business strategy, within an adequate timeframe.”

Let’s take a detailed look at the meaning of this definition. The core concept is “an integrated business management and decision-making process” The first question to answer is, what’s a management process? As we all know (at least intuitively), a management process is:

• One that we use to allocate the resources of a company and to execute actions that are consistent with its plans and objectives on a daily basis.
• One that facilitates the making of decisions that chart a course for those actions.

For instance, we determine which of two investment possibilities is more important, and as a result of that set priority, the actions that the staff will carry out (what do I produce, what do I sell, what do I ship, to whom I ship, etc.) will be consistent with the priorities identified. A crucial element of this process is the metrics that are tracked and which actually govern the behavior of individuals.(That’s the origin of the management adage, “tell me what you measure and I’ll tell you how I’ll behave.”)
Moreover, we say it is integrated because the S&OP process is not just for the Supply Chain. Rather, it includes other areas relating to demand (sales) and the meeting of such demand, as well as the financial area that participates in the evaluation of the plans.

The next element of the definition, to “balance demand and supply and align commercial, operative and financial plans to the business strategy” clearly states that S&OP has strong influence on the Chain, but an influence subordinate to the idea that it focuses the efforts of key participants on the achievement of the
defined strategy and objectives.

Finally, we have to explain the last part of the definition “within an adequate timeframe”; the word “adequate” refers to two elements:

The plans that the S&OP generates are tactical, rather than operative; i.e., they help us make decisions for the mid-term (1-12 month), as compared to
operative plans, which span 1 to 4 weeks.
• The second element is specific to each company. The timeframe should depend on the usefulness of the information generated. For instance, in a segment
like investment banking—where the external influences impacting the company are so many and so volatile—it would be somewhat impractical to have a
12-month plan. Likewise, a 1 to 3 month horizon would also be useless if my product is manufactured in China and 12 weeks go by between the moment
I place my order and the time I receive the goods.
Thus, the S&OP process becomes a means to execute our strategy, ensuring that we have short- and mid-term goals consistent with company objectives, as well as
decision-making that’s aligned to the priorities set by our strategic and annual plans.
WHY IS IT RELEVANT TO HAVE AN S&OP PROCESS?
Once we have a clear definition of the process, it’s easier to understand why it’s so relevant. It’s imperative for a company to have information that is common to
all areas, and at the appropriate level of detail to support decision-making on those business needs included in the “adequate timeframe”. Some examples are
the scheduling of maintenance procedures to maintain rated production capacity, decisions related to purchases from vendors with protracted delivery times, and
defining the required size of teams. All of these are examples of the decisions solved by S&OP. The requirements S&OP does not solve are those that are beyond our
timeframe. For instance, the decision whether or not to open a new production site is not solved via the S&OP—it’s beyond the timeframe. Likewise, it doesn’t help
solve the decision on what to produce over the next few days, because this factor occurs before our timeframe begins.
Once these decisions are supported by the appropriate information, the process also gets input from the strategic guide and the financial assessment of decision alternatives intended to help the company achieve its objectives.

S&OP is important due to the information it generates, and especially because executing its steps generates significant benefits. The most relevant benefit is an open and standardized flow of information among all participants that are relevant to the achievement of a company’s goals. A study by AMR Research on S&OP1 found that “companies that lack strong S&OP practices take four to six months longer to understand changes in demand, adjust portfolios, and respond with the appropriate inventory strategies”. In this era, when reaction capability is vital, such delays can make the difference in the success or failure of a company.

As shown, participation by senior management in the process is highly relevant due to the high-level decisions involved, which demand having a thoroughly clear perception of the strategic priorities of the business:

• As in the execution of any other management process, the benefits of S&OP are more obvious to the elements that coordinate collective work, which at the end of the day have a strong impact on business results. Those benefits are as follows:

Enhanced teamwork.

• Enhanced communications through the creation of an institutional channel via the person responsible for the coordination of the process.
• Enhanced decision-making processes. The decision process is conducted with enhanced information, with less effort and in a shorter time.
• Enhanced control – By providing a panel of indicators that spans all operational areas and includes business result metrics.
• Enhanced coordination. The use of one single set of information and a single formal communication channel has a positive impact on the coordination of the business.
• View into the future. The purpose of the planning exercise is to project the business risks and opportunities over a mid-term future, successfully triggering relevant discussions to foster proactivity and prevent the business from becoming merely reactive.

Eventually, a well-executed process will impact the business through improvements in:
Revenues

• Reducing lost sales due to out-of-stocks.
• Reallocation of promotional investments and with increased profitability.

Profitability

• The combination of increased revenues and reduced expenses, by minimizing wastage, inefficiencies, urgencies, etc.

Cash Flow

• Maintaining healthy inventory levels.

Level of Service
Building shared understanding of the demand that the current rate capacity is able to meet.

WHAT’S ITS RELATIONSHIP WITH OTHER BUSINESS PROCESSES? MANAGEMENT
Corporations, however, have always had management processes that involve all areas of the business. The most common are those relating to the financial planning of the business and its tracking by means of periodic (usually monthly) business reviews, plus quarterly reviews to adjust the plan to changing realities. How does S&OP relate to these processes? The S&OP gets to complete these processes in various ways:

• It adds more level of detail. Usually, annual planning processes and quarterly reviews are processes led by a central planning entity in which there are various degrees of interaction with the various areas.For its part, S&OP arises from operative areas where a finer detail level is used to make the decisions (i.e., to manage). This is relevant because models that oversimplify things may lead to wrong decisions.

• It generates a shared common view of the business’ future on the basis of its operation. The demand and supply information generated and managed by the S&OP is, by definition, a product of the areas that directly execute and influence the operation, and for this reason the shared perspective created is stronger.

• Well-executed S&OP eventually enables the annual planning and budgeting processes. Information-generating processes provide input to the other planning processes, thus ensuring the continuity of the shared vision, with priorities and assumptions that are consistent with the various levels of resource planning and allocation. One example may ne the plan of promotions to the trade or the launch of new products that remain aligned with existing supply capability.

• It provides coherent tracking of the business. The elements monitored in the S&OP process are a superset of those monitored by financial planning.

HOW DOES IT RELATE WITH OTHER BUSINESS PROCESSES?DAY-TO-DAY OPERATIONS
One of the main challenges faced by corporations that use S&OP involves how to relate S&OP to daily operations. A good metaphor to compare S&OP and execution would be a sports team: S&OP would be the preparations for a game, assembling a team with the required players (capabilities) and establishing appropriate strategies (how we expect to develop the encounter). Execution is the game that will be planned on the basis of the facts set forth in the S&OP but it will require the ability to react as reality continually changes and, above all, the ability to adjust adequately.

The better preparation we have, the more likely it is for our game to evolve along the strategies we defined, with minor deviations that are easily resolved thanks to
the capabilities we created.
As concerns a corporation and its operation, generating that ability to react in alignment with the S&OP requires making sure that:

• Decision-makers in the operations are familiar with the plan generated by the S&OP, as well as its assumptions and priorities.
• Sales focuses its efforts on meeting demand as well as possible.
• It is used in weekly reviews, along with the actual demand received.

These simple steps of communicating, using it as a guide and monitoring it during operations are the link between the tactical planning of S&OP and daily operations, which is where desired results are achieved.

CRITICAL SUCCESS FACTORS FOR S&OP IMPLEMENTATION
Of course, the first step to ensure successful implementation of S&OP (as with any other new way to work) involves having all the components of the process.

Obvious as this assertion may seem, our past experience shows that it’s always good to stress it again: clearly defined and scheduled activities, cross-functional participation, well validated input information, properly identified accountabilities, execution according to schedule (switching delivery or meeting dates only leads to an impression of deficient priorities), meetings with clearly structured agendas, process indicators, and technology that properly enables our processes.

Additionally, S&OP has elements without which the process would be doomed to fall short of expectations and to fail to meet objectives:

• Align measurement and reward systems. S&OP requires equal support and involvement by Sales, Marketing, and Operations, and this can only be achieved if there is true alignment of the objectives of all participants with shared responsibility for the same indicators. Silos in the organization generate barriers that stagnate the operation of the process, generating the typical case of optimum local situations translating in a less than optimal overall situation. Indicators affected by the process should undergo measuring of the assertiveness of the forecasts, monitoring of inventories, reviewing the achievement of revenues and profitability, and evaluating customer service. In this way all reward systems should relate around these elements shared by all participants.
• Empower participants to make decisions. Through the process, several of the relevant players of the operation will interact and work together in order to arrive at recommendations based on available information; if the decisions are later reverted on a daily basis, the process will lose momentum because it will be perceived as an exercise in futility. Besides,it is also important to ensure that the participants have the adequate stature and comprehensive perception of the business that enables them to make good decisions.
• Implement according to appropriate levels of maturity. As seen in Figure 2, S&OP within an organization requires a degree of maturity in which each of the stages consolidates prior components that enable the achievement of increasingly better results and, above all, improved collaboration and decisions. Any implementation, therefore, must take fully into consideration the organization’s available information and technology tools, so that realistic and achievable goals may be set. Once a process with an appropriate level of maturity is implemented and stabilized, the organization must continue evolving and improving it.
• Involvement by senior management. This critical success factor, which is so common to other initiatives, is vital to S&OP. In order to turn S&OP into a formal, stable and permanent process for the organization, senior management needs to believe in the value of the information it generates. In other words, if inputs external to those generated by the S&OP were to be used to review the progress and direction of the business, such review would be diminishing the relevance of S&OP, and thus undermining its success.

• Dedicated official responsible for the process. While reviewing the contents of the process, we saw that the S&OP Coordinator participates in each of its steps, and that such participation isn’t limited to gathering information but that instead it demands dynamic interactions and intelligent discussion with all the areas involved. The implication of this is that the position must be performed by an individual with clear understanding of both the commercial and logistic aspects of the operation, plus good business acumen in order to become a true conduit of inter-functional communications, able to involve the rest of the relevant players in a timely manner. It is equally relevant to point out that the tracking of the proper execution of the process will demand full dedication of the responsible individual, at least during the period of stabilization. Perhaps after stabilization is completed the executive in charge may allocate time to the planning of steps to continue evolving the process and increase its added value, but to distract him with other responsibilities alien to the process would surely undermine the quality of the implementation and maturation of the process.

Finally, the most important element for the success of S&OP is change management, to ensure that everyone that generates information for the process, executes it, and eventually works along the guidelines generated by S&OP is able to perceive the value that S&OP brings to the company and embrace it as a core element of their work. This is the obvious difference between those that reap the benefits of S&OP and those that merely wear themselves down attempting to make it work.

Detailed understanding of all those factors is an important condition for the implementation of the process. An experienced partner can facilitate the learning curve for the company. We at Sintec are the consulting firm with the most numerous S&OP implementations in Latin America. We’ve designed and implemented over 30 S&OP processes in consumer, beverage, retail, telecom, construction, apparel, and publishing corporations.

CONCLUSION
S&OP is a process that spans all the operational areas of a company and which, properly implemented, helps it operate more nimbly and fluidly and becomes a key tool to execute its strategy. Its potential benefits impact company revenues, profitability, cash flow and client service, along with significantly enhancing communication and coordination among its areas. However, an appropriate implementation of the process requires a maturation process in which the various elements of the process gradually evolve over time, and most crucially, it requires a strong degree of change management and aligning the systems to evaluate and reward its workforce.

Angel Hermida Posadas, Sintec
angel.hermida@sicweb.wpengine.com

About Sintec
Sintec is the leading consulting firm focused on generating profitable growth and developing competitive advantages through the design and execution of holistic and innovative Customer and Operations Strategies. Sintec provides a thorough and unique methodology for the development of organizational competencies, based on three key elements: Organization, Processes and IT. Furthermore, Sintec has successfully carried out more than 300 projects on Commercial Strategies, Operations and IT issues with more than 100 companies in 14 countries throughout Latin America. Our track record of more than 25 years makes Sintec the most experienced consulting firm in this area of expertise in the region. 

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