What is S&OP (Sales and Operations Planning)?

As a strategic business manager, Sales and Operations Planning (S&OP) ensures that a company’s operational plan fits its general business strategy and sales forecasts. It helps leaders and executives keep supply and demand in balance by combining planning for sales, marketing, production, and finances, among other areas.

Businesses use S&OP to:

• Give better service to customers
• Lower the cost of inventory
• Get the most out of your resources
• Improve communication and teamwork between departments
• Make their methods for making big decisions better.

It helps people make better decisions by giving them a complete picture of the business and its market. This step is crucial in supply chain management-heavy fields like B2B manufacturing, trade, retail, and consumer packaged goods (CPG).

Synonyms

• Sales and operations planning
• Integrated business planning (IBP)

A Look at S&OP and Why It’s Important

How the S&OP System Works

S&OP is a plan for lining up and coordinating the sales process, internal operations, and tasks further down the supply chain. This process, which has the following parts, is generally run by senior executives:

1. Planning for demand. This means guessing what goods or services people will want to buy. When planning for demand, you must look at past sales data, market trends, and outside factors like the economy or the competition.

2. Plan the supply. This step ensures the company has the tools to meet the expected demand, such as raw materials, workers, and the ability to make things. It includes managing inventory, making purchases, and planning for capacity.

3. Bringing together supply and demand. Supply chain planning is possible because it combines the data gathered from supply/demand planning. Stakeholders can determine the best number of items to keep in stock so that goods aren’t overproduced or understocked.

4. Review and decision-making by the executive. Senior management looks over the integrated plans and decides how to make them fit with the company’s general goals. Examples include choosing where to invest money, releasing new products, and changing marketing tactics.

5. Setting up and keeping an eye on things. The plan is implemented in many departments after the choices have been made. Monitoring the plan to ensure it stays on track and make any necessary changes is essential.

Executives who attended the S&OP meeting

For everyone in the company to agree on the overall supply chain management plan, there needs to be an executive S&OP meeting where everyone from all departments can share their ideas. In an average S&OP meeting room, you’ll find people from

• Management is at the top. This could be your CEO based on how big your business is. It could also be several people in your C-suite, like the COO and CFO. They’re in charge of the meeting and ensuring everyone sticks to the plan that gets approved. They also have the final say in settling disagreements and carrying out plans.
• Heads of departments. Each team’s boss (sales, marketing, finance, operations, and supply chain) discusses how their department is doing and ensures that the agreed-upon business processes are followed.
• Demand plan. This person on your team is skilled at using statistics to make correct predictions. They show all the information about what customers want.
• Plan the supply. This person is part of your management and production team. They show you some of the same information as your demand planner, but they’ll also look at your supply chain, product levels, and past orders.
• Leader of operations. Your operations manager shows you the difference between the actual and expected inventory levels. They work with your production and operations teams to make a production plan that can be followed.

The people on the above list are essential to the S&OP process. Depending on your business is set up, you may also have leaders from the marketing, tech, sales, human resources, and product teams.

Why S&OP Is Important

Businesses have many moving parts, so operational planning is essential for their long-term financial health and ability to grow. The main goal of S&OP is to bring together teams that wouldn’t usually work together (for example, sales and operations don’t usually work in the same place).

Businesses use sales and operations planning for more than just harmony.

• Improve the customer experience from start to finish
• Keep their supply and demand in check.
• Help teams work together, share information, and be open with each other.
• Make their inventory handling better.
• Make quotas, budgets, and financial predictions.
• Make forecasts more accurate.
• Learn more about the stages of a product’s life.

How often the different teams work together on this project will depend on how often they change their plans for sales and demand. Some businesses run on a weekly or seasonal schedule. Younger companies tend to go back to it more often, while older companies with strong ties to their supply chains may plan every year for several years ahead of time.

The frequency of S&OP also depends on how your business plans to grow. For example, you would need to give this extra thought during a new product launch or scaling time. Organizational changes, like getting a new supplier or entering a foreign market, would also need an extra S&OP meeting and changes to the current plan.

Pros and cons of S&OP

Better accuracy in forecasting

Research from Gartner shows that insufficient data costs each company about $12.9 million annually. It is tough to do supply/demand and financial planning because there isn’t a single place to find all the information.

The fact that different data types stand for entirely different things makes it more challenging. It’s hard to separate sales and product data because they look and feel different. This makes it hard to tell the whole story.

Integrations of systems like CRM, CPQ, ERP, and billing make this better by letting them share data about sales, income, and products. But the truth is that these departments don’t work together.

The goal of S&OP is to make it easier for teams that make money and products work together. When they can all check the accuracy of the data from different points, they can make more accurate predictions about what customers will want in the future.

In turn, this makes planning, financial forecasting, accurate inventory management, and getting a better sense of the lifecycle of both the product and the customer easier. Business leaders can confidently make significant growth, investment, and product development choices with the correct data. If they need to, they can even tell investors about these choices.

Optimized levels of inventory

When everything is said and done, the costs of keeping goods will add up to about 20% to 30% of its value. A high inventory turnover rate means better profits and cash flow—in simple words, making money.

Businesses can buy the right amount of inventory if they know about market trends, customer demand (for each product), lead times, and how the supply chain reacts to changes. They don’t have to worry about overstocking, holding prices, or running out of stock.

Better service for customers

A suitable S&OP method ensures the right products are available at the right time and place. This helps the business make the things that its customers want. Customers have shorter wait times and more reliable service, making them trust the business more and building lasting relationships.

S&OP also helps customers handle their backlogs better, which is another benefit. Businesses can ensure customers get what they need when they need it by putting orders in order of importance and distributing inventory quickly when they have accurate forecast information.

Cutting costs

Aligning production plans with predicted sales and demand helps businesses make the best use of their capacity while cutting costs on production that isn’t needed. This also has a good effect on the bottom line, making the company more profitable and possibly giving them more money to spend on developing their business or products.

Companies can avoid doing the same things twice by getting all their departments to work together on a single plan. For example, sales might buy too much inventory because they didn’t know operations already had enough stock. Inefficient delivery and extra costs are no longer a problem.

Alignment Across Functions

One of the best things about S&OP is that it puts together teams that generally work alone. S&OP encourages understanding and communication across functions. This helps people understand how the different departments affect each other, builds relationships, and improves the company’s general performance.

At the company level, well-aligned teams have individual goals that help the company reach its more significant goals. Businesses that are well coordinated within themselves make 72% more money and grow their sales 58% faster.

Quick to adapt to changes

In a dynamic work setting, things are constantly changing. The S&OP process gives you a way to make decisions that take both sales and operations into account.

The S&OP team regularly looks at changes in market trends, customer demand, supplier skills, and internal operations and adds them to their plans. This lets plans be changed in real time, ensuring they align with how the business world is changing.

Because the S&OP method is collaborative, it encourages departments to share information. This makes finding problems, understanding them, and making changes quickly easier. You don’t need to quickly assemble a group since your departments are already working together. You can go right to making good decisions on time.

Bringing together finances

Finance tasks are related to S&OP but are not the same. They work together with sales and operations planning. The finance offices depend on. Unbiased operational and sales data to make budgets, share predictions with investors, and report on the company’s success.

Finance departments can use accurate and up-to-date data from S&OP to make significant choices about money. A good demand plan also helps them figure out when to put money into different areas (like marketing vs. production), which helps them stay ahead of the curve.

Dealing with Risk

S&OP gives businesses an organized way to think about and prepare for possible problems. It finds supply chain risks, changes in demand, and market changes by combining information from different functions. Regular review processes in S&OP let companies make changes to their plans ahead of time, which lets them respond quickly to unknowns.

What goes into and comes out of sales and operations planning

Different team members must contribute in specific ways for the S&OP process to work as it should for businesses.

Put ins

• Sales data from the past
• Estimates of sales
• Market information from the past and present
• Analyses of trends (for example, cycles)
• Number of items in stock and history
• Predictions and orders from clients
• Range of products
• Changes and projects coming up in business
• Plans for marketing
• Problems with the supply chain

What It Does

• Action items and an executive summary
• Plan for sales
• Plans for supply and demand
• A business plan that works together
• Plan for allocating resources
• Plans for production
• Goals and amounts of inventory
• Budgets and predictions about money
• Goals for sales
• Steps for managing risks
• Metrics for performance

How to plan for sales and operations: the steps

Get information about sales, production, and demand and keep track of it.

To meet with other departments, each must gather their information. There will be different ways for each team to get it, but they will all focus on what has worked in the past, how accurate the plan is, how often it works, and any other factors that could affect it.

• Customer orders will be put in CPQ, sales forecasts will be used, and sales will use in-house data (like product success reports).
• ERP and its warehouse management system (WMS) give Operations most of its data, such as reports on output and inventory levels.
• Marketing makes its data with the help of web analytics, social media insights, and marketing automation tools.
• The logistics data supply chain teams need will include what suppliers can do, lead times, shipping prices, and other supply-side factors.
• The sales and RevOps software tells the finance staff about the budget, total sales, and top-line revenue.

Each team will turn their information into forecasts to give to the demand manager once everything is in order. Ideally, the software your company uses should be able to do this for you immediately and all the time.

Get ready for demand.

Once your demand planner has all of the forecasts in a style that is easy to understand, accounting and finance will check to see if they are correct. The demand manager can start working on the plan after considering the possible changes and the room for error.

This is what a demand plan has:

• Rules for customer service
• Promotions and savings
• The release of new products
• Projects for GTM
• Events that only happen once, like a trade show
• Changes of channel

The demand manager takes this step, but the sales and marketing teams should have a say because they can give information about how customers act and how the market is changing.

Make a plan for output and supply.

The head of supply will use the demand plan to make a high-level production plan. During this time,

• Goals for inventory
• The need for raw materials
• A safety stock
• Ways of making things
• Amounts made of each product and changes in volume
• Changes to the stock
• Planning the production

If they have any, they’ll also include changes to how things work before the start. This might be for releasing a new product or an event with many people interested. They will also check suppliers’ capabilities and lead times to ensure they meet the production plan.

Match the plan with a meeting before the S&OP.

The business department needs to be involved in this. They make sure that the suggested supply and demand plans align with what the company can afford. They also give information about the available money and how the plans might affect the company’s finances.

If the reconciliation process finds problems or challenges that cost money, the finance department must determine if the present budget can cover these costs. They figure out how much these problems will cost and help make decisions.

When some parts of the plan are too expensive, the financial team helps determine if putting them off until the next fiscal year would be better.

Set up the S&OP meeting for the executives.

This meeting, which happens about once a month or three times a year, should include all critical people and area heads. At this meeting, they will review the adjusted plan and make any needed changes.

The results of this meeting are:

• A last-minute sales plan
• A business plan that meets the goals of the company and works as a whole
• Information about how resources are being used (for example, budgets)

Do a review every month.

For S&OP to work, it needs to be a process that goes on all the time, not just one event. In monthly reviews, you should:

• A talk about the current measures of performance
• An analysis of any changes in the business or market setting that might affect the plan
• A look at inventory numbers and sales projections to see if there are any problems
• A check-in on how healthy aims and goals are being met

Plans for sales and management are kept on track after they are put into action with monthly reviews.

Metrics for S&OP

There are two main types of S&OP metrics: those that measure supply and demand and those that measure finances.

Metrics for Supply and Demand

1. Forecast accuracy measures how well supply and demand predictions match actual sales.

2. Order fulfillment rate: The share of on-time deliveries of customer requests.

3. Inventory turnover is the rate at which items are bought and sold over a specific period. Usually, the faster it is, the better.

4. Potential utilization refers to how much of an organization’s production potential is used to its fullest.

5. Supplier performance includes quantitative and qualitative measures of how reliable and high-quality your suppliers are, such as how often they deliver on time and how good their products are.

Metrics for Money

1. Gross margin is the difference between sales and the cost of goods sold (COGS). It shows how well your business is doing financially as a whole.

2. Operating fees are the costs of running your sales and operations. These include the costs of selling, shipping, storing, and making things.

3. Return on investment (ROI) measures how valuable your business and sales processes were before and after they were planned and implemented.

4. This is the time it takes from buying raw materials to getting paid in cash for sales. It measures how efficiently cash moves through the supply chain.

5. Budget variance is the difference between what was planned to be spent and what happened. It shows how well the S&OP process planned the money.

The best ways to make S&OP work

For different groups to work together, it starts from within. It would be best to encourage people to talk to each other and change the focus from teams working alone to working together.

When it comes to S&OP, here are some rules you should follow:

• Train people from both the sales and operations teams together.
• Get rid of gaps in communication by having reasonable standards for correspondence and response times.
• Give one executive member responsibility for the team and oversight to keep contact from breaking down.
• You should set up proactive tracking systems to find supply and demand problems before they get too bad.
• Make a straightforward way for disagreements between areas to be taken to the next level.
• Set up a way to track and regularly evaluate success metrics to ensure that things keep improving.
• Use technology to simplify and automate the S&OP process. This will make it more accurate and efficient and reduce mistakes people make.