By Jim Errington, Business Development Manager

What Is Sales and Operations Planning?
Many manufacturers have attempted to manage their supply chain more effectively through Sales and Operations Planning (S&OP). Sales and Operations Planning is a process, not an event. This process is meant to develop and evaluate the numerous tactical strategies available to the business, choose the one that contributes the most toward realization of the firm's long-term objectives, and measure the actual performance versus the plan.

The capstone to this process is a monthly or quarterly meeting during which the plans are analyzed, discussed, and validated. The emphasis in this meeting is on validation, since most of the decisions are taken based on objective measures and the real body of analysis is done at a level once removed from the key meeting attendees — which should include representatives from every aspect of your enterprise involved in any way with your supply chain.

What Issues and Processes are Evaluated?
What Decisions Taken?
There are just three topics that need evaluation and consensus in most firms. Production is needed to support the expected level of Shipments and maintain a buffer Inventory — PS&I. In manufacturing firms, Production is the major operations activity, Sales and Marketing forecast what is needed because they are close to the customer, and Inventory is important because it is a result of the interaction of the first two and is almost always one of the largest items on the firm's balance sheet.

Data granularity must be addressed. Firms with a few products may choose to review each item, and introduce specific customer needs for each. This is common in make-to-order and highly engineered products. Where there are many products and/or many customers, the firm should plan based upon some kind of product family definition, where each family has some meaningful common attributes (brand name, work center, channel of distribution, or end use application).

The Sales, Marketing, and Operations teams must understand the product family breakdown, where a change in demand can be clearly correlated to specific critical capacities. At this level, collaboration clearly comes into play. In order for Sales and Marketing organizations to obtain the "best" information on the various customer demands, at any level, a degree of interaction with the customer is required.

In the best organizations, the Sales and Marketing team is armed with the last year shipment data and perhaps a statistical forecast. This forms the basis for discussions with customers on events they see will shape the projected demand profile for the coming periods. In such a collaborative environment, the more data available for demand planning discussions with customers, the better.

Firms lacking optimization capabilities typically revert to a reiterative simulation process, using a base forecast and perhaps an upper bound (a.k.a. "blue sky" number) and an "austerity" number, representing the lower confidence level, wrapped around the most likely result. These three forecasts each would be factored into a different master production schedule, each with two to four scenarios of its own. Each scenario would then be compared to the inventory budget, and adjusted as necessary for compliance.

Each compliant scenario could become a discussion topic during the preparatory run-up to the validation meeting. This is a very labor-intensive process and could involve six to twelve (three forecasts x two to four MPS approaches) plans for evaluation. No wonder the process is often seen as burdensome — in fact, the process is often so labor intensive, companies elect to consider fewer alternatives or defer to a yearly process!

If the firm employs current optimization technology, it probably has complex mathematical solvers able to analyze operating constraints and recommend the balanced product mix that can be produced and sold most profitably. Such solvers consider the demand forecast, available capacity (facilities, labor, transportation and storage) and inventory carrying costs to optimize the plan. In such cases, one assumes that the optimal plan would always be accepted but in reality, there may be very short-term, subjective considerations which work toward a sub-optimal plan and this is the task before the participants: to understand these additional factors and address them in the way that makes the most sense for the firm.

This usually falls to staffers like production and inventory planners, forecast analysts, and the master scheduler to make the best alternatives into scenarios for the executive staff to evaluate. The current technology also allows for period-specific changes to be reflected in the business model, resulting in clear financial impact for model changes. Examples are changes in resource availability, cost, seasonality, new product introduction, and production outsourcing.

This is the process we will examine in the next section, looking at a typical data flow diagram and some template forms for use in the process.

Process Narrative for Sales and Operations Planning
We will list the preparation activities, participants, expected duration, and input/output contents, and then discuss the structure of the validation meeting and finally, the steps needed to assure the plan is followed. In short, "Plan the Work, then Work the Plan". Then it is a simple matter to map the various activities to the operating calendar for almost any firm. The planning cycle will depend on volatility of demand, manufacturing cycle time, and general supply chain response. This could range from quarters to daily. For now, we assume a monthly planning cycle.

Collect and update period-end actual results
Actual demand versus forecast is a by-product of the regular period-end forecast update/regeneration run and is likely to be totally automatic. If not, it will involve the forecast analyst, who might have to start demand posting processes and interactively filter the demand. The demand aggregation and future forecast generation are always automatic — and the reconciliation of group forecasts to item specificity, if done, is usually an automatic process. Duration of this process varies widely due to database size and software process efficiency but usually is complete by the second or third workday, which allows for the analysts' review prior to publication.

Similar activities take place within the production planning function to determine actual results versus plan for overall volume and for critical items — usually those items that are short or about to go short. Planners must summarize production compliance to plan, actual demand versus forecast, and evaluate the ending inventory versus plan to determine whether the inevitable inventory variance is "explainable". If not, they need to investigate the underlying cause of the variance, which is often returned goods, finished goods rejections or other unplanned events. Duration of this process is usually two to five workdays.

Prepare preliminary forecasts and production schedules
At the end of workday two/three, the forecast analyst publishes the new, reviewed forecast seeking input from all authorized participants including key accounts, the field sales reps and managers, and the corporate sales/marketing functions. The unconstrained forecast is sent to the optimizer (if available) for processing and a constrained and profit-maximized forecast is generated and sent back to the demand forecasting system for later comparison with actual results. Duration of these activities is no more than three to five days. Operations/Engineering highlights any capacity problems for review. Decisions are made on when to propose implementing capacity changes, which are tentatively reflected in the model.

The production and inventory planners as well as the master scheduler take the constrained forecast, available at or about workday three-five, and drive it through the MPS process to get various ending inventory scenarios for executive review. This process should end by workday ten.

Mid-month checkpoint and pre-S&OP preparations
All forecast constituencies will have reported in by now and the forecaster enters forecast revisions, if any, for the next several periods, reconciling the results from the bottom up (if customer input), top down (if sales/marketing input), or middle out (miscellaneous participants). The revised forecast is sent to the optimizer for processing and the proposed optimal and profit-maximized forecast is shared with the production and inventory planners as well as the master scheduler. An analysis of period-to-date actual results versus forecasted demand must accompany the revised forecast to assist downstream reviewers. This takes just one day because it is fully automated.

The day after the proposed (optimal, profit-maximized) forecast is published, the master scheduler prepares several scenario schedules for review with the production and inventory planners. The planners select the preferred scenarios and meet with the sales and marketing teams by workday thirteen, at which time the preferred scenario is agreed by the team, with one or two alternates. These pre-S&OP meetings must conclude in time for the planners to produce an S&OP briefing note for the executive attendees who expect the memo the day before the validation meeting.

The Sales and Operations Planning Meeting
The meeting should be held as soon after the twelfth or thirteenth workday as possible, preferably on the third Thursday of the month. What is important is that it be held the same day every month, like clockwork, so traveling staff can properly set schedules or provide backup attendees.

The general manager (CEO or equal) conducts the meeting and there is a designated briefer for each session whose job it is to report "just the facts". For each product family defined, he/she reports actual demand vs. forecast and associated forecast accuracy for the prior period, actual production vs. plan (compliance) for the same period, and ending inventory vs. plan. This is the summary data prepared by the planners.

The sales and marketing managers for the family report on planned promotions and answer questions regarding the next period's (and next quarter's) effect on year-end goals. The Finance VP is asked for approval, and then the process continues for production, validating the "do-ability" and emphasizing whether overtime or slack time is in the plan.

The proposed plan and potential alternates are evaluated for ending inventory's effect on the balance sheet and final approval is granted on one of the plans presented. Any last minute changes to the forecast are noted by the analyst for inclusion in a final revision to be prepared on Friday for inclusion in the weekly MRP processing done over the weekend.

Each executive present has an opportunity to question the plan's effect on his/her area of responsibility but most of those questions have been fully resolved during the pre-S&OP meetings between staffers.

The process is repeated, in turn, for all product families (or business groups, or whatever level of aggregation is appropriate) until the company has been totally reviewed. Ideally, this will be completed early enough on Thursday for the forecaster to make final changes, for the sales and marketing team to publish promotional announcements (they usually are validated in the same process when the promotion plan is discussed), and the finance staff to do final revisions to the cash flow budget before starting the final prep for period-end processing. The purchasing staff can also make required changes to the aggregate purchasing plan before month-end, when it is traditionally impossible to get a vendor's attention.

Monitor the plan
The process starts all over again in the next period

Sales & Operations Planning Summary
Three key principles to follow in your Sales & Operations Planning process are:

Sales and Operations Planning is a business process not an event. The S&OP is the key operational process that links the business functions together. Comprehensive planning that elevates problems to the management team for resolution, before the plan is finalized, ensures a greater chance that the plan will be executed and the business performance achieved.

What are the Benefits to be derived from a Sales & Operations Planning Process?
We have addressed the what, who, how, and when of the S&OP process but the critical question remains: "What's in it for me to participate?" The following lists apply in varying degrees to various industry types and specific firms but some will be nearly universal:

Hard Benefits

• One number planning: The ability to point to one plan and have everyone pulling on the same oar, at the same time, in the same direction. This sounds obvious, but in actual practice, seldom occurs without a finely tuned management process.
• Fewer and smaller performance gaps: Those that do occur are easily explained and understood.
• Framework for performance appraisal: especially applicable to incentive compensation.
• Quicker response to turning points within operating periods: Tracking actual vs. plan during the month highlights significant up ticks and downturns, so the firm can respond more pro-actively.
• All constituencies with valuable input get to provide it: Most organizations fail to use all available intelligence. In this process, participation is inescapable and the benefits of true collaboration can be recognized.
• Senior management can plan the financial affairs of the firm with confidence: The consensus planning process typically yields the most "doable" plan.
• Added operational stability: Fewer knee-jerk reactions to unplanned orders, thus less expediting, and fewer interpersonal confrontations between well-meaning people just trying to get the job done.
• Added professionalism and polish in dealings with various external stakeholders in the business: Flows from added stability, vendors will be the first to notice. By making the flow of materials and services more stable, you make the vendor more profitable, thus you can negotiate price reductions.

Soft Benefits

• Improved morale: Job stress is a result of high expectations from a person, with little personal control over how to deliver the results. Key participants can influence their destinies.
• Better internal communications: The professional/administrative and middle manager levels must talk to each other clearly and consistently to prepare the briefing documents required by the executive attendees.
• Improved succession management: As people learn more about the inner operations of the firm, they are better prepared for cross-functional movement in the organization.
• Improved work habits: The simple discipline of doing things right and seeing results motivates people to improve their contributions if for no other reason than they want to look good.
• Improved esprit de corps: Not quite the same as morale because it relates specifically to the group ethic. As in the military, people begin to know they can depend on a buddy.