Sales and operations planning (S&OP), sometimes known as aggregate planning, is a process where executive level management regularly meets and reviews projections for demand, supply and the resulting financial impact. S&OP is a decision making process that makes certain that tactical plans in every business area are in line with the overall view of the company’s business plan. The overall result of the Sales and Operations Planning process is that a single operating plan is created that identifies the allocation of company resources, including time, money and employees.
Benefits of Sales and Operations Planning
Companies that use S&OP can give a number of benefits such as:
- A greater visibility of the demand and supply across the enterprise,
- Improved inventory management,
- Promotional planning,
- Increased accuracy in budget forecasting,
- Improved product life cycle management process.
Sales and Operations Planning Tactical Planning
Whereas strategic planning looks at the company’s plan years into the future, tactical plans look at the company’s business plan over the coming year. Tactical plans take into account overall strategies of the company, which are found in the strategic plan. Sales and operations planning are aimed to helping to provide companies develop and align the tactical plans developed by the various business areas. There are two approaches that are used in sales and operations planning; top-down planning and bottom-up planning.
Top-down planning is the simplest approach to sales and operations planning. In this approach, there is a single sales forecast that drives the planning process. The forecast is derived from a combination of products and services that require similar resources, for example, a number of manufactured finished products. Using top-down planning, the Sales and Operations management team can create tactical plans based on the overall forecast and divide the resources across the finished goods or SKUs: (Stock Keeping Units) in the plan.
After a company has worked through their sales forecasts and calculated the resource requirements, the various alternate production plans should be generated. There are three approaches that are used for the production plan; level, chased and mixed.
Level Production Plan: The level production plan is used where the cost of making a change in the production level is extremely expensive, while the cost of holding inventory is very low, for example in the oil industry. Using the level production plan, the production remains constant and inventory is used to absorb the differences between the sales forecast and production.
Chase Production Plan: The chase production plan is the opposite of the level production plan. In this production plan, the production is changed for each time interval of the plan to match the sales forecast for that interval. With this approach the production is always chasing the demand, hence the name chase production plan. This approach is best used for companies who either cannot hold inventory or to do so is extremely expensive, while changes in production costs very little.
Mixed Production Plan: The mixed production plan takes elements from both the chase and level plans, where there will be variances in production and inventory levels which will produce the best production plan.
There are “time fences ” that have to be taken into consideration. This is defined as cumulative lead times for finished products or SKUs. If you plan within cumulative lead times, it will create “negative lead times” in Purchasing or unrealistic due dates for Suppliers when MRP (Material Requirements Planning) is executed. It will also create negative or unrealistic lead times for manufacturing when manufacturing orders are executed for the shop floor.
It may be “minor” to some people, but I believe that Inventory Record Accuracy (IRA) is critical in planning and execution of plans. If you are not working with finished goods (SKUs) and materials inventory accuracy at 98-100% accuracy daily via cycle counting, all numbers are suspect even with good planning or great execution of planning.
Often called Demand Planning in Logistics
Logistics Planning includes transportation, warehousing, and inventory within the firm and between supply chain partners. Historically, purchasing and finished goods transportation both attempted to minimize their freight cost individually. Procurement minimized the expense of raw material movements by working with suppliers and inbound carriers. Logistics focused on minimizing outbound freight expense by working with customers and their transportation carriers. There is also often a third managerial focus related to international shipments. The individual perspectives of transportation often result in limited economies of scale, limited information sharing, and excessive transportation expense.
Logistics planning integrates overall movement demand, vehicle availability, and relevant movement cost into a common decision support system that seeks to minimize overall freight expense. The analysis suggests ways that freight can be shifted among carriers or consolidated to achieve scale economies. It also facilitates information sharing with carriers and other service providers to enable better asset utilization.
Logistics Planning is essential for effective Resource Utilization. Lack of accurate and comprehensive logistics and supply chain planning tools historically resulted in poor utilization of production, storage, and transportation capacity. The increasingly strong focus on improved asset utilization in conjunction with improved information management and decision analysis capabilities and techniques has brought comprehensive planning systems to reality.
Using the Transportation Management System (TMS) you can plan the optimum (TMS Optimization) routes and lanes for your customer’s transportation, and offer/share Cost Reduction to them.
Yard Management Systems (YMS) manages the visibility of avoiding “dead heads” or transportation movement without freight which is very costly to a transportation company.
And of course, Enterprise Resource Planning (ERP) integrates the ENTIRE Company and all important modules of the ERP system, for planning and effective execution of plans.
Summary of Sales and Operations Planning
It is more important to streamline a company’s processes to gain competitive advantage. Companies that have an effective sales and operations planning process are improving their visibility across their enterprise.
Collaboration Addition in Effective Sales and Operations Planning
Today, drilling down to your Suppliers and gathering their input to your planning is becoming more critical. Getting your Suppliers involved in S and OP makes this planning more realistic and time sensitive. In advance of your S and OP meeting send as much planning information to your Suppliers as you possibly can via e-mail, EDI or new software that is available to support more detailed S and OP planning.
After the forecast is set, actual production to this S and OP forecast is reviewed to see how realistic this forecast was when it was completed.
The more Supplier involvement relative to commodities, parts and components schedules are available before the S and OP is executed, the more accurate the S and OP will become. This is sometimes called “Bottom Up” S & OP.
Your comments on how you use S and OP for planning and what issues are important to you are important to us. You can leave a comment below the related articles section.