What's Wrong with S&OP?

Posted by Jeff Bodenstab and Joe Shamir on Apr 12, 2016 8:30:00 AMin

“The No. 1 challenge among manufacturing companies is connecting sales and operations planning (S&OP) to operational plan/execution.” 
– Gartner Research¹

There are few competencies more core for a company than the ability to coordinate sales with supply chain in order to fill demand. But according to Gartner, today’s Sales and Operations Planning (S&OP) isn’t solving the fundamental challenge of translating aggregated decisions into operational details.

Lora Cecere, CEO of Supply Chain Insights, found the same problem. Her 2015 survey showed that only 11% of the manufacturers “nearly always” effectively tie S&OP planning to execution and only 19% can do it “most of the time”.

The good news - there’s more focus on collaboration processes between sales, financials, and operations than ever before.  Most S&OP processes are starting to overcome a major organizational issue by horizontally connecting Finance, Sales and Operations (or Supply Chain) silos.

 

The bad news – the long-to-mid-term plan only has meaning if it translates into execution. Otherwise you have the #1 S&OP problem facing companies today.

What’s wrong?

This is a planning disconnect—between tactical plans modeled on aggregate sales and demand numbers and operational execution plans that need detailed data down to the daily SKU-Location level. The longer term tactical plan often doesn’t translate well into the execution plan and the execution plan doesn’t translate back up to the financial plan.

This shouldn’t be too surprising because companies usually have separate planning and operations models. They plan with one and execute with the other, creating a gap that is difficult to bridge.

That's because firms collaborate and model for S&OP around some level of aggregation. It’s the only way management can efficiently participate and drive the process. But firms must optimize in a detailed model that represents real-world constraints – such as plant level production capacities and distribution centers by Ship-to SKU-Locations. Sales and finance can stay at a higher level, but for optimization and execution “the devil is in the details.”

And that makes it also an optimization problem. Optimization not only drives the process to superior outcomes, but cuts a lot of manual decision guesswork out of an already complex process. Right now most companies’ S&OP processes entail collaboration, but not much optimization. Or sometimes optimization, but not much collaboration. But not both.

They lack a real-world model that can be used in a collaborative environment. S&OP models that are independent of, and completely different from, the detailed execution planning models, do not map well to each other. The aggregate models cannot be reliably translated to an operational plan at the item level.

The missing element is a coherent model that supports the tactical and financial plan, but is also capable of supporting S&OP with detailed mapping to supply chain execution. It is a modeling environment of the entire process that is coherent from top to bottom and at every level in between. It’s where the aggregated S&OP model and operational model are continuously synchronized through perfect mapping.

No one has all the information to globally optimize S&OP—market information is always going to be missing. But a single integrated model is required for collaboration and decisions to be supported by optimization around a common version of the truth.

Without it, functional bias consistently disrupts the sales and operational plan. No one in the process is able to make meaningful collaboration tradeoffs based on “what ifs” between: margin and volume, inventory and customer service, and supply and demand. The only way to do that properly is with a model that can clearly show the results of each decision, so a company can wisely choose the outcomes that best match their business targets.

Cecere says the largest gulf in organizations can be found in the alignment between the sales and operations teams. Better modeling can bridge that gap, and give you the common language, objectives and visibility of trade-offs to balance decision making across the commercial and operational sides. This enables both sides to advocate their interests, yet make S&OP decisions based on the best overall outcomes for the company.

If you are creating a sales and operations plan, but not connecting it to execution, where does that leave your company in its effort to achieve its performance goals?

¹ Set Up Sales and Operations Execution Process to Support the S&OP Cycle, Marko Pukkila, 28 January 2016