Relax; It’s Just a Plan

Here’s the deal: You know your supply chain is special and using a one-size-fits-all approach like Sales & Operations Planning (“S&OP”) is not for you. Or you operate a process that is too complex. Or maybe it doesn’t require such a complex approach. And then when you tried it; the statistical forecast was inaccurate and executing the plan resulted in shortages and excess at the same time. You know you are right: S&OP is not for you. Or is it?

” Forecasts drive the plan — Customers drive execution “

One of the reasons for resistance in organizations to adopt S&OP is a misunderstanding on the purpose of S&OP. The plan is seen as “the way we need to execute”. “The plan says X, therefore we produce X”. For companies that use S&OP effectively this is not typically true: their customers drive your execution. Don’t misunderstand this statement as all companies are make-to-order. If you are producing product to replenish inventories then your customer is also driving your execution. The point is that a plan was true at one point in time. Newer information, such as orders or replenishment signals, will drive the final execution.

The easiest way to assess the purpose of planning is by removing it completely for a moment. Let’s assume you have no planning processes in place. What would be the result on your operation? When you receive orders, you will have to contact your suppliers to get the required materials. Remember – your had no planning, therefore no raw materials or finished goods in stock to respond to these orders. If any raw material is constrained then you may need to pay a little extra to get access to these materials. You can produce as soon as materials arrive. Once complete you may schedule transportation or notify the customer you’re ready for pickup. The outcome? Longer lead-times, potentially higher cost and an unpredictable process – availability of materials (and labor and transportation) influence your ability for consistent lead-times.

The alternative is called S&OP. Based on your best estimation you position materials and/or capacity (labor, transportation). In order to have the most optimal cost, reliable deliveries and consistent lead-times your S&OP process needs to position the right mix of materials and/or capacity. Many internal and external influences have an impact on your ability to achieve this: the demand forecast, reliability of suppliers and processes, your competitors, nature, the economy and so on. Execution will attempt to address any of these influences. You execute to your actual customers’ requirements. The time for planning has passed..

How you perform S&OP depends on the business you operate. If you have one product which you sell pretty much the same every month except for the holidays when volume triples for one month, then the back of a cigar box will do. All others require a more formal process. More about this another time.