Sales & Operations Planning: Why is S&OP Important?
Key questions every underlying business model should answer
Any company in the business of selling products or commodities has an underlying business model (formal or informal) that answers the key questions:
- What will we sell?
- To whom?
- How will we operate?
- How do we earn an adequate return for our investors?
Five critical ways effective S&OP drives to the heart of business model enablement
- Effective S&OP drives right product, place, time, quantity, cost and business performance. A purchase order that creates a contractual agreement for a seller to sell and a buyer to buy will always specify more than product attributes. It will also define a quantity, a place, a price, and often a time. Effective S&OP is the business capability that enables a seller to provide the right product, at the right time, in the right place, in the right quantity, and at the right underlying cost. Failures in execution of these core functions threaten the vitality of the business model.
- Effective S&OP is a critical enabler of demand-fulfillment nimble responsiveness. Nothing is constant. The availability of upstream supply, manufacturing capacity, logistical arc and node networks, and downstream demand are all subject to change. Sometimes it is abrupt change, sometimes evolutionary change. S&OP is, in part, the art of anticipating and properly reacting to and positioning for those changes. Nimble responsiveness, without betting the farm on what lies behind the visible horizon, is critical to perpetuation of a working business model.
- Effective S&OP enables an informed, aligned eco-system from suppliers' suppliers to customers' customers. Boundaries engender imbalances. In the world of end-to-end demand/supply chain, imbalances choke efficient and effective flow. Unless an organization is 100% vertically integrated, it will deal with both upstream and downstream boundaries, maybe even multiple layers in either direction (suppliers' suppliers, customers' customers).
- Effective S&OP is the prime integration layer of Total Value OptimizationTM (TVO). Total Value Optimization is the art of synchronized maturation across the buy (procurement), make (operations) and move/fulfillment (logistics) operations of a company's end to end demand/supply chain. Progress beyond a level two or three maturity in any one leg of the TVO Pyramid is dependent on simultaneous maturation of the other legs. S&OP is the prime integration layer of TVO. The art of synchronized advanced operations planning is the portal to level four and five TVO performance.
- Effective S&OP provides stability, support and the drive to real benefit realization. S&OP lifts the enterprise from a focus on tactical collaboration to a single-number business planning and execution solution capable of generating a hard to create, difficult to imitate competitive advantage.
The next level of business integration
S&OP represents the next level of business integration and expands significantly beyond the boundaries of tactical supply operations. It aspires to better communication (good), advanced operational coordination (better) and cross-functional collaboration (better yet). Integration, particularly in an executive leadership-led and financially controlled demand-supply single-number executed plan, provides true competitive differentiation and Total Value Optimization.
Stand alone S&OP results have historically been both short-lived and tactically isolated from the true heartbeat of the enterprise. Approaching S&OP as a more integrated process by bringing in DSI functionality will allow entities from executive leadership (finance, marketing, sales, and supply operations) to act in pursuit of a common set of goals, rather than in pursuit of an isolated functional goal such as sales revenue, cost-per-unit purchased or sold or cost-per-mile transportation costs.
Total demand for goods or services must be balanced with the ability to supply the same. The financial constraints, targets, and objectives must weigh in heavily as critical decisions are made during this balancing process. The needs of the human capital of the organization should likewise be taken into consideration. Senior leadership, as only they can, need to balance tactical and strategic considerations.
In part three of this five-part series, I will outline the four essential toolsets that help drive supply-side S&OP excellence.
Other articles in the Sales & Operations Planning series:
- Part one: The C-Suite dilemma
- Part three: Four essential toolsets that drive success
- Part four: Six critical success factors for S&OP implementation
- Part five: The principles that underwrite success
Click here to read our Sales & Operations Planning perspectives paper
Maine Pointe is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash and growth across their procurement, logistics and operations. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.
Maine Pointe's engagements are results-driven and deliver between 4:1-8:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com