Cross-functional or coordinated planning is a key principle in the S&OP process. The lack of collaboration from stakeholders would lead to wider variability and unnecessary costs. The bullwhip effect is one common consequence of the unsynchronized operation.
The bullwhip effect increases production cost, inventory cost, lead time, transportation cost, and other aspect impacting the supply chain.
Sales and operations planning focuses on balancing demand and supply. These two when not balanced, will lead to higher supply chain cost and lost sales. Unserved orders due to capacity constraints would lead to lost revenue while fulfilling orders with too much capacity would incur unwanted costs.
Balancing demand and supply in a real-world scenario could be difficult due to several variables, however, having the right data and people will help close the gap between supply and demand.
The main goals of sales and operations planning are;
– Match company’s supply chain capability with customer requirements
– Proactive to foreseeable demand and reactive to unexpected demand
– Close the gap between supply and demand
– Reduce demand variability
Figure 7. The sales and operations planning (S&OP) process. Source: Adopted from Wallace and Stahl, Sales and Operations Planning, The How-To-Book, 3rd edition.
You see in figure 7 that planning is synchronized across stakeholders to achieve a realistic demand plan. The process starts by utilizing data collected for demand and supply planning that are then refined for accuracy through a series of meetings.
To validate demand data with supply, your organization must evaluate existing capacity to determine the sufficiency of your supply chain. In assessing your supply chain, you should be able to identify constraints limiting your capability to fulfill demand. The constrained resource or process is then exploited to maximize capacity.
Any element that slows down your supply chain performance is a constraint, it could be machines, raw material availability, labor, product knowledge, or logistics. When supply chain limitations are solved, the resource requirements plan should be available for an initial meeting.
Sales and operations planning require a periodic meeting of executives and managers across enterprise to make decisions on demand and supply projections. Involvement of executive-level management is an integral part of a successful S&OP process. Without the support of the management, the sales and operations planning would fail no matter how good the plan looks.
There are two important elements by which S&OP is built upon; demand management and supply planning.