Sales & Operations Planning (S&OP) is much more than just a practical tool for forecasting demand and optimizing operational efficiency. It’s also a way of profitably managing your portfolio of products and customers. Moreover, it helps you to pursue a winning strategy, to link your operation to the planned budget and to improve your strategic business results. When you get to that phase, it’s called Integrated Business Planning (IBP). But how do you reach that point?
Michel van Buren, director of Solventure Netherlands, is deep diving into the practical implementation of this concept. We asked him some critical questions.
What’s wrong with ‘traditional’ S&OP?
“There’s nothing wrong with it. But I’ve noticed that S&OP tends to be mainly seen as a method for improving efficiency and saving costs. Besides that, there is often a strong focus on the past and on the operational use of S&OP. However, a well-designed S&OP process offers lots of opportunities for future-proofing your product and customer portfolio, which actually enables you to increase your revenue – especially if you link it to your strategy and financial planning.”
Does that require a completely different approach then?
“The best way is to take a step-by-step approach to S&OP. This can be divided into three distinct phases:
Phase 1: You develop a reliable sales forecast based on combining statistical data with input from Sales & Marketing. This enables you to optimize the efficiency of both your short-term and long-term operational planning.
Phase 2: You utilize the available data to build an optimal product portfolio; products at the start of the life cycle demand a different approach than ones nearing the end. You segment your customers to ensure you focus most heavily on those who generate the most value. That guarantees the most optimal use of your resources.
Phase 3: You link the supply chain to the business strategy and financial planning. You aim to strike the optimal balance between costs (including production), tied-up capital (including inventory) and service (including product and service offering).
Needless to say, you don’t have to follow these steps to the letter, but it’s wise to introduce the system in phases. This also allows you enough time to involve all the stakeholders so that the process becomes properly embedded in the whole organization. You determine the pace and sequence of the steps in line with your own priorities. So in fact, you can take a completely modular approach to implementing S&OP.”
Where does S&OP end and IBP start?
“There’s no clear-cut boundary, but I’d say that Phase 1 marks the start of S&OP and that your S&OP process reaches maturity in Phase 2. It’s not really Integrated Business Planning until Phase 3.”
What are the concrete benefits?
“Phase 1 is mainly about saving costs, and you can generate more sales such as by preventing out-of-stock situations and improving your response to unforeseen circumstances. In Phase 2 you actively increase your revenue by taking a more differentiated approach to customers and setting up your processes to offer each customer group precisely what is important to them. In Phase 3 you improve the company’s bottom line because you can reduce the stock and improve the return on capital employed (ROCE). I always notice the CFO and CEO suddenly taking a keener interest at that point, and rightly so. Serious IBP can earn you some serious money.”
Where do I start?
It is becoming more and more challenging for companies to provide their customers with extra services without increasing cost and cash. However, balancing the Supply Chain Triangle of service, cost and cash is very beneficial, because it will lead to a maximization of the ROCE of the company. To succeed at this balancing act, supply chain should be put at the heart of the strategy discussion instead of seeing it as a result.
This link between supply chain, strategy and financial metrics is handled more in depth in the book Supply Chain Strategy and Financial Metrics of Solventure’s CEO Prof. dr. Bram Desmet. The book is a step-by-step guide to balancing service, cost and cash by linking supply chain, strategy and finance through financial metrics.
Curious to find out more about the link between Supply Chain, Strategy and Finance? Read our whitepaper on Strategy-Driven S&OP to take your supply chain to the next level by including financial metrics.