Executive Briefings

What Is This Thing Called S&OP?

Remember those nightmarish stories about businesses that were thrown into turmoil when they tried to implement enterprise resource planning systems for the first time? Some projects dragged on for years; others collapsed altogether. (Never mind the horrendous cost of the application and the army of consultants required to plug it in.) ERP became a cautionary tale about the perils of buying big software packages without fully understanding what was required to make them work in a "legacy" environment.

I wonder whether sales and operations planning is the new ERP. Not because an S&OP project is doomed to fail - plenty of companies have reported good results from embracing the concept. The reason that ERP comes to mind is that the successful implementation of S&OP software seems to require just as radical a transformation in a company's business processes. More so, even, if you consider that S&OP affects nearly every part of the supply chain.

So what is S&OP? Most definitions are lengthy and crammed with buzzwords, but it boils down to a means by which companies can align production with actual demand, through the merging of tactical and strategic planning methods across any number of organizational silos. S&OP takes into account product design, raw materials, manufacturing capacity, labor, finance, distribution, marketing, sales and customer service. (Sounds suspiciously like the Supply Chain Council's SCOR model, which breaks down into the stages of Plan, Source, Make, Deliver and Return.)

The basic concept isn't that difficult to grasp, although consultants like to confuse the issue by constantly inventing new acronyms that purport to describe even greater levels of organizational integration. (Sort of like buying a heavily advertised toothpaste, only to be told by merchandisers that you need mouthwash and floss as well.) Let's assume, though, that a formal S&OP process is itself a desirable goal - one that's far from ready to be supplanted by a trendier concept, given that so few companies have yet to adopt it in full.

S&OP differs from ERP in that it's not a single, massive software package that gets switched on and immediately transforms the way in which information flows throughout the business. It's really a series of processes that should be implemented in phases. The management consultancy Oliver Wight talks about the need for a detailed review of product, demand and supply before combining it all under a comprehensive management business review. MIT has described a four-stage maturity model which outlines progressive improvements in numerous areas, including the frequency and nature of meetings, the degree of integration among processes, and way in which software applications are deployed. And Nari Viswanathan of Aberdeen Group has shown how the progress of implementation varies widely across businesses, with only about a third of those surveyed having managed to integrate financial planning and budgeting with S&OP.

More proof that companies are slow to extract the full benefits of S&OP comes from Ventana Research, which found back in 2007 that less than half of surveyed companies were doing supply and capacity planning as part of their S&OP programs. It got worse from there, with only 37 percent holding formal executive meetings, 33 percent doing consensus demand planning and 31 percent deploying balanced scorecards or conducting performance reviews. I've seen no more recent reports suggesting that the progress of most companies has greatly improved.

According to the software vendor Kinaxis, modern-day S&OP must contain at least four key capabilities: scenario management, by which a company can explore multiple "what-if" situations; financial measures, including cash-to-cash cycle, gross margin and economic value-add; early alerting, when key performance indicators exceed tolerance levels, and management by exception, with the ability to identify the precise cause of an out-of-tolerance condition. Kinaxis "thought leader" Trevor Miles views quick responsiveness as a critical corrective to the errors that plague any demand forecast. Speaking at the IE Group's recent High-Tech Forecasting & Planning Innovation conference in San Francisco, he noted that forecast errors by the top consumer packaged goods companies range between 19 and 43 percent. S&OP can help to offset that shocking gap by enabling them to plan for variance.

Mike Groesch, vice president of S&OP with NCR Corp., said the process is an invaluable tool in a configure-to-order environment - yet another technique for coping with demand variability. The problem, he said, is that too many companies - including, until recently, NCR - fail to separate their tactical and strategic efforts. The first stage of S&OP is basic execution - "the weekly grind," as Groesch put it. The people who handle order management and fulfillment can't also be responsible for the long-term aspects of real S&OP, with its monthly and quarterly planning cycles. In Groesch's words, sales and operations execution (S&OE) is the "foglights," while S&OP represents "the headlights [that shine] further." Don't make the mistake of conflating the two.

So why, according to just about any survey out there, are most companies still stuck in the first or second stages of adopting S&OP? My guess is they view it primarily as a matter of acquiring technology - and vendors aren't doing enough to convince them otherwise. S&OP is a long, tough road to travel, but the rewards at the end are substantial. You need to redefine your underlying processes and - horror of horrors - get the various disciplines within your supply chain to talk to one another. Of course you also need someone at the top to drive the effort and cut through the fog of acronyms and marketing hype. If you don't have that, perhaps you ought to be in a business where demand is predictable and customers are married to you forever. Like management consulting.

- Robert J. Bowman, SupplyChainBrain

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Remember those nightmarish stories about businesses that were thrown into turmoil when they tried to implement enterprise resource planning systems for the first time? Some projects dragged on for years; others collapsed altogether. (Never mind the horrendous cost of the application and the army of consultants required to plug it in.) ERP became a cautionary tale about the perils of buying big software packages without fully understanding what was required to make them work in a "legacy" environment.

I wonder whether sales and operations planning is the new ERP. Not because an S&OP project is doomed to fail - plenty of companies have reported good results from embracing the concept. The reason that ERP comes to mind is that the successful implementation of S&OP software seems to require just as radical a transformation in a company's business processes. More so, even, if you consider that S&OP affects nearly every part of the supply chain.

So what is S&OP? Most definitions are lengthy and crammed with buzzwords, but it boils down to a means by which companies can align production with actual demand, through the merging of tactical and strategic planning methods across any number of organizational silos. S&OP takes into account product design, raw materials, manufacturing capacity, labor, finance, distribution, marketing, sales and customer service. (Sounds suspiciously like the Supply Chain Council's SCOR model, which breaks down into the stages of Plan, Source, Make, Deliver and Return.)

The basic concept isn't that difficult to grasp, although consultants like to confuse the issue by constantly inventing new acronyms that purport to describe even greater levels of organizational integration. (Sort of like buying a heavily advertised toothpaste, only to be told by merchandisers that you need mouthwash and floss as well.) Let's assume, though, that a formal S&OP process is itself a desirable goal - one that's far from ready to be supplanted by a trendier concept, given that so few companies have yet to adopt it in full.

S&OP differs from ERP in that it's not a single, massive software package that gets switched on and immediately transforms the way in which information flows throughout the business. It's really a series of processes that should be implemented in phases. The management consultancy Oliver Wight talks about the need for a detailed review of product, demand and supply before combining it all under a comprehensive management business review. MIT has described a four-stage maturity model which outlines progressive improvements in numerous areas, including the frequency and nature of meetings, the degree of integration among processes, and way in which software applications are deployed. And Nari Viswanathan of Aberdeen Group has shown how the progress of implementation varies widely across businesses, with only about a third of those surveyed having managed to integrate financial planning and budgeting with S&OP.

More proof that companies are slow to extract the full benefits of S&OP comes from Ventana Research, which found back in 2007 that less than half of surveyed companies were doing supply and capacity planning as part of their S&OP programs. It got worse from there, with only 37 percent holding formal executive meetings, 33 percent doing consensus demand planning and 31 percent deploying balanced scorecards or conducting performance reviews. I've seen no more recent reports suggesting that the progress of most companies has greatly improved.

According to the software vendor Kinaxis, modern-day S&OP must contain at least four key capabilities: scenario management, by which a company can explore multiple "what-if" situations; financial measures, including cash-to-cash cycle, gross margin and economic value-add; early alerting, when key performance indicators exceed tolerance levels, and management by exception, with the ability to identify the precise cause of an out-of-tolerance condition. Kinaxis "thought leader" Trevor Miles views quick responsiveness as a critical corrective to the errors that plague any demand forecast. Speaking at the IE Group's recent High-Tech Forecasting & Planning Innovation conference in San Francisco, he noted that forecast errors by the top consumer packaged goods companies range between 19 and 43 percent. S&OP can help to offset that shocking gap by enabling them to plan for variance.

Mike Groesch, vice president of S&OP with NCR Corp., said the process is an invaluable tool in a configure-to-order environment - yet another technique for coping with demand variability. The problem, he said, is that too many companies - including, until recently, NCR - fail to separate their tactical and strategic efforts. The first stage of S&OP is basic execution - "the weekly grind," as Groesch put it. The people who handle order management and fulfillment can't also be responsible for the long-term aspects of real S&OP, with its monthly and quarterly planning cycles. In Groesch's words, sales and operations execution (S&OE) is the "foglights," while S&OP represents "the headlights [that shine] further." Don't make the mistake of conflating the two.

So why, according to just about any survey out there, are most companies still stuck in the first or second stages of adopting S&OP? My guess is they view it primarily as a matter of acquiring technology - and vendors aren't doing enough to convince them otherwise. S&OP is a long, tough road to travel, but the rewards at the end are substantial. You need to redefine your underlying processes and - horror of horrors - get the various disciplines within your supply chain to talk to one another. Of course you also need someone at the top to drive the effort and cut through the fog of acronyms and marketing hype. If you don't have that, perhaps you ought to be in a business where demand is predictable and customers are married to you forever. Like management consulting.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article