Imagine a football team strategizing to win a game. The steps have to be organized prior to the game in order to make sure, for instance, that Player A will be upfield waiting for Player B on defense to pass him the ball. The last thing the team wants to happen is for that defense player to pass a ball to nowhere and allow it to get away from them.
Sales and operations planning is a complex process for companies who, like the football team in the example, don’t want to lose the ball on future sales due to lack of preparation.
What is S&OP?
Much like a football team would rely on its coach to consolidate the strategy, a business organization relies on its leadership to establish and iterate S&OP.
S&OP, or sales and operations planning, is a management process that focuses and synchronizes the various teams of an organization in order to ensure supply production matches with demand.
In a small business, this is typically a very narrow process in which they really only have to look at inventory. A ten-person team selling handmade earrings via Instagram is just going to sell whatever stock they have during a sales drop. Larger companies selling various items or services, however, need to implement planning activities to stay on track and ensure they meet demand — without wasting resources, productivity, or time.
The advantages of a thorough S&OP plan go even further than simply establishing efficiency.
When implemented effectively, some of the benefits of sales and operations planning include:
- Increased accuracy of forecasts.
- Better visibility into sales.
- Reduced incongruencies between the supply and demand sides of the supply chain.
- Lower inventory costs thanks to reduced buffer product.
- Higher customer satisfaction and reduced last minute costs to the company thanks to better delivery timing.
- More harmonized operations among departments and teams.
- Improved customer service levels.
- Improved effectiveness of product launches and marketing initiatives.
- More predictable operating performance.
Altogether, these benefits add up to a big conclusion: timely meeting of goals, of AOP (annual operations plan), and increased revenue.
Sales and operations planning process: how it works
The S&OP planning process consists of several steps that are usually run on a monthly cycle. The amount of steps and exactly what they include vary according to the organization and its setup, but they normally follow a similar pattern to this:
1. Gathering data: Information is collected about past sales, existing forecasts, and deals in the works. Trend information across the business is analyzed. Current inventory and assets are also taken into consideration.
2. Demand planning: In this stage the aforementioned forecasts are validated, and demand is not only predicted but influenced. Sources of demand should be understood while accounting for demand variability. Customer service policies, promotion plans, and new products fall into this category.
3. Supply planning: The ability to meet demand is assessed by reviewing inventory, production and distribution capacity and constraints, and scheduling operations.
4. Reconciliation AKA Pre-S&OP: Demand and production plans are aligned, accounting for financial and scheduling considerations. This is the last step before the plan is operationalized.
5. Finalize S&OP: An executive meeting is carried out to receive final input, review the final version of the plan, and release it to be implemented.
After step five a company should circle back to step one and begin the process over again; repeating this process regularly ensures the company stays on track with current data and projections. After all, supply and demand capacity for December 2020 might not match what June 2021 has in store.
As you might expect, taking care of all these steps requires a great deal of cooperation between teams and departments!
It is not enough to just put into practice a certain S&OP strategy: it is important to know that you are implementing it as efficiently as possible so that you can meet the increasing needs of the entire value chain.
To do this, you need to know which current KPIs to track, where to set them, and how to measure the available data to boost performance and keep customers coming back to you.
Take a look at these 5 important S&OP metrics that will help you make sure your S&OP strategy is still on track.
1. Percentage On-time Delivery to Customer
OTD measures the overall performance of your supply chain. At a basic level, OTD is expressed as a ratio of units delivered on time to total deliveries made over the same period. The benefit of OTD tracking for S&OP is that it allows you to track the quality of your customers’ service to comply with SLAs associated with delivery windows. Your company should use specific data in writing. This concerns internal planning as well as publicly available SLAs for your customers.
2. Production Plan Adherence
This percentage determines how well actual production is meeting the target as determined by your S&OP team. The key figure is calculated as “Planned Production – Actual Production/Planned Production”.
Measuring this value allows you to determine the degree of compliance of the existing equipment with the standards and plans. You can also use Manufacturing Compliance to establish a baseline against which you can measure future manufacturing performance to ensure the company is meeting growing customer needs.
Besides, this indicator will help you identify the main reasons for the slowdown in production.
3. Forecast Accuracy
When used correctly and with well-defined standards, this metric helps determine the overall success of a company. The common problem with measurement is that it is often weighted disproportionately to its value, and, as a result, can widely vary. The most confusing thing is that most often, it is not clear, what is being measured, so:
- Start with a clear understanding of the specific situation and weighing the real need for measuring this metric. For example, if you’re selling fresh food products, then forecast accuracy is critical to avoid waste and associated costs. However, in the case of selling machine parts, you should pay attention to other aspects of planning.
- Next, you need to determine which metric you are measuring, as many additional numbers fall under the “forecast accuracy” heading, including Forecast Error, Mean Absolute Percent Error, and Mean Average Deviation.
4. Order Cycle Time
This metric is the finest snapshot of your entire order fulfillment process. This indicator can refer to two different numbers:
- the time between the moment when a customer places an order and the time when this order is received;
- the time between two consecutive customer orders or deliveries to a given customer.
Otherwise, order cycle time offers an accurate pulse check of your production, inventory, supply chain, and shipment, helping you pinpoint the health of your end-to-end supply chain based on the amount of cumulative downtime.
5. Capacity Utilization
Capacity Plan vs Actual is expressed as a percentage of the total production capacity and helps determine how close is the current production capacity to full capacity. This is extremely important when developing production plans.
For example, if with a total production of 1000 units, a plant currently produces only 850, that means it is operating at 85% of its potential capacity. Also, the calculation can work in reverse, helping to determine how much additional bandwidth a plant has and therefore how much more output can be planned.
Keys to successful S&OP
While the steps for an effective S&OP process are straightforward, a number of challenges can get in the way of implementing them. According to Forbes, only 2 out of 5 companies believe their processes work properly. Some reasons for ineffective S&OP may be:
- Difficulty establishing cooperation among teams.
- Poor demand-planning and forecasting.
- Creation of an overly complex S&OP plan.
- Lack of S&OP education and training.
- Unaligned metrics across departments.
The coronavirus has also caused a noticeable disruption to supply chains during 2020 and 2021, adding a new layer of challenges to sales and operations planning that isn’t going to expire any time soon.
To tackle these challenges to sales operations in 2021 and onward, the key is in improving data collection and analysis methods. Such a data-driven sales method necessitates changes to the sales and operations process as well as to the mindset of sales leaders in an organization.
With a data-driven foundation of practices, companies are able to take on more dynamic planning and selling policies, making them more flexible to a changing market and supply chain. Organizations also gain the ability to respond more quickly to external and internal changes
This can be accomplished with dynamic guided selling, a seller-focused concept that enables sales teams to have better visibility into pipelines and deals, gain flexible control over the sales process, and use data to their advantage in selling.
With the right software, sales leaders and their teams can harness the power of dynamic guided selling to streamline sales and operations planning.
Revenue Grid’s guided selling tool incorporates a number of useful features essential for successful S&OP. Revenue Grid’s pipeline visibility feature is particularly helpful for sales leaders analyzing S&OP metrics to understand sales and establish best practices. The program gives a snapshot of the health of the pipeline, key metrics, and reasons behind scores or dropped sales. Leaders and reps alike can see where a deal stands in a matter of seconds, allowing for better judgment on where supply should be at for products.
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Taking it a step further than visibility, the product features interactive, contextual alerts that literally guide sellers toward the next best choice. These Revenue Signals are the driving force behind guided selling: they remove guesswork, help reps stick to the established sales process and provide predictability to deals, which ultimately makes sales and operations planning much simpler.
Revenue Grid integrates directly with Salesforce, which makes it easy for teams to incorporate it into daily operations. Learn more about how to beat the sales challenges of 2021 by downloading the whitepaper here.