Is S&OP ready to leave its supply chain nest?

Jul 10, 2017
  • finance
  • operations
  • SAP
  • Microsoft

Many organizations are now familiar with sales and operations planning (S&OP), the tactical process of aligning goals and key resources across the entire value chain in order to meet customer needs effectively. Most likely, many organizations have already experienced the benefits of a careful supply and demand balancing act: increased revenue, improved forecasting accuracy, reduced inventories, more successful new product introductions and phase-outs, etc. However, the transition from a volume-driven S&OP process towards a truly value-driven one doesn’t come naturally for most organizations.

The Finance connection

The key to value-driven S&OP lies in connecting the S&OP process with the financial budgeting and planning process, as opposed to focusing merely on simulating volumes. This integration starts with translating the financial P&L account into operational P&L information. More specifically, it requires the use of the past gross sales prices to arrive at a gross sales price forecast, taking into account a variety of fixed and variable costs. Subtracting the cost of goods sold and the cost to serve from this gross sales price will give the estimated operational margin, which can be set as a new baseline. This will then allow assessment of multiple scenarios from a financial perspective and a new approach to profit planning.

This may seem rather straightforward, but in reality this exercise entails quite a lot of challenges. One of them is the multitude of indirect, hidden costs and potential penalties that must be made transparent in order for S&OP to become truly value-driven – e.g. the costs of not delivering to customers as planned, of having to reallocate volumes to other distribution centers or of having to run an additional shift in production. But it is more than just a matter of making the indirect cost impact of such scenarios tangible; it is equally important to have supply chain controllers who interpret and make the best possible use of this cost data for informed decision-making. Do these hidden costs have to be clarified down to the last penny? No, but the more these costs have been taken into account, the better the decisions can be objectified.

Strategic considerations

Besides the financial aspect of value-driven S&OP, there is a strategic side to it as well. Today, I rarely see a formalized connection between the company strategy and the decisions emerging from the S&OP process – yet there should be one. Because if your organization has determined that Eastern Europe will be a key market in the coming years, you may want to favor a less-profitable customer in this region because of this strategic priority. So, in the long run, the transparency that you’ve created through your value-driven S&OP will also support better strategic decision-making!

To make sure that the organization’s strategic values can be captured into the S&OP decision-making process, companies should translate their strategy into a set of simple rules that make it easier for managers to seize opportunities that come their way. Such a mix of boundary rules, priority rules, timing rules and exit rules has proven to be very effective when it comes to decision-making in an ever-more complex world.

A new approach to S&OP

Very few companies have reached this level of S&OP maturity so far. However, organizations are increasingly aware of the fact that fast and effective decision-making is a key differentiator in a volatile world. Only if all the relevant data is available on the fly can managers decide swiftly based on simple rules. In that case, a solid, value-driven S&OP process will immediately pay off.

In view of all this, one more question comes to mind: should Supply Chain still take the lead in the S&OP process? Personally, I believe that S&OP is ready to leave its supply chain nest. It is a process at the intersection of sales, operations, supply chain, and increasingly finance as well. S&OP is a fully fledged strategic supply chain process, and it should be recognized as such.

Author: Kristof De Backer. You can connect with Kristof on LinkedIn.