Blog post written by Jim Scarlata, COO, SMB Value Partners, Inc.
“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett
This certainly speaks to the importance of planning, doesn’t it? I’d like to speak to a business process that can yield significant value: S&OP. In this first post I’ll define, describe and explain it, and in the next post I’ll answer the “so what” you’ll probably be asking.
S&OP stands for Sales and Operations Planning, and it is a business process developed several years ago, now used by many organizations across many different industries, business types, and organization structures (including for-profit and non-profit entities).
At its basic function, the S&OP process allows an organization to:
- Regularly review its consumer/client demand
- Review performance against prior plan, understanding key misses
- Construct short-term forecasts using historical sales as a basis
- Review the short term (usually 3 and 6 month) production plans
- Examine overall inventory levels and any backlogs of key products or SKUs (typically using an “A,B,C” designator based on volumes)
- Agree upon customer lead times for key products
- Set manufacturing staffing/production levels for the current period under review
You’ll note that while these S&OP functions may appear to be more relevant to SMB manufacturing and/or distribution companies, we find that savvy non-profits/associations utilize S&OP as part of their larger portfolio management processes. S&OP plans and measures the key inputs and outputs of the value creation process.
One of the key points we stress with our clients is that there is no one single “best” way to implement an S&OP process in their organization. Every organization will define and manage S&OP in a different manner. I learned this by personally managing the demand forecasting and S&OP processes at two different organizations.
In general, S&OP best practices include the following:
- Retrieve relevant information:
- Sales (sales, web hits, new memberships), and with Marketing (forecasts), and
- Operations and other business functions (inventory creation/procurement, program execution, promotions, advertising, etc.), and
- Analyze trends in support of the forecasts submitted during the current process
- Review and agree upon the forecasts while revising inventory if needed
- Align available organization capabilities (e.g. production, sourcing, ads, promotions, etc.) to meet the forecast
- Review all decisions made to finalize the plan for implementation as part of the current review
- Participation in the process requires the active participation of the key business managers and the related members of the senior leadership team. This is required as the process output and performance monitoring are key to the short-term success of the overall organization
Finally, the process cycle and planning horizon of S&OP is dependent on the specifics of the organization and industry. Short product life cycles, high demand environments and volatility require more frequent S&OP planning than steadily consumed products and services.
Our experience shows that at a minimum, a quarterly S&OP cycle would be relevant for a smaller organization with lower volatility, while monthly meetings are an absolute necessity for a higher volume, dynamic business.
The most important benefit of the S&OP process, however, is its ability to connect all company functions on the periodic basis of its comprehensive business review structure, and normally includes sales, marketing, membership, web/blog teams, engineering, manufacturing, finance, supply chain/sourcing and human resources. Just think of all those processes and connections that resulted in someone sitting in the shade under that tree, because that’s what it takes to plan and operate a business. Warren Buffett certainly knows the value of that process.
Well, that’s the short version of the “What” about S&OP. In my next post I’ll discuss the “Why” or “So What” about this business process. Feel free to contact SMB Value Partners with any questions you may have about implementing S&OP within your organization.
Jim Scarlata, COO, SMB Value Partners, Inc.
Click here to read the next post in the S&OP Bolg Series
See also the related Posts: Beware of What You Reward: Part-One
and Part-Two
Click here: see our other SMB Value Partners blog posts
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