Meanwhile, the operations and logistics people are responsible for the costs of making, moving, and storing products. They also understand that variations in your supply chain flow cost money because you need to pay for the space and the people to meet your peak demand, even if you aren't using that space and those people the rest of the time. Operations people want to make and store only as many products as are needed in order to keep manufacturing and logistics costs low.
This trade-off between sales and operations can lead to major conflicts in a company. In many cases, a sales department creates an unrealistic forecast, and the operations department is blamed for having too much inventory. In other cases, the sales department can't meet its revenue targets because the operations team was too conservative in its planning.
A common solution for this problem is a process called sales and operations planning (S&OP), which forces the sales and operations teams to coordinate and agree on their goals and targets.
S&OP usually starts with a sales forecast for a certain planning horizon. For example, the sales team might estimate that they could sell 1,000 widgets per month for the next 12 months. This is called an unconstrained forecast because it is based on a best-case scenario.
Once the forecast has been established, the operations team looks at the forecast and decides whether the numbers are reasonable and what it would take to manufacture that many products. In some cases, operations may not have the staffing, the equipment, or the raw materials to make all of the widgets that are called for in the unconstrained forecast. In that case, the operations team would ask the sales team to reduce their forecast based on all of the constraints that have been identified. Or, the operations team may need to make changes or investments that will enable them to meet the sales forecast.
S&OP is an iterative process that needs to be repeated so that the constrained sales forecast and the manufacturing production plan stay in sync. In many cases, the S&OP process involves senior executives from a company to ensure that trade-offs are understood and aligned with the corporate strategy.
S&OP may sound simple, but many companies struggle to make it work. Dr. Larry Lapide from MIT is one of the leading experts on S&OP. In his article "Sales and Operations Planning Part I: The Process" in The Journal of Business Forecasting, Dr. Lapide says that there are 10 factors that are required for S&OP success:
- Ongoing, routine S&OP meetings
- Structured meeting agendas
- Pre-work to support meeting inputs
- Cross-functional participation
- Participants empowered to make decisions
- An unbiased, responsible organization that can run a disciplined process
- Internal collaborative process leading to consensus and accountability
- An unbiased baseline forecast to start the process
- Joint supply and demand planning to ensure balance
- Support from an integrated supply-demand planning technology
- External inputs to the process
Read more about details about the S&OP process.
Fundamentally, S&OP is about sharing information and getting people to agree on a plan. There are a number of software companies that offer S&OP tools to help the sales and operations teams automate workflows and streamline the process.Before making an investment in S&OP software, it's a good idea to get input from consultants who specialize in S&OP and to check out the latest product reviews from software analyst firms. Companies whose products get high marks will often provide you with copies of these reports for free.