Sales and operations planning process

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Sales and operations planning process

  1. 1. Paper on the Sales and Operations Planning Process (S&OP)This paper will explain how the Sales and Operations Planning (S&OP) processcan enable an organization to deliver a higher level of customer service, reduceinventory levels, shorten customer lead-times, stabilize production rates, allowmanagement to have better control of the overall business, and ultimately buildteamwork between the sales, operations, and finance functions of anorganization.As shown in the image on the right, the S&OP process is an integral piece of theentire organization from a planning and capacity perspective, and can be used asan effective tool to produce successful results within the company.The S&OP process involves a cross-functional team that has an overall objectiveof linking the strategic plan and operational plan with the functional plans. Itrequires participation from many levels and functions in the organization,including senior management who will ultimately ensure that the process and theplans developed during its execution are consistent with or support theorganization’s goals and strategy. Involving the right people doing the right thingsat the right times and places is important to a successful institutionalization of theprocess.It is imperative that the individuals involved in the implementation and executionof the sales and operations plan understand the overall process. Also, theseindividuals should have a detailed understanding of the sub processes in whichthey participate or have overall responsibility.
  2. 2. The S&OP team that implements the process must not only understand theprocess, but they must also have the ability to document their understanding in away that will communicate it to the rest of the organization. Understanding is veryuseful for anyone affected by the process, and that typically includes mostmanagers and professionals in the organization.The sales and operations planning process is an iterative process with the plansbeing revised in each cycle. Typically, as each new cycle begins, the oldestmonth of data is dropped and a month is added at the end of the planninghorizon.The S&OP Process is composed of five sub processes.The S&OP process is not a one-time event that occurs only in a monthlyexecutive S&OP meeting. The process begins shortly after the month-end resultsare reported and involves middle management, with the results of the processpresented to upper management on a monthly basis. If a major issue related todemand or supply occurs shortly after the executive S&OP meeting, well-organized S&OP users will conduct an abbreviated and accelerated S&OPprocess. They will complete the pre-S&OP process very quickly, focusing only onthe items that are causing issues within the organization. Once this is complete,they will conduct the executive S&OP meeting and make the necessarydecisions. Even though the process is expedited, the same process andprocedures are maintained to ensure consistency.This paper will introduce the formats used for summarizing the sales andoperations plans for each product family and will then explore the sub processes..Individual functional areas may have formats for organizing and presenting theirplans, but a cross-functional view of the plans is required for a cross-functionalprocess. The sales and operations planning grids that are presented in this topicprovide that cross-functional view. This view allows each function to see theirown data as well as the data from the other functions. This holistic view of thedata should enable better decision-making.The cross-functional grids combine the demand, supply, and inventory or backlogdata for a product family and a number of periods on a single page. The gridscan be produced manually, using a spreadsheet program, or from a sales andoperations planning computer application subsystem.The grid for each product family would typically be developed in terms of theprimary unit of measure and then converted to monetary units to facilitatecomparison with the business plans. A consolidated S&OP grid for all productfamilies would be stated completely in monetary units.There are two basic forms of the grid.
  3. 3. Basic Content of S&OP GridThe basic contents of the S&OP grid are shown below.The body of the fully expanded S&OP Grid can be viewed as 13 elements. Thedetails of each element will be explored in the following pages. The first elementprovides the title and the date. One or two lines of static information about theproduct family follow the title and date.The three main elements of the sales and operations planning grid are:• Demand or sales plan• Supply or production plan• Inventory or backlog planTypically, supply and demand issues and assumptions follow the three mainelements.
  4. 4. Demand Plan DetailsThe section of the sales and operations planning grid related to the demand orsales plan consists of four rows.The first row contains the sales forecast for current, past, and future periods. Itcontains the forecast that was current at the beginning of each period of history.For example, the sales plan is 80 for March and 90 for November.The three rows after the sales plan contain historical data related to actualperformance. First, the actual sales for the period are shown. For example, theactual sales for December and January were 48 and 62 respectively. Next arethe period variances of actual sales from forecast. In this example, the Decembersales plan was 50, while actual sales were 48. Therefore, the difference isnegative two. Last is the cumulative difference or variance for each period ofhistory. Through February, the sales plan was 180, while actual sales were 177.Therefore, the cumulative difference is negative three.Supply Plan DetailsThe term supply plan typically means the production plan, but it can mean apurchase plan when the product family is purchased from another organization.The terms supply plan, production plan, and operations plan are frequently usedinterchangeably. However, operations plan and supply plan are more descriptiveand apply to both internal production and subcontracted, or outsourced,production. Note that the first two rows of the grid below are only included todiscuss this section of the S&OP grid. Normally they would only be shown at thetop of the full S&OP grid.In the expanded version of the S&OP plan, the supply or production plan elementconsists of four rows.
  5. 5. The first row contains the supply or production plan for past, current, and futureperiods. It contains the supply plan that was current at the beginning of thatperiod for each period of history. For example, the production plan is 80 forMarch and 70 for November.The three rows after the production plan contain historical data related to actualperformance. The first of these contains the actual supply or production for theperiod. For example, the actual supply for December and January were 50 and58, respectively. The next row contains the difference or period variance of actualsupply from the planned supply. In this example, the planned supply for Januarywas 60, while the actual supply was 58. Therefore, the difference is negative two.The final row is the cumulative difference or variance for the periods of history.Through February, the production plan was 180, while the actual amountproduced was 178. Therefore, the cumulative difference is negative two.Inventory Plan DetailsThe following section of the sales and operations planning grid is related to theinventory plan, and would apply to a make-to-stock environment. Keep in mindthat the first two rows of the grid below are only included to discuss this sectionof the S&OP grid. Normally, they would only be included at the top of the fullS&OP grid.The inventory plan element actually consists of at least three rows, and mayinclude additional rows.The first row contains the planned inventory at the end of each period for past,current, and future periods. It contains the planned ending inventory for thatperiod. For example, the inventory plan is 20 and 10 for March and June,respectively.
  6. 6. The second row contains the actual inventory for the period. For example, theactual inventory for December and February were 22 and 21, respectively.The third row contains the difference between the planned and actual endinginventory for each period. Note that cumulative difference has no value in thiscase, since inventory is an absolute data point. In this example, the inventoryplan in December was 20 and the actual inventory was 22. Therefore, thedifference is two, which could indicate that either sales were on target and twomore units were produced than planned or sales were two fewer than forecastedand the production plan was executed as planned.Additional rows could include measures of inventory performance such as thedays worth of supply represented by the on-hand inventory, turnover ratio, andthe line-fill rate.Backlog Plan DetailsThe section of the sales and operations planning grid that is related to thebacklog plan is applicable to an assemble-to-order or make-to-orderenvironment. A backlog plan refers to customer orders received but not yetshipped. Keep in mind, the first three rows of the grid below are only included todiscuss this section of the S&OP grid. Normally they would only be included inthe top of the full S&OP grid.The backlog plan element consists of at least three rows and may includeadditional rows.The first row contains the current planned backlog at the end of each period forpast, current, and future periods. For example, the backlog plan is 30 and 20 forDecember and March, respectively.The second row contains the actual backlog for the period. For example, theactual backlog for December was 38 and February was 41. The third rowcontains the difference between the planned and actual ending backlog for eachperiod of history. Cumulative difference has no value in this case. In thisexample, the backlog plan in December was 30 and the actual backlog was 38.Therefore, the difference is eight, which could indicate either sales were on targetand more units were produced than planned or sales were fewer than forecastedand the production plan was executed as planned.
  7. 7. The additional rows could include measures of inventory performance such asthe order fill rate and the days or weeks of backlog.The Full Grid – Make-to-StockThe following is an example of a complete sales and operations process planninggrid for a make-to-stock manufacturing environment. In this environment, a firmserves their customers from finished goods inventory. Therefore the grid willinclude a plan for inventory, but no backlog plan. In the grid below, the inventoryplan for December was 20 and the actual inventory was 22. Therefore, therewere two more units of inventory than originally planned. The difference betweenthe planned and actual inventory will be discussed later in the paper.The Full Grid – Make-to-OrderThe following is an example of a complete sales and operations planning processgrid for a make-to-order manufacturing environment. In this environment, a firmwill produce goods based on actual customer demand. Therefore, a backlog planinstead of an inventory plan is used to assist with the sales and operationsplanning process. In the grid below, the planned backlog for December was 30and the actual backlog was 32. Therefore, there were two more units of backlogthan originally planned. The difference between the planned and actual backlogwill be discussed later in the course.
  8. 8. The sales and operations planning grids provide a cross-functional view of thefunctional plans that should enable better decision-making.There are two basic forms of the grid:• One for product families that are made to stock or finished from stock• One for product families that are designed or produced to customer orderHorizontally, the grid shows a few periods of history, the current period, and theremainder of the sales and operations planning horizon.The demand plan and supply plan sections show the planned and actual data forthe periods of history and the planned data for the current and future periods.The inventory and backlog plan sections show the planned and actual data forthe periods of history and the planned data for the current and future periods aswell. The columns containing history can be used as performance data related tothe firm.
  9. 9. Generate ForecastsAs shown below, the sub-process of generating forecasts is step 1 of the S&OPProcess. This sub-process could be viewed as a part of the regular businessoperation, but it is vital to the successful operation of the sales and operationsplanning process.This step essentially involves closing the books for the just-completed month andprogrammatically generating the statistical forecasts. Valuable data formeasuring the performance of the sales and operations planning process isgenerated as part of closing the books.The actual sales, and hopefully demand, can be captured and compared to boththe statistical and approved management forecasts. The actual production canbe captured and summarized to the product family level and that can becompared to the production plan for that period. The closing inventory and/orbacklog positions can be captured and summarized to the product family leveland then compared to the plans.Generate Forecasts OverviewThe process of generating the forecasts begins shortly after the completion of amonth. The month-end information systems processing is completed and therequired data related to such items as actual sales, production, and inventory isdisseminated to sales and marketing as inputs for the demand plans.This sub process must be executed as soon after the end of the month as ispractical to make the overall sales and operations planning process a timely one.A typical target would be that the designated users receive all data by the secondbusiness day following the end of the previous month. This is important becauseif the designated users didn’t receive the data until 10-15 days into the newmonth, that month could be over before the sales and operations planningprocess could be completed.The exact steps and how they are performed depend on the specific systemsand procedures at each organization
  10. 10. Implementation Considerations for Generating ForecastsThe forecasting organization and the processes it employs will have the biggesteffect on how the process is executed.What will happen if bottom-up projections from the sales force are used?If bottom-up projections from the sales force are used, worksheets may need tobe generated, the responses tracked and accumulated, and the results organizedand summarized.What will happen if the forecasting processes generate product familyprojections?If the forecasting processes generate product family projections, they can bepassed directly on. If they do not, the lower level forecasts will have to beaggregated into product family forecasts.If the operations planning and control and forecasting applications areindependent, data will have to be transferred from one to the other, which can bedone programmatically or manually.The specific requirements for the actual demand and sales analysis data must bedefined. In practice, the recent history and year-to-date data may only go directlyto the demand planning team. The supply planning team would receive itindirectly when the preliminary demand plan is forwarded to them.Key Performance Indicators for Generating ForecastsThe primary indicator of the effectiveness of this process is whether thedesignated users receive the information specified by the deadline specified. Forexample, the statistical forecasts and key performance indicators are due on thethird day following the previous month-end. An additional measurement ofeffectiveness is the accuracy of the forecasts and performance information. Forinstance, the established goal for forecast accuracy is 96%.The primary indicator of efficiency of the process is the user and informationsystems costs incurred to prepare and disseminate the information.Can the information be generated with the push of a button on a monthlybasis or does it take three individuals two days to prepare the information?Obviously, if data integrity were high within the organization, the first scenariowould be more economical and timely, and would minimize data entry or clericalerrors.There is no commonly used indicator of the adaptability of the process. Onemeasurement of adaptability is the time and cost to implement changes in thedata reported and in the formats in which it is reported. For instance, uppermanagement has requested that the data be presented in a specific format.
  11. 11. Can we incorporate these changes into the current process in an efficientmanner?If so, an organization will increase the probability of the reports being utilized todrive change in the organization. Otherwise, management may use other meansto understand the data.Topic SummaryThe sub process of generating forecasts is the first step of the S&OP process. Itbegins shortly after the completion of a month and must be completed in a fewdays for the overall process to be timely.The month-end information systems processing is completed and the requireddata is formatted and disseminated to those who need it for input into demandplanning. The precise steps of the sub process and how they are performeddepend on the specific systems and procedures at each organization.This step essentially involves closing the books for the just-completed month andprogrammatically generating the statistical forecasts. Valuable data formeasuring the performance of the sales and operations planning process isgenerated as part of closing the books. Actual sales and demand can becaptured and compared to forecasts. Actual production can be compared to theproduction plan. The closing inventory or backlog positions can be compared tothe plans.The forecasting organization and the processes employed by an organization willaffect how the process is executed. Overall, this sub process is vital to thesuccessful execution of the sales and operations planning process.
  12. 12. Demand PlanningAs shown below, the sub process of demand planning is step 2 of the S&OPprocess.This sub process is primarily a sales and marketing responsibility, but the newproduct development team also plays an important role. They typically have thebest understanding of when new products will be launched. That informationaffects the forecasts for the new product. It may also affect the forecasts forexisting products.The outputs from the previous sub process and inputs from sales and marketingare transformed into management-approved forecasts.The process does not build new plans from scratch. The management forecastsand the approved S&OP grids, along with the outputs from the previous subprocess, are the basis for the revised plans. The process also populates theinitial S&OP grids with the forecast data and demand planning assumptions andissues.Demand Planning OverviewThis process is composed of three steps:Develop management forecastsThe statistical forecasts are combined with market intelligence to create productline forecasts that reflect history, current conditions, and expectations of futureconditionsReview and approve forecast (management task)This step brings senior sales and marketing management into the process andgets their approval of the forecasts.Create the initial S&OP gridsThe forecasts are placed in the approved S&OP grid from the previous cycle tocreate the initial grid for the current period.Techniques and Considerations – Demand PlanningThe way that market intelligence is captured and applied will differ byorganization, but some general guidelines apply to most situations.
  13. 13. Make-to-stockThe forecasts for make-to-stock product families will be based on the statisticalforecasts. The demand planning team for a product family takes the statisticalforecasts and uses their collective knowledge to identify when history will not bethe best predictor of future demand. They then override the statistical forecasts toreflect their collective judgment. The plans of selected customers may alsoinfluence the management forecast.For example, suppose a product family has had stable demand over severalyears with a slight, but steady, upward trend. The statistical forecasts wouldproject that trend into the future. Assume that the marketing department isplanning a major promotion in advance of a rumored launch by a competitor of aproduct family with additional features. They would modify the forecast for theproduct family to reflect a growth in demand beginning two weeks after thepromotion starts and a decline in demand 30 days after the launch of thecompetitor’s product.Make-to-order and engineer-to-orderThe forecasts for make-to-order and engineer-to-order product families willdepend more heavily on human input. This is because the customer’s plans are abetter predictor of the future than is history. This means that field sales forceinput is very important in this situation and it should be requested in a way thatmakes it easy for the sales force to respond to.For example, the sales force could be given their individual forecasts from theprevious month on the 20th of the month and asked to update it by the first of themonth with the latest plans of key customers and the status of outstandingproposals, bids, and quotes. This information would be aggregated and used tooverride the statistical forecasts.Purpose of Management ForecastsSome organizations will develop the management forecasts through a series offace-to-face encounters, while other organizations bring the various groupstogether with a formal demand planning meeting. Large organizations are morelikely to use the latter approach than small ones. When considering twoorganizations of similar size, the one with a hierarchical organization is morelikely to hold the formal meeting.
  14. 14. Key Performance Indicators – Demand PlanningThe primary indicators of the effectiveness of the demand planning process are:• The cumulative variance between the demand plan and the actual demand.This is typically measured for the periods of history on the grids and for the fiscalyear-to-date.• The timeliness of completing the process and getting the outputs to the supplyplanning team.A secondary indicator of effectiveness is identification of issues. This is typicallymeasured by the lack of surprises. The primary indicator of the efficiency of thisprocess is the cost of executing it each month. However, those costs may bedifficult to separate from the normal operations of the functional units. The laborhours spent on the process each month are typically easier to capture and areused as an indicator.The primary indicator of the adaptability of the process is its ability to respond tochanges in the marketplace and still produce the outputs on time.Topic SummaryThis sub process is primarily a sales and marketing responsibility, but the newproduct development function also plays an important role. The outputs from theprevious process plus inputs from the sales and marketing department aretransformed into management-authorized forecasts and the initial S&OP grids.This process is composed of three steps:• Develop management forecasts• Management review and approval• Create the initial S&OP gridsThe way that market intelligence is captured and applied will differ byorganization, but some general guidelines that apply to most situations.• The forecasts for product families that are made-to-stock will be based on thestatistical forecasts• Make-to-stock product family forecasts are based on statistical forecasts• Make-to-order and engineer-to-order product families will depend more heavilyon human inputThere are three reasons for bringing the senior sales and marketing managersinto the process:• They can question the assumptions and the forecasts• They are not surprised during the executive meeting• They are committed to the forecast
  15. 15. Supply PlanningAs shown below, the sub-process of supply planning is step 3 of the S&OPProcess. This sub-process determines how the demand plan can be satisfiedand whether there are adequate resources to satisfy the demand plan, and isprimarily an operations responsibility.The new product development team plays an important role in the process. Theytypically have the best understanding of when new products will be introducedinto production. That information may affect the available resources during theintroduction and ramp-up.The initial S&OP grids, targets for backlog or inventory, and any changes inresource availability are transformed into the updated S&OP grid with allconstraints identified.The process does not build new supply plans from scratch. The approved supplyplan from the previous period is included in the initial grids. This process needsonly to revise the plans to reflect changes since the plans were approved.Supply Planning OverviewThe supply planning process is composed of four steps:1. Develop the preliminary supply plan2. Perform Resource Planning3. Develop inventory or backlog plans4. Create updated S&OP gridWhat is the first decision that must be made in supply planning?First it must be decided whether anything has changed enough since last monthto require revising the supply plan. Quite frequently there is no reason to changethe plan other than to account for the passage of time. In this case, thepreliminary supply plan and the resource plan from the previous month’s plan arecarried forward.
  16. 16. On the other hand, when there are significant changes in the demand plan,inventory targets, backlog levels, or resource availability, the supply plan must berevised and tested for feasibility. In such a case, the inventory or backlog planmust be revised to reflect the actual events of the previous month, and then theS&OP grid must be updated.Who participates in this process?As stated above, the operations function has the primary responsibility for thisprocess. Representatives of the master scheduling, production, materials,purchasing, accounting, and distribution functions are potential members of thesupply planning team.The product development group must be represented in the supply planningprocess. That could be an individual from product development or an individual inmaterials or production who serves as an interface with product development.Inputs to the preliminary S&OP meeting include the completed S&OP grids,capacity requirements, and the supply and demand issues and assumptions.Supply Planning ProcessTechniques and Considerations - Supply PlanningAs with the demand plan, some organizations will develop the supply plansthrough a series of face-to-face encounters, while other organizations pull theeffort together with a formal supply planning meeting, or meetings. Largeorganizations are more likely to use the latter approach than small ones. Whenconsidering two organizations of similar size, the one with a hierarchicalorganization is more likely to hold the formal meeting.Resource planning determines whether the supply plan is feasible based on theactual and planned availability of a few critical resources. These resourcestypically have one or more of the following characteristics:• They take a long time to acquire and make ready for use• They require a large investment• There is a limited supplyContractual limitations can be more important than physical resources whenproduction is subcontracted or outsourced. For example, the contract mayspecify minimum and maximum production volumes for the life of the contractand those limits cannot be changed without renegotiating the contract.
  17. 17. Production Planning MethodsThree production planning methods can be employed.The chase production method, or demand matching approachFirms that employ this approach try to match production to demand. Changes indemand cannot be matched before they materialize and changes in productiontend to trail changes in demand. When this method is used, inventory or backloglevels are relatively constant and production varies. This method is mostappropriate when there is a great deal of flexibility in the resources.For example, a contractor may not have any employees and hire only thelaborers and skilled craftspeople needed to meet the contracts. There is a limit tothe magnitude of change that can be absorbed when this method is employed. Itis highly unlikely that the contractor could absorb a ten-fold or one-hundred-foldchange in business volume.The level production methodFirms that employ this approach try to maintain steady production. When thismethod is employed, inventory or quoted delivery time is used to absorb changesin demand. This approach is most appropriate when resources must be added ordeleted in large increments or when the increments are very difficult to implementand reverse.For example, a university may maintain the facility and faculty level even thoughthe projection is for a one- or two-year decline in undergraduate enrollment.The hybrid production methodFirms using this approach plan changes in production level in advance tobalance the costs of changing capacity and the costs of not changing capacity.For example, resorts maintain one level of staffing and capacity for the primeseason and a lower level of staffing and capacity for the off-season. The facilitycapacity is the hard constraint on the ability to accept more guests during theprime season.Imbalance of Resources – Supply PlanningThe first category of imbalance must be resolved by operations beforecompleting the supply and inventory or backlog plans. The other two categoriesof imbalance must be documented as issues, and they must be addressed in thepreliminary S&OP meeting.Relationship between Demand and Supply PlanningThe following S&OP grid illustrates the relationship between the demand andsupply planning process in a make-to-stock environment. The S&OP grid shows
  18. 18. how the planned results of the demand and supply plans will determine theoverall level of inventory. For example, in December the demand plan was 50and the supply plan was 50. Therefore, the difference is zero, and the inventoryplan will stay at 20.Key Performance Indicators – Supply PlanningThe primary indicators of the effectiveness of the supply planning process are:• The cumulative variance between the supply plan and the actual supply. This istypically measured for the periods of history on the grids and for the fiscal year-to-date.• The timeliness of completing the process and getting the outputs to thepreliminary S&OP meeting team.A secondary indicator of effectiveness is identification of issues. This is typicallymeasured by the lack of surprises.The primary indicator of the efficiency of this process is the cost of executing iteach month. However, those costs may be difficult to separate from the normaloperations of the functional units. The labor hours spent on the process eachmonth is typically easier to capture and is used as an indicator. The primaryindicator of the adaptability of the process is its ability to respond to constraintsand changes in the supply and still produce the outputs on time.
  19. 19. Topic SummaryThis process determines how the demand plan can be satisfied and whetherthere are adequate resources to do so. The initial S&OP grids, targets forbacklog or inventory, and any changes in resource availability are transformedinto supply and capacity plans. It is primarily an operations responsibility, but thenew product development function plays an important role in the process.The supply planning process is composed of four steps:1. Develop the preliminary supply plan2. Perform resource planning3. Develop inventory or backlog plans4. Create updated S&OP gridResource planning determines whether the supply plan is feasible based on theactual and planned availability of a few critical resources. Contractual limitationscan be more important than physical resources when production is subcontractedor outsourced.An imbalance between the resources available and the resources required tomeet the demand plan can fall into one of three categories:• The imbalance is small enough and/or short enough in duration that it can beresolved within operations – this category of imbalance must be resolved byoperations before completing the supply and inventory or backlog plans• The imbalance is too large or too long to overcome within the time requirement• The imbalance can be resolved, but will require actions that must be approvedby top management
  20. 20. S&OP Planning MeetingsThis topic explores the last two sub processes in the sales and operationsplanning process: the pre-S&OP and exec-S&OP meetings. They will be treatedas two separate processes, but they may be combined into a single step insmaller organizations.The grids from demand and supply planning processes, along with theexecutives’ knowledge of the business, marketplace, and economy are theprimary inputs to the processes. It is in these sub processes that issues areresolved and decisions are made. The decisions and approved game plan for theorganization are the primary outputs.Preliminary Meeting OverviewThe preliminary sales and operations planning meeting brings togetherrepresentatives of the demand planning and supply planning teams, the financedepartment, and the process owner to perform a product family by product familyreview of the plans. The process owner is the person whose ongoingresponsibility is the design and results of the process. He or she must have acomprehensive and organization-wide understanding of how the processoperates and how it interrelates with other processes.The main purpose of the meeting is to resolve as many of the issues as possibleso that the executive S&OP meeting can be kept at a reasonable length. Thepre-S&OP meeting must be highly structured because of the scope of material tobe covered and the potentially large number of participants. The agenda shouldbe distributed in advance so that the participants can be prepared to address theissues.
  21. 21. Preliminary Meeting ProcessThe participants in this process will vary widely from organization to organization.The structure of the organization and the degree of centralization will influencethe size of the team. The process owner and the demand and supply managersshould be participants. Other members of the demand and supply planningteams would typically also participate in this process. Click the arrow below tosee a list of the preliminary meeting’s outputs:The agenda for the executive S&OP meeting should be distributed before thatmeeting so that the participants can be prepared to address the issues. This maybe a single meeting or a series of meetings with time between meeting to do thenecessary research and analysis to document the alternatives.Techniques and Considerations – Preliminary S&OP MeetingTwo common considerations that must be addressed in defining andimplementing this step are keeping the resources required at a reasonable leveland making good use of the participants’ time. The major portion of effort in thisprocess is devoted to the review of the S&OP grids for each subfamily or family.However, this step should start with a review of the performance for the previousmonth and for the year-to-date. This review has several purposes.• Understand any variances or unusual numbers before the executive S&OPmeeting.• Spot any issues that may not pertain to a single product family.• Periodically the supply and demand strategies for each product family shouldalso be reviewed. One way to schedule this activity is to review one productfamily and its subfamilies per meeting.When a firm has a large number of product families and/or facilities, the numberof participants in the step and the expense of getting them involved in the stepbecome major considerations. Techniques for addressing these considerationsare summarized below.Number of participantsThe number of participants can become very large when there are a number offacilities or separate sales and/or marketing organizations for individual productfamilies. There are three basic approaches to controlling the size of the meeting.
  22. 22. • If the resources are aligned with the product families, meetings of the affectedparties can be held for each product family and then a summary meeting can beheld to consolidate the product family plans into a set of plans for theorganization, document the unresolved issues, and prepare the agenda for theexecutive S&OP meeting.• If the resources are not aligned with the product families, this approach is lessappropriate because everyone except the sales and marketing representativeswould have to attend every meeting.One long meeting with scheduled time periods for product family or facility can beused to reduce the size of the meeting at any point in time. Multiple facilitiesIf the organization has multiple facilities that are geographically dispersed, it mustdetermine how to ensure that the remote facilities are represented in the process.One of three generic approaches is typically employed to involve these facilities.• Individuals at the central site can be designated to represent the remotefacilities. These individuals would communicate with the remote site before themeeting to identify their perceived issues and to get their input for the analysis ofthe alternatives.Product Family Focus – Preliminary MeetingsThe first decision that must be made for each product family or subfamily issimilar to the first decision in the supply planning process. If the plans for asubfamily or family are in balance and haven’t changed significantly from theprevious month:• There shouldn’t be any issues to resolve• The review can be done rather quicklyThere are three basic recommendations that can be made for each productfamily:• No change is required• Increase or decrease the sales plan• Increase or decrease the supply planIf product subfamilies are employed, the plans for the subfamilies must beaggregated to the product family level. However, the majority of the time shouldbe devoted to the product families where there are imbalances or issues toresolve. The S&OP grids are the primary source of data for these reviews. Inaddition to S&OP grids, some data may be presented graphically such as
  23. 23. product family monthly sales, cumulative demand and supply, and customerservice level.If the supply or demand plans must be modified, the alternatives must beanalyzed. This task is typically assigned to be completed in preparation for themeeting. However, the need for additional analysis may be identified during themeeting. The task would be assigned and a second meeting would be held tocover the open items.Managing Imbalances – Preliminary MeetingsA wide variety of methods can be employed to evaluate the alternatives forresolving imbalances. They all focus on balancing the costs of resolving theimbalance with the costs of not resolving it, and range from simple manual orspreadsheet analysis to more complex mathematical modeling and simulationmethods. The more complex methods are typically used where the decisionsinvolve large investments or are difficult to reverse. For example, adding capacityin the form of a petroleum refinery or semiconductor fabrication plant requires avery large investment and would require a more thorough analysis of the costsand benefits.Key points to keep in mind regarding managing imbalances include:• Decision-making in this step should be based on what is best for theorganization rather than what is best for a specific function or role in theorganization• When the decisions are made, the analysis should be documented• When the decisions cannot be made, the alternatives should be evaluated andthe evaluations documented• This information will go into the package for the executive S&OP meetingKey Performance Indicators – Preliminary MeetingThe primary indicators of the effectiveness of the preliminary meeting are:The number or percentage of the identified issues that is resolved at this leveland the acceptance of those recommendations in the final step.For example, the goal at this level is to resolve 90% of the issues identified in thepreliminary meeting, and 95% acceptance of all recommendations at theexecutive meeting.The timeliness of completing the process and distributing the agenda for theexecutive meeting.
  24. 24. For instance, the goal for distributing the agenda for the executive meeting isseven days prior to the meeting.Adherence to the meeting agenda.For example, the object is to complete all of the items on the agenda, within thestated time frame.The primary indicator of the efficiency of this process is the cost of executing iteach month. However, those costs may be difficult to separate from the normaloperations of the functional units. The labor hours spent on the process eachmonth is typically easier to capture and is used as an indicator.Executive Meeting OverviewThe executive S&OP meeting is the final sub process in the monthly sales andoperations planning process.The purpose of this meeting is to approve recommendations, make decisions,and issue the game plan of the organization. The outputs of the work that hasbeen done in the previous sub-processes are the primary inputs to this process.This would include any changes in supply that require senior managementapproval, such as:• The agenda for the meeting• Recommendations and analysis of the alternatives for unresolved issues• Revised S&OP grids for each product family and for the businessExecutive Meeting ProcessThe outputs of this meeting are the meeting minutes or summary, anymodifications to the business plans, and the finalized S&OP grids. These arecollectively referred to as the authorized game plan for the organization. Theobjectives of this meeting are shown below.Make the final decision regarding all issues raised in the processFor the issues that were resolved in the preliminary meeting, this can range fromaccepting the recommendations to overriding those recommendations. For those
  25. 25. issues that were not resolved, this would include reviewing the alternatives andmaking a choice.Review period and year-to-date performanceThe review would include customer service, new product launch, and the salesand operations planning process. Any changes in the plans and/or targets wouldbe decided and documented.Review the business plans and the monetized sales and operations plan forthe organizationThis review ensures that the two plans are consistent. When a significantdeviation occurs, a decision must be made whether to revise the business plans,the sales and operations plans, or both.Techniques and Considerations – Executive S&OP MeetingThis meeting should also be highly structured and keep to the agenda. It musthave a planned duration of no more than two hours, and preferably one hour.The meeting should never run over the planned time without unanimousagreement to do so – time is a most valuable resource and should be usedwisely.Among the most likely signs of a process that is not working are four interrelatedones:• All issues that have been raised are pushed to the executive meeting forresolution• The meeting agenda is followed when convenient• Executive meetings that drag on for hours• The most common decision is a decision to address the issue in the nextmeetingGraphical representation of selected data from the business plans and/or salesand operations plans can be effective in this meeting. Decisions should not bedeferred from meeting to meeting. Deferring the decision is in fact deciding thatthis issue is not significant at this time and that decision should be explicitly madeand documented. There may be good reasons for this.For example, a decision was made to change one or more assumptions and theanalysis of alternatives must be changed to take them into consideration. Thechanges may not be practical to make within the one-hour meeting. A meetingsummary must be complied and distributed as soon as practical after themeeting.
  26. 26. A significant event that affects the plan assumptions, the supply plan, or thedemand plan may require action before the next sales and operations planningcycle. This may require executing the entire process, but only considering theeffects of the event. This allows the process to be executed quickly and ensuresthat the decisions will be timely.Key Performance Indicators – Executive S&OP MeetingThe primary indicators of the effectiveness of this process are:Adherence to the agenda and completing on scheduleFor example, it is expected that through proper preparation in the preliminaryS&OP meeting, eight agenda items will be discussed in a one-hour time period.Timeliness of distribution of the meeting summary or minutesFor instance, in order for the executive S&OP meeting to be effective, theminutes and actions will be distributed within 24 hours of the meeting.Adherence to the plans in the following monthFor example, it was agreed that inventory would drop by 300 units in thefollowing month. Performance against that standard will be measured for the nextmeeting.The primary indicator of the efficiency of this process is labor hours spent in themeeting and in documenting its results. The primary indicator of the adaptabilityof the process is the continued use of the process as the business andrequirements change over time.
  27. 27. Topic SummaryThe work done in the preceding sub processes are transformed into a game planfor the organization in these processes. This is also where issues are resolvedand decisions are made.The preliminary meeting brings together demand planning and supply planningteam representatives, finance representatives, and the process owner to performa product family by product family review of the plans. The main purpose of themeeting is to resolve as many of the issues as possible. The preliminary S&OPmeeting has four primary objectives:• Make decisions regarding the balancing of demand and supply• Resolve issues and formulate a single set of recommendations• Document the issues that could not be resolved and the alternate course ofaction for each• Develop the agenda for the executive meetingThe major outputs of the preliminary S&OP meeting are a summary of the S&OPfor the business in monetary units and third-pass S&OP grids andrecommendations for each product family.The executive meeting is a structured meeting and should be kept to less thantwo hours in length. The purpose of this meeting is to approve recommendations,make decisions, and issue the organization game plan. The executive S&OPmeeting has two primary objectives:• Make the final decision regarding all issues raised in the process• Review period and year-to-date performanceThe major outputs of the executive meeting are the meeting minutes orsummary, any modifications to the business plans, and finalized S&OP grids.

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