We’ve all heard of supply and demand. Demand is what consumers want, and supply is what companies have. But do you know how your business can bring supply and demand together to maximize profits and cut costs?
The secret is sales and operations planning, or S&OP. Sales & Operations Planning involves predicting future customer behavior and making decisions about inventory, sales, and other business operations based on those predictions.
At RTG Solutions Group, we believe that proven methodology, a commitment to people, and effective communication drive success. We love S&OP because it encompasses all of those things! It’s a tested-and-true strategy, encourages teamwork across departments, and requires consistent communication.
Today, we answer all of the big questions so that you can implement S&OP into your own organization and see the ROI. In this article, we cover the following questions:
- What is S&OP?
- Why is S&OP important?
- How does S&OP affect the supply chain and inventory management?
- Why do companies struggle with S&OP?
Let’s jump right in!
WHAT IS S&OP?
Sales and operations planning, or S&OP, is a multimodal business process. The goal it is essentially to balance supply and demand. Sounds easy enough, right? As it turns out, aligning your company’s supply to your customers’ demand requires extensive planning. And this is where S&OP comes in.
The starting point is a thorough analysis of consumer buying patterns. These patterns are then modeled to predict future customer demands. You then work backwards to align all business operations–inventory management, logistics, purchasing, manufacturing–to the customer behavior forecasts.
Because sales and operations planning touches so many different areas of the business–from marketing to manufacturing–it requires seamless cross-departmental collaboration. This collaboration often poses a challenge to companies whose departments typically work in silos.
WHY IS S&OP IMPORTANT?
Balancing supply and demand through S&OP may be tricky, but it is well worth it. Its primary benefit is profit maximization.
On one hand, it reduces inventory costs by eliminating waste. Excess and idle inventory eats up profits, and it’s a bigger problem than you might think. In fact, US retailers hold onto $1.36 of inventory for every $1 in sales! (Source)
But with strong S&OP, you can avoid over-stocks. This is because the inventory you have on hand is supposed to match the inventory that customers buy. The result is less waste and lower inventory costs!
On the other hand, sound practices through sales and operations planning can maximize your sales and improve the customer experience. Again, if your supply chain plan allows you to have the right inventory at the right time, then you’ll be able to fulfill every order you receive. Plus, consumers expect shorter and shorter delivery times, so the time savings from S&OP will enhance your customer service performance.
In other words, S&OP can be used to eliminate stock-outs and over-stocks, which means all the collaborative efforts can save you money. One market analysis found that overall inventory costs can be cut by 10% just by reducing stock-outs and over-stocks.
How does S&OP affect the supply chain and inventory management?
A successful S&OP plan should heavily influence inventory management and supply chain strategies. As we mentioned earlier, S&OP starts with forecasted demand and then works its way backwards through the organization.
Once you develop your consumer demand predictions, you work backwards to ensure all operations are in line to meet those demands. This means supply chain operations and inventory management need to be strategic, efficient, and carefully planned.
For one, you will need dependable supply chain partners who can adjust to your forecasts as they fluctuate. For even smarter planning, set up alternate sources for all supplies. This way, you will have back-up sources in case of supply chain disruptions.
In addition, your inventory should be informed by your demand forecasts. And because the goal of S&OP is to balance out supply and demand, you need strong inventory management policies that keep the “supply” side up to par.
In particular, inventory management policies should encourage accurate inventory data, which is essential to effective supply chain operations. Inaccurate inventory data is actually quite a widespread problem in the business world. One report found that the average U.S. retailer only has an inventory accuracy of about 63%!
Finally, automating inventory processes through Enterprise Resource Planning (ERP) systems will make your S&OP process more effective. ERPs were first designed to centralize and improve inventory management. However, today, they support a wide range of business processes.
ERPs are therefore invaluable tools in S&OP. This is true for a couple of reasons. First, they allow for centralized information-sharing across departments. Second, they encourage accurate inventory data, which is essential for successful S&OP but difficult to achieve.
These are just some examples of the many ways S&OP impacts the supply chain and inventory management.
Interested in more information about inventory management? Check out our article on How Better Inventory Management Leads to Increase in Profits!
Why do companies struggle with S&OP?
Many companies struggle to nail S&OP because it relies on a skill that organizations find difficult: cross-department collaboration.
The process of balancing supply and demand inevitably requires several departments to work together. So, business leaders must be able to break down walls between departments and open up lines of communication.
Just how many departments need to be involved in the fine orchestration? Well, that varies from company to company according to size, product type, and other factors.
Here are some departments that might be included in an S&OP process and the role they’d play:
- Senior Management: Facilitates conversation, accountability, and collaboration across departments.
- Marketing: Collects consumer data and models future customer demand predictions.
- Sales: Achieves sales according to inventory availability and S&OP targets. Also provides real-time updates on consumer behavior.
- Purchasing: Procures materials according to S&OP targets.
- Supply Chain/Logistics: Coordinates appropriate supply chain arrangements to ensure production can meet demand.
- Warehouse: Collects and reports accurate inventory data.
This list is by no means exhaustive. Sales & operations planning can – and should – be a universal roadmap that guides all areas of operations, and it requires expertise across various disciplines.
Therefore, every department has a role to play in the creation, achievement, and re-adjustment of strategies and goals. And, importantly, departments cannot work in silos. They should have access to all the same information and consistently work together to achieve common goals. Teamwork will always win the day!
S&OP is the key to balance what your consumers want with what your organization can provide. The greatest advantages are its ability to maximize profits, cut waste, and improve customer service.
However, many organizations struggle with the implementation of S&OP because it requires consistent teamwork across departments. Organizations should actively foster cross-departmental communication and collaboration to execute the sales and operations planning strategy.
Do you think your business could benefit from S&OP, but you’re not quite sure where to start? Contact us today to speak with our supply chain experts!