Sales and operations planning is a formal exercise many businesses practice to bring their supplies into balance with demands and best utilize their capital and other resources.
To make it all work, a company’s ERP system must be up to date with all transactions and the information must be accurate. Sales orders and forecasts need to be netted against each other for a true picture of demand. Purchase orders, receiving, materials inventory and work in process inventory also must be very accurate for a comparable view of supplies.
Every business is unique. A typical S&OP process begins with a hard look at demands. Are sales orders accurate compared to customers’ true order demands? If an order is known to be unavailable on the original order date, has it been moved to a ship date that is feasible? If five units of a product were forecasted in a time period and orders for two are on the books, have we reduced the forecast demand to three units? These are technical issues necessary to clean up the true demand.
The hard work comes in validating forecasts. Why did we forecast those five units? To whom do we expect to sell those units? Do we have hard data from customers or reliable statistical expectations for the demand or is it a wishful hope from sales people? We hope to get to a demand plan that we could expect to sell over the next few months if supplies are available.
Now, we look carefully at supplies. We might have a forecast in the first month that requires a long-lead material component. But our on-hand inventory and existing purchase orders are insufficient and any new purchased supply won’t be available until the third month. Because that product cannot be completed until the third month, we could have production capacity available for some other product in the first and second month. Making that second product early could allow us to satisfy more of the demand but will require carrying some completed product in inventory which ties up working capital. The result of the analysis of our supply side will show what we can produce and ideally it matches the demand perfectly.
Now we put the two sides together. We could have valid demand that cannot be met. Sales can now know if an order comes from a customer for certain products, the lead time will be longer than hoped for and can negotiate delivery offer a longer period or avoid taking an order only to disappoint a customer. We also can find we have inventory available that is not forecasted. These are candidates for a sales push, even offering a discounted price to take those products. If we have free production capacity and could get materials for some products, we could let customers know these can be quickly available if needed. We might consider reducing capacity based on our validated order demand.
The final step is to update supply and demand in the ERP system to match our choices.
S&OP is a valuable set of tools that not enough businesses use. There are several software offerings to help. A business can also perform the tasks using spreadsheets or similar less sophisticated tools.