There is no doubt that over the years, Sales & Operations Planning (S&OP) has brought companies around the world many valuable business improvements. This article argues that after existing for over 30 years, the development of S&OP as an end to end business management process method has come to a standstill. This standstill is threatening the very existence of S&OP. The only way to further mature S&OP is to academically define it, govern it and integrate it with other academic disciplines.
The times since Sales & Operations planning (S&OP) was born in 1987 as a solution for operational issues are long gone. Back then, connecting sales with a Material Requirements Planning (MRP) run was a first attempt from operations to integrate functions and achieve some business alignment and joined decision making.
Since that time, the scope of S&OP has significantly increased. Demand management, feasible supply and capacity planning, product portfolio management, financial integration, customer and supplier integration and resource management amongst others have all been added to make S&OP a more complete and value adding business process. Over the years S&OP has made a lot of improvements and added value for numerous businesses in the world.
Although still mostly deployed in the manufacturing industry, S&OP as an advanced planning & forecasting process is now a much sought after capability for many businesses. More and more articles on S&OP are released, S&OP is being discussed on social media, more IT and service suppliers are using S&OP in their value proposition. Some even say that after 30 years, S&OP is having a renaissance
The pitfall in S&OP development
In practising S&OP for the last 15 years and researching and writing about it for the last five years, I have noticed that the development of S&OP has stalled. In the last 5 or even 10 years nothing new has come to this business process. Worse even, the term S&OP has become a commodity, a thing everybody talks about but few know about, like an overbought stock advised by a cab driver. It is now a marketing gimmick for any vendor that offers something only slightly related to S&OP.
To add to the confusion we have given S&OP new names like Sales, Inventory and Operations Planning (SIOP), Integrated Business Management (IBM) or Integrate Business Planning (IBP) to name only a few. A lot of time has been spent in blogs, articles, conferences and whitepapers to explain the difference in those names. This time would have better been spent on how to improve S&OP.
Of course we can’t say that no progress has been made at all. In process we might have added a bit more scope or detail like demand shaping and sensing. In IT, solution providers have given us clever S&OP cockpits, scenario and simulation capability and added collaboration and social functionality to our planning systems. Consultancies with S&OP in their offering started talking about the importance of people and behaviour, but hardly any consultancy came up with solutions. For S&OP as a business management capability, few of these changes can be called significant developments that contributed to better end to end business management for the highest executive level.
Most improvements in S&OP have a common denominator. And this has also been a common pitfall in the development of S&OP as aligned and integrated business management method. It is a pitfall I’ve observed in language from business leaders, practitioners and consultancies. A couple of exception excluded, it is a pitfall I noticed in articles from many S&OP thought leaders and academics. This pitfall is holding S&OP back from further maturing as an end to end business management capability.
I call this pitfall the supply chain bias!
Over the last 30 years, S&OP has been developed as a supply chain capability, not as an end to end business capability. S&OP thought leaders, consultancies and practitioners have had a significant supply chain bias and still do. S&OP LinkedIn groups are mostly joined by planners or people with a supply chain background. The same holds for participants in S&OP conferences. S&OP consultancies mostly have a supply chain background. S&OP is widely discussed in the supply chain community, but not widely acknowledged in other business communities. Academics that discuss S&OP are mostly operations, logistics or supply chain academics.
Outside this little bubble of the manufacturing industry and the supply chain and logistics world, S&OP has gone by mostly unnoticed in the rest of the world for almost 30 years. This has stalled the holistic development of S&OP.
How to further develop S&OP
To further develop S&OP needs to let go of its focus on supply chain language and improvements. S&OP has to start doing what it has been advocating within businesses since its inception in 1987. Organize and govern in a disciplined way and integrate and cross silos with other industries, business functions and academic disciplines. These are two ways in which we have to improve S&OP.
- Organize and govern S&OP: within the academic, business and supply chain world S&OP is not organised and governed well. There are no common agreements, definitions, metrics or certifications. Anything goes and can be called S&OP. Patrick Bower’s article ‘Integrated Business Planning: is it a hoax or here to stay’ provides great solutions how to advance S&OP and its governing. Creating a governing model is a much needed next step, but it will not be enough for S&OP to survive.
- Integrate S&OP with other disciplines: for S&OP to survive as an end to end business model, we need to look at how other business functions or academic disciplines can support further development. We need to think holistic and create a model that solves the core planning objectives every business has. We need to cross the silos and engage with other academic and business disciplines to advance S&OP thinking, make it more valuable and keep it relevant.
At the highest level, the core planning objectives of a business are the same. Companies are simply here in the world to fulfil their purpose and execute their vision. The vision is their long term aspiration and the starting point for every business plan. Given a business has a vision and a strategy, the core planning objectives becomes to make that vision a reality by making great plans that connect vision, strategy and annual plans with execution. With the right development, S&OP is well positioned to take on this planning role.
Where to integrate S&OP with other disciplines
S&OP well done has at least four outcomes to provide visibility and support to the execution of a company vision. It is in these four areas where S&OP needs to integrate and learn from other disciplines to improve as end to end business planning process
1. A feasible rolling forecast and budget:
This provides executives periodically with an updated feasible Profit and Loss (P&L) statement, working capital, cash flows, gaps to budget and scenarios on business risks and opportunities across the most important P&L lines.
The academic and business history of financial planning & forecasting started before S&OP came to life. Finance and supply chain integration and cross learning grew when Supply Chain Finance development academically as well as in business. You can find some finance publications that show an interest in S&OP or Integrated Business Planning, but the finance community usually talks about rolling forecasting & budgeting, zero-based budgeting or driver based forecasting.
The 2003 article ‘Who Needs a budget’ discusses rolling forecasting that was applied in the 70’s in the banking industry. Long before S&OP was born. More recent in the 2014 article ‘Managing the strategic journey’ McKinsey argues that to connect strategy with execution “one important capability that companies must develop … is rolling forecasting and budgeting”. The strategy and finance community use common language where S&OP usually doesn’t get a mention.
2. A check against strategic intent
Strategy plans are active in current budget year and beyond the budget horizon. S&OP done well, peeks beyond the budget horizon and has a look at next year’s budget and strategic initiatives.
Strategy and strategic planning also have a longer history than S&OP. Many theories on how to link strategy with execution have been published, Kaplan and Norton‘s business balance scorecard amongst the well-known. In the 2006 whitepaper ‘Creating the office of strategy management’, Kaplan and Norton suggest an integrated planning model to connect strategy to rolling forecasting & budgeting, workforce planning and execution. This paper describes at a high level, everything S&OP could be, but S&OP is not mentioned.
S&OP at its best can play a significant role in connecting strategy with execution. Yet, in dozens of strategy articles from McKinsey, the world most famous strategy consultancy, S&OP is not mentioned once. Similar to the finance community, McKinsey and Kaplan & Norton do use the term rolling forecasting & budgeting.
3. Updated resource allocation
Changes in the workforce or resources requirement for business as usual operations, budget or strategic initiatives, provide executives the opportunity to re-allocate resource where they add most value.
With its traditional background in operations, S&OP consultancies and practitioners seem well equipped to use logic and algorithms to apply resource allocation as outcome of an S&OP cycle. However resource allocation is also a topic strategy consultancy and academics spend significant time on. S&OP can learn a lot from cross business unit resource allocation discussion as in the 2013 McKinsey article; ‘Avoiding the quicksand; ten techniques for more agile corporate, resource allocation’. Besides giving many useful references on corporate resource allocation, this article discusses research that shows that 90% of corporate resource allocation don’t change year on year. However, companies that reallocated more resources earned, on average, 30 percent higher total returns to shareholders. Needless to say, dynamic resource allocation is paramount and there are many other academic and business articles and whitepapers to leverage from to improve S&OP thinking.
4. Communication with execution
Well-defined communication strategy gives executives the opportunity to inform and refocus their employees and keep them engaged with changes in strategy, resourcing and budget plans.
A plan needs to be executed at one point of time. Using an internal S&OP communication strategy to address the right stakeholders with the right information through the right channel at the right time can have a powerful impact and keep employees engaged with strategy, budget, resource allocation and execution in a structured way. In the 2008 article ‘The secrets of successful strategy execution’, Gary L. Neilson and others address the importance of communication and suggest that information flow is the strongest contributor to good strategy execution. To further improve and play a role in strategy execution, S&OP has to understand the changing communication needs of employees and S&OP needs to start developing an integrated communication strategy as part of its model.
5. Mindset and Behaviours
To achieve these four advanced S&OP outcomes and meet business planning objectives, there is a fifth element required to achieve sustainable and advanced S&OP. A cultural change!
Before starting an S&OP change program, which according to many experts can take 5-10 years to master, advanced and sustainable S&OP has to address the only guidance in the strategic horizon, namely the company purpose, vision, values and behaviours. As Collins and Porras suggest in ‘Build to last’, we can call this; company culture.
More specifically, within a company culture, a change is needed in mindset and behaviours. To implement S&OP, businesses have to go through a major transformation of alignment, structure, discipline, transparency and cross functional team work. This requires a mindset change for many people and sometimes a whole business. Often many little kingdoms or tribes have to fall and make place for cooperation and collaboration, listening, empathy, conflict resolution and effective decision making. This requires effective behaviours as part of the company culture.
To develop S&OP further and stay relevant, the S&OP community has to start reaching out, integrate, learn from the five business disciplines of behaviours, strategy, rolling forecasting & budgeting, resource allocation and communication.
The fall of S&OP
In ecology, the competitive exclusion principle states that two species competing for the same resource cannot coexist. The specie with only the slightest advantage over the other will dominate in the long term. Similar to this principle, S&OP has to evolve to become the unquestionable number one business planning model. This needs to be across all disciplines and industries, not only in the supply chain discipline and manufacturing industry. If not, another discipline like finance or strategy will get the advantage and take over S&OP in the long run.
As we’ve seen happen to many companies and industries in recent years, a new disruptive idea or development will take its place. Strategy and finance communities will create a new end to end business model that will replace S&OP. Whilst the S&OP community is discussing what acronym to use for its model, the strategy and finance disciplines already use common language and definitions for rolling forecasting & budgeting and have been publishing research that connects culture, strategy, finance, communication and execution for years.
The articles referred to earlier are just some of the dozens of examples from very serious strategy and finance academics and consultancies trying to solve the same puzzle as S&OP. Where S&OP is stalled academically and does not get a lot of serious research support, strategy and finance academics and consultancies seem to be better resourced, more focused and show visible progress. If this continuous, it will only be a matter of time before they present a rolling forecasting & budgeting variant as the new worldwide accepted end to end business planning model.
When they do, S&OP will slowly become redundant and will only remain as an academic footnote. S&OP will be a great idea in the history of business planning that never came fully to fruition.