What is the difference between a Sales and Operations Planning (S&OP) process that makes a modest difference in a company’s operational and financial performance and an S&OP process that, year after year, enables a company to achieve its operational, business, and strategic goals?
You don’t have to look beyond the senior leadership team for the answer.
Sales and Operations Planning (also known as Integrated Business Planning) is an executive management process for running the business. The focus of S&OP in the 1980s and 1990s (and still today for some companies) was a management process for aligning demand and supply at the aggregate level.
Today, Sales and Operations Planning has evolved into Integrated Business Planning where all company plans – product, demand, supply, strategic initiatives and resulting financials – are synchronized and aligned at the aggregate level each month. IBP has also evolved into a process for identifying gaps between future projections and the company’s business and strategic objectives – providing direction and making decisions on how to most effectively close those gaps.
With Integrated Business Planning, the senior leadership team has a process where every month they understand not only performance to date, but also the future state of the business over at least a 24-month, rolling, planning horizon. They also have a process for ensuring that the appropriate actions and activities are undertaken to achieve the company’s business and strategic objectives. The enterprise performance management element of Integrated Business Planning provides the platform for monitoring execution of the company’s operational and business strategies and goals.
The above simply cannot happen without senior leadership involvement in the process. Involvement means just that – active, high-profile involvement, and not just lip service support.
The S&OP/IBP Process
Each step of the Sales and Operations Planning/Integrated Business Planning process (product management review, demand review, supply review, financial appraisal, and management business review) has a senior leadership team owner, and ownership and involvement is not delegated. The management business review is the president/CEO/COO’s meeting, and the participants are the senior leadership team representing product management, sales and marketing, supply management, strategy and finance. Additionally, key functional support leaders of quality, human resources, public relations etc. are represented.
With the senior leadership team’s active involvement in S&OP/IBP, the leadership culture changes. Instead of thinking in terms of what is best from a functional perspective, the leadership team provides direction and makes decisions based on what is best for the company overall. What evolves is the development of common agendas and goals.
When Sales and Operations Planning/Integrated Business Planning is first implemented, a leadership culture that emphasizes teamwork in working toward common goals and agendas typically does not exist. That is because trust, openness, and honesty often have not yet been established.
With strong chief executive leadership in the S&OP/IBP process, trust will evolve. It comes from focusing on the business issues and opportunities, looking forward across the entire 24-month planning horizon while keeping the best interest of the whole company in mind. It comes from the chief executive’s well-articulated and frequently reinforced expectation that truth will drive the process, and misbehavior will not be tolerated. Examples of misbehaviors that are destructive to the objectives of the S&OP/IBP process include disguising the truth (hedging and “sandbagging” that is not communicated, for example) and making decisions outside the S&OP process without the leadership team’s participation.
Trust and openness also become key organizational values when performance measures focus on the achievement of the strategy and performance improvement. If a functional group is penalized for doing what is best for the company, teamwork dissolves. This can occur, for example, when a commercial group’s demand plan is reduced because there is insufficient capacity to fulfill demand, but the commercial group’s revenue goal upon which commissions are based is not likewise adjusted.
Reducing the Chaos
With strong leadership, team-based management becomes the unconscious way in which the business is managed and operated. One client company achieved this breakthrough when, at the conclusion of the management business review, one of the senior leaders commented, “Do you realize this is the first meeting where we weren’t defending ourselves and blaming each other, and we really focused on making decisions for the business?”
The leader of another client company, which had been managing the business using Sales and Operations Planning for a little over one year, called with this report: He overheard a middle manager who was new to the company ask: “Why do we do S&OP?” His compatriot answered: “I don’t know for sure, but I don’t want to go back to the way we used to do things. It was chaotic.” An experienced practitioner of S&OP made the point that “even if the market place, our customers, and the external environment as a whole are chaotic, we don’t have to have management chaos in our company. We have chosen to manage the dynamics of the business using a regular and routine management approach where we anticipate the changing dynamics in sufficient time to prevent needing to make last minute, costly responses.”
Another client company’s leaders – from CEO, to COO, to the vice presidents of business units – state that Sales and Operations Planning has transformed their business. Not only have they made several timely acquisitions, they have assimilated those acquisitions very well. Plus, during the recession, their financial performance has exceeded their competitors by quite a large margin.
This statement of the impact that S&OP has had on the company is in sharp contrast to inquiries we get from clients that struggle with S&OP. For those struggling companies, usually, leadership involvement is lacking. Seeing S&OP as only a supply chain initiative, these companies’ leaders have set too low of an ambition for the process.
Independent research from firms like Aberdeen, Ventana Research, and AMR Research have shown that companies that do S&OP/IBP well are more successful than companies that do not. One finding by Ventana Research showed that in companies that reported the highest gains in customer satisfaction, the Sales and Operations Planning process was sponsored by the CEO or CFO. This finding supports the authors’ experience in leading and guiding companies to implement the Sales & Operations Planning/Integrated Business Planning process the right way.