Sales and operations planning (S&OP) is similar to investing in gold: it gets a lot of attention during tough economic times. Sure enough, the economic downturn over the past two years has seen a steady resurgence of companies pursuing S&OP initiatives. Companies running S&OP improvement initiatives are aiming to achieve the overarching benefits of improved service levels and lower supply chain costs. Extensive research has shown companies running best-in-class S&OP do indeed have supply chain cost advantages over their competition. However, is the current S&OP business process the best that supply chain planning can achieve? Or are there methods to enhance the process?
The depressed world economy not only has led to increased activity in S&OP but also forced companies to scrutinize their working capital investments. As a result, inventory optimization became a popular initiative as companies race to right-size their working capital investment. Inventory optimization excels at this goal by utilizing software algorithms to plan to service level targets instead of leaving the planner to rely on rules-of-thumb. However, inventory optimization has mainly been implemented as an adjunct process to Materials Requirements Planning (MRP) and Dividend Reinvestment Planning (DRP) focused on the short-term planning cycle, and not linked to a company's S&OP process.
Both S&OP and inventory optimization use much of the same data and involve most of the same corporate stakeholders. It is the marriage of S&OP and inventory optimization that can create an even more powerful planning process. With the additional capabilities to plan service levels and truly optimize inventory investment, sales, inventory & operations planning (SI&OP) is the next evolution in supply chain planning. This article discusses how companies seeking a competitive advantage in supply chain can integrate inventory optimization into S&OP to create an advanced SI&OP process.
Back to S&OP basics
Sales and operations planning steadily moved higher on corporate agendas as more executives realized the power of aligning demand and supply. Companies are pursuing S&OP for its high-impact benefits. The benefits of a well-executed process include reduced inventory, reduced expedited transportation costs, increased forecast accuracy, improved service levels and quicker decision-making. A 2010 Aberdeen Group survey corroborates this linkage by indicating the top two reasons companies were pursuing S&OP improvements: 1) to improve top line sales revenue and 2) to reduce supply chain operating costs.
Since the earliest days when the term S&OP was first coined, its process witnessed consistent improvement. Evolutionary improvements include both the integration of finance and the emphasis on new product launches. The classic model starts with demand planning followed by supply planning. It is in these first two steps that most of the work occurs. The outputs are a constrained supply plan and usually a number of supply issues. Steps three and four are meetings to review the exceptions, align stakeholders and resolve the outstanding issues. Since the classic model serves as a guideline, it does allow for a wide variety of sophistication in the demand planning and supply planning steps. Two separate companies could be doing both steps but at vastly different levels of detail and proficiency. For instance, some companies have not fully embraced the use of statistical software or even the measurement of forecast accuracy in demand planning.
However, it is in supply planning where the most common deficiency resides. Many companies neglect to take service-level targets into account during supply planning. Instead, many inventory planning processes include a calculation for safety stock or even a simple rule-of-thumb (for example, four weeks of safety stock). While these approaches are most common, they are not best-in-class. The ability to calculate inventory levels based on service-level goals allows for optimal levels of inventory investment.