How S&OP Reduces Supply Chain Costs
Brian Hoey - November 19, 2020
S&OP, or sales and operations planning, occupies a strange space in the supply chain management discussion. Though the term fundamentally refers to a process (i.e. undertaking quarterly or annual meetings to align sales and capacity in the medium term planning horizon), it’s often spoken of as though it were a software solution. It’s certainly true that successful S&OP processes tend to be driven by sophisticated planning software, there is a distinction to be made between the solutions themselves and the business processes they underpin.
Still, the fact that the process is so closely associated with its related software solutions puts us in a position where we can think about it the same way we would think about a new technology solution. In other words, we can ask the important question: “Is this a sound investment from a business perspective?”
Whether you’re running an S&OP meeting from a set of Excel spreadsheets (not recommended, but theoretically possible), or trying to determine whether to upgrade your planning solution, you need to figure out what kind of ROI you should expect. To do so, you need to examine the ways that successful sales and operations planning can and does reduce costs.
How Does S&OP Work?
Okay, before we get into the specifics of the various cost-saving levers that S&OP makes available to planners across a wide variety of enterprises, let’s quickly go over how the process actually works. At the simplest possible level, it’s about meeting to align forecasted sales demand levels with existing production capacity. Different organizations do this on different timetables, but the cycle typically covers anywhere from a few months to the next 12-18 months. If it looks like meeting expected demand is going to be impossible given current capacity restrictions, you can figure that out far enough in advance to expand your capacity to needed levels.
It may sound simple—but it’s anything but. The first challenge is creating a forecast that can be relied on with any degree of certainty. Past performance isn’t the best predictor of future events, and yet it’s often the best information that planners have to rely on, which means that it’s difficult or impossible in many circumstances to see real demand coming. The next challenge is in figuring out how your current capacity actually translates into operational capacity. This, too, may seem simple, but in point of fact it requires you to have an extraordinary amount of visibility into your current inventory levels, your suppliers’ inventory level, your shipping partners’ capacities, your machine downtime statistics, the structure of your whole transport and production networks, and more. Without this data in tow, you could easily determine that you have much more capacity than you actually do, resulting in an inability to meet orders down the road.
This is where the right S&OP software can come in. By collecting relevant data from up and down the supply stream, you can analyze your actual capacity in real-time based on your specified planning parameters. By the same token, you can use all of the data you’re gathering both to improve forecasts and to give visibility to the planning process. But how do those benefits translate into direct cost savings?
S&OP’s Impact on Inventory and Logistics
Okay, let’s say you’ve got an S&OP solution that helps you to gain visibility across the supply chain. This results in successful sales and operations planning meetings, which in turn result in sound sales and capacity plans. What should you expect to happen in practice at this point? First of all, because you have a clear idea—understood throughout the company—of what your sales for the coming period are going to look like, you can effectively optimize your inventory usage. Usually, this results in cutting down buffer and safety stock, resulting in a reduction of capital commitments by a double digit percentage. Essentially, because capacity and demand are aligned more carefully than previously, buffer stocks that previously appeared cautious or prudent are now shown to be excessive.
Secondly, you can improve your transportation management from end-to-end. Why? Because when your production and inventory planning are backed by a successfully-implemented sales and capacity planning workflow, you’re much less likely to be taken by surprise by orders that are difficult or impossible to fill on time. Since you’re less likely to be behind on your production schedule (since you saw the relevant orders coming in advance), you’re more likely to have the relevant goods on hand when you need them, meaning that you can avoid costly premium freight runs (the result of late production runs that threaten on-time order fulfillment) and keep down logistics costs. Here, you might even be able to integrate transportation forecasting, such that you can proactively secure freight capacity in advance—driving down costs even further.
Powering Advanced Analytics and AI
No doubt you’ve gotten the impression from the analysis above that successful S&OP workflows require a ton of data. This presents both a challenge and an opportunity. The challenge? Grappling with potentially more information than a human being could reasonably deal with. The opportunity? Turning that data into AI-powered predictions that are faster and more accurate than a human planner could conceivably come up with. This is, in large part, the reason that we discouraged using Excel spreadsheets in the first paragraph. With a robust S&OP module integrated into your IT environment, it’s possible to leverage every piece of information generated by your supply chain into advanced analytics workflows that produce more accurate demand forecasts than ever before.
Not only will the right sales planning solution help you to generate these forecasts and check them against a live, mathematically-derived analysis of your real operational capacity, it’ll do so in a way that’s hyper-visible across your entire organization. Thus, the true cost-saving potential of S&OP can be realized: the more accurate your forecasts, the more you can decrease buffer stock without increasing risk, the more proactively you can reserve shipping capacity, and the more effectively you can leverage all the tools in your supply chain toolbox towards a shared sales and operations goal.