S&OP helps a business create a plan for addressing supply chain disruptions. These updated best practices will help you make the most of this valuable process.

Authors are experts in their field and only write about topics where they have experience. Toptal experts who are also in the field review and validate all of our content. 

By Juan Franco

Juan is an expert in management consulting, business planning, and process improvement. He has implemented S&OP in companies across multiple industries in Latin America. He has over 20 years experience as a senior manager and advisor for companies such as Mondelez International and Yanbal International.

EXPERTISE

Business Plan Strategic Planning Consultants Business Operations Consultants

PREVIOUSLY, AT

Since 2020, a series of disruptions have obstructed smooth operations for companies all over the world. Many are finding it difficult to get the parts they require or to deliver their products to the customers. Business leaders should prepare their businesses to be able to respond to changes more quickly and comprehensively.

In my experience as a business planner and consultant for business operations, the best way I have found to achieve this is by using sales & operations planning. This collaborative method can be implemented in different ways, but all of them help companies create a long-term, comprehensive plan that aligns the objectives of both commercial divisions (products, sales, and customer service) and operations. I recommend that companies also include the finance division (financial budgeting, cost management, and financial planning) when implementing S&OP. This method is sometimes called integrated business planning (IBP).

S&OP is a process that incorporates input from all stakeholders. This allows a company’s response to change to be rapid. One of the main benefits of my method is that it allows me to match daily operations with business goals and also sync supply and demand.

Companies that use information constantly to adapt are able to spot problems coming before they happen. S&OP, for example, can alert companies that they might need to find alternative suppliers, manufacturers, or distributors when their regular partners are unable to deliver products. A few years back, I worked with an auto parts distributor in Ecuador who bought products for distribution to customers. Our vendors in China were having trouble supplying us with parts. In the S&OP process, we found an alternative parts distributor and had researched it. We reacted quickly when obstacles arose to ensure that we could get the parts from this new supplier and minimize any impact on our customers.

Our experience is not unusual, according to research. According to McKinsey & Company‘s assessments of over 170 companies, organizations with a successful IBP implementation had “service levels five to twenty percentage points higher; freight costs and Capital Intensity (total asset divided by sales), that were 10% to 15% less, and customer service penalties and missed sales of 40% to 50% less” than companies without an effective IBP. According to McKinsey & Company’s assessments of more than 170 companies, organizations with a well-functioning IBP implementation have “service levels that are five to 20 percentage points higher, freight costs and capital intensity (total assets divided by sales) that are 10% to 15% lower and customer delivery penalties and missed sales that are 40% to 50% lower” than those without effective IBP.

S&OP may be a concept that has been introduced previously, but the crisis in the supply chain made it evident that too few companies can benefit from it. This is either because the processes are not implemented correctly, or they’re not being used effectively. This article shares my thoughts on how to improve or initiate S&OP implementation for your company to weather supply chain issues and other disruptions such as freight or cargo container limits, natural disasters, or IT outages.

Why S&OP optimization is so important now

S&OP was first introduced to me more than 20 years ago when I set up a Manufacturing Resource Planning process at a cosmetics company. S&OP back then was a great way to keep the company on track and increase productivity. It also helped reduce waste, especially when problems occurred that were out of the ordinary. In the wake of a globalized supply chain crisis, S&OP is now a must-have for companies that depend on various supply chain processes.

The global supply disruptions due to the pandemic of COVID-19, conflict between Russia and Ukraine, escalating freight shipping costs, and limited shipping container supplies have mostly abated. There are still unknowns. A McKinsey Global Institute report stated that companies can expect supply chain disruptions lasting at least a month to happen every 3.7. The accumulated losses from these events could be as high as 42% of a year’s profits over a 10-year period.

Supply chains today are long and complex, making them highly susceptible to disruptions. This includes extreme weather, terrorism, or trade disputes. S&OP plays a vital role in ensuring that supply chains are always running smoothly. According to The Hackett Group’s 2020 Survey, chief supply officers are most concerned with improving S&OP. is also a major focus for optimization. This is a tacit acknowledgment that putting in place a process is not enough. A poorly executed S&OP may also hinder an organization’s capacity to identify alternate customers, suppliers, and manufacturers, as well as its ability to identify alternate vendors and distributors.

Unexpected events have always worried companies. They could cause them to be unable to obtain the materials needed, meet customer demand or deliver their products. The stakes have never been higher for hyper-productive businesses today, which rely on a highly vulnerable global value chain.

• Demand Planning: This step is designed to align your company’s sales and resource goals so that you can quickly produce enough inventory to meet customer demand. This process is based on past demand patterns to forecast the need for services and products throughout the supply chain. The historical sales data, the market trends, and other relevant information are analyzed to estimate the amount of product or service required. It is important to get input and feedback from your operations team so you can determine realistic demand levels based on product availability. S&OP also analyzes and adjusts the demand plan to align it with company strategic goals such as product line growth, discount percent, and gross margins.
• Operational/supply planning: The demand plan is then translated into a plan for supply and inventory to meet the projected demand. Some tasks include forecasting the demand for raw materials and components; identifying potential suppliers; monitoring the supplier’s performance; identifying potential risks in the supply chain, like freight restrictions, disruptions of suppliers, or changes to market conditions, and developing plans to minimize these risks.