The objective of the S&OP process is to support target customer service levels while optimizing total costs through balancing product supply and demand. Common S&OP objectives include:

• Minimize costs/maximize profits
• Maximize customer service
• Minimize inventory investment
• Minimize changes in production rates
• Minimize changes in workforce levels
• Maximize use of plants and equipment

S&OP in the Overall Enterprise Planning Hierarchy

Table 1 shows where S&OP fits in with other enterprise planning processes in terms of product scope, planning horizon, and the types of decisions involved.

Table 1

Enterprise planning processes compared

S&OP Strategies

S&OP strategies can be proactive or reactive.

Proactive strategies are aggressive actions that attempt to modify demand. These include:

• Shifting demand to other time periods: Incentives, sales promotions, advertising campaigns.
• Offering products or services with counter-cyclical demand patterns but having similar resource requirements. Counter-cycle products are products that are needed during different seasons; for example, a consumer durables company that makes air conditioners for summer and room heaters for winter. Theoretically if these two can be made in same machine then the company can manage the demand picks well.

Proactive strategies are quite common in service industries for managing demand. Examples are mobile operators giving free talk time for late night calls or hotels offering heavy discounts during off seasons.

Reactive strategies are strategies for adjusting capacity to meet demand fluctuations. This can take a variety of forms:

• Level production: Producing at a constant rate and using inventory to absorb fluctuations in demand.
• Chase demand: Hiring and firing workers to match demand.
• Overtime and under time: Increasing or decreasing working hours.
• Subcontracting: Letting outside companies complete the work.
• Part-time workers: Hiring part-time workers to complete the work.

However, these strategies may not be equally applicable for service industries, as the latter have their own S&OP challenges:

• Most services cannot be inventoried (leveling service is virtually impossible)
• Demand for services is difficult to predict
• Service capacity must be provided at the appropriate place and time
• Labor is usually the most constraining resource for services

Parts of the S&OP Process

While there are different versions of the S&OP process followed in different companies around the world, there are a few fundamental sub-processes:

• Demand or sales planning: This is the process of finalizing the unconstrained demand for a company’s products and services. There can be several sub-steps, including gathering and cleansing of historical data, getting inputs from the sales and marketing team, statistical forecasting to get a base demand plan, adding promotions, and finally arriving at the final forecast number based on consensus with other departments in the organization or in collaboration with customers.
  
  Some companies like to have different what-if analyses also as part of this process (for example, finding what the demand situation is under different pricing conditions). This process requires inputs on new product introduction plans, retirement plans for existing products, product seasonality, and causal factors. In some organizations this process is also known as sales planning.
• Supply or operational planning: This process can have several sub-processes, including distribution planning, inventory planning, production and capacity planning, and procurement planning. Planners review inventory norms in the supply chain, look at factory capacities, decide which factory can produce how much (based on cost and capacity utilization targets), and finalize material requirements from the supplier. 
• Pre-S&OP meeting: In the earlier two steps the demand and supply teams built their plans almost independently. This is the step where the two are brought together. If demand cannot be met with available capacity or there is excess capacity, then different what-if scenarios can be modeled at this stage. The best scenarios or alternatives for the business are identified based on profitability, revenue, customer service, and targeted inventory levels. Constraints are identified, demand shortfalls are highlighted, alternate scenarios are created for unmet requirements, and plants are prioritized. All of these constraints, alternate scenarios, and prioritizations are kept ready so that they can be presented in an executive S&OP meeting where the final decision can be taken.
  
  Financial reconciliation of the plan is also done during the pre-S&OP meeting. This meeting also focuses on preparing performance reports, an agenda for the executive S&OP meeting, and a plan for how critical issues should be highlighted. Success of an executive S&OP meeting depends a lot on how good the preparation is at this stage.
• Monthly executive S&OP meeting: This step of the S&OP process should be attended by all relevant stakeholders (including sales, marketing, production, procurement, and finance). This meeting focuses on reviewing past performance, discussing points in the agenda, reviewing the supply plan with specific focus on unmet requirements, reviewing the backlog and rolling supply and demand plans, and evaluating possible alternatives to arrive at the final supply plan. (Alternatives are ideally suggested in the pre-S&OP meeting.) Executives also review sales, financial, and inventory plans in terms of the confirmed supply plan, and review new product plans. The goal of this meeting is to finalize one number (for sales, production, procurement, and other teams) that can be published and communicated to operational teams for execution. Meeting minutes need to be circulated to all stakeholders so that everyone is in sync with the decisions taken.
• Management evaluation and analysis of the S&OP plan: The S&OP plan needs to be measured throughout the month. Metrics should be published and this information should be used as the starting point for the next cycle. The plan’s success can be measured based on a set of previously agreed-upon key performance indicators (KPIs), including: forecast accuracy, expected-versus-actual profitability, expected-versus-actual revenue, expected-versus-actual inventories, and expected-versus-actual customer service levels.

Sales, Inventory, and Operations Planning (SIOP) Versus S&OP

Within the S&OP process, some organizations insert an additional process step of scenario planning for multitier inventory analysis, and name the entire process SIOP. Companies needing such analysis of inventory scenarios can look at products from third-party vendors, including LogicTools, Optiant, and SmartOps. These third-party tools offer some functionality that is difficult to achieve using SAP.

Technological Requirements

At a high level, S&OP processes need three different systems to meet their requirements:

• Demand-side planning systems: These systems support the development of demand plans, or “unconstrained” forecasts. They have capabilities that include statistical forecasting, consensus planning with different departments of the organization, Web-based collaboration, collaboration with different supply chain partners, taking inputs (such as promotions), and different types of market intelligence.
• Supply-side planning systems: These systems support the development of supply plans. They generate inventory, production, and procurement plans to meet the demand forecast. Inventory management and distributed requirements planning systems help in generating the expected inventory replenishment of finished goods warehouses. They help users to set inventory targets that optimally trade off customer service targets against component, material, subassembly, and finished goods inventories. Web-based supply collaboration systems can collaborate with suppliers and contract manufacturers. These systems have advanced optimization capabilities that can account for limitations in plant and distribution capacity, and shortages of components and materials. They also have what-if analysis capability.
• System for key performance indicators (KPIs), reports, and alerts: These systems can take the form of a workbench that generates different dashboards, metrics, or KPIs on the demand side (including forecast accuracy, expected unfulfilled customer demand, and customer order backlogs), as well as supply-side metrics (including expected plant use, production capacity shortages, and critical component and shortages/surpluses). The dashboard functionality also allows S&OP participants to quickly conduct what-if analyses of potential changes to the supply or demand plans.

Table 2 details the various functionalities that S&OP systems should support.

Figure 2

Requirements for an S&OP system

S&OP Solutions from SAP [h2]

SAP currently has three S&OP solutions in its product portfolio:

1. Sales and Operations planning in SAP ERP Central Component (SAP ECC, the ECC flexible planning and sales and operations planning tools)
2. Sales and Operations planning in SAP Advanced Planning & Optimization (SAP APO Demand Planning and SAP APO Supply Network Planning tools)
3. SAP’s recent xApp for sales and operations planning,SAP xSOP

Sales and Operations Planning in the SAP ECC Solution

The S&OP solution in SAP ECC uses the Logistics Information System (LIS) infostructure and has two application components: flexible planning and standard S&OP. LIS is suitable for the planning of finished materials. The flexible planning component mainly helps in demand forecasting while S&OP helps in distribution and production planning. A few concepts about the S&OP solution in SAP ECC follow:

• Planning hierarchies: Master data for flexible planning is created by specifying the values of the characteristics you want to plan. This is done in a planning hierarchy.
• Planning types: It is possible to create your own customized planning screens in flexible planning. These are called planning types. A planning type is a self-defined view on the planning data in an information structure. It is a customized view on the planning table – for example, one view for the sales planner and another view for the production planner. A planning type defines the content and layout of the lines in the planning table as well as the mathematical operations, in the form of macros, which can be performed on these lines.
• Rough-cut planning profiles: Rough-cut planning profiles are used to plan for critical resources such as a bottleneck work center or material capacities. Rough-cut planning profiles can also give an aggregate (summarized) picture of resources (i.e., workdays rather than hours or minutes, or work center groups and product groups rather than individual work centers or products).
• Resource leveling and capacity planning: The system computes available capacity, capacity requirements, and capacity load, and displays them per period for every work center and capacity category. Total requirements planned in S&OP for a particular work center and capacity category can be viewed and then some manual capacity balancing is possible.
• Version management: In S&OP, each planning version is stored under a version number with a description. This allows for construction of different planning scenarios for one information structure. 
• Transfer of S&OP plan: S&OP plans can be passed to SAP ECC Demand Management in the form of independent requirements. Demand Management determines the requirement dates and quantities for important assemblies and specifies the strategies for planning, producing, and procuring finished products. The result of Demand Management is the demand program. SAP ECC S&OP can also be interfaced with Profitability Analysis (CO-PA), which allows use of CO-PA data as the basis for sales planning in S&OP.

Sales and Operations Planning in SAP APO

Sales and operations planning in an SAP APO solution is mainly supported in two of its modules: Demand Planning (DP) and Supply Network Planning (SNP). DP is the demand-side application helping in statistical forecasting, promotion planning, new product introduction, consensus planning, and collaborative forecasting. SNP supports the supply-side processes such as distribution requirement planning (DRP), inventory planning, and production and capacity planning. SNP has a variety of planning tools including Heuristics, capable to promise (CTP), and optimizers that help in planning supply. The SNP optimizer improves the production and distribution plan based on a set of supply-chain objective functions and a set of supply-chain constraints (such as production constraint or lot size). SAP APO supports a set of alerts for monitoring all demand and supply-side exceptions. 

Sales and Operations Planning in SAP xSOP

Built on the SAP NetWeaver stack, SAP xSOP is SAP’s recent solution for S&OP process. It is also SAP’s first off-premise, hosted supply-chain application developed on the HANA platform. The business promise of this application is quick visualization of the supply chain for executive review, use of what-if analysis using the HANA engine for parallel processing, and execution tracking of the S&OP plan. The solution has these key capabilities:

1. Integrates planning tools: This can connect to number of applications including SAP ECC, SAP NetWeaver BW, and SCM applications. It can pull data from any planning tools, including flexible planning, MRP SCM DP, SCM SNP, or BI Data Providers for financial data. Planning data from these different planning tools can then be extracted and stored in one single application (i.e., SAP xSOP). This allows users to simulate plans in SAP xSOP itself in real time –for example, live during the monthly S&OP meeting.
2. Process management: Successful S&OP requires multiple processes to work in parallel. The process management functionalities within SAP xSOP allow you to define and assign responsibility for the steps that need to occur between planning meetings. During S&OP meetings, the team agrees on the process steps important for the execution of the plan. Within each process step, tasks can be defined that must be completed before the next meeting. These tasks can be software-related tasks, such as loading demand history to SAP DP, or decision-making tasks, such as reviewing the demand plan with the sales force. These tasks need to be tracked and completed to report progress at the next meeting. SAP xSOP makes it easy to track all such tasks and decisions made at planning meetings and to follow up on related issues. SAP xSOP process management capabilities are as follows:
   • Create tasks and assign to users
   • Create action items for follow-up in the next S&OP process step
   • Update task completion
   • Notify via email) when tasks are assigned
   • Group tasks into process steps to model process
3. Predefined analytics and reports: The analytics functionality in SAP xSOP is, in many ways, the heart of the application. The solution is pre-delivered with analytic KPIs in several general categories, including demand, supply, inventory, capacity, and budget. Examples of a few of these KPIs are:
   • Demand: Demand plan accuracy and  demand plan bias
   • Inventory: Total inventory value (in monetary units), inventory turns (in monetary units and physical units), days of inventory
   • Financial: Overall margin and comparison to budget (financial plan)
   • Production or receipts: Production to schedule, delivery to schedule (procurement), delivery to schedule (customer), and capacity utilization
   • Comparisons to targets: Target inventory, target turns, target margin, and target capacity utilization

Users can change KPI calculations or add new KPIs to the system to meet their specific reporting needs. Within SAP xSOP’s user interface, users can select multiple views for analysis; for example, executive-level stakeholders want summarized data while demand planners want a more granular level of detail.

However, the tool does not have the depth of optimization required for manufacturing constraint analysis or determining inventory strategies, or the ability to determine the best constrained forecast so it does not replace SAP APO or SAP ECC tools. It can, however, enhance their capability by better use of the data and plans generated in those applications.

Comparing S&OP Solutions

As discussed earlier, S&OP capabilities differ in SAP solutions and it’s important to know the pros and cons of these solutions before making a deployment decision. Table 3 compares the capabilities of these three solutions against the list of S&OP solution requirements in Table 1.

Figure 3

How S&OP capabilities differ in different S&OP solutions

Rajesh Ray

Rajesh Ray currently leads the SAP SCM product area at IBM Global Business Services. He has worked with SAP SE and SAP India prior to joining IBM. He is the author of two books on ERP and retail supply chain published by McGraw-Hill, and has contributed more than 52 articles in 16 international journals. Rajesh is a frequent speaker at different SCM forums and is an honorary member of the CII Logistics Council, APICS India chapter and the SCOR Society. 

You may contact the author at rajesray@in.ibm.com.

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