Chapter 6, Strategy, Coordination, and Planning
Strong sales and operations planning is vital to a successful manufacturing production process. In this excerpt, find out how sales and operations planning helps balance supply and demand and serves as the link between supply chain strategy and execution.
In Pursuit of the Perfect Plant: A Business and Technical Guide, Ch. 6
Table of contents:
Sales and operations planning for manufacturing
Manufacturing plant information management
Information integration in manufacturing: Process control and planning software
Manufacturing supply chain strategy: KPI and execution in process industries
Manufacturing operations management and planning based on strategic models
Sales and Operations Planning
"This next concept is the 'secret sauce' of strategy." Moulton turned to the whiteboard and wrote:
S&OP: SALES AND OPERATIONS PLANNING
"At the simplest level, S&OP is about balancing supply and demand. In an ideal plant, which would produce the entirety of a single product, that's a fairly easy proposition. In the real world, however, that's not what we have. Multiple corporations support multiple business lines. Huge portions of manufacturing capability are 'virtualized,' outsourced, or spread across multiple plants and products. And your business units may even be competing for some of the same assets and resources." Moulton sketched a diagram on the whiteboard. "Here's how S&OP fi ts in with the whole production scheme."
"As you can see," Moulton continued, "there are three segments coming together. In one circle, you have sales and marketing. In another, you have manufacturing operations. In the last is your supply chain. S&OP sits at the point where they all intersect."
"Couldn't you say that the supply chain really drives S&OP, since it runs the network design optimization?" Bonhoffer asked.
"The supply chain," Moulton said, "should be getting feedback from sales and marketing that says, 'We want to explore either changing this product or customer mix, or we want to explore a new market. Run us some models that show the effect on distribution costs.' Manufacturing operations balances things out by providing a clear sense of what's happening at the factory level, and communicates plans to the people there that take all three parts into consideration."
"Maybe we could think of sales and operations planning as the link between strategy and execution," Bala said.
"Exactly," Moulton said. "The various units of the plant—picture them as 'mini-plants'—often compete for resources. S&OP determines the best way to allocate those resources. But it gets complicated, because although some of these plants are measured against the same metrics and KPIs, others use different measurements.
"When a plant is part of a business unit and reports up into that unit, S&OP is a straightforward proposition. If so, the plant is measured for its productivity, but not necessarily for its profit. It may be measured on throughput or operating efficiency."
"In which case," Mulcahy said, "you simply want to run the plant to the limit of its capacity and safety, and throw as much material through the line as possible."
"A 'Rough-Cut' view of S&OP says, 'Show me all the supply capacity that I have, and show me all the demand requirements,'" Moulton said. "When the answer arrives, the 'Rough Cut' asks, 'Do I have the capacity, in aggregate, to provide all this, and if not, where is the shortfall?' Your initial view, on the other hand, says, 'This is all the demand that sales is telling me for all of the products for all of the markets. Here is all the production I have available to produce all the products that are available.'
"In markets where you have multiple sites and scheduled maintenance windows to deal with, the sales and operations process has to be well organized. You project forward, looking very tightly at the next 90 days even as you try to provide a rolling forecast for the next 18 months that includes all of your planned maintenance, outages, or any other promotions that might come in."
"People are looking at the targets," Bonhoffer said. "They're saying, 'Yes, we're planning this promotion campaign from a sales standpoint, and we're predicting this sort of uptick.'"
"Or they're saying, 'Here's the seasonality of this market for this product in this particular sector,'" Bala said.
"Or, 'there will be a major outage, or we need to rebuild in this plant at this point in time,'" Mulcahy said.
"Exactly," Moulton said. "All of these points should be on that 18-month calendar. And if anything changes, it should be adjusted. Ideally, by the third week of every month, you have locked down your production schedule for the next month."
"Does the plan typically stay locked throughout the month?" Bonhoffer asked.
"It does," Moulton said. "However, since supply and demand never stays locked, S&OP's plan needs to reflect the locked-down targets, which consider all of their commitments and accountabilities. It also needs to reflect each target's activities. If the world never changed, you'd only need sales, marketing, and manufacturing. You'd simply balance them once and run the model forever. But that's not the reality in a competitive marketplace. To stay on top, you've got to engage a constant process of monitoring and adjusting. You have to watch distribution costs, market share, foreign exchange rates, and so forth. If the data says you should do something different in a week or a month, you have to be flexible enough to make the required changes."
"It sounds to me," Bala said, "as if a well-organized operation will have tight 90-day and 18-month cycles in which planned maintenance, outages, seasonal market changes, and other promotions are coming in. That way, targets can be set and goals met."
"Meanwhile," Moulton said, "sales and operations look at the balance of supply and demand each week and make the needed adjustments."
"Who makes sure this happens?" Bonhoffer asked. "How do meetings run? What's the hierarchy?"
"It's not the same everywhere," Moulton said. "But, generally, on the third week of each month, the chairman, CEO, and business unit leaders come together and set the plan for the next month. At the same time, they look forward three months. That meeting enables the planning department to execute against the sales and operations plan that is aligned to corporate strategy."
"Even if the biggest head honchos in the organization are not at the meeting each month," Mulcahy said, "they always want to know what happened and what was decided. That raises the bar of accountability and guarantees the information will be collected and shared."
"Who are the specific people that would attend this meeting?" Bala asked.
"The CEO, the CFO, the executive VP of manufacturing operations, and the head of sales," Moulton said. "If the company is divided by business units, the heads of each will be there as well.
"In addition, with the last meeting held two or three days ahead of the executive-level meeting, there is another meeting every week, where the S&OP director meets with the production planners and delegates from the business units or authoritative functions."
"These are the meetings," Mulcahy said, "where corporate sets out its financial goals for the plant. Depending on the goals, the managers might fight back to make them realistic and reachable."
"I imagine it can be a bit of a struggle," Bonhoffer said, "between corporate's idealistic dreams of profitability, and operations doling out heavy doses of reality regarding plant capacity."
"Somewhere between these two points of view," Moulton said, "live the real possibilities for what can be achieved. Once they figure it out, the production planners disperse the results to the plant managers. The individual plant production plans must then be aligned with the sales and operations plan so that the sum of the parts equals the whole, asset by asset. Usually, the plant manager reports up one level to an executive who has been part of the weekly sales and operations meeting.
"The S&OP planner's main concern is to balance operations so that the corporation makes the most profit. That means you don't plan more sales than you have production capability, unless there is inventory that must be sold."
"So the monthly executive meeting," Bonhoffer said, "is basically a 'management-by-exception' affair to get a synopsis of the prior month and ensure that everything is on track for the next three-month period, right? And the weekly meeting is where more fine-grain adjustments are made, brokering the relationship between the realities at the plant level and the long-range planning at the executive level."
"You've got it," Moulton said. "This mid-tier S&OP group is also responsible for making sure all customers are informed about changes in product flow. Remember, as well, that since the plan sets the expectation for production volume by product and asset, it also is a predictor of what raw materials will be required for each location. This is why S&OP is a valuable tool for the upstream supply chain partners, the vendors, and the suppliers, too."
"What if a decision can't wait until the executive meeting?" Bala asked.
"The director of the S&OP meeting may need to inform his superior of the events that have taken place, and the subsequent recommendations. The director will then request that a decision be made immediately with the promise that a report will be ready at the next meeting. That way, he won't lose any time. We call this the 'closed loop.' The S&OP meeting is the lynchpin that holds that loop together."
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This was first published in November 2008