CONTRIBUTION BY NIELS VAN HOVE – FOUNDER AND DIRECTOR TRUEBRIDGES CONSULTING
There is no doubt that over the years, S&OP has brought companies around the world many valuable business improvements. This article argues that after existing for over 30 years, the development of S&OP as an end to end business management process method has come to a standstill. This standstill is threatening the very existence of S&OP.
The times since Sales & Operations planning (S&OP) was born in 1987 as a solution for operational issues are long gone. Back then, connecting sales with a Material Requirements Planning (MRP) run was a first attempt from operations to integrate functions and achieve some business alignment and joined decision making.
Since that time, the scope of S&OP has significantly increased. Demand management, feasible supply and capacity planning, product portfolio management, financial integration, customer and supplier integration and resource management amongst others have all been added to make S&OP a more complete and value adding business process. Over the years S&OP has made a lot of improvements and added value for numerous businesses in the world.
Although still mostly deployed in the manufacturing industry, S&OP as an advanced planning & forecasting process is now a much sought after capability for many businesses. More and more articles on S&OP are released, S&OP is being discussed on social media, more IT and service suppliers are using S&OP in their value proposition. Some even say that after 30 years, S&OP is having a renaissance.
The pitfall in S&OP development
In practicing S&OP for the last 15 years and researching and writing about it for the last five years, I have noticed that the development of S&OP has stalled in the last years. The term S&OP has now become a commodity, a thing everybody talks about but few know about, like an overbought stock advised by a cab driver. It is now a marketing gimmick for any vendor that offers something just slightly related to S&OP.
The last years we might have added product portfolio management. We might have added more scope within demand management through demand shaping and sensing. IT solution providers might have given us clever S&OP cockpits, scenario and simulation capability and collaboration and social functionality to our planning systems. Consultancies started talking about the importance of the people, behaviour and change aspect, but hardly any consultancy came up with solutions in this discipline. For S&OP as a business management capability, few of these changes can be called significant developments that contributed to better end to end business management for executives.
To add to the confusion we have given S&OP new names like Sales, Inventory and Operations Planning (SIOP), Integrated Business Management (IBM) or Integrate Business Planning (IBP) to name only a few. A lot of time has been spend in blogs, articles and whitepapers to explain the difference in those names. Time that would have better been spend on how to improve S&OP.
All these events have a common denominator. There has been a common pitfall in the development of S&OP as aligned and integrated business management method. It is a pitfall I’ve observed in language from business leaders, practitioners and consultancies. A couple of exception excluded, it is a pitfall I noticed in articles from many S&OP thought leaders and academics. This pitfall is holding S&OP back from further maturing as an end to end business management capability.
I call this pitfall the supply chain bias!
Over the last 30 years, S&OP has been developed as a supply chain capability, not as an end to end business capability. S&OP thought leaders, consultancies and practitioners have had a significant supply chain bias and still do. S&OP LinkedIn groups are mostly joined by planners or people with a supply chain background. The same holds for S&OP conferences. S&OP is widely discussed in the supply chain community, but not widely acknowledged in other business communities. Academics that discuss S&OP are mostly operations, logistics or supply chain academics.
Outside this little bubble of the manufacturing industry and the supply chain and logistics world, S&OP has gone by mostly unnoticed in the rest of the world for almost 30 years. Since its inception in 1987 S&OP has focused on supply chain language and improvements, but forgot to learn from and integrate with other business functions and academic disciplines to really develop further and be the unquestionable number one business management model. S&OP as a business planning methodology forgot to do what it is advocating within a business; integrate and cross silos.
How to further develop S&OP
This lack of integration and development is now threatening the very existence of S&OP. If we will not develop S&OP further and make the the leading business planning model, in time it will disappear in to insignificance. It will be a blip in the history of business management, a great idea that never came to fruition. As happened to many industries in the last ten years, a new disruptive idea or development will take its place.
To develop S&OP further as an end to end business model, we need to look at what business functions or academic disciplines can support further development. We need to cross the silos and engage with other the functions and disciplines to make S&OP more valuable and keep it relevant. A good starting point to find where to integrate is to have a look at the main outputs from an advanced S&OP process.
S&OP well done has at least four main outcomes:
- A feasible rolling forecast and budget: this provides executives periodically with an updated feasible Profit and Loss (P&L) statement, working capital, cash flows, gaps to budget and scenarios on business risks and opportunities across the most important P&L lines. The academic and business history of financial planning & forecasting started before S&OP was born. There are even references that rolling forecasting was applied in the 70’s in the banking industry. Finance and supply chain integration and cross learning grew when Supply Chain Finance development academically as well as in business. And although you can find finance publications that show an interest in Integrated Business Planning, the finance community usually talks about rolling forecasting & budgeting or driver based forecasting. S&OP hardly gets a footnote.
- A check against strategic intent: strategy plans are active in current budget year and beyond the budget horizon. S&OP done well, peeks beyond the budget horizon and has a look at next year’s budget and strategic initiatives. Strategy and strategic planning also have a longer history than S&OP. Many theories on how to link strategy with execution have been published, Kaplan and Norton‘s business balance scorecard amongst the well known. S&OP can play a significant role in connecting strategy with execution. Yet, in dozens of strategy articles from McKinsey, the world most famous strategy consultancy, S&OP is not mentioned once. Similar to the finance community, McKinsey and Kaplan & Norton do use the term rolling forecasting & budgeting.
- Updated resource allocation: changes in the workforce or resources requirement for business as usual operations, budget or strategic initiatives, provide executives the opportunity to re-allocate resource where they add most value.
- Communication with execution: a well-defined communication strategy gives executives the opportunity to inform and refocus their employees and keep them engaged with changes in strategy and budget plans.
In ‘The secrets of successful strategy execution’, Gary L. Neilson and others suggest that information flow is the strongest contributor to good strategy execution. Using an internal S&OP communication strategy to address the right stakeholders with the right information through the right channel at the right time can have a powerful impact and keep employees engaged with strategy, budget and resource allocation in a structured way.
To achieve these four outcomes, businesses have to go through a major transformation of alignment, structure, discipline, transparency and cross functional collaboration. Often many little kingdoms or tribes have to fall. Therefore, before starting an S&OP change program, which according to many experts can take 5-10 years to master, advanced and sustainable S&OP has to address the only guidance in the strategic horizon, namely the company purpose, vision, values and behaviours. In short we can call this; company culture
With its traditional background in operations, S&OP consultancies and practitioners seem well equipped to use logic and algorithms to apply resource allocation as outcome of an S&OP cycle. However, to develop S&OP further, the S&OP community has to start reaching out, integrate and learn from the business disciplines of strategy, finance, culture and communication.
The fall of S&OP
If S&OP doesn’t develop these four areas, the strategy and finance communities will create a new end to end business model that provides the four outputs. Whilst the S&OP community is discussing what acronym to use for its model, the strategy and finance discipline already use common language and definitions for rolling forecasting & budgeting.
They are already integrating to solve the same puzzle S&OP is trying to solve. Over the world, the strategy and finance community are well resourced and more focused and it will be only a matter of time before they present a rolling forecasting & budgeting variant as the new accepted business planning model.
When they do, S&OP will slowly become redundant and will only remain as a footnote in the history of business planning.