(This is an ongoing column in TheJournal, which is intended to givea brief view on a potential topic ofinterest to practitioners of businessforecasting. Suggestions on topicsthat you would like to see coveredshould be sent via email tollapide@mit.edu. Ed)

The Sales and Operations Planning(S&OP) process has been aroundfor quite some time. I started

including it in many of my presentationson forecasting in the mid-1990s. As Ipolled audiences along the way, I foundthat about one-third of the early ones hadimplemented an S&OP at their company,while lately, the number has beenhovering over 80%. Clearly the S&OPprocess was becoming more prevalentover the last decade or so, with acrescendo of interest in the last couple ofyears.

HEIGHTENED INTEREST INTHE S&OP PROCESS

An indicator of the interest in theS&OP process is the fact that, accordingto AMR Research (my former employer),companies have spent over $12 billion insupply chain planning applicationsoftware over the last 6 years. Yet whilespending significant sums of money onS&OP-related software, they were notseeing the benefits they expected, becausemany did not change the process to fullyleverage the enabling technology. So,companies are now starting to adjust theirS&OP process to do that.

In addition, a few studies, includingone done by AMR Research, are

indicating that companies that fullyembrace the use of the S&OP processoperationally outperform companies thatdon’t use the process as much or at all.These study findings indicate thatcompanies can meet customer demands atthe highest levels, while at the same time,maintaining reduced inventories andminimized supply chain operating costs.Publication of these findings is partially

responsible for some of the heightenedinterest in S&OP. The increased interestled me to write a column on the S&OPprocess in the Summer 2002 issue of theJournal of Business Forecasting, whichwas titled, “You Need Sales andOperations Planning.”

In this issue’s column, I’m kicking offa three-part series on the S&OP process.Coverage includes (in this order): 1) theprocess itself, 2) its enabling technolo-gies, and 3) a diagnostics tool I havedeveloped to assess where a company is inits evolution of the process and the use ofenabling technology.

S&OP SUCCESS FACTORS

To kickoff this series of columns, I’mfirst discussing the factors that can makean S&OP process successful. In Figure 1,there is a list of a dozen factors that canhelp lead to operating an S&OP processthat maintains exceptional supply chainoperational performance over time. Thesefactors are detailed below:

1. Ongoing, Routine S&OP Meetings: Akey aspect of an S&OP process is thatit is comprised of routine meetingsthat are held on a periodic basis. Interms of frequency, a decade ago,these were often held on a quarterlybasis. However, recently manycompanies have evolved to holdingthem monthly. In addition, mostcompanies I’ve talked to conduct threetypes of meetings. The first is focusedon establishing an unconstraineddemand plan and forecast, and this isfollowed by a second meeting toestablish a draft or rough-cut supplyplan and a constrained demand plan.These are followed by a third meeting

SALES AND OPERATIONS PLANNINGPART I: THE PROCESSBy Larry Lapide

LARRY LAPIDE

Dr. Lapide is a Research Director atMIT’s Center for Transportation andLogistics. He has extensive businessexperience in industry, consulting, andresearch, and has a broad range offorecasting experiences. He was aforecaster in the industry for manyyears, has led forecasting-relatedconsulting projects for clients acrossvariety of industries, and has taughtforecasting in a college setting. Inaddition, for 7 years, he was a leadingmarket analyst in the research offorecasting and supply chain software.

THE JOURNAL OF BUSINESS FORECASTING, FALL 2004 17

to fine tune and finalize the alignmentof the demand and supply plans.

2. Structured Meeting Agenda: Sincethe S&OP meetings need to beroutine, they should follow a fixedagenda in a pre-specified amount oftime (e.g., two to four hour meetingsor for some companies, a whole day).While my prior S&OP article wentinto more depth on how to run these,generally the meetings need to includea review of how well previous planswere met, including a root-causeanalysis of any plan variances. Themeetings need to eventually havediscussion that leads to the alignmentof demand-side plans of Marketingand Sales with the supply-side plansof Operations and Supply Chainmanagement. Finally, closure needs tobe established at the conclusion ofevery meeting, so that plans can bepublished and distributed around thecompany on a timely basis. This helpsto foster a ‘single number’ planningenvironment.

3. Pre-Work To Support Meeting Inputs:A baseline demand forecast andrough-cut demand and supply plansneed to be brought into the S&OPmeetings. These need to beaggregated, synthesized, andtranslated for management prior to themeetings. The baseline demandforecast should be unconstrained andincorporate all known factors thatcould impact future demand,including new product introductionsand promotions. In addition, rough-cutdemand and supply plans shouldinclude all known impacts on thefuture, including details on marketingand sales actions, as well as supplycapacities and limitations — such asscarce inventories and future plantshut-downs. Thus, a lot of homeworkneeds to be done in advance of anS&OP meeting and its importance tothe process should not beunderestimated.

4. Cross-Functional Participation: As

the name implies, the S&OP processneeds to be a cross-functional processthat involves demand-side managersfrom Sales, Customer Service, andMarketing, and supply-side managersfrom Manufacturing, Logistics,Procurement, and Supply Chain. Inaddition, Finance personnel are alsoinvolved to help marry the operationalplans established with the financialobjectives of the company. Multi-functional attendance and involvementalone in meetings, however, is notsufficient towards making the S&OPprocess successful. There also needsto be active participation during themeetings, with each member having arole to play that contributes to theprocess. All members need torepresent their functional area’sperspective to the fullest extent, andgive it priority by routinely showingup, or sending a proxy to ensureparticipation in all the meetings.

5. Participants Empowered To MakeDecisions: Participants in the S&OPprocess have to make decisions on theoperational plans and forecasts thatwill be followed. Therefore, they needto be empowered by the executiveteam to make decisions based on theirbeliefs and interactions with otherparticipants during the meetings.

While this can be accomplished byholding meetings that involve onlysenior managers, such as SVPs andVPs, most company executivesempower their subordinate director-level managers to attend the meetingson behalf of their department and tomake decisions they will support. Toavoid bogging-down the S&OPprocess, as mentioned above, themeetings need to achieve a closure.Therefore, there should be no optionof going back to get executive-levelapprovals before decisions are made.

6. An Unbiased, Responsible Organiza-tion To Run A Disciplined Process:S&OP needs to be conducted as arepeatable process that runs on-timeand according to a schedule. Toaccomplish this, it needs to beorganized and run (but not dictated by)a responsible organization. Thisorganization takes on a charter to runan extremely disciplined processthrough scheduling meetings, settingthe agendas, moderating the meetings,and ensuring that the pre- and post-meetings work is done in a timelyfashion. The person in charge of theS&OP process is usually not a high-level executive — as such anindividual might dominate themeetings by demanding acceptance of

18 THE JOURNAL OF BUSINESS FORECASTING, FALL 2004

1. Ongoing, routine S&OP meetings2. Structured meeting agendas 3. Pre-work to support meeting inputs4. Cross-functional participation5. Participants empowered to make decisions 6. An unbiased, responsible organization to run a disciplined process7. Internal collaborative process leading to consensus and accountability8. An unbiased baseline forecast to start the process9. Joint supply and demand planning to ensure balance 10. Measurement of the process11. Supported by integrated supply-demand planning technology12. External inputs to the process

FIGURE 1SUCCESS FACTORS OF SALES & OPERATIONS PLANNING

(S&OP) PROCESS

his or her point of view, rather thandriving towards consensus.

7. Internal Collaborative ProcessLeading To Consensus And Account-ability: To ensure that supply anddemand plans become accountableand get buy-in from all stakeholderfunctional organizations, a collabora-tive process designed to lead toconsensus-based plans is required.This means that every stakeholderneeds to be able to quickly create,review, and revise plans. To do this, aprocess needs to be set up that allowsall members to easily providefeedback, on an equal basis, to work-in-progress plans.

8. An Unbiased Baseline Forecast ToStart The Process: For more detail onthis success factor, see my Winter2003-2004 Journal column titled,“Make the Baseline Forecast YourTrusted Advisor.” In it, I detailed theimportance of the baseline demandforecast in the S&OP process anddescribed what is needed to develop it.Generally, the baseline forecast isimportant because it forms theworking-draft from which S&OPparticipants develop final supply anddemand plans. As such, it should beunbiased, unconstrained, and incorp-orate all known impacts to futuredemand. To keep it 100% factually-based, the baseline forecast is mostoften developed using statisticalforecasting methods.

9. Joint Supply And Demand PlanningTo Ensure Balance: As stated to meby a manager that runs his company’sS&OP process, one “needs a processthat is able to chase demand or supplyquickly.” Most S&OP processes inplace today tend to fail in this regard.The major issue is that they tend topresume a given set of marketing andsales plans. In these cases, the S&OPprocess primarily entails developingsupply plans that meet the demandforecast based on relatively inflexiblemarketing and sales plans, to which

very little modification is made duringthe S&OP meetings. When this is thecase, the meetings are driven bysupply-side operational managerslargely trying to adjust rough-cutsupply plans to meet a pre-specifieddemand plan.

This approach to S&OP has atleast two problems associated with it.The first is that there is virtually norole for Marketing and Sales to play atthese meetings, so they tend not toactively participate in or even botherto show up for them. The second, andmost important problem, is that ittends to hide potential revenueopportunities that could be generatedby taking advantage of opportunisticand/or excess supply capacities. Abetter process solves these problemsby assuming (that like the supplyplans) the marketing and sales plansare rough-cut plans that will be revisedduring the S&OP meetings. Thus,both the final supply and demandplans are developed concurrently.

10. Measurement Of The Process: Likeany process, the performance of theS&OP process itself should bemeasured so it can be improvedthrough learning over time. Mostcurrent S&OP processes tend tomeasure demand forecast accuracy,which is probably the most importantmetric to track. However, to helpimprove the process, other metricssuch as variance to baseline forecastsand budgets, as well as adherence tosales, marketing, and operations plans,should also be tracked over time.

11. Supported By Integrated Supply-Demand Planning Technology: I willgo over this in more detail in my nextcolumn. Today a big problem in thisregard is that many S&OP processesare supported by myriad spreadsheetsthat are not synchronized. Companiestend to solve this by implementing ademand forecasting or planningsoftware package. However, while thishelps immensely, to fully support the

S&OP process, supply-side softwareapplications need to be integrated withthese types of demand-side packages,as well as with some type of S&OPworkbench software that is used tobring together the views of supply anddemand needed to support S&OPmeetings.

12. External Inputs To The Process: TheS&OP processes in place todayprimarily use internal supply-demanddata, such as customer orders,shipments, on-hand inventories, andplant capacities as inputs. Morerecently, however, with co-managedinventory programs – such as VendorManaged Inventories (VMI), Colla-borative Planning, Forecasting, andReplenishment (CPFR) and thesharing of downstream data like Point-of-Sale (POS) information –companies have greater access toexternal information about futuresupply and demand from theircustomers and suppliers. Someleading companies are starting toincorporate this type of externalinformation to support their S&OPprocess.

CONCLUSION

The dozen factors for successmentioned above represent a checklistthat can be used to gauge how well yourS&OP process is doing in improving andsustaining operational performance. In thenext column, I’ll discuss the technologyrequired to best enable the S&OP process,and follow that up with the third article,which will offer a diagnostic tool that canbe used to help improve your S&OPprocess. n

THE JOURNAL OF BUSINESS FORECASTING, FALL 2004 19

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