Sales and Operations Planning: One Plan for the Whole Business

In many companies, three plans describe the same year. Sales has a forecast that assumes everything it sells can be delivered. Operations has a production plan built on last quarter's numbers and the capacity it actually has. Finance has the budget approved in November. All three are reasonable, none of them agree, and the differences are discovered as missed orders, emergency overtime or a profit warning.

Sales and operations planning (S&OP), and its broader successor, integrated business planning, is the monthly process that reconciles them into one plan the executive team owns. It is often presented as a supply chain process. Its real value is financial: it is the only place where the volume plan, the capacity plan and the financial plan are forced to meet before the month, not after it.

What the gap looks like

Consider a manufacturer whose budget is 832 million of revenue. The latest demand plan is better: 869 million, with a strong peak in the middle of the year. But the plant can only ship 76 million a month. The gap between what the market wants and what operations can deliver is invisible in the budget and in the sales forecast; it only appears when the two are put on the same chart.

Without S&OP, the year unfolds predictably. Sales celebrates a forecast above budget, the peak arrives, the plant runs flat out, and 25 million of orders are lost or delayed, together with the customers who placed them. Finance reports revenue slightly above budget and calls it a good year. In reality, 25 million of demand at a 30% contribution margin, 7.5 million of profit, was left on the table.

Decisions, not reconciliations

The purpose of the meeting is not to agree a number; it is to choose between options while there is still time. In the example, the S&OP team can put four choices in front of the executive team in February, each with its price:

• Pre-build inventory in the first months of the year, when there is spare capacity. It recovers about 18 of the 25 million, at the cost of carrying up to 18 million of extra stock for four months.
• Add a temporary shift during the peak, at an overtime premium that cuts the margin on the extra volume roughly in half.
• Outsource part of the volume to a contract manufacturer, at a lower margin but with no capital and no stock.
• Allocate the scarce capacity to the most profitable customers and products, and tell the others early, with a price that reflects scarcity.

Each option has a cost, a cash effect and a risk if demand does not materialise. Only finance can put them on the same basis, which is why S&OP fails when it is run as a supply chain meeting that finance attends occasionally.

The monthly cycle

1. Data and portfolio: close last month's actuals, update new products and phase-outs.
2. Demand review: sales and marketing agree an unconstrained demand plan in units and in value, with the assumptions and the risks.
3. Supply review: operations tests the plan against capacity, materials and suppliers, and lists the constraints.
4. Integrated reconciliation: finance translates the gaps and the options into revenue, margin, inventory and cash, and compares them with the budget and guidance.
5. Executive review: the leadership team decides, and the decision becomes the plan that everyone executes, including the financial forecast.