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Regular Industry Development Updates, Opinions and Talking Points relating to Manufacturing, the Supply Chain and Logistics.

Untangling S&OP and S&OE

12-Apr-2018
Untangling S&OP and S&OE
Many sales and operations planning (S&OP) meetings end up focusing on execution. I recently visited an automotive original equipment manufacturer (OEM) and had the opportunity to attend their S&OP meeting. The majority of the meeting was spent on short-term production issues, with comments such as: “I don’t have floorboards for the assembly line next month,” “We need to add an extra shift three weeks from now,” and “We need to expedite a purchase order for a high-priority customer order.” Bottom-line: it was very short-term focused. Even though it was an S&OP meeting, they were really doing sales and operations execution (S&OE).

S&OP has been around for several years, but when I talk to businesses about what they mean by S&OP, I hear many different perspectives. Some think of S&OP as tactical demand planning; others view it as a purely tactical demand-supply matching. A lot of customers I meet say they have been doing S&OP, but are not getting value from it. After some investigation, it turns out that what they are calling S&OP is really S&OE. Their S&OP meetings focus entirely on day-to-day tactical details, leaving no time for cross-functional strategic business decisions, goals and objectives.

On the other end of the spectrum, there are a few customers I talk to who think of S&OP as integrated business planning (IBP). IBP is a forward-looking, strategic business decision-making process, where the objective is to keep on track with the annual budget. With IBP as part of the S&OP process, the focus is on product launches, market trends, the profit and loss (P&L) statement, the balance sheet, competition, new market growth opportunities, demand realisation scenarios, and capacity expansion scenarios.

As Marko Pukkila from Gartner articulates, S&OP is a strategic business decision-making process to orchestrate planning for the 3-month to 24-month horizon. S&OP is typically done on a monthly cadence, where the focus is on product groups and making directionally correct trade-offs based on factors such as revenue, customer service and costs. S&OE, on the other hand, is a more granular process. The focus of S&OE is the near term, with the goal to keep on track with the S&OP plan. S&OE is typically conducted for the 0 to 12-week horizon on a weekly cadence. S&OE meetings look at a granular level of detail such as stock-keeping units, orders, shipments, fill rates, production attainment and inventory levels. When you think of these differences in relation to the plan-do-check-act cycle, the “plan and do” activities are S&OP, whereas the “check and act” activities are S&OE.

It’s like planning a holiday
Consider the difference between S&OP and S&OE in the context of planning a holiday. You might start planning three months out, and your objective is to choose a destination to spend time with your family. As part of the planning process, you look at different scenarios such as whether to fly, take the train or drive to your destination. You explore the trade-offs of those different options (in terms of time, cost, scope) and pick the scenario that best aligns with your goal of spending quality time with your family. Flying, for instance, will get you to your destination faster, but will be more expensive. Traveling by train may be the cheapest, but doesn’t provide much flexibility.

Let’s say in this case you decide to drive because it costs less, provides more flexibility and is faster than taking the train. This type of planning is similar to the S&OP process; you are planning three months out, exploring necessary trade-offs and scenarios to ensure that your decision making is directionally correct and supports the overarching goal of your vacation. At this point, you are not looking at traffic congestion on the actual route itself. However, when the day comes for you to embark on your road trip, that is when you look at that level of detail. You see if there is traffic congestion due to accidents or road construction and then re-route if necessary. This type of granular planning is illustrative of S&OE.

Making it work in the real world
Technology has come a long way, and best-in-class companies are using one solution on one platform to seamlessly orchestrate their S&OP and S&OE processes. For example, semiconductor manufacturer Infineon Technologies uses S&OP for mid- to long-term planning (6-18 months out), focusing on where it should be making strategic investments. S&OE is used for short-term planning (0-5 months), with a focus on tactical demand-supply matching and fulfilling demand. As part of its S&OP process, Infineon has gone beyond just volume planning and demand-supply matching in its S&OP process to representing strategic decision-making information such as research and design expenses, revenue, margin, costs of idle capacity, costs of goods sold (COGS), costs of inventory, cost to serve, and generating the initial P&L statement for the business units.

When Infineon decides to chase a business opportunity, there are costs associated with it — inventory costs and COGS, as well as capacity utilisation and depreciation. Leveraging real-time what-if capabilities, Infineon has been able to explore these different trade-offs, shape the demand picture or come up with contingency plans to make sure it is on track with its annual operating plan. This has allowed it to derive value across many different areas of the business, from decreasing planning errors by up to 90 per cent, and cutting lead time for its volume rolling forecast from four weeks to two weeks.

S&OP and S&OE are two different processes, with different points of focus, purpose, degrees of freedom, and planning horizons. S&OP sets the destination, targets and provides the guard rails, whereas S&OE makes sure you are executing per plan—including taking any corrective measures in the short term to get back on track. Though separate processes, S&OP and S&OE complement each other; both are key ingredients for success.

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