When Larry Lapide began giving talks on sales and operations planning at seminars in the early 1990s, his informal audience polls showed that about 30% of companies had enacted the process. Nowadays, the research director at MIT's Supply Chain 2020 program routinely finds that more than 80% of attendees have implemented a sales and operations planning (S&OP) process. While Lapide's data may skew high — a 2006 study by industry analyst firm AMR Research found that 65% of companies have had an S&OP process in place for at least two years — there's no denying the trend. The traditional planning process of hopeful guesses and unexpected constraints is now giving way at most manufacturing firms to a more regimented effort to measure demand and adjust supply. But, while the basic concept behind S&OP is fairly straightforward, implementing an effective sales and operations planning process can be tricky. Manufacturers must first understand the five basic steps of an S&OP process, experts say. And they must find a way to get different functional groups — like production and sales — to work together smoothly. Finally, they must decide where and how technology fits into the S&OP picture. The heightened interest in S&OP owes to several factors, according to AMR. Mergers and acquisitions have forced companies to rationalize planning processes across newly acquired units. Contract manufacturing activities — both offshore and on — have also been a driver for S&OP, since extended supply chains demand longer, more complex forecasts. Other manufacturers cite a desire to improve sales channel response and customer service. In a nutshell, S&OP is an attempt to divine the future of demand and then plan for supply to meet it. A company that is able to predict a 7% surge in demand for its flagship product a few months in advance can avoid lost sales by increasing product volume. Likewise, if that company predicts that a competitor's new offering will steal 4% market share 12 months down the road, it can throttle back on production and pre-empt excess inventory costs. Or, it might choose to accelerate its own new product introduction to stave off the competitive incursion. History as a Guide The sales and operations planning concept was born during the material requirements planning (MRP) era of the mid-1980s. Dick Ling, then a consultant for the Oliver Wight Group, envisioned a process that would help companies align their manufacturing operations and resources planning with the anticipated demand for their products. Chris Turner, a colleague of Ling's who is now vice president of StrataBridge, a UK-based S&OP consultancy, remembers the early days of the discipline as groundbreaking. "In the early '80s, the production plan was separate from the sales plan, which was separate from the finance plan, so getting them together to talk about it was a breakthrough," Turner says. Turner and most other experts view basic sales and operations planning as a five-step process. In most cases it is broken into monthly blocks and capped off by a meeting of higher-level executives who attempt to resolve the main demand and supply issues of the month. In the majority of instances, the focus is on product families, not the individual SKUs that comprise the more granular mix level. In most S&OP processes, demand planning is the first step. This normally occurs just after the close of the preceding month, and involves updating a running file with the previous month's data on units sold, orders placed, etc. A forecasting engine then generates a statistical outlook that, in the words of Steve Hochman of AMR Research, is a "combination of actual sales activity and forecast history combined with other forms of market insight." That insight can come from data as disparate as weather predictions, the competition's plans, and anticipated customer buying patterns. A centralized demand planning meeting follows. There the multiple forecasts for each product family — often from different regions — are rolled up into a consensus outlook. At this point in the process, the forecast is unconstrained; the supply planners and production representatives have yet to weigh in on their ability to meet the projected demand. Capacity and supply planning occurs during the third step. Production planners might note that a certain supplier has been late on shipments, or that the amount of product expected would mean additional worker overtime. "The idea," Hochman says, "is to get a sense ahead of time of what we could do in an unconstrained world but then match that against constraints." This segues into the pre-S&OP meeting, the fourth step in the process. Here, problems and imbalances are identified and financial implications are considered. Issues that can't be resolved by the manager-/director-level participants are elevated to the next step. "One of the unique value propositions on S&OP is it brings the customer-facing people like sales and marketing [and] merchandising together with the operations people," Lapide explains. "It says, 'You will come to this meeting, you will talk about the plan, you will talk about the future.' If that didn't happen, they would never talk." Not that the novelty adds anything to the festivities, Lapide notes. "Frankly, it's probably not a very exciting meeting." But it is an essential enabler of the final step — the executive S&OP meeting. That gathering often begins with a review of monthly or quarterly performance and a summary of the outlook for all the product families. The senior executives involved then consider the three or four most important unresolved issues and decide how they should be handled. Typical decisions include increasing procurement budgets or adjusting production schedules at various plants — high-cost activities that demand executive sign-off. Similarly, an executive might need to make a key decision on a high-profile customer that is considering pulling its business, for example. Should the manufacturer offer additional cost incentives or make a change to the sales team in an effort to keep the account? The Technology Arc How much technology is required to support the S&OP process? Typically, not much, says Tom Wallace, author of three books on the process, including the recently published Sales & Operations Planning: An Executive's Guide. "What they do is get data from their existing systems — the ERP system, the legacy, and the CRM... and push it into Excel," Wallace says. Indeed, Microsoft Excel dominates the world of sales and operations planning. AMR's Hochman estimates that over 70% of companies use Excel as the presentation engine for the data involved. Typically, the information itself is gleaned from existing transactional systems such as ERP, MRP, and CRM. Once the consensus forecast is approved, it is translated to various supply-side systems such as advanced planning and scheduling software. For about 15 years, software vendors were mostly content to leave sales and operations planning to the folks in Redmond. Today, however, the landscape of software dedicated to S&OP is changing quickly. ERP vendors, rather than just providing financial data to support S&OP processes, are beginning to include S&OP modules in their software, notes StrataBridge's Turner. Oracle's acquisition of Demantra in July 2006 gave the ERP stalwart a strong sales and operations planning suite. That same month, SAP announced it was developing an S&OP product to fill out its Advanced Planning and Optimization suite. And only a month before that, business intelligence software supplier Cognos debuted its Sales and Operations Planning Blueprint product. The allure of these new products lies in their ability to save planners from the traditional process of "blood, sweat, and Excel." By automating the data gathering, these S&OP-specific products aim to save companies time and resources. Among the others cited by experts as moving in the right direction are Logility, i2, and Manugistics. There's still room, however, for better S&OP software, experts say. "What we really want is some more powerful 'what if' capability," Turner says. "That hasn't tended to be the domain of the big ERP offerings." In that vacuum, a new breed of supply chain software vendor is cutting its teeth. Most allow companies to run "what if" planning scenarios in the space of one to two hours or less, a sharp contrast to the traditional offerings, which can take 30 hours to process and recalculate all the associated variables. Packages with this capability are now available from Interlace Systems, Kinaxis, Steelwedge, and others. Forecasting Success Among the industries that have found success with S&OP, high tech tops most experts' lists. Hochman also cites pharmaceutical companies as standouts. Within the consumer goods and food segments, companies have instituted S&OP for a number of reasons. Some deal with seasonal demand that can swing their production from high volume to low volume in a matter of months. Others devote significant resources to shaping demand — promotions at the store level, huge advertising budgets — and need to link those efforts with the production side of the business. Sunsweet Growers, Inc., a maker of juices and packaged fruits, has become well-practiced at delivering on customers' specialized orders since its founding in 1917. But the flexibility that that demanded, says Harold Upton, Sunsweet's vice president of strategic processes, came at the cost of two things. On the operational side, it engendered inefficiencies — necessitating more changeovers and increasing overtime. On the supply chain side, it created excess product and drove up inventory costs. In late 2004, Sunset decided to call in extra software to rally its S&OP efforts. The company chose the Zemeter suite from Supply Chain Consultants, which interacts closely with Sunsweet's SAP system. Upton says the tool aligns well with the business, offering the look and feel of a spreadsheet and mapping closely to the functional roles across the organization. Zemeter also allows Sunsweet's planners to change the variables in the constrained forecast and quickly re-run projections. "We can do that in a matter of hours, where before it was so slow to do that realistically we only did it a couple times a year," Upton says. As for payback, Upton says Sunsweet met its ROI requirements within the first three months. "You know, if you can save a couple shifts of overtime, you're saving a lot of money real fast." Is It Simple? Some consultants will say that S&OP is really a simple discipline — the time-honored tradition of balancing supply and demand. But that may be true only in the abstract. "Don't get blindsided by the apparent simplicity of sales and operations planning and its logic," Wallace says. "The hard part of implementing [S&OP] is organizational behavior change. That's where 90% of the challenge is." Forcing interaction among employees who don't normally interact, in other words, can require a Titanic effort. AMR's Hochman offers another view. "Sometimes I refer to it as integrated business planning, because it's really about more than just balancing supply and demand. It's about making significant business decisions that have a bearing on where the business is going for the next anywhere from 30 days to 12 months." Procter & Gamble is one company that keeps its S&OP efforts focused on the long view. The consumer-products giant first implemented an S&OP strategy back in the 1990s to manage the activities of its many global brands. In recent years it has reinvigorated its efforts, according to Dick Clark, P&G's associate director for supply planning. P&G recently added the Real-Time Forecasting tool from Terra Technologies to its demand planning arsenal. The software monitors daily order flow and from that estimates short-term demand. Clark says the tool will significantly increase P&G's ability to see what is happening at the mix level and adjust weekly or daily plans accordingly. He is careful, however, to note that Procter & Gamble does not consider the technology central to the S&OP process. "Our intent with S&OP is to not focus on the current month, our preference is to not focus on the current quarter, it really is to look out from months four to 12 to 18," Clark says. That longer-term view raises questions about the usefulness of real-time data — such as that generated from RFID systems, experts say. RFID's ground-level view of supply chain activity certainly allows a manufacturer to adjust quickly. But, Lapide says, while reacting fast sounds like a good idea, "you also may be reacting to something that's not going to happen again." So extrapolating from daily-level information to the mid- to long-term forecasting that S&OP involves may not be beneficial for the majority of firms. Still, there are companies that consider both volume and mix decisions part of the S&OP process, and, as the definition evolves, it's possible that more will apply the process to the entire universe of product decisions. For now, though, most seem to have their hands full dealing with planning decisions at the product family level without adding more granularity into the equation. Sorting the Field Likely, the truth about S&OP lies somewhere between the traditional view that it does not require much technology and the new, vendor-driven hypothesis that it does. Sunsweet credits the Zemeter technology for allowing the company to adjust its plan more frequently and respond more effectively to changing market conditions. Dick Clark at Procter & Gamble — whose $68 billion in revenue dwarfs Sunsweet's $223 million — sees the S&OP process as one primarily enabled by Excel. Most can agree that manufacturers will always wrestle with demand and supply. Perhaps someday, with the right combination of technology and process change, the twain shall meet.