How to run a successful Sales and Operations Planning (S&OP) for Substantial Financial Results

Dec 7, 2023 | S&OP/ IBP

business people analyzing checking finance graphs office

Think about profits, margins, cash flow, EBITDA (earnings before interest, tax, depreciation, and amortization). Stop thinking about number of cases, pallets, truckloads, and OTIF (on time in full)…or even better, think about both physical and monetary units, financial and operational metrics.

Think about the finance and operations intersection for better decision-making. Sales and Operations Planning (S&OP) has the potential to skyrocket the company’s financial performance when finance integrates with operations.

This is the most advanced phase—level 5 in Gartner’s S&OP maturity tool. This phase is also known as Integrated Business Planning (IBP).

S&OP Maturity Levels

Companies with an effective or mature S&OP capture benefits in increased revenue and profitability. According to consulting firms like McKinsey and Deloitte, an advanced S&OP/ IBP can increase EBIT by 6% and lead to 40 to 50 percent lower customer delivery penalties and missed sales.

This allows for higher service levels and at the same time, lower inventories. McKinsey provides specific examples of these results In its article “Consumer-goods companies need to transform their planning end-to-end;” Here are few examples:

  • An international packed-food company reduced inventory by 20% by increasing its S&OP maturity/IBP. They started with less than 30 days of inventory and over 95% service level.
  • Another leading food company reduced inventory by 30% and increased service levels by 3%.

Despite the attractive returns, many companies cannot bypass level three in Gartner’s scale. At low maturity levels, S&OP is still a siloed process within the walls of supply chain, or in the best case, starting to be cross-functional with Sales and Marketing.

It serves the purpose of balancing demand and supply. It is more a production planning tool as it was in its origin, when Richard (Dick) Ling coined the S&OP term in the 1980’s.

In the 1990’s, the IBP term was born to distinguish a mature S&OP process from its early stages. Oliver Wight was one of the pioneers of IBP.

Wight’s defined IBP as follows: “it is a process that drives the alignment of all functions across an organization, models and creates readiness for alternate outcomes, drives deployment of strategy, and enhances collaboration across supply chains.”

From this definition, there are five main aspects to highlight:

  1. Business process – “process that drives”
  2. Highly cross-functional, going beyond supply chain — “all functions across an organization”
  3. Scenario and contingency planning — “models and creates readiness for alternate outcomes”
  4. Linked to strategy — “drives deployment of strategy”
  5. External collaboration, outside-in focus — “collaboration across supply chains.”

Vineet Khanna—Former Global Head of Supply Chain at Nestle—regards IBP as “the next big thing, as a Crystal Ball and Magic Wand are out-of-stock.”

Khanna adds that “seriously, Integrated Business Planning (IBP) done well works. It delivers results. Is it magical? Not really…but definitely the best next substitute.”

The Bridge: Finance Integration

The integration with Finance is fundamental in reaching a higher maturity in S&OP. Ling indicates that such an integration “is the step that most companies will miss doing well without understanding and help.”

Debbie Climer, Director of Integrated Business Planning at Cummins Inc, and Misty Eldridge, Senior Manager Planner and Fulfillment Systems at GE Appliances, both emphasized the importance of finance-ops integration for achieving a successful S&OP. They shared their insights during the IBF’s S&OP Best Practices Conference in Chicago in 2022.

According to Eldridge, Presentations at the event emphasized the link between S&OP and financial performance, such as EBITDA and cash flow. S&OP enables process buy-in and maturity, leading to these outcomes. Product reviews are important for becoming a Vanguard S&OP organization.

Integrating Finance allows for better decision making considering the financial impact of the plans. As opposed to less mature S&OP processes, where decisions and plans take place in silos, in most advanced S&OP/ IBP, such decisions are above the functional level to consider what is best for the business.

For example, Procurement may want to reduce cost. If the company loses an important customer, Procurement will accomplish savings, as the raw materials requirements will be lower.

But, this cost reduction is due to a customer loss, which is probably not good for the overall company, having a negative impact on revenues and profitability.

For a successful integration with Finance, it is of utmost importance that demand and supply planners learn the language of the business—Finance and Accounting—to communicate in cross-functional settings and understand the financial impact of operations. This involves translating volume plans into financial plans and identifying any gaps against the budget.

Decisions in mature S&OP/ IBP are about revenue, costs, profits, cash, along with financial metrics. It is a different language from Supply Chain whose focus is on physical units and metrics such as OTIF (on time in full) and forecast accuracy.

Conclusion

  • Many companies are not fully capturing the value of Integrated Business Planning, the most advanced S&OP level that goes beyond balancing demand and supply.
  • To take advantage of the full potential of a mature S&OP/ IBP process, the integration with Finance becomes fundamental to measure the financial impact of operations, considering different what-if scenarios.
  • It is critical for demand and supply planners to learn the language of the business—Finance and Accounting—as the focus is on revenue, cost, profit, cash, and financial metrics; different from Supply Chain language that includes service level metrics and physical units.

Are You Ready For A Supply Chain Transformation?

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