So many acronyms can become confusing even for the seasoned practitioner of financial and operational planning. This article aims at defining and shedding light on the concepts behind the numerous acronyms.
S&OP—Sales and Operations Planning
In the 1980’s, Richard Ling—at the time a consultant at the Oliver Wight firm— coined the S&OP term. Ling noted that companies had too little or too much inventory. S&OP was conceived to address this issue, considering demand, production capacity and supply.
In its origin, S&OP was all about balancing demand and supply. The covid-19 pandemic showed the severe effects when such a delicate balance fails.
Examples were the toilet paper shortage crisis with empty shelves at the stores and the excess inventory at the big retailers, including Walmart and GAP. Fast growing companies may also experience the negative effects of an unbalanced supply and demand.
The S&OP concept has been evolving and together with it, more acronyms were born including SIOP.
SIOP—Sales, Inventory and Operations Planning
A critical output plan from S&OP is the inventory plan. This acronym, by adding the “I”, highlights the importance of inventory that is precisely, one of the buffers used to balance demand and supply.
However, S&OP and SIOP refer to the same general 5-stage process:
- Data gathering
- Demand plan
- Supply plan
- Pre-S&OP Meeting
- Executive S&OP Meeting
The next acronym—IBP–was created in the 1990’s and it represents a major change to the S&OP concept.
IBP—Integrated Business Planning
There are two conflicting views about the Integrated Business Planning concept (IBP). Some claim that is a separate process from S&OP and others state that IBP is S&OP in its more mature stages.
Per Gartner’s S&OP maturity tool, the integration with Finance takes place in stages 4 and 5.
Oliver Wight, one of the IBP fathers, defines such a process 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.”
Congruent with this definition, Tom Wallace—thought leader in sales and operations planning —describes IBP as “a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high-level strategic plans with day-to-day operations.”
Whether considered the most advanced S&OP phases or a separate process from S&OP, IBP is a strategic management process that encompasses the entire company, going beyond production planning and supply chain.
Due to its cross-functional nature, the language spoken is the business language that is of Finance and Accounting. IBP measures performance and achievements in financial terms that companies can compare against financial targets.
In IBP, product rationalization and what-if-scenarios showing the impact on the financials become fundamental for optimizing production plans. Debbie Climer—Director of Integrated Business Planning at Cummins Inc.—indicates that “the connection to Finance is really critical.
I mean everything we do is related to money right? So making that connection and bringing those pieces together is really important for a successful IBP or an S&OP process.”
As essential as the integration with Finance is, Ling indicates “this is the step that most companies will miss doing well without understanding and help.”
FP&A—Financial Planning and Analysis
Financial Planning and Analysis (FP&A) resides in Finance. In contrast to S&OP in the early stages—this is stages 1 through 3 in Gartner’s maturity tool—FP&A covers all the business; extending further than manufacturing.
The language is different too.
For the immature S&OP processes with focus on balancing supply chain and demand, metrics may include on time in full (OTIF), lead time in days, and most of the units of measure used are physical units.
In FP&A, the team may talk about forecasted financial statements (including cash flow), profits, EBITDA, using monetary units as the main unit of measure.
Because FP&A may be siloed in Finance while S&OP in Supply Chain, there are redundancies and non-value added activities.
S&OP in its most advance stage—maturity level 5 per Gartner’s tool—or IBP facilitates the integration of Finance and Supply Chain as well as the other functions and it’s the conduit to the business strategy as well.
S&OE—Sales and Operations Execution
Sometimes also referred as Integrated Tactical Planning (ITP)— S&OE focuses on executing S&OP. It is like a mini-version of S&OP ran by middle management, with weekly cadence instead of monthly.
S&OP—ran by the executives—is more strategic and covers, on average, from 3 months up to 36 in the case of IBP, while S&OE is highly tactical.
A defined terminology is the starting point for companies to drive improvements to fully capture the massive advantages of Sales and Operations Planning.