In recent years, S&OP has shifted as management has begun redefining the objectives of S&OP to focus on maximizing the value generation for shareholders while appropriately balancing strategic objectives and risk.
While intended as a tactical process, it's not unusual for monthly S&OP meetings to get bogged down solving operational issues rather than focusing on the long-term direction of the organization. Recognizing this predicament, Gartner proposed a second process called Sales & Operations Execution that should run separately from S&OP to execute the S&OP and deal with crucial short-term operational issues. Oftentimes, the technology used for S&OP and S&OE can be completely different.
Definition of S&OE
As the name implies, S&OE is primarily focused on the execution of tactical plans determined during S&OP meetings. Gartner defines S&OE as a "weekly cyclical multistep process" that acts as the link between operational day-to-day processes and strategic or tactical activities conducted as part of the organization's S&OP or Integrated Business Planning (IBP) processes.
S&OE deals with immediate issues affecting any period from the immediate through to the next few months. As indicated above, meetings are held weekly or even twice a week to deal with the hurly burly of actual supply and demand issues. This meeting frequency is such that it's possible to determine short -term interventions and corrections to keep supply, manufacturing and sales on track.
How S&OE Differs From S&OP
S&OP focuses on medium- to long-term plans for the organization. Its primary purpose is to determine how to implement goals laid out in the strategic plan. By its very nature, S&OP operates at a high level that considers product families, production facilities and how to optimize overall supply and demand issues. It gets involved with product life cycles and when new products should be introduced. In most instances, it monetizes activities to determine revenue goals. Its time horizons are anything from three months to several years. S&OP meetings are infrequent, usually once a month.
S&OE fills the gap between S&OP and day-to-day operations. It recognizes that long-term plans don't take into account short-term issues such as shipping delays, unplanned equipment downtime and similar production issues. The primary goal of the S&OE team is to execute S&OP plans, solve problems and keep supply, production and sales on course. To do this, the team meets as frequently as necessary and at least once a week.
Business Planning Steps, Horizon and Metrics
To better understand the purpose of S&OE, here's a brief refresher of the roles, time horizons and typical metrics of each level of planning.
Strategic Planning Meetings
These meetings are typically held once a year. They deal with turnover, growth, cash flow, working capital as well as tackling long-term strategic issues such as competitive threats, business opportunities and how to address them. The meeting determines overall organizational strategies with timelines anywhere from one to ten years. Metrics considered include growth and revenue targets.
S&OP focuses on implementing the overall strategy with a time scale of approximately three months extending through to the next year or two. Its metrics are related to overall annual and monthly supply chain, production, sales, performance, profits and revenues. It's a forward-looking process that determines medium-term direction.
Sales & Operations Execution considers actual production planning processes for the next three months. It deals with detailed production scheduling and logistics planning for specific products and production lines. It determines the resources required to fulfill the production plan and identifies constraints and other issues that may affect production, as well as implements work-arounds to ensure targets are met.
Operational planning and execution deals with and resolves current production issues on a daily and hourly basis. Its metrics are daily production rates, efficiency and productivity.
Need for Separate Meetings for S&OP and S&OE
Because there's a degree of overlap, some feel these functions can be part of the same meeting, possibly handled at separate stages in the meeting. In fact, most S&OP meetings devote a certain amount of time attempting to resolve operational issues.
The reality is that when this happens, focus is lost and more time and attention is given to solving short-term operational issues than dealing with less tangible S&OP process strategies.
Another key reason why meetings should be separate is that operational management should focus on immediate issues rather than tactical ones. While they need to be informed of S&OP decisions so they can adjust plans as required, their primary responsibilities are managing day-to-day operations. In a similar vein, executive management should focus on tactical decisions and not involve themselves with day-to-day operation issues, except in exceptional circumstances.
Why S&OP Often Fails
Although S&OP has been around for a few decades, only 35% of companies rate their S&OP processes as effective. Part of the problem appears to be a dilution of S&OP focus. Companies are concentrating on newer fads, but also wasting time and energy dealing with operational issues.
This is why separate S&OE is crucial because it removes destructive influences from S&OP meetings, allowing teams to concentrate on their primary task, which is preparing tactical S&OP plans.
Another factor that teams lose sight of is the need for S&OP to include financials rather than simply nuts and bolts. While it may be essential to know what's produced and sold operationally, it's only when performance is measured in financial terms that organizations really understand where they are going.
Finally, the inflexibility of IT systems often causes serious problems thanks to rigid ERP and MRP processes that can't adapt to variability caused by issues on production lines. Often, planners must resort to manual methods and spreadsheets to figure out a way to meet commitments, effectively breaking the system.
Using Integrated Business Modeling to Facilitate Sales Operational Planning and Execution
In most organizations, there's a major disconnect when it comes to integrating long-, medium- and short-term plans. This is because the systems, software and methods used don't talk to each other, namely:
- Strategic plans are produced in isolation
- S&OP planning is based on the annual budget
- Annual budgets aren't directly linked to strategic plans
- S&OP decisions don't feed into operational plans
The reasons are easy to understand. ERP, MRP and corporate financial systems are essentially transactional based. Their goal is processing lots of numbers efficiently. Unfortunately, this doesn't facilitate tactical and operational decision-making, nor do these systems incorporate decision analysis and decision-making tools.
What's needed are integrated business modeling tools that leverage organizational data to support scenario analysis and optimize decision-making. This form of analysis, known as prescriptive analytics modeling, allows managers, at all levels of the organization, to interrogate business models to determine answers to complex questions. At the strategic level, it guides corporate strategy by revealing which of several alternatives will be most profitable. For S&OP, it helps executives facilitate trade-offs and determine hard answers to questions such as how to maximize profitability and revenue. At the operational level, prescriptive analytics models help determine the best way to meet production and revenue goals while satisfying customers. Taken together, these tools facilitate the process of tying planning to execution.
Why Sales & Operational Execution is Crucial
In some ways, Sales & Operations Execution is the missing link between S&OP and Operations Execution. It separates tactical planning from operational realities, while providing the link between the two. It simplifies S&OP, while at the same time offering a structured management tool for addressing short-term imbalances and operational problems to facilitate S&OP Execution.
S&OE closes the loop between Sales Planning and Operations. Gartner, in a study of organizations that introduced Sales & Operational Execution processes, discovered that more than 50% achieved significant benefits in terms of inventory levels, asset utilization and adherence to production schedules. Sales & Operational Execution is crucial.