Operations Management / Supply Chain Management

Module 11.01 Key Concept: Sales and Operations Planning Overview

Sales & Operations Planning uses cross-functional collaboration to develop realistic tactical plans that are in line with, and support, the overall business plan.  This ensures that follow-on detailed planning will truly support the over-all objectives of the organization.

So called “functional silos” exist in most organizations.

Take a minute and think about different functional organizations in a company.  What are their different objectives?  What drives their decision processes?  What are they rewarded for?  What turns them on and what drives them crazy?  Go ahead, do a little brainstorming exercise on your own or in a group.  It is quite interesting.

Let’s take Marketing and Sales for example.  Marketing and Sales functions are responsible for customer relationship management and might be driven by the mantra “sell – sell – See!”  How does this impact decisions on inventory?  Well, typical sales and marketing people want lots of inventory and expect operations to respond immediately to changes in a dynamic marketplace.

On the other hand, Operations is driven by cost and efficiency.  Operations strives for long production runs (that can drive up inventory) and few changes.  This can lead to a loss in customer responsiveness.

Finance wants it all.  Finance drives for low cost, high asset utilization and high customer service as long as this brings real money into the organization.

In reality, are all these things bad?  No they are not.  However, when each function strives to optimize selective objectives, it can result in sub-optimization of total company performance.  This can even be worse in the extended supply chain where completely different companies are involved as well.

Sales & Operations Planning provides key communication links for top management to coordinate the various functional planning activities in a business.  When conflicts arise they are dealt with through cross-functional collaboration.  Then all functional leaders agree to a single, unified company plan.



Every business process has a certain basic structure and the Sales & Operations Planning Process is not different.  Key inputs include data (prior performance, market changes, customer changes, etc) and key outputs include decisions, reports, revised plans, etc.

There are five basic sub-processes in Sales & Operations Planning:

  1. Run Sales Forecast reports
  2. Demand Planning
  3. Supply Planning
  4. Pre-S&OP
  5. Executive S&OP

Step 1:  Data Collection (Run Sales Forecast Reports)

Sales & Operations Planning is a very data intensive process.   Plans and decisions must be driven by clear metrics and excellent compilation and analysis.  Modern information systems make this much easier than in the past.

At the beginning of the month, data is collected regarding: actual sales vs. forecast, actual supply vs. plan, inventory, backlog / customer service level performance, financial performance, product development project status and much more.  Market intelligence and significant demand changes are included along with historical demand statistics.  A first pass statistical forecast is created for each product family.  Forecasting methodologies were presented is Module 03

Step 2:  Demand Planning

The Demand Planning team analyzes actual vs. planned customer demand in order to determine the validity and change / improve forecast methodology.  The Team also analyzes the potential forecast impact of new marketing programs as well as product introduction and withdrawal.  The final output is revised product family forecasts in both units and dollars.  The unit level forecasts are used in the supply-planning step and the financial demand forecasts are used in finance planning to validate Performa financial statements.

Step 3:  Supply Planning

The Supply Planning team analyzes actual vs. planned supply and actual vs. planned capacity utilization.  The team also evaluates expected changes in resource capacity (i.e. plant shut-down or major schedule changes).  The team also reviews potential changes in supply strategy based on the family level Demand Plans generated during the previous step.  This culminates in the creation of a Resource Load Plan that is evaluated vs. agreed capacity.  If there are major discrepancies (under or over capacity), then the team evaluates various options to reconcile the discrepancies.

From a Resource Planning perspective, Bills of Resources and Load profiles are created in order to evaluate capacity utilization, requirements and problems.

Step 4:  Integrated Reconciliation

Step 4 requires excellent collaboration between the Demand Planning Team and the Supply Planning team.  They must resolve major differences or the respective plans will fail.  For example, if the Demand Planning team is forecasting a 50% increase in sales for a particular product family and manufacturing capacity or external supplier capacity are inadequate to meet the increased demand, they the sales will not be met.  Customer backorders will increase and customer service will suffer.  This could result in loss of multiple orders or, worse case, loss of one or more customers.  The outputs of this step include agreed actions required to support changes in demand and supply; key decisions to mitigate any potential risks or problems; recommendations for adding or reducing capacity (people and / or facilities); revisions in product development plans; etc.  A summary of all data analysis and results of the Integrated Reconciliation team meeting is prepared and presented to representatives of the Executive S&OP well in advance of their meeting.

Step 5; Executive S&OP

The Executive S&OP meeting typically lasts only 2 hours.  For this reason, all relevant data must be available and the meeting must focus only on high-level issues.  Often these meeting fail because they become detailed discussions of current problems.  The Executive S&OP team’s responsibility is to manage the long-term future of the organization.  Thus, their issues are all about what will occur 3 months, 6 months, 18 months out – not what occurred in the last weeks.

The Executive S&OP reviews key issues in the Pre-Meeting Reports: assumptions, risks, opportunities, management changes, decisions made, and decisions required.  They discuss implications of Integrated Reconciliation and make decisions.  They agree on a final updated S&OP Plan and finally publish and communicate Meeting Minutes.

Sales & Operations Planning occurs on a regular monthly cycle and surely follows the “Plan > Do > Check > Act” continuous improvement process.  It incorporates meaningful metrics and high-level resource analysis (Resource Planning) to ensure that agreed plans can be met.


Sales and Operations Planning provides family-level plans that are then disaggregated to detailed, item level and component plans in the Manufacturing Planning and Control processes of Master Production Scheduling and Material Requirements Planning.

Integration among Sales, Marketing, and Production is key.  Sales and Marketing need to sell what is planned (overselling is just as bad as underselling).  Opportunities need to be evaluated via changes to the SOP.  Manufacturing’s job is to achieve the plan–exactly (overproduction and underproduction are equally bad).  The functional area responsible must quickly report deviations in plans. The end result is good customer service and optimum business performance.

Sales and Operations Planning must support the Strategic Plans of the business. The SOP process should be widely understood and planned results for each functional area should be clearly communicated.  The seriousness of the plan must also be reinforced throughout the organization.

As mentioned above, Sales & Operations Planning occurs at the product family level.   Thus, forecasts and supply plans are created at the aggregate product family level in order to balance supply and demand at the volume level (not the product mix level).

Aggregation levels should be convenient for all functional areas, structured by product type, product characteristics, brand, market segment, etc.  Product family groupings that are consistent with sales and marketing’s view of the market are generally best.  The fundamental question is: How do you go to market?  An appropriate unit of measure should be established for each family (units, pounds, cases, etc.).

Volume issues include quantity and rate of production and these are used to determine resource requirements.   Several different Production planning methods are applicable (level, chase, or hybrid) in the determination of product family volume decisions.  The deployment of one approach over another is determined by financial implications and weighing trade-offs between inventory or backlog and customer service.  This often highlights conflicts due to differences in internal priorities among functions.  The Sales & Operations process is designed to mitigate the impact of these conflicts and result in a single agreed set of objectives and plans to achieve them.

From a financial perspective Sales & Operations Planning must assess customer service and inventory effects of demand and supply plans and compare projected revenue, cost, and profit scenarios.  This links directly to the Strategic Plan by assessment of the impact of plan choices on the income statement, balance sheet, and cash flow.

From a customer perspective, Sales and Operations Planning strives to meet customer lead-time requirements and ensure that resources and customer orders are in balance.  This will then avoid unacceptable backlogs.