Sales, Supply and Operations Planning

If you read much on this topic, you have started to see an increasing number of articles, columns, and presentations about Sales, Inventory and Operations Planning, or SIOP for short.  This is particularly true if you read some of the collateral from some software firms, some consultancies (e.g. Accenture, I believe), and probably some of those self-declared omniscient ones, the industry analysts (I will leave the potential examples to your imagination).  For a moment, I would like to examine why that emphasis makes sense in a way that has not been adequately represented (as far as I know) to date.

Sales planning, broadly speaking, is about determining which customers to serve, through which channels, for what they will demand, at what price (strategic pricing strategy).  The execution of this plan results in revenue.  Operations planning, focused on making, storing and transporting product, determines where to place what manufacturing capacity, from where to distribute to where, and how to transport product in service to the sales plan.   The result is operational costs.  Sometimes missing from this equation is supply planning and management which determines how much stock to position where and when, for each level in the bill of material (or formula/recipe), as well as where and from whom to source, when and how to execute strategic purchases, and how to structure contracts for minimal risk and maximum flexibility.  The result of the supply plan directly affects cash because most manufacturing companies spend the majority of their cash flow on inventory, most of which, hopefully, is sold and appears on the income statement as the cost of goods sold.  What is not sold (always more than planned) appears as inventory on the balance sheet.  Inventory is one of the key drivers (along with cash, accounts payable, and accounts receivable) of working capital requirements.  If working capital requirements can be reduced, then cash flow can be spent on innovation, capital equipment, and other opportunities.  The supply plan also manages the risk from the supply base and creates opportunities for the business through strategic supply management.

So, then, S&OP is really more about Sales and Supply and Operations Planning (SS&OP anyone? . . . I know that sounds like an industry “analyst” making up another redundant acronym, but it sounds better and is more descriptive than SIOP).  Anyway, my point is supply planning, including planning for safety stock to account for uncertainties in both demand and supply, as well as how to minimize risks from the supply base and leverage opportunities with suppliers has a disproportionate impact on working capital, operational risk and flexibility within your value network.  Typical S&OP often omits these interdependent variables and decision sets and their huge potential impact on the value of the company.  This decision set which I am calling supply planning and management is interdependent with both sales planning and operations planning so that no one of these decision sets can be properly considered without incorporating the other two.

Find more of my thoughts on S&OP here:  http://www.apics.org.au/Default.asp?page=343 or here:  http://arnoldmarkwells.com/images/Sales_and_Operations_Planning_The_Key_to_Continuous_Demand_Satisfaction.pdf

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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