Essay: S&OP matrix for a business

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  • S&OP matrix for a business
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The first and basic document to prepare is the S&OP matrix which contains sales, production and inventory plan covering history of past three months and forecast for the next 12-18 months.
For each product family, a separate document is prepared. Each plan will have actual figures, difference in comparison with plan and cumulative difference. In addition assumptions are listed out to act as learning’s for future reference.
A sample matrix sheet inspired by the proposal of Wallace and Stahl (2008) is attached as Annexure-1 (Page no 228) for understanding the development and use in the implementation of S&OP. The details are:
i. Product details and others.
Block A contains information on Family, Unit of Measure, Delivery Compliance, and Finished Inventory Target in number of days. Here, the delivery compliance requirement is 100 percent, that is, whatever mix customer has scheduled on the supplier; the same is to be met fully. The strategy for this is to have an inventory of finished target of six-ten days as per requirement.
It is seen that the inventory levels would be increasing to targeted ten days in the month of September and Q3 to take care of any demand spikes during festival season. However, the cost of inventory need to be kept in mind and so attempts should be made to bring the same to less than ten days as a process of Kaizen (continuous improvement).
ii. History-Past Sales, Production and Inventory.
In Block B, Sales data is captured for the previous three months showing a healthy growth in sales compared to forecast by a figure of 44,000 Nos.
Production details are captured in Block C, wherein cumulatively 5000 numbers are manufactured in excess of old plan to meet the target of finished goods.
In Block D, the inventory details are projected. Here, as the sales are surpassing forecast figures, inventory is going below the target of ten days. Even though, the compliance is not breached, a further demand spike may hurt the company unless proactive actions are taken.
iii. Future Projections scenario.
In Block E, new sales forecast is presented along with old forecast with variance. The important point to note here is the value of the family in Rupee terms is projected alongside ABP for the fiscal year, for easy comparison and to enable management to deploy strategies and tactics to make the forecast plan meet the ABP if there is a huge variance. Fortunately, the Forecast plan is above the ABP figures and hence that exercise is not warranted in this example.
Looking at Block F, it is seen that the new production plan is higher than old plan in line with sales forecast.
Block G presents the Inventory Plan projections along with the expected finished goods (FG) stocks. The example here has considered working days as 20 for ease of calculation instead of 25 days.
The calculation of Inventory is —
Last months ending inventory (March’15- 61nos)-This month’s new forecast
(April’15-210nos)+This month’s production plan (April’15-210nos) = This months ending inventory (61nos).
The Projected days on hand calculation is as given below-
Next Month’s New Forecast (May’15-210nos) ÷ Number of working days in month =daily sales rate (210/20) =10.5
Daily sales rate ÷ this month’s Inventory plan (April15: 61) =
This month’s days supply (61/10.5=5.8≈6)
iv. Issues and Assumptions.
In Block H, the demand issues and underlying assumptions of forecast are presented to track, alter and analyze the same. Usually, due to uncertainty with some issues, we may assume certain possibilities by gut feeling or by considering past experiences which may or may not materialize. Such, exercises improves the learning’s of the participants.
Lastly in Block I, supply issues like customer or auto-component company plant shut downs, raw material issues, capacity constraints are captured.
As can be seen, this statement is an effective format for S&OP planning. Instead of having multiple statements on sales, production, and inventory in different formats and on separate sheets, this enables all the information of a family of components to be captured in a single sheet along past and future projected data conveniently.
V. Financial Plan Integration.
Once all the products are added it is now necessary to convert the volumes into value terms. The production values thus arrived at, based on average price, and should now be compared with the ABP figures. It may not be possible to price each item/component to be priced separately. It may so happen that a component may be supplied to two OEM’s at different prices. In such cases it is convenient to consider average price for calculation. The conversion of volumes into rupee terms, as mentioned earlier, serves the purpose of tracking the business plan and making adjustments in the supply plans to meet the plan in full.
A separate one page statement in rupee terms not only provides information from financial point of view, it could also include production cost, month wise and the Inventory costs. Further enrichment is possible by including year—to—date (YTD) margins in percentage and in rupees..
Assumptions, Demand & Supply issues and Customer rating could also be captured in the statement enabling a snapshot view of financial position of the company.
New Products to be launched and old products to be phased out could also be successfully projected to enhance the utility of the S&OP matrix statement. Depending on the type of industry/ segment, the statement could be designed to draw maximum mileage.
Figure: 81 Source: Author’s proposal of stage-wise PORA-D model
Stage1: Demand Assessment/Forecast (PLAN)
This S&OP process in the company is initiated by the coordinator. The process usually starts in the first week of each month – around 3rd /4th. The sales planner at head office gathers data on sales, production, inventory etc from plants, warehouses, consignment service agents and 3PL’s to which direct customer orders are added to arrive at basic demand plan. The information compiled is on the basis of customer, product and warehouse both in units and value terms.
After the basic demand plan is made, sales and marketing team at the Head Office would prepare a new forecast by 7th of each month spanning next 15 to 18 months based on the historic data and future expectations. From the survey it was found that only in 39% of companies’ sales and marketing department developed the demand plan and only 2% considered the horizon of 18 months.
This is the domain of sales and marketing as they are close to the customers and hence are primarily responsible for the exercise. The new forecast becomes the company’s monthly demand plan/ forecast (CMF) agreed upon by sales and marketing department.
It may be noted that outmost importance is to be given to forecasting and all the concerned staff have to be trained in the techniques and methods. To recap, the survey results showed that only 62% companies accorded high importance to forecasting exercise and only 12 % found the same very difficult to calculate, indirectly hinting at high dependence on OEM’s forecast without embarking on independent forecast exercise.
All the information from sales personnel, regional offices, customers, suppliers, trade, industry and economy need to be factored in while preparing the new forecast. Survey results showed that only 27% collated information from all the above indicating a bad practice. Most of the company depended on previous year sales (17%) and on front line sales (27%). This could be the main reason why the forecast variation was found to be between 5-20% in 84% of the cases.
Figure: 82
Source: Milliken L. Alan,”Sales and Operations Planning -Two Decades of Learning at BASF”, 2007.
The data would be under different families both in units and rupee terms for OEM customers as well as dealers. It may be noted that at the CMF and supply planning stage the demarcation is done at sub-family or individual family levels.
The illustration in figure: 80 would explain how the demand plan is finalized. The inputs form the basis for the process of initial forecast and the output would be the Demand Plan/CMF. The key performance measure for output is the accuracy of the CMF.
The CMF should reflect the changes that could occur due to change of plans at any customers/dealers end, competitor’s activity, addition of new customer, prevalent economic scenario etc. Assumptions made at arriving at CMF should be noted and circulated as part of the report. This is an important practice to link the outcome of any assumption. It could, over a period of time become ‘Learning Experience’ for the team members.
Complete information on development of New Products (NPs) should be provided. The information would be entered in the forecast and tracked during the tenure of product development so that such products get due attention along with the regular products. This way delivery deadlines are not missed for NPs.
The demand planning data is converted into rupee terms to compare with the quarterly/half yearly /annual business plan. Once the CMF in rupee terms is ready it is discussed at the Vice President /National Sales Managers/Product Manager level to check for veracity and revision, if any, and also to have ‘Ownership’. The new CMF will replace the previous month forecast and becomes the input document for the Supply Planning which is Stage 2 of the process.
It may be noted that S&OP is a monthly process, to recap; the survey results showed that only 33% firms held monthly meetings. In 53% of the firms, meetings were held every week indicating that the planning mechanism was in a ‘fire-fighting’ mode.
The data needs to be manually consolidated and integrated in an excel spread sheet. Relevant software modules are available to assist in obtaining CMF with desired outputs in terms of spread sheets and graphs.
A note of suggestion-companies may start off with S&OP in a phased manner by choosing four-five products and may gradually add more products every month as they move on the learning curve.
Stage 2: Supply/ Operation Plan (ORGANISE)
In Supply Planning process the CMF is reviewed by the production planners of all plant(s) and purchase managers. Based on the above information the availability of RM, capacity, workforce and other relevant issues are reviewed. If the demand is within the available capacity boundaries then no change is required in the supply plans.
If there is a change in some product sizes then the rough cut resource planning is worked out and accordingly resource balancing is done. Meticulous planning is undertaken to organize all the required components including bought outs. Vendors are updated on the new plan. Departmental plans are worked out to match the overall plan. All functional plans need to be worked out based on the CMF.
For multi-product and multi-location plants use of software packages like ERP would save time and efforts. The aim of the supply plan is to meet the CMF fully. The document prepared at this stage basically contains the supply or production plan in terms of product-wise and family-wise.
As regards problems on supply that cannot be sorted out at departmental level due to various reasons like requirement of investments for additional resources etc, such issues are elevated to the next meeting as they are not in their purview.
Figure: 83
Source: Milliken L. Alan,”Sales and Operations Planning -Two Decades of Learning at BASF”, 2007.
The illustration in figure: 82 provide an overview of Supply Planning process. The input for this exercise is CMF/demand plan and inventories available at plant, customers, warehouses etc. The output would be supply plan in terms of product family based on the process of production and purchase review and after due assessment of internal and external capacities and capabilities. The key performance of the output would be the quantum of deviation that may arise between planned and actual supply and accuracy of timely data.
The participants in this stage comprise sales planners, plant planners, representatives of strategic sourcing or purchase, engineering, production heads, cost accountant and S&OP coordinator.
If need arises video /tele-conferencing can be arranged for the participation of other concerned executives who may be stationed at different plants. The process starts around 10th of the month and would be completed within 3 to 4 days. This output document of Supply / Operational Planning becomes the input for the next stage, that is, Balancing of Demand-Supply Meeting.
Stage3: The Balancing of Demand-Supply Meeting (Reconcile)
This meeting which is planned around 18th of the month is a crucial and important one as it sorts out major issues and lists out those that is to be put up to final Approval Meeting . Decisions for balancing of demand with supply are taken here. The meeting becomes a crucial link to meeting business goals and customer service levels due to the fact that companies have to service more than one OEM through allocation of components under varied demand scenarios.
Another major objective of this meeting is to attain high customer service levels for survival under the competitive scenarios in terms of timely delivery and in full quantity — both in volumes and mix. The survey showed that only 52% strongly agreed to this objective which is not a good sign. Hence, the significance of this meeting cannot be ignored.
It may so happen that the CMF may be lower than business plan. In such cases decision regarding pricing, promotion would be taken. If demand is more than supply for a particular product/size, allocation could be made based on customer importance and may also consider price hike for aftermarket. Here, the management adopts strategies to manage either demand or yield depending on the situation.
This is a very crucial decision requiring lot of maturity on the part of participants as any wrong decision could hurt future business from a prospective customer. Allocation based on profitability may not be entertained by large customers. Suppliers need to meet the demand at any cost. This becomes mandatory when the supplier is holding a major share or is having only one competitor in the fray. Increasing sales in the aftermarket may work for components of consistently high demand but for low off take items dealers may not reap the benefits.
An important point to note is that decisions at this stage are arrived after consensus with all concerned and within the boundaries of ABP, policies and overall strategy. ‘What-if’ scenarios are worked out and best plans are recommended with least impact on KPI’s including customer service levels.
The discussions would be family wise as well as individual product/ size wise. The output documents would contain recommendation on increasing or decreasing the sales plan and /or production plan, new product development issues, resource requirements in terms of manpower, adding/removing shifts, outsourcing, etc. Where conflicts persist, recourse to yield management is taken, judiciously as mentioned above.
Finally, the financial view of the CMF and supply plan in comparison with ABP is prepared. Issues which are not resolved and where agreement is not reached due to serious concerns of delivery, capacity etc , such concerns become part of agenda for the Approval Meeting. The agenda also invariably covers review of products by family, production and sales review, new product development status, review of industry, recap of decisions made in the earlier month , impact on ABP , customer service ratings and other relevant KPI’s which are operational, financial and strategic in nature .
This meeting is attended by a cross functional team consisting of sales planner, production planner, heads or senior executives from production, purchase, finance, logistics and S&OP coordinator. Depending on the requirements members from R&D, engineering, supply chain and plant managers from other locations may be included.
Stage 4: Approval Meeting (Authorise)
This is the final meeting of the S&OP at the MD/COO level held around 25th of the month. The agenda of this meeting is to review outstanding issues of the previous month followed by review of KPI’s. Product by product review covering sales, demand and inventory are completed making a note of assumptions made. The decisions of the Balancing Meeting are accepted, rejected or altered depending on the merits.
Further, expenditure on resources is authorized and decision on unresolved issues is taken. CMF value Vis-a-Vis ABP is discussed and changes are authorized. Lastly, strategies and policies to balance demand and supply are decided. It may be noted that Approval Meeting is not a platform for discovering problems but rather a ‘Decision Making’ and ‘Direction Setting’ meeting.(Wallace and Stahl,2014)
Reekie(2005), has a final word when he says that effective ‘exception management’ is the key to successful implementation of S&OP process as it is impossible to resolve issues for thousands of products on monthly basis. The solution would be to prioritize and focus on issues falling beyond pre-defined boundaries.
The output of the Approval Meeting becomes the ‘Approved Plan’. This meeting normally takes three to four hours and should be attended by heads of sales, production, engineering and finance, product/ sales managers, sales planners and S&OP coordinator. The minutes of the meeting is sent out within two days to all the concerned for effective communication and implementation of the decisions taken.
The presentations are made with the help of excel spread sheets as well as in graphics. Each product family that is discussed is invariably presented as a single page summary and as the number of products increase software systems could be used in collating data in required formats and to facilitate decision making.

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