This column discusses various aspects of the Sales and Operations Planning (S&OP) planning horizon in terms of the length of time and the foci of decision making within it. A Telescoping Planning Horizon approach is introduced that extends the planning horizon based on all supply-demand lead times, as well as focuses on various decision-making and decision-support data used in the short-term versus the long-term segments within the horizon.
During a visit to a well-known semi-conductor manufacturer to conduct research on its Demand Management processes— that I define as the matching of supply and demand—I met with a young woman who wanted my advice concerning implementing a Sales and Operations Planning (S&OP) process. The Chief Operating Officer (COO) of the company had asked her to start an S&OP process among executives. He made a good choice because during our conversation I found out that she had been at the company for some time and was known as a thoughtful, deliberate consensus builder. She was an ideal person to moderate the various meetings that would take place among executives. I advised her to use her skills in building the requisite consensus-based process.
Then she said to me that she was concerned that the COO wanted the process to focus only on the immediate fiscal quarter. This planning horizon is too short for executives to have full impact on the future. Sales and marketing activities are already in place and difficult to change significantly during a quarter, and supply is constrained within that window of time as well. It’s not really a good meeting for executives to impact performance in a meaningful way because it’s often too detail oriented and operational. My advice to her was to not be initially concerned about that. She should focus primarily on getting a meaningful routine process started. However, over time she should try to convince the COO to move out the planning horizon to at least 6, possibly up to 18 months, consistent with typical S&OP planning horizons at most other companies.
Figure 1 | S&OP: A Routine Tactical Planning Process to Match Future Supply and Demand
Sources: Tan, Peng Kuan. “Demand Management: A Cross-Industry Analysis of Supply ‐Demand Planning,” MIT Master of Engineering In Logistics Thesis, June 2006. Lapide, Larry. “S&OP: The Linchpin Planning Process.” Journal of Business Forecasting. Fall 2011.
PLANNING HORIZONS, GOALS, AND OBJECTIVES
My Fall 2011 Journal of Business Forecasting column, “S&OP: The Linchpin Planning Process,” included Figure 1, which depicts the three types of planning processes that companies typically conduct. The planning horizon for Strategic Planning is typically three or more years out and might be driven by a snapshot of the company’s vision at that time in the future, or by a year-to-year evolutionary path towards it. Output from the planning process includes Strategic Objectives and Goals that ought to drive Tactical Planning processes, thereby enabling these to provide the requisite linkage from strategy to operations. Tactical processes should in turn then drive daily Operational Planning and Scheduling that might typically have a planning horizon that looks out one day and possibly up to a few weeks on a day-to-day or week-to-week basis.
S&OP is the Tactical Planning process that matches demand and supply over a planning horizon that typically looks out from 6 to 18 months into the future. Demand forecasts that drive the plans, as well as the demand and supply plans themselves, are typically expressed with “time buckets” detailing week-to-week or month-to-month. The process has been extremely successful over the past two decades in being implemented by a lion’s share of Fortune 500 companies.
The S&OP process will have the major objective of helping to ensure that companies achieve annual/quarterly financial performance goals. As such, a cross-functional S&OP team of managers will be responsible for routinely assessing whether a company is on a path towards achieving its financial goals and, if not, re-charting a path to get there or changing the goals to be more realistic.
LENGTH OF THE PLANNING HORIZON
Using the analogy of a ship sailing across the ocean, the captain and other officers of the ship (i.e., the executives of a company) are supported by a navigation (i.e., S&OP) team that is constantly re-charting the path to get to the final destination (i.e., the financials goals). Much as the navigators on a ship are responsible for using global positioning equipment as well as weather and tide forecasts to assess if a course correction is necessary, an S&OP team needs to routinely update supply-demand plans based on where the company is going relative to its financial destination, as well as assess whether there are extenuating factors preventing them from getting there.
This is the primary reason why I believe that an S&OP process that deals with a planning horizon significantly less than six months will not tap into the full potential of the process. For example, using a planning horizon of one fiscal quarter is like navigating a ship by just looking ahead as far as the eyes can see, without any knowledge on what things might look like over the visible horizon. (Indeed, in ancient times sailors worried about falling off the edge of a “flat” Earth!)
When thinking about what should be the length of forecast/planning horizons, most supply chain managers would say that they should be as long as the longest lead time among all manufacturing materials and components. So, for example, if a scarce and unique component used to manufacture a product needs to be purchased at least six months in advance of production, and that represents the item with the longest lead time, then forecasts/plans would need to go out at least six months. However, this approach is too manufacturing-centric.
An S&OP planning horizon needs to consider all supply and demand lead times, not just the lead times of items sourced for production. On the supply side, for example, it also has to consider resource lead times such as those for labor, indirect materials, and equipment, as well as supply chain business process times. On the demand side it needs to consider lead times involved in sales and marketing activities such as the new product launch, promotional, pricing, and product placement processes.
TELESCOPING PLANNING HORIZONS
A Stock Keeping Unit (SKU) for companies in the Apparel and Footwear industry is largely designated by an item’s color, style, size, and width (for footwear). Yet a company in the industry typically focuses its planning processes on the color and style of an item looking out over an 18-month horizon. The planning horizon looks out that far because the company has to make new item decisions on how much neutral colored textiles to source in advance of production. Twelve months out, it needs to start making decisions on dying the textiles various colors. Closer in, such as a six-month or so window of time within the horizon, it needs to start deciding on the quantities that will be sewn and stocked in terms of color, style, size, and width.
This industry follows a “best practice” of using a Telescoping Planning Horizon, which in its case is expanded out to 18 months and is divided into three major segments. The period of time is extended out as far as it needs to be in order to support its longest-term decisions that need to be made well in advance, while also recognizing that other decisions are to be made within shorter planning horizons. The level of data needed to support longer-term decisions is aggregated, while the level of detail data needed to support shorter-term decisions is more detailed. Generally, this “best” practice segments the S&OP planning horizon into at least two or more parts, and formally considers the decisions that need to be made depending on when they need to be made within various segments of the planning horizon.
With this in mind, a survey of about 200 supply chain managers was conducted by the Demand Management Solution Group (that I managed some time ago). It attempted to get an understanding of the length of supply-demand (e.g., S&OP) planning horizons and the decision making that was taking place within these horizons. (The survey solicited information for two segments of a Telescopic Planning Horizon: short-term and long-term). While the results are somewhat dated, they offer some valuable insight as to how planning was being done at that time, and that has likely become more prevalent since. Below are some key survey findings (with the percent of respondents giving specific answers designated in parentheses).
Figure 2 | Qualitative Results from S&OP Planning Survey
- Sixty-eight percent (68%) of the respondents stated that their company routinely plans supply/ demand one or more years out, and only 16% had planning horizons less than six months.
Eighty-six percent (86%) stated that during planning meetings, major decisions that were being made varied by the short term versus long term within the planning horizon. Thus a segmented and telescoping approach was prevalent among the companies represented in the survey.
- The point at which respondents split the short term versus long term varied, with 33% stating that long term was after 12 months and 28% after 6 months.
- Inventory replenishment (93%), production and operations scheduling (88%), and buying or procurement decisions (74%) dominate short-term decision making.
- Outsourcing (77%) and new product launch (75%) decisions dominate long-term decision making. Plant capacity planning (54%) decisions are relatively equally considered in both the short term and the long term.
- In terms of the aggregation of decision-support data, detailed-item and SKU levels are overwhelmingly used (88%) in the short term. Product family (74%) and brand (64%) level aggregations are prominently considered for long-term decisions. In contrast, regional demand and customer segment aggregations are about equally considered when making both short-term and long-term decisions.
These results are summarized in Figure 2, which qualitatively depicts the focus of decision-making within the short term versus the long term, as well as the aggregation of data that supports these decisions within each segment. The results support my advice to the young woman at the semi-conductor company previously discussed. An S&OP meeting focused exclusively on a planning horizon only up to three months is really meant to be mostly attended by senior managers and not executives—it is too detailed and does not involve strategically impactful decision-making. Executives need to largely attend meetings that deal with the long term within a planning horizon, as well as the short term.
Thus, I highly recommend using an SO&P process with a Telescoping Planning Horizon so that executive-level meetings are not entirely consumed by short-term decision-making, which is best left to senior managers. To do so takes too much time away from an executive’s focus on strategic issues. If executives are only looking three months out into the future, then similar to the ancient sailors, the failure to look well beyond the horizon might cause the company to fall off the edge of the Earth!
This article was first published in the Journal of Business Forecasting Summer 2014.