TALLYING THE BENEFITS OF S&OP

S&OP IN CONJUNCTION WITH CLOSE COLLABORATION CAN

DELIVER MAJOR PERFORMANCE ADVANTAGES
Collaboration has become one of the profession’s guiding ideals. And while collaboration in supply chain
management typically conjures visions of data sharing with suppliers and customers, it’s important to
remember that collaboration takes place internally, too. Recognizing this, more and more companies are
embracing sales and operations planning (S&OP) to end the inefficiency inherent in functional silos. In
effect, they are using S&OP to foster internal collaboration—i.e., to let the right hand know what the
left hand is doing within the organization.

Information sharing between the supply chain and other internal business functions is really what S&OP
is all about. The ultimate goal is to achieve the following benefits:

 greater visibility of demand and supply,

 better promotional planning,
 improved product lifecycle management,
 improved inventory management,
 improved revenue management, and
 more accurate budget forecasting.

A DISTINCT APPROACH TO PLANNING

While its principles were formulated many years ago, S&OP has become a common supply chain activity
only in recent years. According to APQC’s Open Standards Benchmarking® data, 73.9 percent of
organizations surveyed have now developed a formal sales and operations planning process. A full 56.2
percent have a centralized supply chain planning operations structure. Because of the global nature of
supply chains today, some organizations reported a supply chain planning structure that includes a mix of
centralized and decentralized by region.

While S&OP supports the traditional business planning process, it is different from that process in
important respects. The S&OP process typically reviews planning at a higher level than traditional
planning. This is reflected in planning meetings that take place monthly and yearly as opposed to the
daily or weekly meetings of the more tactical traditional planning. Also, senior management is usually
more heavily involved in S&OP than they are in tactical planning sessions, seeking to encourage
consensus for a single operating plan across business functions.

According to Hitachi Consulting, the types of information that get examined at an S&OP meeting
typically include:

 forecasted demand and corresponding revenue;

 production plan and cost-of-sale projections;
 inventory positions/levels;
 financial budget vs. actual comparison (P&L, balance sheet, and cash flow);
 raw material purchase projections;

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  forecasted capacity utilization compared to past performance; and
 forecasted labor utilization compared to past performance.

S&OP combines a view of demand and supply. It often begins with a demand plan across a specific time
period such as 12 or 24 months. A supply plan is then created for the same period by the supply chain
team in collaboration with marketing and sales. Demand and supply are justified to develop an operating
plan. The goal is to gain consensus on what will be sold and what revenue will be produced for each
product each month. This gives the supply chain function visibility into actual demand. This improved
viability allows the supply chain team to create a more efficient flow of materials.

THE BENEFITS OF S&OP

There are a number of efficiencies associated with S&OP, especially when its measures are combined
with external collaboration on both the demand and supply side. APQC’s Open Standards Benchmarking
shows that organizations that have a high level of external demand collaboration in their dealings with
customers had half the inventory carrying costs (as a percentage of average annual inventory value) as
those with low levels of demand collaboration (Figure 1). Likewise, those with high collaboration
displayed better return on assets and lower shrinkage as a percentage of total revenue.

Impact of External Demand Collaboration on Key S&OP Measures

Selected S&OP Measures Median N
Inventory carrying cost as a percentage of average annual
inventory value

Low collaboration 10.0% 51

High collaboration 4.7% 38

Return on assets

Low collaboration 11.3% 16

High collaboration 15.9% 16

Shrinkage as a percentage of total revenue

Low collaboration 0.2% 61

High collaboration 0.1% 50

Figure 1

(Note: “Low collaboration” indicates the median performance level for organizations with a low degree (1-2 on a
five-point scale) of external demand collaboration with customers.
“High collaboration” indicates the median performance level for organizations with a high degree of external
demand collaboration with customers (4-5 on a five-point scale).)

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 External demand collaboration involves bringing the customer’s view of demand into the
planning process. External supply collaboration brings the view of suppliers into the planning
process. The combination of these external views can smooth out any disruptions due to
demand spikes or supply shortages.

Those organizations with high levels of demand collaboration also show a better finished goods
inventory turn rate that the low collaborators—11.2 turns vs. 9.6 turns. With regard to staffing
levels, the collaboration leaders needed only 20.3 full time equivalent (FTE) personnel in supply
chain planning per $1 billion in revenue. By contrast, those with low collaboration needed 25.1
FTEs to perform the same function (Figure 2).

Organizations that collaborated closely with suppliers on S&OP measures also recorded
demand and supply planning costs that were nearly half that of companies that reported low
levels of collaboration (Figure 2).

External Supply Planning Collaboration with Suppliers on Key S&OP Metrics

Selected S&OP Measures Median N
Demand/supply planning costs per $1,000 revenue

Low collaboration $1.60 68

High collaboration $0.86 63

Number of FTEs for the supply chain planning function per $1

billion revenue

Low collaboration 25.1 74

High collaboration 20.3 67

Figure 2

Organizations using a high level of collaboration with suppliers on S&OP measures had a
finished goods inventory performance turn rate of 14.5. Those with a low level of collaboration
reported a finished goods inventory turn rate of 7.6. Even when external collaboration is not
factored into the reporting equation, those organizations with formal S&OP programs
significantly outperform the others. According to data from APQC’s Open Standards
Benchmarking, companies with S&OP programs in place reported demand and supply planning
costs of $1.24 per $1,000 in revenue. This compares to $2.22 per $1,000 in revenue for those
organizations with no formal S&OP program.

The same pattern emerged with respect to finished goods turn rate. Organizations with formal
S&OP reported a median turn rate of 9.0 vs. organizations with no formal S&OP reporting 7.2.
The overall supply chain management costs per $1,000 in revenue was $35.00 for the formal
S&OP companies. Overall costs for those organizations with no formal S&OP in place were
$40.35 per $1,000 in revenue.

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 NUMBERS TELL THE STORY
While it is not prudent to causally assert that S&OP practices will deliver consistent efficiency
improvements, it is clear that organizations using S&OP in conjunction with external
collaboration with suppliers and customers enjoy a range of advantages over those
organizations that do not. APQC’s Open Standards Benchmarking shows that organizations
with a high level of collaboration display greater levels of efficiency across a number of S&OP
metrics, including planning costs, return on assets, and inventory carrying costs. Other
efficiencies shown by high collaborators include improved inventory turn rates, a lower cost of
goods as a percent of revenue, and reduced shrinkage.

All in all, the numbers make a very compelling case for S&OP.

ABOUT APQC
APQC is a member-based nonprofit and one of the leading proponents of benchmarking and best
practice business research. Working with more than 500 organizations worldwide in all industries,
APQC focuses on providing organizations with the information they need to work smarter, faster, and
with confidence. Every day we uncover the processes and practices that push organizations from good
to great. Visit us at www.apqc.org and learn how you can make best practices your practices.

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