What is Sales and Operations Planning (S&OP)?
A general understanding of both terms is required to understand the evolution of Sales and Operations Planning (S&OP) to Integrated Business Planning (IBP). In our article Why Do Sales And Operations Planning Projects Fail? we already had a look into the definition of S&OP and the most likely obstacles for a successful implementation. In the following, a short re-cap is given about the definition of S&OP, and in addition, a brief look into the origins and the development of S&OP throughout the decades.
In a nutshell, Sales & Operations Planning (S&OP) is a business management process to balance demand and supply, integrate financial planning and operational planning, and link high-level strategic plans with day-to-day operations.
S&OP works as a lubricant between the different departments involved, their functions, and different plans, merging them into one integrated set of numbers.
The below graphic “Sales and Operations Planning in a nutshell” summarizes the definition, framework, typical focus areas, and challenges of an S&OP process.
The History of Sales and Operations Planning (S&OP)
Originally, Sales and Operations Planning has emerged from the discipline of material requirement planning (MRP), a part of production planning, in the late 1970s. Back then, it was first originated by Oliver Wight associates to align demand and supply on a month-by-month basis. Since then, it has constantly evolved in several steps. Although the process is often used to enhance the supply chain, it has become much more than just a process to control and optimize the supply chain.
As illustrated in the graphic above, the Sales and Operations Planning process developed from being a simple reconciliation between sales plans and operations plans in the early 80s towards the Integrated Business Planning process known today. This was achieved in the first step by adding a balance between demand and supply. Outstanding is that the process has become demand-driven back then, reflecting and focusing on customer requirements rather than production capabilities.
Moreover, finance was integrated into the S&OP process in the late 80s. This meant linking units and value measures, as the finance plan usually deals in values while the operation plan usually deals in units. This was one of the main factors that made Sales and Operations Planning a breakthrough in the 1980s since business planning, sales planning, and production/procurement planning were usually separated functions.
The process kept changing and constantly adjusting, coping with the challenges and requirements from evolving industries and customer requirements, faster-moving environments, internationalization, and increasing complexity in worldwide supply chains. In the late 90s, Product and Portfolio Management was getting more into the focus of S&OP. While in the last two decades, scenario planning, supply chain collaboration, and optimization were put more into focus, facing the ever-growing market challenges in a more dynamic environment with the latest IT capabilities and solutions.
These days, S&OP is a monthly occurring integrated end-to-end business process led by the executive management to steer the operative execution in consensus with the company’s strategic plan over a horizon of at least 18-months.
Thereby, the process still focuses on classic objectives of supply chain management such as service level, customer satisfaction, and cost reduction but is also aligned with the business plan and its goals. This is, and always has been, one of the objectives of Sales and Operations Planning!
Having this background and statement in mind, the big question arises: What is the main difference to the famous term “Integrated Business Planning (IBP)” since Sales and Operations Planning (S&OP) already sounds pretty integrated into the overall organization.
Sales and Operations Planning (S&OP) vs. Integrated Business Planning (IBP)
During the last years, the term “Integrated Business Planning” (IBP) (during its emergence, sometimes also called “Advanced S&OP”) has come up more and more frequently, originally impelled by Oliver Wight. These two labels represent the same: An evolved S&OP process.
But what does evolved mean, what is the key differentiator, the changes and enhancements, and how does this process look?
According to Oliver Wight, the background of IBP lies within the current practice of S&OP in many companies. Research studies have shown that in many companies, Sales and Operations Planning is seen as a process to balance the supply chain and not accepted or operated as a management process for steering the whole business. These companies are stuck in a certain maturity stage of their S&OP process, and they are not willing or able to put the necessary effort into reaching the next stage.
We have seen this behavior in many S&OP projects, and most likely, you have the same experience. With the start of an initial S&OP project, there are a lot of areas to cover, from setting up a first understanding and process to outlining and improving the core processes underneath, such as Demand Planning, Supply Planning, and Inventory Management. Typically, the focus is on volume planning rather than value planning. Ideally, the first link to value planning is created by integrating price and cost information, giving the flexibility to translate volumes into value and vice versa. However, even this step is often omitted due to compliance regulations in the finance department, fully stretched project resources, missing structures, etc. The possible reasons for putting this topic aside, in the beginning, are numerous.
Although supply chain management is the origin of Sales and Operations Planning and is still a vital part, the true intent evolved. The objective should be to use S&OP as an integrated end-to-end management process to steer the organization.
A new name was invented to achieve this objective and reinforce this intention that better represents this process function: Integrated Business Planning (IBP).
We can recite the definition of the IBP process from the definition of the S&OP process: a business management process to balance demand and supply, to integrate financial planning and operational planning, and to link high-level strategic plans day-to-day operations.
This definition is still valid, as it holds all the key objectives of both S&OP and IBP, but the detail in which the objectives are pursued might differ based on the individual understanding.
This leads to the conclusion that IBP is the same as S&OP, at least when the S&OP process is implemented and used with its full potential as an integrated end-to-end management process. Due to this reason, there are some critique voices against IBP, calling it a hoax, selling something already existing under a new name. It makes sense from a marketing point of view, regarding some basic principles of marketing, e.g.:
- The Law of Leadership: “It is better to be first than to be better.”
- The Law of Category: “If you can’t be the first in a category, set up a new category you can be first in.”
Following this line of argumentation, IBP is a new way of selling S&OP to implement it with its full potential and focus on establishing the status as a management process to steer the whole organization considering the business strategy.
As so often, the truth lies somewhere in the middle. Although it is often forgotten that close integration with the finance department was foreseen initially, it is in practice an optional step to have in an S&OP process. IBP changes this by “Integrated Reconciliation Meeting,” a must-have and not only an optional meeting.
Furthermore, IBP focuses even more on linking the strategic and financial plans with the operational plans. While S&OP already moves away from the traditional silo-thinking to a vertical collaboration, IBP has the objective and power to remove these boundaries, completely involving all departments in a collaborative way of working with one set of integrated numbers driven by the same guidelines.
Independent from the label, this should be the objective of a mature S&OP/IBP process. The beauty and simultaneous challenge that both frameworks provide is a powerful management process that must be defined and outlined in detail, based on the individual requirements and challenges of a company and the environment in which it operates.
Benefits of Integrated Business Planning
A list of gained benefits by transitioning from Sales and Operations Planning to Integrated Business Planning is presented in the graphic below “Improved Benefits from Integrated Business Planning,” based on the book “The Transition from Sales and Operations Planning to Integrated Business Planning. Moving from Fundamental Demand and Supply Balancing to Strategic Management” from Palmatier and Crum (Oliver Wight).
On closer inspection of these benefits, it is again realized that none of these are entirely new. Most benefits include adjectives like “improved” or “more.” The added value in the benefits comes from further focusing on the function of Sales and Operations Planning as an integrated management process. This is done by focusing even more on the financial aspects and strategic integration, such as making the annual budgeting process a significant non-event by leveraging the power of IBP. In this context, extending the time horizon to at least rolling 24 months is often recommended further to improve the connection with the company’s strategy.
Again, you could fulfill these benefits by achieving a fully matured and developed S&OP process. Another aspect of IBP is customer and supplier collaboration. This aspect is much more focused in the IBP approach than in the original S&OP process, but once again not an entirely new concept as the idea did exist before.
Some scholars represent the opinion that IBP provides the strategy. However, at this point, the opinions and views differ if it allows for or supports the strategy. In the end, the power of both S&OP and IBP lies within its flexibility and how the company defines its detailed purpose and agenda.
However, no matter if S&OP or IBP, in the end, it is about making it happen and ensuring execution of improvement levers identified during the S&OP/IBP process. This is where our AIOimpact platform comes in. Learn more on how AIOimpact platform can support the S&OP/IBP process and ensure leveraging the benefits of S&OP/IBP by unlocking the real value of S&OP Execution in our recorded webinar Digitalization of Sales and Operations Planning.