The goal of sales and operations planning, or S&OP, is to balance supply and demand. Specifically, it involves balancing our supply and demand plans to ensure smooth and effective operations. However, why is it referred to as a "demand plan" rather than a "demand forecast"? Let's investigate the logic behind this.
A forecast is a passive concept, something we anticipate may occur. A plan is something we actively want to happen. In S&OP, we're not simply making educated guesses about future demand. Just like our supply plan, we're developing a plan where individuals are accountable.
The Significance of Accountability in S&OP
On the supply side, we hold operations accountable for delivering the supply plan. Similarly, we must hold sales responsible for their demand plan. Accountability may be compromised if we only use projections. Have you ever heard the saying, "It's not my forecast" or “I don’t know where that came from”? This kind of mindset makes it harder to manage demand effectively. A demand plan gives sales a specific goal to strive toward, encouraging accountability and ownership.
Breaking Down the Demand Plan
Three distinct components comprise a demand plan:
1. Booking Plan: This shows the orders that we’re taking or incoming orders.
2. Unconstrained Shipment Plan: This is the shipments that we think the market wants us to deliver.
3. Backlog Plan: This relates to open orders; should we be adding or subtracting orders from our backlog? Backlog also affects lead times, an important strategic factor for the business.
These three components come together to create a demand plan that is organized and actionable. In the S&OP process, we group this data into monthly buckets, often at the product family level. However, when the product family level doesn’t provide an appropriate level of granularity, we also consider individual demand streams.
For a deeper understanding of these components and the others in the five section sheet click here.
Introducing Demand Streams
A demand stream is a segment of the demand for a constraint based family with similar or like characteristics. We are better able to see the many forms of demand that are influencing our product families thanks to this segmentation. For example, a product's demand may originate from a number of sources, such as distributors, direct consumers, or domestic vs foreign markets. Our planning method must take into consideration the potential variances in needs among these groups.
Examples of demand streams include:
Project demand vs. flow demand
Distributor vs. direct customers
Make-to-stock vs. make-to-order
International vs. domestic customers
Demand can be better managed by segmenting it, but the real advantage comes when we hold particular demand segments accountable. Having someone in charge of a segment, whether it be a large client relationship manager or a regional sales representative, should ensure results for that stream.
Master Your Demand Segments
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Advantages of Demand Streams in S&OP
Clear Accountability: Giving teams or individuals responsibility for demand streams promotes ownership of certain demand segments.
Tailored Fulfillment Strategies: Various consumer categories may call for different fulfillment tactics. For instance, it could be necessary to create a quick-ship program for specific consumers or products separately from items with longer lead times.
Improved Planning Accuracy: We will increase the demand plan's overall accuracy by using the appropriate planning strategies for every stream and measuring accuracy at a fine level.
The Final Objective: Demand Plan Accuracy
The ultimate objective of all this planning and segmentation is to increase the accuracy of the demand plan. Businesses can better satisfy the needs of their clients and guarantee more efficient operations by dividing up demand, using the appropriate planning techniques, and closely monitoring accuracy.
In conclusion, S&OP is about developing workable plans that hold individuals accountable, not just matching supply and demand. You will improve the precision and efficiency of your S&OP process by converting predictions into demand plans, segmenting demand into streams, and allocating accountability. The outcome? A more effective company that is better able to satisfy consumer demands.
Stay tuned for Part 2, where we’ll dive deeper into the next stages of demand planning, exploring the different types of demand you can encounter. To stay updated on the latest on S&OP and more, subscribe to our newsletter at the bottom of the page.
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