CPIM 9.0

Where S&OP Sits in Manufacturing Planning and Control

Sales and operations planning (S&OP) is the monthly, cross-functional process that develops tactical plans by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. Its output is a single operating plan, stated in product families, that links the strategic business plan to the detailed schedules that run the plant and the purchasing department.

The manufacturing planning and control (MPC) hierarchy moves from broad to detailed. Each level plans a shorter horizon in more detail, and each has a matching capacity check. A plan that passes its capacity check is handed down as the constraint for the next level; problems that cannot be solved below are passed back up.

Strategic / business plan

Plans feed down · feedback up More detail, shorter horizon

Master production schedule

weeks · end items or modules

Material requirements planning

weeks and days · components

Execution: PAC and purchasing

Simplified schematic: each planning level from the business plan to execution is paired with its own capacity check, from resource planning down to input/output control.

PLANNING LEVELS AT A GLANCE Level Planning unit

Long-range facility and equipment plans

Business plan Dollars by market or business unit quarterly

12–18 months or more; monthly

S&OP / production plan Product families in units (and

Master production End items or modules schedule weekly

MRP Components and purchased parts

Execution (PAC, Orders and operations

Hierarchy questions ask which capacity technique matches a planning level. Pair them exactly: production plan with resource planning, MPS with RCCP, MRP with CRP, and shop-floor execution with input/output control. If a choice pairs RCCP with the production plan or CRP with the MPS, eliminate it.

S&OP exists to keep demand and supply in balance at the aggregate level, to give executives an early view of problems, and to make the business plan executable. It replaces separate sales, operations, and financial plans with one set of numbers. Because it works with families over a long horizon, it can change capacity, inventory, and backlog before shortages or excess appear in the schedule.

Business plan and financial targets (revenue, margin, inventory investment)

Approved production plan by family (rate per month)

Unconstrained demand plan: statistical forecast plus market intelligence

Approved demand plan (sales plan) by family

Actual sales, production, inventory, and backlog versus plan

Inventory and backlog targets by family

Capacity and resource data: labor, key equipment, supplier limits

Resource and capacity actions (hire, overtime, subcontract, invest)

Product and service portfolio changes (launches, phase-outs)

Financial projection reconciled to the business plan

Risks, assumptions, and open issues

Decisions, assumptions, and the authority for the MPS

Most companies run S&OP as a five-step monthly cycle that ends in an executive meeting. Each step has an owner, a deadline, and a defined handoff, so the executive meeting reviews decisions that have already been analyzed rather than

THE FIVE-STEP MONTHLY S&OP CYCLE

Executive S&OP Pre-S&OP meeting meeting

Data gathering

Shortly after month-end, update actual sales, production, inventory, and backlog; refresh the statistical forecast; measure performance against last month’s plan.

Demand planning

Sales, marketing, and demand planners review the forecast, add customer and market intelligence, and agree on an unconstrained demand plan by family, in units and dollars.

Supply planning

Operations converts the demand plan into a production plan, runs resource planning, and identifies capacity, material, and

Pre-S&OP (partnership) meeting

Middle managers from demand, supply, and finance resolve what they can, build scenarios for what they cannot, and prepare

Executive S&OP meeting

Senior leaders approve the plan, decide the open trade-offs, and authorize changes in capacity, inventory, or business targets.

S&OP process owner Executive sponsor

Demand planning team

Sales, marketing, and product management own the demand plan and the assumptions behind it.

Runs the calendar, templates, and

Usually the general manager or president. Chairs the executive meeting, agenda; makes sure every step happens on time and that decisions are recorded.

enforces attendance, and makes the

Supply planning team Finance

Product management and engineering

Bring launch and phase-out dates, design changes, and their effects on demand and supply.

Converts units to dollars, compares the plan with the business plan, and own the production plan and the resource and supplier checks.

highlights gaps in revenue, margin, and

Product and Service Portfolio Review

Early in the cycle, the team reviews the portfolio. New product introductions add demand that has no history and may draw volume away from existing items (cannibalization). Phase-outs require a plan to run down component and finished goods inventory so obsolete stock is not left behind. Service offerings, such as repair or installation capacity, are reviewed the same way when they compete for the same people.

Planning at the Family Level

S&OP plans product families: groups of items with similar demand drivers and similar resource needs, such as all residential water heaters or all 20-ounce beverages. Families keep the plan manageable and more accurate, because aggregate forecasts are more accurate than item forecasts. Detail by item, color, or size is left to the master schedule, which must add up to the approved family totals.

HORIZON AND TIME FENCES IN S&OP

The S&OP horizon is normally 12 to 18 months or more, long enough to cover the lead time to change capacity, add a supplier, or launch a product. Many companies roll the plan forward each month and treat the near months as firm, the middle months as subject to approval, and the far months as open for change.

Financial Reconciliation: One Set of Numbers

Every S&OP volume must be expressed in units for operations and in dollars for finance. Finance multiplies each family’s planned units by its average price (and cost) and compares the total with the business plan. A gap is a business decision, not an accounting adjustment: leaders either close it with actions or formally revise the business plan.

WORKED EXAMPLE: RECONCILING THE SALES PLAN TO THE BUSINESS PLAN

When demand exceeds supply, or supply exceeds demand, the pre-S&OP team builds scenarios that show the cost, service, and financial effect of each option. Executives then choose. Good scenarios are few, quantified, and comparable, with the volume, revenue, margin, inventory, and service level of each.

TYPICAL IMBALANCES AND OPTIONS Supply-side options Situation

Allocate to key customers, raise price, extend quoted lead times, shift promotions

Demand above capacity build in slack months

Reduce shifts or hours, move work in from subcontractors,

Capacity above cross-train, pull forward maintenance demand

Promotions, new markets or channels, accelerate launches

Inventory above Lower the production rate target

Targeted promotion; reduce safety stock if service allows

Raise the rate, add capacity Backlog above target

Manage customer expectations; quote realistic dates

A mid-sized appliance manufacturer’s demand plan for its premium dishwasher family rises 18% for the next two quarters after a retailer adds the line. Supply planning shows the assembly line is short by about one shift. At pre-S&OP, operations, sales, and finance prepare two scenarios: run Saturday overtime for six months, or add a second shift with hiring and training costs. Best response: present both scenarios with cost, service, and margin effects to the executive meeting, recommend one, and record the decision and its assumptions so the master scheduler can load the approved rate.

The executive meeting is short and decision-focused. It reviews performance against last month’s plan, approves family plans, decides the open trade-offs, and confirms that the financial projection matches the business plan or that the business plan will be changed. Decisions made outside the meeting, or plans that sales and operations keep separately,

Scenario items often describe sales and operations using different numbers or a plant ignoring the approved plan. The best answer restores one agreed plan owned by the executive team, decided in the S&OP meeting and reconciled to finance. Answers that let one function override the plan, or that push the decision to the master

S&OP is measured on two levels: how good the plans were and how well the business executed them. Measures are reviewed by family every month, and trends matter more than a single month.

Positive bias means demand is under-forecast

Actual production / planned production Production plan attainment

Actual inventory versus planned inventory or days of

Above target ties up cash

Backlog to target Actual backlog versus target backlog

Above target lengthens customer lead times

On-time delivery, fill rate, or perfect order Customer service

Linked to the service policy

Actual revenue or margin / plan Financial plan attainment

Shows whether the business plan is being met

S&OP Maturity and Integrated Business Planning

S&OP matures in recognizable stages. Early versions are sales and operations meetings focused on volume. Mature processes plan the full horizon, run scenarios, and integrate finance, product, and strategy. Integrated business planning (IBP) is the term for this mature form: the monthly process becomes the way the leadership team manages the whole business, not only the supply chain.

SIGNS OF A MATURE S&OP PROCESS

Executives attend every month and decisions are made in the meeting. One set of numbers in units and dollars, reconciled to the business plan.

The plan covers 18 months or more and includes portfolio changes. Scenarios and risks are quantified before the executive meeting. Performance measures drive corrective action, not blame.

S&OP links the business plan to the MPS and produces one operating plan by product family. Each MPC level has its capacity check: resource planning, RCCP, CRP, input/output control. The monthly cycle: data gathering, demand planning, supply planning, pre-S&OP, executive S&OP. Plan families over 12–18+ months; the MPS must sum to the approved family plan. Finance converts units to dollars; any gap to the business plan is an executive decision. Scenarios quantify trade-offs; executives decide them in the meeting.

Mature S&OP becomes integrated business planning.

The production plan is the operations side of S&OP: the agreed rate of output for each product family, usually by month. Its form depends on the manufacturing environment. In make-to-stock (MTS), finished goods inventory absorbs the difference between production and demand, so the plan sets an inventory target. In make-to-order (MTO), there is no finished goods inventory, so the plan sets a backlog target instead.

PRODUCTION PLAN FORMULAS Plan Formula

Ending inventory = beginning inventory + production − forecast

Production per period = (total forecast + desired ending inventory − beginning inventory) / number of

Ending backlog = beginning backlog + forecast (new orders) − production

Production per period = (total forecast + beginning backlog − desired ending backlog) / number of periods

Production / output per worker per period Workforce required

Level, Chase, and Hybrid Strategies

Level strategy Chase strategy

Produce at a constant rate. Inventory (or

Hybrid strategy

Combine the two: a stable base rate plus overtime, subcontracting, or seasonal staff in peaks, with some inventory build ahead of the peak.

Change production to match demand each period. Inventory stays near backlog) rises and falls to absorb target; capacity changes through hiring, demand swings. Stable workforce and

Worked Example: MTS Level Plan

A family has a six-month forecast of 450, 500, 600, 700, 650, and 500 units (total 3,400). Beginning inventory is 300 units and management wants 200 units at the end. Each worker produces 10 units per month, the current workforce is 55, and carrying cost is $5 per unit per month on ending inventory.

Worked Example: MTS Chase Plan

The chase plan holds inventory at the 200-unit target. Month 1 production is 450 + 200 − 300 = 350; later months produce exactly the forecast. Hiring costs $800 per worker and a layoff costs $1,200 per worker, starting from 55

Hire 35, lay off 40

TOTAL PLAN COST: LEVEL VS CHASE ($)

With these costs the level plan is far cheaper because workforce changes are expensive and inventory is cheap to hold. The chase plan saves 1,850 − 1,200 = 650 unit-months of inventory, so it would only break even if carrying cost rose to about $76,000 / 650 = $117 per unit per month. Perishable, high-value, or fast-obsolescing products push toward chase; costly or scarce skills push toward level.

A hybrid test with the same data: cut to 50 workers (5 layoffs = $6,000), run 500 units a month, and add 150 overtime units in months 3 and 4 at a $15 premium (300 × $15 = $4,500). Inventory ends at 350, 350, 400, 350, 200, and 200, or 1,850 unit-months ($9,250). Total = $19,750, so under these costs the hybrid also loses to the level plan.

COSTS CONSIDERED IN AGGREGATE PLANNING

Hiring and training cost per new worker; layoff and severance cost per released worker. Overtime premium per unit or per hour, and subcontracting premium over the in-house unit cost. Inventory carrying cost per unit per period, usually on ending or average inventory.

Backorder or lost-sale cost when demand is not met on time.

Idle-time cost when a level workforce has nothing productive to build.

Level-versus-chase items give a forecast, a beginning and ending inventory, and cost rates. Compute the level rate first, project inventory period by period, and check that no period goes negative. Then total hiring, layoff, overtime, and carrying costs. A best answer names the cheaper plan and the cost driver behind it.

In MTO, the backlog of unfilled customer orders is the buffer. A level MTO plan lets the backlog grow and shrink; the target backlog sets the customer lead time, because lead time from backlog is roughly backlog divided by the production

Setting Inventory and Backlog Targets

Targets come from the business strategy and the service policy. MTS families set finished goods targets, often in days or weeks of supply, to meet the service level and to cover seasonal build. MTO families set backlog targets that match the lead time customers will accept. Seasonal businesses plan anticipation inventory in the slow months; competitors’ lead times limit how large a backlog can grow.

Higher service means more MTS inventory or a smaller MTO backlog

Build anticipation inventory before the peak when capacity is level

High cost or short life lowers inventory targets

A backlog longer than competitors’ lead times loses orders

Flexible capacity allows lower inventory and backlog buffers

Resource Planning with a Bill of Resources

Resource planning checks whether the production plan is feasible against long-lead, aggregate resources: labor pools, key work centers, floor space, and critical suppliers. It uses a bill of resources (also called a resource profile or load profile): the hours of each key resource needed per unit of a family. Load equals planned units multiplied by hours per

The plan calls for family A at 2,000, 2,200, and 1,800 units and family B at 1,200, 1,200, and 1,000 units over three months. Assembly has 2,000 available hours per month at 95% utilization and 95% efficiency, so rated capacity is 2,000 × 0.95 ×

LOAD PROFILE VERSUS CAPACITY Month Assembly load

INTERPRETING THE LOAD PROFILE

Test is feasible every month. Assembly is overloaded in months 1 and 2 and still 305 hours short over the three months, so moving work into month 3 alone cannot fix it. At 95% efficiency, covering month 1 with overtime takes about 155 / 0.95 = 163 clock hours, and month 2 about 255 / 0.95 = 268 clock hours.

Fast, no hiring, uses existing skills Overtime

Premium pay, fatigue, quality risk if sustained

Extra shift or temporary labor Large capacity increase

Subcontracting Adds capacity without investment

Higher unit cost, quality and lead time risk

Uses slack in earlier months (MTS only)

Carrying cost; needs a forecast you trust

Alternate routings or equipment Uses idle resources

Shift promotions, extend lead times, allocate

Lost or delayed sales; needs executive approval

Lower the production plan to match capacity

Revenue gap must go back to S&OP

A contract manufacturer of medical carts finds that its welding cell, a key resource in the bill of resources, is overloaded 12% for the next four months while assembly has slack. Certified welders take months to hire. Best response: the supply planner takes the overload to pre-S&OP with costed options: overtime in the welding cell, subcontracting simple welded frames to a qualified supplier, and pre-building frames in the current month. Executives choose; the production plan is not passed to the

master scheduler until it is feasible.

Services cannot be stored, so a service firm has no finished goods inventory to absorb demand swings. Capacity must match demand closely (a chase approach), or customers wait in a queue, which is the service form of backlog. Call centers, repair depots, and hospitals plan staff by forecasted volume per period.

Demand tools

Appointments and reservations, off-peak pricing, and self- service options that shift or reduce peak load.

Queue as buffer

An acceptable waiting time plays the role of backlog; the service policy sets the target.

Resource profile

Staff hours per transaction act as the bill of resources for checking feasibility.

Service-planning items test the absence of inventory. The best answer adjusts capacity to demand or shifts demand with reservations or pricing. Eliminate choices that suggest building inventory of a service or that treat an unlimited

Level rate (MTS) = (total forecast + ending inventory − beginning inventory) / periods. Level holds the workforce constant and carries inventory; chase changes capacity and holds little inventory. Compare total hiring, layoff, overtime, and carrying cost; the cost ratios decide the best strategy. Backlog / production rate approximates customer lead time in MTO. Resource planning multiplies family volumes by a bill of resources and compares load with rated capacity. Services have no inventory buffer, so they chase demand or manage it.