Conceived with the main objective of aligning the company's functional areas, ensuring that all the company's planning points to a common objective, S&OP has gained relative importance over time. Currently, an evolution of this concept for the IBP is being discussed (Integrated Business Planning), whose greater procedural and tool maturity would enable a broader scope of action, in parallel with better financial clarity of the trade-offs. This increase in the participation of the company's strategic areas (such as finance) has even led some companies to replace the annual budgeting process with the rolling natural from your PPIs.
Without discussing the conceptual merits of this evolution and whether this really should be the natural path for S&OP, what becomes undeniable is the importance and growing role of sales and operations planning in companies' lives. Even for this reason, we already see many companies with a relatively structured and disciplined monthly process, with a well-defined calendar and responsible people. Even so, it is quite common to see companies dissatisfied with the value effectively delivered by the S&OP process compared to expectations. There are many times that companies show complaints, because despite the S&OP process running according to plan, problems are not adequately anticipated and execution ends up completely detached from the agreed plan.
This happens, many times, because the risks and restrictions present in the execution were not evidenced when the plans of action were confronted. supply. For some reason, the problems are not clear and are not even discussed in the monthly meetings, forcing large deviations from the plan. Thus, execution occurs with sub-optimal, local decision-making, looking only at the short term, when the time horizon is shorter, responsiveness is lower and resources are more expensive. It is evident, therefore, that the quality of the plans is decisive for the success of the S&OP.
It happens that, several times, when we apply a more in-depth look, these same elaborated operations plans are shown to be quite deficient. Either because they are inadequately structured, being ineffective for the proposed objective; or even because they already contain increased capacities (and not nominal ones) after the areas have already managed local changes, such as, for example, the distribution plan already counts on third-party spot freight, the production plan counts on overtime for the production teams, the storage plan includes the leasing of additional spaces, seeking to accommodate demand at any cost.
This time, two fundamental decisions to be taken, aiming to give the adequate quality to the plans are: the planning horizon and the degree of aggregation of the information.
planning horizon
Planning horizon definitions are essential for the coherence of the plan itself and the fluidity of the process, and should take into account the particularities of each of the company's functional areas.
A preliminary constraint that must be considered in defining the horizon of each plan is the lead time Give me an answer. If the planning horizon is very close to or lower than such a reference, any deliberation will not have sufficient reaction capacity. Therefore, it is natural that supply plans, which work with longer terms and less reaction capacity due to negotiations with suppliers, need planning horizons that are substantially longer than the transport plan, which has sufficient response capacity for shorter horizons. .
It happens that plans with very broad horizons, however, considerably impair the quality of the plan drawn. It would even be possible to say well in advance the optimized production plan of a week far in the future, but would it be worth doing so? If we consider that the plan would be radically modified in the week prior to execution, given the needs of the new reality, the answer would be negative.
Figure 1 – Planning horizon trade-offs
Source: ILOS
By now, it should have been clear that the choice of plan horizon involves a clear trade-off between reaction capacity and predictive capacity. Wider horizons allow for greater reaction capacity, considerably optimizing the necessary resources, however they lead to a low accuracy of the plan, often not taking advantage of the proposed economy in resources. Nevertheless, shorter horizons even indicate a greater predictive capacity, but the closer to execution, the more expensive and flexible your service resources should be. Thus, companies must balance the cost of error, characteristic of longer horizons, with the costs of flexibility present in shorter horizons.
Degree of aggregation of information
The decision on the level of organization of information for each plan must be drawn in three dimensions: time, place and product. The “time” dimension refers to which temporal organization the information is grouped, whether the view will be by year, by month, by week or even by day; the “local” dimension is the degree of geographic aggregation of the information, whether the vision will be total of the company, by State, by Regional or by DC; the “product” dimension refers to the degree of aggregation of the portfolio, whether the view will be in total volume, by brand, by category, by product family or even by SKU.
It is easy to understand that different areas of the company have preferences for different degrees of aggregation. Sales are more inclined to want to see information by sales region, total volume (or brand) and month; Production prefers to see information by factory, SKU and week; Storage needs to parse the information on CD; Pallet and day, for example. It is not news to anyone that if each area wants to collaborate as it sees fit, the alignment of plans will be completely dysfunctional, making the decision-making process difficult.
It is essential, therefore, to choose levels of organization of information for the plans that are convertible to a common language, through which there must be communication, an area shares the plans with others. The choice of this level of information aggregation should be based on three questions: usefulness; predictability and effort.
When we look at the utility criterion, the more disaggregated the information, the greater its utility. For example, in a Distribution Plan, when looking at the total volumes handled in the month, one comes to the conclusion that there is delivery feasibility, however, if this same plan is disaggregated considering the daily variability, it will possibly be found restrictions that were previously hidden: days that the volume is below average, generating idleness of assets, and days that the volume is above average, resulting in lack of capacity (the classic concentration of demand). The plans must be designed so that the organization of the information handled is sufficient to be useful, making the restrictions clear.
From the point of view of predictability, the more disaggregated the information, the lower the forecast accuracy. Intuitively, it is natural that the more detailed the information is, the lower the predictive capacity. For example, it is usually much easier, in the Demand Plan, to forecast the total volume of the company, than the volume of each SKU. This occurs, because when we disaggregate the information, there is a negative correlation between the items, indicating cannibalization and greater oscillations, which makes it difficult to the forecasting process.
However, it is not possible to make the decision only taking into account the predictive capacity and utility. That being the case, companies would choose to always use ultra-sophisticated tools and an ultra-qualified team. When in fact, it is necessary to weigh whether the related efforts to deliver the appropriate utility and predictability are compatible with the available resources and the company's reality.
Figure 2 – Trade-offs of the degree of information aggregation
Source: ILOS
What is observed, in many cases, is that a correct critique of usefulness, predictability and effort was not carried out at the level of organization of information; so that neither during the S&OP process nor during the meetings are the restrictions and, consequently, the trade-offs to be carried out. Therefore, when problems are perceived, there is no longer enough reaction capacity and each area ends up making the decision that is under its governance locally, overlapping with what would be the company's global optimum and what was previously aligned in the S&OP, whose decision-making body is hierarchically superior, due to the shortening of the planning horizon.
In Brazil today, given the scenario of economic depression, there is a very strong negative bias in demand, causing considerable idleness of assets. This abundance of resources, in turn, gives the false impression that there is unlimited capacity and, when this is combined with the feeling of urgency for any and all sales (given the low volume scenario), any oscillation in demand ends up being met. through operational flexibility, which tends to be more costly for the company. With the recovery of the economy, these practices will necessarily need to be reviewed. Considering this, the guarantee of alignment at the tactical and operational levels must be achieved through a well-structured and conducted S&OP process.
References
BOWER, PATRICK. Integrated Business Planning: Is It a Hoax or Here to Stay?, Journal of Business Forecasting, 2012.
CORRÊA, HENRIQUE L.; GIANESI, IRINEU GN; CAON, MAURO. S&OP – Sales and Operations Planning, Production Planning, Programming and Control. Atlas publishing house, 2001.
WALLACE, THOMAS F.. Sales & Operations Planning, The How-To Handbook. TF Wallace & Company, 1999.
WANKE, P.; JULIANELLI, L. Sales Forecast: Organizational Processes & Qualitative and Quantitative Methods, Editora Atlas: Rio de Janeiro, 2006.
WANKE, P.; SALIBY, E. Top-down or bottom-up forecasting? Operational Research. v. 27, n3, p.591-605, Sep/Dec 2007.
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