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Sales and Operations

Planning
in Food and Beverage
Companies

A Knowledge-Driven Consulting®
White Paper

© 2004 Hitachi Consulting Corporation

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Contents

What Is Sales and Operations Planning and Why Is It Important


for a Food and Beverage Manufacturer? ....................................3

Assessing the Opportunity for Sales and Operations Planning ..3

Where Sales and Operations Planning Fits With Traditional


Planning Processes ....................................................................4

Sales and Operations Planning Process Cycle ..........................5

Successful Implementation Lessons...........................................6

Summary ....................................................................................7

About Hitachi Consulting ............................................................7

About Hitachi, Ltd .......................................................................7

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What Is Sales and Operations Planning and Why Is It
Important for a Food and Beverage Manufacturer?

Every year, the imbalance between supply and demand costs food and
beverage manufacturers billions of dollars in out of stocks, excess inventory and
excessive discounting. Managing through things such as regional promotions,
product introductions and discontinuations, packaging/graphics changes,
seasonal capacity constraints and weather related demand patterns can wreak
havoc with the Demand and Supply planning processes for a Food and
Beverage manufacturer. Combined with trends such as ‘low carb’ diets, the next
‘cool’ product, and unpredictable consumer behavior, food and beverage
companies are finding agility and access to information to be the necessary
recipe for success.

The Sales and Operations Planning (S&OP) process helps to maintain a well
coordinated and valid, current operating plan in support of customer demand, a
business plan and a strategy. The operating plan provides management with a
complete picture of forecasted demand, supply capacity, corresponding financial
information and allows them to make informed, critical decisions. This process
includes a formal meeting each month (or more frequent, if required due to
business needs) run by the senior management and covers a planning horizon
adequate to plan resources effectively. This approach helps the company move
in one direction for the overall good of the company instead of each function
pulling for its own ‘silo’ goals.

Companies that utilize Sales and Operations Planning have greater visibility
across the company, gain the agility necessary to improve the Product Lifecycle
Management (PLM) process, improve promotional planning, minimize
unnecessary buildups of inventory and increase revenue predictability and
budget forecasting.

Assessing the Opportunity for Sales and Operations Planning

Implementing a Sales and Operations Planning process enables companies to


Benefits of the S&OP Process identify problems and make better decisions faster and easier. Some typical
1. Visibility of demand and problems that are addressed in the S&OP process include:
supply across the company  Silo organizational structure where each department or business unit
2. Improvement of the Product operates and plans for inputs independently of one another, often
Lifecycle Management resulting in misalignment with the corporate strategy.
process  Master plans, production plans and production schedules change
3. Improvement of promotional continuously, promoting instability throughout operations. Sales and
planning operations blame each other for problems.
4. Improvement of inventory  Financial plans are inaccurate, resulting in high variances between
management budget and actual results.
5. Revenue predictability  Revenue goals are consistently not met. Low service levels or high cost
6. Budget forecasting of servicing customers along with low inventory turns are prevalent.
 Capacity utilization, forecast accuracy, obsolete inventory, product-to-
market time and transportation costs are not understood and/or
measured. In addition, corrective action plans are not made.
 New product introduction process is broken and generally results in
missed launch dates, significant issues with inventory management and
poor service levels.
 Product phase-outs are costly and generally involve inventory excess or
shortage issues. Poorly performing product lines are not reviewed and
discussed. Product codes that have been phased out are not deleted
or consolidated, promoting SKU proliferation.
 Promotional campaigns and activities cause major swings in inventory and
service levels resulting in higher operational costs than budgeted.

3
Where Sales and Operational Planning Fits With Traditional
Planning Processes
The Sales and Operations Planning process is a vehicle for communication
among all functions within a business. It enables the deployment of company
strategy and helps to better coordinate the allocation of critical resources
(people, capacity, materials, time and money) so the company can profitably and
effectively meet customer demand. As such, it serves as a mechanism to
coordinate the vision, strategy, financial and tactical plans of a business into one
unified operating plan.

Furthermore, the Sales and Operations Planning process reviews high level
planning activities at the monthly and yearly levels. Therefore, the review
process does not get bogged down into tactical planning at the weekly or daily
level. This is critical as it allows an organization the opportunity to proactively
identify and manage around up coming issues like overstock situations, fixed
capacity constraints, regional velocity of demand and financial reserve accruals.
The following illustration provides a high level view of the integrated planning
process.

4
Sales and Operations Planning Process Cycle
Sales and Operations Planning is a monthly process that is heavily participated
in by senior management to achieve cross functional consensus on a single
operating plan. Although actual processes vary depending upon complexity and
size of an organization, a typical model of the Sales and Operations Planning
process is pictured below:

The S&OP process begins with the development of the demand plan for a rolling
time period of 12-24 months (dependent upon business needs of the company)
followed by the creation of the corresponding supply plan over the same time
period. The demand and supply plans are then used to create the operating
plan. The process is continually refined where focus is geared toward resolving
Key Elements to Demand Review conflicts and assigning priorities in supply and demand in the short term, and
aligning more closely to corporate strategy and setting direction, in the long run.
1. Define process
2. Have business-appointed
process owner Demand Review Process
3. Involve participation from every
As discussed above, the S&OP process begins with a Demand Review meeting
– at which the ultimate goal is to gain consensus on what will be sold each
division within the organization
4. Produce unbiased forecast month for each product line or category and the resulting revenue. The driver of
5. Document assumptions the Demand Review process is continuous improvement of forecast accuracy.
6. Utilize aggregate and detailed The purpose of the meeting is to have all stakeholders, including sales,
demand plan marketing, finance, product development and supply chain agree upon a
7. Continuously improve forecast consensus Demand Plan. At the meeting, participants will discuss factors
inaccuracy affecting customer demand patterns (such as new or deleted products,
competitors or market conditions), the aggregate demand plans and associated
revenue plans. Once all demand for products and services has been recognized,
the information is consolidated into one Demand Plan. When the Demand Plan
has been approved by the meeting participants, it is then passed to the Supply
team.

5
Supply Review Process
After the Demand Plan is received by the Supply team (which includes buyers,
inventory management, production, warehousing and logistics), a Supply Plan,
Key Elements to Supply Review including a rough-cut Capacity Plan and a procurement plan, is created to fulfill
the Demand Plan. The goals of the Supply Review are to:
1. Define process
2. Participation from supply chain,  Develop a proactive approach to resolving imbalances in capacity and
operations and finance resources
3. Document assumptions  Identify capacity constraints and alternatives
4. Determine planned capacity  Develop a procurement plan
5. Capacity constraints  Improve plan adherence
6. Create rough-cut capacity plan  Evaluate capacity utilization (forecasted and past performance)
7. Determine gaps between  Maximize resource utilization (capacity, storage, transportation, people,
supply and demand materials)
8. Continuously improve capacity At the Supply Review meeting, participants review and approve the Supply Plan
utilization and planned and and accompanying costs. This information is used as the primary input to the
schedule adherence Sales and Operations Planning Meeting. If there are any imbalances between
the demand and supply plans they are documented and brought to the Sales
and Operations Planning meeting.

Sales and Operations Planning Meeting


The purpose of the Sales and Operations Planning meeting is to discuss and
resolve any imbalances between supply and demand. Participants in this
meeting include senior leadership representing functional areas such as finance,
sales, marketing, purchasing, operations, planning, logistics and other
operational and sales management as needed. In the meeting, the Demand and
Supply Plans, financial plans, strategic business goals and unresolved issues
from previous meetings are all reviewed and resolved. Where imbalances exist,
participants are prepared to discuss alternative plans since new options must be
developed and approved in this meeting. The group sets strategic direction on
capacity, raw material availability and new business opportunities, and comes to
a consensus on the Sales and Operations Plan.

All decisions resulting from the meeting are published as a single authorized
plan which becomes the operating plan for each function within the company.

Sample of Information Examined


in Sales and Operations Planning
Meeting Successful Implementation Lessons
1. Forecasted demand and The following attributes are key to successful Sales and Operations Planning
corresponding revenue implementations:
2. Production Plan and cost of
sale projections 1. An organization is in place to support Sales and Operations Planning
3. Inventory positions/levels functions.
4. Financial budget versus actual 2. Enterprise Executives are both key supporters and leaders of the Sales
comparison (P&L, balance and Operations Planning process. At the beginning of the implementation
sheet and cash flow) of S&OP, an individual project team can be utilized to develop and deploy
the process. However, the team should utilize the Executive sponsor to
5. Raw material purchase derive direction and leadership.
projections
3. Key Performance Indicators (KPIs) are determined and defined prior to the
6. Forecasted capacity utilization beginning of the project. These KPIs are monitored on a monthly basis to
compared to past performance
measure the success of the implementation and identify areas of
7. Forecasted labor utilization opportunity to continuously improve and refine the Sales and Operations
compared to past performance Planning process.
4. Continuous improvement is part of the process. You are not going to define
everything with 100 percent accuracy at the beginning of the project. The
Sales and Operations Planning process is a process that continuously
changes and improves to suit the needs of the business.

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5. Deploy and stabilize the Demand Planning process prior to the Supply
Planning process. This is dependent upon the processes that are already
in place and data availability.
6. Hold regular meetings with Executive Sponsorship Board to discuss
process improvements and direction.
7. Recognize the difference between productive and non-productive
meetings. The Sales and Operations Planning process is decision making
tool – if decisions are not being made, enhancements to the process will
need to be made.

Summary
Enterprises that utilize the Sales and Operations Planning process to manage
their business stand a greater chance to increase their customer service levels
and attain improved, more balanced inventory, supply and demand plans. The
Sales and Operations Planning process seeks to improve sales forecast,
inventory turns, production plan and schedule adherence, capacity utilization
rates, and decrease the gap between the budget and actual performance.
Additionally, it is a vehicle for communication between all planning functions
within a business. Sales and Operations Planning translates the vision, strategy,
financial and tactical plans of a business into one operating plan.

Given the changing landscape of the food and beverage industry, it is more
important than ever to streamline all processes to gain competitive advantage.
Companies that are effective in utilizing the Sales and Operations Planning
process stand to improve their visibility across the company and realize
opportunities to increase their revenue predictability and budgeting.

About Hitachi Consulting


Hitachi Consulting is Hitachi, Ltd.’s (NYSE: HIT) global business and IT
consulting company. We serve Fortune 2000 companies across many industries
across the United States. We work with you to understand your needs and to
enable and implement key business strategies. We deliver practical solutions to
generate demand, ensure supply and help you manage your enterprise
effectively. Our commitment to delivering measurable results is unparalleled, as
is our dedication to transferring knowledge. Our experience translates to your
results.
To find out more about how Hitachi Consulting can inspire your next success,
please call 1.877.664.0010 or visit us at www.hitachiconsulting.com

About Hitachi
Hitachi, Ltd. (NYSE: HIT), headquartered in Tokyo, Japan, is a leading global
electronics company, with approximately 326,000 employees worldwide. Fiscal
2003 (ended March 31, 2004) consolidated sales totaled 8,632.4 billion yen
($81.4 billion). The company offers a wide range of systems, products and
services in market sectors, including information systems, electronic devices,
power and industrial systems, consumer products, materials and financial
services. For more information on Hitachi, please visit the company's Web site at
http://www.hitachi.com.
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© 2004 Hitachi Consulting Corporation. All rights reserved. "Information Velocity" is a
service mark, and "Knowledge-Driven Consulting" is a registered service mark of Hitachi
Consulting Corporation. Printed in USA..

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