Increase value added

Sales and operations planning (S&OP)

Strengthen the company’s competitive power, ensure better execution of the strategy and increase value added.

In this article, we will clarify how a stronger integration between the company’s decision-making processes in terms of sales and operations planning can create growth, reduce costs and utilise the production facilities and use of capital in the company more optimally.

Strengthen strategic and business-related execution by optimising sales and operations planning

The company’s sales and operations planning is an important link between the overall strategic and business-related decisions and the short-term operational and tactical planning, as illustrated in the figure below.

Sales and operations planning

Sales and operations planning can thus be described as a number of decision-making processes which aim to balance and integrate sales and supply chain decisions with financial and operational planning.

A well-organised decision structure and planning horizon clarify who will take what initiatives (sales or production) to balance the situation or provide new opportunities or initiatives. Sales and operations planning is thus a significant control element for the management between the overall strategic and business-related goals and the operational day-to-day decisions.

A well-anchored structure and decisionmaking process in connection with sales and operations planning may thus be part of supporting that important initiatives across the entire supply chain are carried out in time and on a wellinformed basis.

The article continues below.

Morten Søndergaard
Morten Søndergaard
+45 2338 0080

Effect of the company’s economic value added by optimising sales and operations planning (S&OP)

As described and illustrated in the first article in this series of articles, a company’s ability to create economic value may be expressed by its ability to generate a return on invested capital (ROIC) in the company beyond the weighted average cost of capital (WACC), which the investors have in general in relation to their invested capital in the company. The level of economic value added at a given period of time can be expressed by using the following formula:

Economic value added

Thus, the two most significant value drivers are the ROIC and – if the return is higher than the WACC – any additional growth that may be generated in the company. Optimisation of the company’s sales and operations planning typically results in a number of significant improvements of the company’s value added, such as:

  • Capacity could be increased in time and create optimal conditions for sales – generate stronger growth
  • If production is reduced in time, this could lower production costs and increase the efficiency of the production facilities – better utilisation of the invested capital and reduced costs
  • If sales initiatives, such as campaigns or introduction of new products, are launched in time, it will increase the possibility of better utilisation of available production capacity as well as raw materials – lower production costs and better utilisation of the invested capital
  • If the stock of seasonal products is increased in time, it will boost sales and reduce waste – stronger growth and reduced costs
  • If stocks are reduced in time, it will reduce tied-up capital as well as waste – release capital and lower costs

Thus, an optimisation of sales and operations planning creates a possibility of both synchronising and optimising a number of operational elements, which will either generate growth, reduce production and distribution costs and/ or utilise the invested capital more optimally.

The point of departure for optimising sales and operations planning is three parallel analysis and planning tracks, i.e. sales prognosis, capacity utilisation and stock management, which together provide the foundation for the periodic and ongoing cross-organisational decision-making process regarding balancing the supply chain configuration, see the figure below.

Sales and operations planning Analysis and decision making model

An efficient sales and operations planning process will support the management’s basis for decision-making in relation to the strategic and business-related adjustments and thus create a strong foundation for strengthening the competitive power and value added going forward.

For further information about this process and examples of its use, please contact Morten Søndergaard.