Sales, Inventory & Operations Planning – What It Is and How to Operate
Sales, Inventory & Operations Planning (SIOP) is a dynamic process in which the company’s operating plan is updated on a regular monthly or more frequent basis. The plans take into account projections made by the sales and marketing departments, the resources available from manufacturing, engineering, purchasing, and finance, and are directed toward hitting the company’s objectives. Sales, Inventory & Operations Planning is done on an aggregate or family level, and covers a sufficient span of time to make sure that the necessary resources will be available. Any difficulties in supporting the sales plan are worked out. The approved aggregate plans drive the individual departmental detail plans. Each month, the representatives meet again to determine whether the overall company plan is on course, and to adjust for changes in the marketplace and changes or problems within the company.
Another contribution of Sales, Inventory & Operations Planning is that it enables the company to fine-tune its long-range strategic plan and annual business plan. The strategy must answer such vital questions as:
- What is our business (products, and services)?
- To whom do we sell (markets, customers)?
- What resources are required (people / skills, technology, plant and equipment, distribution, etc.)?
- What is the measure by which we compete (quality, delivery, price, service)?
- What is our financial strategy (profit, growth, ROA, ROI)?
- Any additional strategies (make or buy, market share, flexibility)?
Sales, Inventory & Operations Planning offers another key benefit to companies striving for the competitive edge: it enables them to operate Manufacturing Resource Planning (MRP II) at its full potential. When Sales, Inventory & Operations Planning is the driver in an MRP II system, the results are likely to be a Class A performance, which in turn means better customer service, more reliable performance, reduced costs, and greater profits.
Objectives of Sales, Inventory & Operations Planning
- Support and measure the business plan. Sales, Inventory & Operations Planning helps to determine whether your original financial expectations (budget), current sales plan, and operations plan are in sync with each other. It does this through monthly reviews of the marketplace and updates of the company’s operations plans. The updated plans must be in tune with the marketplace.
- Ensure that the plans are realistic. The key players from each department participate in formulating the new plans to make sure that all recommendations can be realistically supported. Since all of the numbers and assumptions are out on the table throughout the process, each department has more time to evaluate its resources and capabilities in the context of the company-wide plan. The result is a solid set of department plans that are based on real numbers and capabilities.
- Effectively manage change. The ability to carry out Sales, Inventory & Operations Planning is synonymous with being able to manage change, to substitute controlled and appropriate responses for knee-jerk reactions.
- Better manage finished goods inventory and / or backlog to support customer service. Maintaining the right level of finished goods inventory for make-to-stock families is essential for good “off the shelf” customer service. Operating at too high an inventory level results in extra costs, while operating at too low a level creates too many back orders. In a similar manner, controlling backlogs for make-to-order products is also essential for good customer service. If actual backlog becomes too large, delivery times stretch out, which eventually will cause customers to go elsewhere. By contrast, insufficient backlog can incur extra operating costs.
- Measure performance. Sales, Inventory & Operations Planning incorporates performance measurements to identify whenever actual performance is deviated significantly from the plan. The two main purposes of this are to separate those activities that are in control from those that aren’t, and to quickly bring the out-of-control situation to the surface so that an evaluation can be made and, if necessary, corrective action taken.
- Build teamwork. A key element of Sales, Inventory & Operations Planning is that it gives each department an opportunity to participate in the overall planning process. Each executive brings his experience and skills, which add insights to the matter of making changes to the current plans. These same talents can respond to proposed changes in terms of consequences and alternatives.
Prerequisites for Performing Sales, Inventory & Operations Planning
- Each department must gain an understanding of the Sales, Inventory & Operations Planning process.
- The company must commit the time and resources to the process
- The company must define product groupings or families
- The company must establish an adequate planning horizon
- The company must establish and manage time fences.
Understanding How to Operate
For SIOP to be effective, there can be no “black boxes” in the process; all participants must understand how it works and what it is designed to achieve. When people understand that sharing information does not mean giving up control and they see that the exchange actually leads to gaining control, they will be more willing to work in concert with their fellow departments toward the larger objectives of the company.
Commitment and People
Embarking on the Sales, Inventory & Operations Planning process is like making a lifetime commitment.
A suggested list of participants is as follows:
Company President, Vice President Sales & Marketing, Vice President Operations, Director of Logistics, Vice President Engineering, Vice President Finance, Vice President Information Systems, Vice President Human Resources
Products Managers, Materials Manager, Manufacturing Managers, Distribution Managers, Customer Service Manager
SIOP is carried out at the aggregate level. By “aggregate” we mean product groupings or families rather than individual products or items. The idea is to get effective input and control from management. This comes about by managing families, not items, and managing rates, not specific work orders.
The term “planning horizon” refers to how far ahead you need to establish your plans. Everyone recognizes that Sales, Inventory & Operations Planning is long-term, but the word “long” needs to be quantified. The SIOP plan must extend far enough into the future to ensure the availability of all resources. Thus, whichever resource – material, equipment, people – takes the longest determines the length of the planning horizon.
All departments must recognize in their SIOP process that changes in the plan are time-dependent; that is, the closer the change, the more costly or impossible it may become to make the changes in the plan. For every product family, there are “time fences” – guidelines that demarcate when changes are feasible. The fences reflect the realities of each business.
Sales, Inventory & Operations Planning as an Ongoing Process
A critical aspect of SIOP is that it not a one-time event during which production levels are established. For each Sales, Inventory & Operations Planning cycle, the key players from each department compare actual results to plan, evaluate their performance, and prepare updated plans for the current period.
Sales, Inventory & Operations Planning meetings should take place at least once per month. A month is usually a sufficient period of time to differentiate a trend from a minor variation or “blip,” but it is not so long that corrective action is no longer possible. Still, there are occasions when SIOP meetings must be held more frequently than once a month, depending on the nature of the company and the volatility of the marketplace. Companies that sell seasonal items, for example, might have to meet weekly prior to and during their peak selling periods.
Another cause for meeting more frequently or on a special basis is abnormal demand. When demand is suddenly noticeably higher or lower than normal, sales and marketing must decide if the demand represents real change or just a temporary anomaly. The key point is that decisions about how to handle abnormal situations must be made in a timely fashion at the appropriate management level.
Developing a proactive strategy that syncs up all divisions across a company enables flexibility and improves overall production. For help optimizing your Sales, Inventory & Operations Planning process, contact the company that was established over 50 years ago as Universal Scheduling Corporation (USC) and has been excelling clients’ processes ever since.
And to learn why inventory is the key to the whole process and why we identify it as SIOP and not S&OP, download our eBook below: