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Supply Chain Planning: Integration

Introduction
Why is Integration Important?

Companies manage their supply chains by connecting the functions in the supply chain
Procurement, Manufacturing, and Fulfillmentvia supply chain planning (SCP) processes.
Supply chain planning processes coordinate and share information among the other supply chain
functions to create an integrated supply chain. Supply chain functions must be integrated for
companies to ensure that material is available for manufacturing, manufacturing resources are
available when required, and customer orders are fulfilled on time.

Companies must also integrate the different SCP processesdemand planning, supply planning,
and production planningto ensure that demand does not exceed supply, or vice versa, and that
customer orders get fulfilled. Companies must coordinate the different supply chain planning
processes so that all the plans are synchronized. The Sales and Operations Planning process,
referred to as S&OP, is normally responsible for coordinating this integration.

Companies make decisions at different operational levels, including the strategic, tactical, and
execution levels, to facilitate their supply chain processes. SCP allows companies to plan and
integrate the supply chain functions across all entities at all operational levels.

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How Does a Company Achieve Integration?

An integrated supply chain passes information back and forth between the business functions
and planning processes. The diagram below shows an example involving supply and production
planning. Press the arrow below to see additional information.

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Objectives

After completing this module, you will be able to:


Identify the interrelationships between supply chain planning (SCP) processes and the
related business functions
Describe the basic process performed by each business function
Describe how each function can be integrated with SCP
Explain why it is critical for SCP to receive and send information to support both strategic
and execution functions
Describe how Sales and Operations Planning (S&OP) integrates planning processes

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Procurement
Overview

Leading organizations view procurement as a strategic part of their business that drives benefits.
Purchased materials and external services constitute a major portionabout 55 percentof the
cost of goods sold for a manufacturing company.

During SCP, planners model lead-times for materials procurement assuming that the material will
be available when needed. But if a supplier's lead-time performance is erratic; i.e., sometimes
they deliver on time, at other times they are late; this variability will require them to carry more
safety stock, resulting in additional cost. Companies strive to work with suppliers who have little
lead-time variability. Quality is also an important criterion for working with suppliers. If a supplier
frequently supplies inferior product, the manufacturer has to discard the low-quality product and
re-order, which has an adverse impact on manufacturing.

We will explore other such procurement issues that either impact SCP or are impacted by it.
Although procurement is used to procure both direct material, which is used for manufacturing
goods, as well as indirect material, like pens, pencils, and paper, we will limit our discussion to
the procurement of direct materials because indirect materials have no impact on supply chain
plans.

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Decisions in Procurement

Procurement has moved from the traditional model of buying products at the lowest possible price
to developing strategic relationships with suppliers to streamline lead-times. A supplier with
erratic delivery lead-times forces a manufacturer to carry excess safety stock. If the manufacturer
can purchase from another supplier who guarantees delivery times, the manufacturer will not
have to carry as much safety stock. While this second supplier may not provide the lowest price,
the long-term cost benefit may outweigh that of the lowest-cost supplier.

Typical Procurement Decisions

Who - decide on which suppliers to use


What - decide on what to purchase from which suppliers
How much - decide on the product volume to purchase from each supplier
What price - negotiate pricing strategy with each supplier
Terms and conditions - decide on lead-times, lead-time variability, inventory levels,
frequency of deliveries, etc.

Since companies don't change such decisions frequently, they are generally considered strategic.
Once strategic decisions are made, manufacturers need to make execution decisions involving:

Buying the product


Managing the confirmations and receipt of goods, i.e., schedule receipts
Tracking the status of material, i.e., in-transits

SCP, integrated with strategic and execution activities, provides the highest level of benefit to a
company.

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How SCP Supports Strategic Procurement

Strategic procurement decisions, such as identifying suppliers and negotiating price terms and
conditions, require input from SCP activities. Procurement relies on a long-term demand plan that
has been disaggregated into a long-term materials plan to decide on what and how much to buy.
Deciding on who (what suppliers) to buy from is significantly more complex because decision
makers must know suppliers' past performance, e.g., reliability, lead-time variability, service level.
Companies obtain this information from their planning systems to help determine and manage the
best suppliers. Companies also identify primary suppliers and secondary supplierssecondary
suppliers are used when the primary supplier is unable to meet requirements.

The price negotiated with each supplier also takes into account terms and conditionse.g.,
service levels, delivery frequency, and delivery lead-time requiredas well as the variability of
the demand pattern. Some companies are now entering into dynamic pricing agreements with
suppliers in which both parties agree to some pricing rules, and the actual price depends on
volume, lead-time, frequency, demand pattern stability, and materials expediting.

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How Strategic Procurement Supports SCP

Just as planning supports strategic procurement, strategic procurement supports planning by


providing key inputs to SCP. During SCP, companies identify and associate every relevant
variable with the planning modelprimary and secondary suppliers, available materials, and
delivery lead-time. Manufacturers must also understand suppliers' volumes and/or constraints
that could impact the receipt of materials needed for production. Finally, they must know the
product price to optimize any cost decisions they may make during SCP.

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How SCP Supports Procurement Execution

Procurement execution activities that require supply chain planning inputs include:

Buying the product


Managing the confirmations and receipt of goods, i.e., schedule receipts
Tracking the status of material, i.e., in-transits

To buy the product, companies must issue purchase orders or draw material against a blanket
purchase order. The purchase orders recommended by SCP are based on the short-term
materials plan generated during production planning.

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How Procurement Execution Supports SCP

Procurement execution includes managing the confirmation and receipt of goods as well as
tracking the status of material. These functions provide valuable input to SCP, e.g.,
confirmation of the receipt of goods implies that material is available and manufacturing can
proceed as planned. After the suppliers confirm their commitment to delivering the product when
needed, the procurement function must ensure that the goods are received and placed in
inventory to be used by manufacturing.

Procurement also provides planners with a delivery schedule and the status of the material on
order. This can provide early warning signs to SCPif planners know early enough that some
material is going to be delayed, i.e., exceptions to the plan, they may be able to alter production
plans to account for the delay. Early visibility also allows planners to consider expediting the
material from an alternate or secondary supplier if needed.

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Integrated Example

A manufacturer generates a long-term demand plan.


Procurement uses that plan to identify Ultra as the
primary supplier for a certain item, and Supra as the
secondary supplier for the same item. Ultra is to
supply 520,000 units during the yearapproximately
10,000 units per week. While generating the
appropriate supply plans, using 10,000 units per
week from Ultra, supply planners ensure a
demand/supply match for the company.

In February, however, the manufacturer's executive


team increases its revenue targets; Marketing plans
to run a promotion during April that will lead to
increased demand of 15,000 units per week for eight
weeks during May and June. Procurement discusses
the increased material requirements with Ultra, and
Ultra responds by saying that they can supply 12,000
units per week during that time period. The secondary supplier, Supra, agrees to supply the
additional 3,000 units per week. Procurement agrees to the price and delivery terms with both
suppliers.

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Integrated Example - Continued

In the second week of May, Ultra informs


Procurement that, due to a manufacturing problem,
they cannot supply 5,000 units during the third week
of May. Procurement then contacts Supra who
confirms that they can air-ship the 5,000 units to
arrive in time for production. The manufacturer
agrees to purchase the units from Supra and absorb
the additional transportation cost.

At the end of the year, the manufacturer analyzes


Ultra's performance and realizes that Ultra has forced
them to expedite material several times during the
year due to manufacturing problems at their end.
Using this information, the manufacturer negotiates
an additional contractual term with Ultra to carry a
higher safety stock to avoid this situation in the
future.

What strategic procurement decisions did the manufacturer make? Show answer

Strategic Decisions:

Identify Ultra as the primary supplier and Supra as the secondary supplier
Ultra will supply 520,000 units during the yearapproximately 10,000 units per week
Negotiate an additional contractual term with Ultra to carry a higher safety stock to avoid
excessive expediting of materials in the future

What procurement execution decisions did the manufacturer make? Show answer
Procurement Execution Decision:

Purchase an extra 5,000 units from Supra during the third week of May

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Topic Summary

Procurement is a strategic part of any business and must be integrated with SCP. The strategic
and execution decisions that are made in Procurement both support and are supported by SCP.
Procurement decisions that are supported by SCP include determining what to purchase, who to
purchase from, and how much to purchase. SCP uses these decisions to develop supply and
production plans to meet the demand requirements of the company. Once plans have been
developed, SCP must know the status and delivery schedule of incoming material because those
plans can be executed successfully only if material is available when needed.

Inputs Outputs
Strategic Procurement Long-term materials plan List of primary suppliers
Supplier performance List of secondary suppliers
Expected lead-times
Expected volumes
Contract terms and conditions
Price

Procurement Execution Recommended purchase orders Purchase order confirmations


Short-term materials plan Delivery schedule
Material status
Exceptions

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Manufacturing
Overview

Organizations that manufacture products invest a large amount of capital in manufacturing assets.
To maximize this investment, they must balance two goals: ensuring that enough material and
machines are available when needed while avoiding idle machines and/or labor resources.

SCP helps manufacturing organizations develop the capability to increase their return on assets
by maximizing throughput, minimizing machine downtimes, or maximizing asset utilization.

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Decisions in Manufacturing

Some organizations view manufacturing simply as the ability to manufacture the required product
and meet demand requirements. When business and demand grows and manufacturing capacity
cannot meet demand, companies must evaluate several options. Known as strategic
manufacturing decisions, companies consider issues such as:

Should manufacturing be outsourced to a subcontractor or vendor?


Should we increase the manufacturing capacity by building or acquiring new plants?
Can we increase the manufacturing capacity by increasing the workforce and/or the
hours of operation of the facilities?
Are our suppliers capable of providing the required material for new product
introductions?

Once these strategic manufacturing decisions are made, planners must think about
manufacturing execution, and make decisions such as:

When should we take down a machine for routine maintenance?


How do we move material from its inventory location to the workstation where it is
needed?

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How SCP Supports Strategic Manufacturing
How SCP Supports Strategic Manufacturing

Companies make two strategic manufacturing decisions that require SCP inputsdeciding
whether to outsource manufacturing of certain components or products, and determining the
material to use when designing a new product.

Outsourcing Decisions Materials Decisions

To make outsourcing decisions, manufacturers must know whether they have a shortage of
capacity. To determine this, SCP provides the demand plan as well as the supply planwhich is
made up of the sourcing, inventory, and distribution plansto satisfy that demand. A review of
these plans will highlight the variance between the two, i.e., a variance that shows a shortage of
capacity or a surplus of capacity. The manufacturer can then evaluate multiple demand and
supply plans to see if they can develop a plan that eliminates capacity variance while satisfying
the business objectives of the company.

If they do decide to outsource a portion of their manufacturing, they will need information to
evaluate the subcontractors in terms of cost, quality, and reliability. They could use some of the
supplier performance information (from manufacturing or procurement as appropriate) combined
with the relevant business planning rules from SCPe.g., lead-time, and lead-time variabilityto
evaluate if certain contract manufacturers are likely to be more reliable than others, and award
the contract based on the above factors.

When organizations design a new product, they must first ensure material availability and
identify potential suppliers to manufacture it and introduce it into the market. To accomplish this,
they again need the demand plan and the materials plan, both generated during SCP, for the new
product. To determine the best vendors, they use the performance information to identify the
more reliable vendors, and then work with procurement to develop the procurement terms from
the suppliers.

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How Strategic Manufacturing Supports SCP

Strategic manufacturing supports supply and production planning with the following key inputs:
Bill of Material - Manufacturing will determine the bill of materials (BOM) and work with
Procurement to finalize the terms and conditions with material suppliers. Planners use
this information during SCP to create the appropriate plans. The materials plan generated
during supply planning is at a higher level of granularity while the plan generated during
production planning is more detailed.
Manufacturing Capacity - Manufacturing capacity is a key input during the supply
planning and the S&OP processes. The capacity constraints applied during supply
planning are less detailed than the capacity constraints during production planning. For
example, the capacity constraints during supply planning may be the capacity of a
manufacturing line, whereas during production planning, the manufacturing capacity
constraint would be for each resource.

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How SCP Supports Manufacturing Execution

Manufacturing execution decisions include issues such as:

When should we take down a machine for routine maintenance?


How do we move material from its inventory location to the appropriate workstation?

The manufacturing facility uses the detailed production schedule and the materials plan as inputs
to determine how and when material should be moved from its inventory location to the
appropriate workstations. Robots, or people, are then scheduled to move the material. If sufficient
material is not available, suppliers may be notified to expedite the material to ensure continuous
production. Many organizations use safety and other kinds of buffer stocks to cover for such
eventualitiesby first using up safety stock for production and then using the expedited material
to replenish the safety stock. SCP helps companies to determine the appropriate level of safety
stock to carry.

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How Manufacturing Execution Supports SCP

Three manufacturing execution activities that impact SCP include:

Actual Build - As manufacturers produce goods, SCP systems are updated. Future production
plans must be adjusted if the amount of goods produced either exceeds or is less than the
planned quantity. For example, suppose a production schedule calls for the assembly line to
produce 150 motorcycles during the first four days of the week and 180 more on Friday by using
some overtime. If the factory actually produces 160 motorcycles every day for the first three days
of the week, the overtime on Friday must be adjusted.

Maintenance Scheduling - As manufacturing takes down machines for maintenance, they


provide the maintenance schedule to the planning systems. Machine maintenance typically
reduces the factory's manufacturing capacity, and decision makers should reflect this in the
planning systems, i.e., as constraints.

Product Design Changes - At times, the BOM must be updated, e.g., due to different parts or a
minor product design change. Manufacturing execution usually tracks such changes and updates
the planning systems to reflect the new BOM. SCP can then determine the material requirements
more accurately.

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Integrated Example
A manager has just learned in a monthly S&OP
meeting that his company has subcontracted some
of its manufacturing capacity to external vendors.
Management has decided that the optimal way to
satisfy increased demand for products is as follows:
Vendor A will provide 2,000 units per week and
Vendor B will provide 1,000 units per week, while the
factory will continue to produce 15,000 units per
week. Since the manager has not used
subcontractors before, he is skeptical and wonders
about vendor reliability.

In addition, Independence Day is near and he is


concerned for several reasons. First, the vacation
schedule for employees is rather ad-hoc at this time; Independence Day falls on a Wednesday
this year, and a large number of employees have taken the remainder of the week off. Second,
one senior engineer has informed him that a critical machine is not functioning optimally and may
need unexpected maintenance soon.

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Integrated Example - Continued

The machine in question does fail and must be sent for


maintenance and repairs. Given these constraints, the
manager realizes that they cannot meet this week's
manufacturing commitments, which will result in a
shortfall of 2,000 units, so he works with supply
planners and contacts the new manufacturing
subcontractors. While Vendor A is unable to provide
any extra units this week, Vendor B can provide the
extra 2,000 units at a five percent price increase. Given
the circumstances, the manager agrees to the higher
terms in order to meet demand.

As the manager hangs up the phone, his senior


engineer informs him that the critical machine just sent
in for maintenance and repairs requires new parts. The
parts will not be available for at least two weeks, and the repairs will require at least a week to
complete, making the machine unavailable for the next three weeks. Therefore, he updates the
machine availability appropriately in the system. SCP then creates a new supply plan for the next
three weeks by reducing the manufacturing commitments of the factory and ordering more
products from the vendors.

What is the manufacturing capacity? Show answer

15,000 units per week

What is the impact of the critical machine "going down"? Show answer

It reduces the manufacturing capacity and forces the manager to order more units from the
subcontractors and at a higher price

Were any strategic sourcing decisions made in this example? Show answer

The strategic sourcing decision was:

Source 15,000/week internally


Source 2000/week from vendor A
Source 1000/week from vendor B

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Topic Summary

Manufacturing and SCP must be integrated to ensure that the product is manufactured at the
right time to satisfy customer demand. We identified two main manufacturing functionsstrategic
manufacturing and manufacturing execution. Each of these functions uses specific information
from SCP as well as sending some information back to SCP.

Inputs Outputs
Strategic Manufacturing Long-term supply and demand plans Manufacturing capacity
Capacity variance BOM
Supplier performance

Manufacturing Execution Detailed production schedule Actual build


Materials plan BOM
Safety stock levels Updated capacity constraints
Maintenance schedule

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Fulfillment
Overview

The fulfillment process ensures that customers receive orders on time. A company's earlier
efforts to procure materials, plan for manufacturing, and manufacture the product are only
successful if customer orders are fulfilled as needed. Fulfillment must know where the product is
stored and how long it takes to move the product from one location to another. Furthermore,
companies strive to minimize fulfillment costs while maximizing customer service. This function is
also closely related to SCP.

To efficiently fill customer orders while adhering to acceptable customer service levels, planners
must model the supply chain network with the associated lead-times and costs to move the
product between different locations. Then they develop a fulfillment model that satisfies customer
demand at the lowest cost within acceptable service levels.

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Fulfillment Decisions

Fulfillment is the final link in the supply chain. Some companies will fulfill a customer order even if
they have to expedite the order due to the lack of available inventory, resulting in increased costs.
Companies must evaluate factors such as this when making fulfillment decisions.

Companies often have multiple manufacturing facilities and distribution centers for their products.
They must therefore decide on network design and configurationthis dictates from which
location they satisfy each customer. Known as strategic fulfillment decisions, companies
consider issues such as:

Should we fulfill customer demand directly from the manufacturing facility or from the
distribution center (DC)?
What is the optimal mode of transportation for shipping customer orders?

Once these decisions have been made, the company must also manage the fulfillment operations.
Among other things, they consider the critical fulfillment execution decision of allocating product
to customer demand.

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How SCP Supports Strategic Fulfillment

Companies answer a variety of questions when they design their supply chain network. Network
design is a complex issue and, in addition to the questions on the previous page, companies seek
to answer other questions during the network design process, such as:
Do we have the right number of factories and are they in the right locations, or should
one or more be consolidated?
Do we have the right number of distribution centers (DC) and are they in the right
locations to most efficiently and cost effectively serve customers?
Are there conditions under which it is profitable to serve customers from more than one
DC, or from a DC in another region?

To facilitate the decision-making process, companies use operations research and/or other
optimization models. These models require information that comes from SCP, such as:

Possible location of the facilities (e.g., factories, distribution centers, or warehouses)


Long-term demand plans
Transportation providers
Associated transportation costs and lead-times
Material suppliers
Material costs and lead-times
Manufacturing and transportation capacities

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How Strategic Fulfillment Supports SCP

The net result of the network design exercise is a distribution network that determines a time-
phased flow of goods through the network, i.e., sourcing and distribution strategies. The flow is
time-phased because it is possible for goods to flow along one link in the network during one time
period and along a second link during another time period. Furthermore, the network design
exercise determines the optimal location of the facilities. SCP uses facilities locations, sourcing
strategy, and distribution strategy to create distribution and sourcing plans.

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How SCP Supports Fulfillment Execution

During fulfillment execution, companies must allocate supply to customer orders when the
demand at any location along the supply chain network exceeds the supply for that node. If
companies use distribution centers to fulfill customer demand, and if the demand at a DC is
higher than its supply (e.g., on-hand inventory + expected receipts), the company may have to
allocate the available supply among the different customer orders.

For example, a DC manager has 350 units of product on hand, of which 50 are allocated to safety
stock, and he expects to receive another 300 units tomorrow. His objective is to allocate this
supply to two customer orders; Customer A requires 300 units and Customer B requires 100 units.
There are several alternatives for resolving this supply/demand discrepancy:

1. Using order allocation rules, allocate the 350 units to the two customer orders, e.g., 275
to customer A and 75 to customer B
2. Backorder the remaining demand and fulfill it from tomorrow's expected stock
3. Determine if another DC has excess stock and use that to fulfill the 50 units of excess
demand

To make such decisions, the manager needs the inventory plan, distribution plan, production
schedule, and order allocation rules, all of which SCP provides.

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How Fulfillment Execution Supports SCP

Customers frequently want to know their order status, e.g., in-production, in-transit. The order
status is based on either the production schedule (if the order is in production) or on the shipping
status of the finished goods (if the order has been shipped). Fulfillment execution regularly
updates the inventory position of finished goods. SCP uses the inventory position to determine
the variance from the planned inventory levels and safety stocks. SCP also determines if the
inventory levels and the safety stock levels need to be adjusted based on actual inventory levels
and actual demand.

Similarly, SCP uses customer orders to determine the variance between actual and forecasted
demand, and whether they should adjust the demand plan.

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Integrated Example

A manufacturer has two manufacturing plantsone in


Birmingham and one in Stockholm; two distribution
centersone in Paris and one in Helsinki; and two
customersone in Madrid and one in Gdansk. He has
initial inventory of 100 units in Paris that he wants to
maintain as safety stock to compensate for the volatile
demand pattern of the Madrid customer. The
manufacturer has forecasted the demand by the Madrid
customer at 500 units per month (at a rate of
125/week), and the demand by the Gdansk customer at
400 per month (100/week). He also knows that the
Birmingham plant can produce 400 units per month
(100/week) and the Stockholm plant can produce 800
units per month (200/week). Click on the "Supply Chain
Parameters" button to see the transportation costs per
unit between each of the cities.

Supply Chain Parameters

Using these supply chain parameters, he runs an optimization engine and determines the optimal
distribution and sourcing solution to minimize the cost of satisfying customer demand.

Initial Optimal Solution

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Integrated Example - Continued

At the end of two weeks, the Madrid customer has ordered 300 units while Gdansk has only
ordered 100. The manufacturer's inventory position is 50 units at Paris and 100 units at Helsinki.
The Madrid customer places an order for 225 units for the third week, and the Gdansk customer
orders 100 units for the same week. The Paris DC manager decides to supply 125 units to the
Madrid customer from Paris and the other 100 units from Helsinki so that she can continue to
maintain a small safety stock at her DC, i.e., at the end of the week, she will have 50 units on
hand.

What does the initial solution optimize? Show answer

It optimizes the transportation cost of satisfying customer demand based on the forecast.

Why does the initial solution need to be modified? Show answer

The initial solution needs to be modified, because the demand from Madrid is higher than
expected and not all the demand can be met from the Paris DC.

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Topic Summary

Fulfillment must be very closely integrated with SCP to ensure that customers receive orders. The
fulfillment function uses information from SCP to make fulfillment decisions and provides
information to SCP for planning.

Inputs Outputs
Strategic Fulfillment Possible facilities locations Facilities locations
Material suppliers, lead-times, and costs Sourcing strategy
Manufacturing capacity Distribution strategy
Transportation providers, lead-times, and
costs

Fulfillment Order allocation rules Customer orders


Execution
Inventory plan Inventory position
Distribution plan Shipping and receiving
Production schedule status

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Sales and Operations Planning
Overview

Companies use the S&OP process to coordinate supply and demand and ensure alignment with
the strategies or financial goals of the company. Different functions within the company create
plans used to achieve different, and sometimes competing, objectives. S&OP can assist in
balancing these different plans and objectives.

Companies strive to develop a single plan that is used to maximize customer fill rates at the
minimum asset investment. The S&OP process brings together a cross-functional team with
representatives from Sales, Marketing, Finance, and Manufacturing. As members of the S&OP
team, these supply chain stakeholders develop a single company game plan and manage
inventories to maximize investment returns and customer satisfaction. The team also helps
ensure integration between planning functionsdemand, supply, and production planningand
the different functions of the organization.

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Purpose of S&OP

S&OP is a formal management process that reviews and communicates future business, tactical,
and demand and supply plans; the goal is to ensure that they are realistic, aligned with strategy,
and executed effectively. S&OP maintains a balance between meeting marketplace needs and
using key company resources, i.e., a trade-off between customer service and costs, while
matching demand and supply. For example, suppose marketing runs unexpected promotions, the
impact of which was not considered during S&OP. This will result in unanticipated demand during
the promotion period. Given the short notice, manufacturing may not be able to respond to the
increased demand due to insufficient capacity or lack of inventory, possibly resulting in a severe
product shortage in the marketplace. This could lead to lost sales, or even worse, lost customers.

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Enabling the S&OP Process - Overview

The cross-functional S&OP teamcomprised of representatives from Sales, Marketing, Finance,


and Manufacturingmeets periodically, e.g., monthly, to review the supply and demand plans
and determine if they need to be modified. The team reviews actual versus planned data,
addressing issues such as:

How to balance inventory and customer service


How to evaluate net income and cash flow impacts with changing demand and supply
schedules
How to influence demand with marketing and sales programs
How to allocate product in short supply
How to secure required resources

S&OP then modifies the demand and supply plans as needed, communicating the modified plans
to the rest of the organization. The team also meets regularly to review variances from plan,
agree on actions to correct the variances, and execute the supply and demand plans.

S&OP Stakeholders

Stakeholders Information Provided


Finance Planned Demand
Sales & Marketing Allocation Priorities
Customer Service Levels
Promotion Plans
Demand Planning Demand Forecast (includes customer input)
Supply Planning Projected Inventory
Safety Stock Targets
Inventory Cost
Net Requirements
Projected Inventory
Factory Utilization
Production Planning Production Plan with Restrictions
Factory Utilization

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Enabling the S&OP Process - Details

We know that the S&OP team conducts a weekly or bi-weekly review meeting followed up by a
long-range, e.g., monthly, review meeting. The team must also communicate decisions made in
these meetings to the organization. Click on the arrow below to see how the S&OP process can
be divided into four steps: preparation, monthly meeting, communication, and weekly review.

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Check Your Understanding

Indicate whether each of the following statements is true or false.

True False
Sales and Operations are key participants in S&OP.

S&OP reviews are conducted weekly and any deviations from plans are
addressed and agreed upon by all participants.

One objective of the S&OP process is to review the supply and demand plans,
and ensure that they are not modified.

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The S&OP Process - Preparation

Preparation is particularly important for a successful S&OP meeting. Prior to the meeting, the
S&OP facilitator updates reports to reflect actual forecast versus plan as well as performance
measures, and then distributes the reports to team members. Each team member knows their
decision role and must be aware of the important issues for discussion. This role-based decision-
making makes the S&OP process successful.

Sales will compare the sales plan with product availability, and match the plan with orders. If
there is an excess, Sales must present plans to consume that excess inventory, e.g., special
sales promotions and incentives. If there is insufficient supply, Sales must allocate the limited
supply among the different customers.

Manufacturing will look at the current report and run simulations around the best way to utilize
capacity and available materials given the updated information. Manufacturing will also prioritize
customers orders if necessary to ensure that they are able to meet the required order due dates.

Finance will view the reports from a financial perspective, analyzing cost of goods sold,
contribution margins, and overall profit margins to ensure they are in line with company
expectations.

Roles and Responsibilities

S&OP Facilitator Each Team Member

Identify new issues related to misaligned supply Review meeting materials to understand current
and demand plans, inventory levels, customer service and expected performance and identity issues
levels, new product introductions, etc. Identify alternatives to solve any potential issues
Calculate inventory based on supply and
demand information, compare to actuals, and reconcile
differences
Modify S&OP reports to reflect updated actuals,
forecasts, and plans
Distribute all meeting materials to members
enabling review prior to the meeting

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The S&OP Process - Meeting

During a regular, e.g., monthly, meeting the S&OP team:


Reviews actual versus planned data, discusses the reasons for variations, and plans how
to minimize future variations
Reviews current month performance to determine if the company is on track to meet
sales commitments
Reviews economic and market conditions to ensure that original assumptions remain
valid, and determine if future sales forecasts are feasible and aligned with business plan
commitments
Reaches consensus on the future plans for each product, or product family, for both
demand and supply
Creates action items for each team member to ensure completion by next meeting

Sample Agenda
Review S&OP report as needed
Review sales and production actuals versus plan; discuss reasons for
variations and means to minimize in the future
Review current month's performance to date (i.e., are we on track to
meeting our sales commitments?)
Ensure sales forecasts are feasible, realistic, and will achieve business
plan commitments; resolve any issues or identify them to be put on the Issues
List
Review assumptions
o Has the marketplace changed?
o Are economic conditions changing?
o Has the competitive situation changed?
o Have changes occurred in the company's structure, roles,
reward system, information systems, etc. that will affect our capabilities?
o Have our exposures changed?
o Are there new assumptions that need to be considered?
Review Issues List and resolve existing issues
o Supply/demand planning problems
o inventory levels too high or too low
o Distribution of product
o New product scheduling
Document new issues identified at the meeting and assign responsibility
and resolution date

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The S&OP Process - Communication

Once the team revises sales forecasts and production plans based on the team decisions, they
update the S&OP reports to reflect the latest plans, including any items that require higher
management review (e.g., shorting an important customer, buying additional capacity at premium
prices) and then send the reports to the organization's executive team.

Revise sales forecasts, marketing sales plans, and production plans as necessary
Revise and distribute S&OP reports to reflect the latest decisions
Communicate new plans to the other organizations that are impacted
Review performance and plans with the executive team
o Review performance versus goals/budgets
o Discuss expected sales and inventory, including forecast scenarios (upsides &
downsides)
o Discuss plans for major upcoming product introductions

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The S&OP Process - Weekly Review

The weekly meeting is used to review variances between actual and planned data. The team
agrees on an action plan to resolve such variances.

Review current month's performance to date


Review variances from the plan and agree on actions to take to correct the variances

During preparation, what is the responsibility of Sales? Show answer

Sales will compare the sales plan with product availability, and match the plan with
orders. If there is excess, Sales must present plans to consume that excess inventory,
e.g., special sales promotion, and incentives. If there is insufficient supply, Sales must
allocate the limited supply among the different customers.

What are the key activities of the S&OP team during their regular (e.g., Show
monthly) meeting? answer

Review actual versus planned data, discuss the reasons for variations, and plan how to
minimize future variations
Review current month performance to determine if the company is on track to meet sales
commitments
Review economic and market conditions to ensure that original assumptions remain
valid, and determine if future sales forecasts are feasible and aligned with business plan
commitments
Reach consensus on the future plans for each product, or product family, for both
demand and supply
Create action items for each team member to ensure completion by the next meeting

What are the purposes of the S&OP weekly review meeting? Show answer

The weekly meeting is used to review variances between actual and planned data
The team agrees on an action plan to resolve variances between actual and planned
data

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Business Issue - Misalignment of Finance and Demand Plans

One business issue S&OP members might tackle is misalignment of finance and demand plans.
In this scenario, a manager reviews the financial plan for one product line and notices that it
projects a ten percent increase in sales (total sales of 400,000 units) for the second quarter. The
demand plan, on the other hand, is forecasting a 20 percent decrease (a total of 290,000 units)
for the same quarter. It is his job to resolve the demand/supply misalignment, which he plans to
do at tomorrow's S&OP meeting.

Before the S&OP team can reach a decision, they must consider the following:

Impact on the financial plan


Root causes of the decrease
Whether forecasted demand will increase in the following quarters
Whether the 20 percent decrease could be absorbed by another product line, and if so,
how this will impact the financial and production plans

What is the best approach for this company? Solution

Based on business objectives, the S&OP team generates and evaluates multiple options to solve
this business issue, ultimately deciding to identify a new sales and marketing strategy to increase
sales and accomplish the financial plans for this product line. Team members receive action
items for the next meeting. Note that the options presented in the figure are not exhaustive.

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Business Issue - Demand Greater than Supply

A mismatch of demand and supply is another typical issue addressed by the S&OP process. In
the following example, the S&OP team must decide what to do when demand is greater than
supply.

Process improvement efforts initiated have increased a Naperville plant's capacity to 2,000,000
units per month. In reviewing demand forecast for the 3rd quarter of 2002, the manager is
shocked to see the forecast for the month of Julywith demand on the Naperville plant's
increasing to 2,500,000 units. Current capacity will fulfill 80 percent. She plans to discuss this
issue at Monday's S&OP meeting.

Before reaching a decision, the S&OP team must consider the following:

Review the inventory, distribution, and production plans for this product line
Verify the customer priority and service levels
Verify the accuracy of the forecast for this product line
Identify products for which the demand can remain unfulfilled and consider using that
capacity to build the required products

What is the best approach for this company? Solution

The S&OP team reviews the options and decides to change service levels and allocation
priorities for some of their customers. They also decide on the products for which the demand will
not be fulfilled. This leads to several action items for the team members to accomplish before the
next meeting. Note that the options presented in the figure are not exhaustive.

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Topic Summary

S&OP is a formal monthly management process that reviews and communicates future business,
tactical, and demand and supply plans to ensure that they are realistic, aligned with strategy, and
executed effectively. S&OP maintains a balance between meeting marketplace needs and using
key company resources, i.e., a trade-off between customer service and costs, while matching
demand and supply. The team reviews actual versus planned data and discusses the reasons for
variations as well as the means to minimize these variations in the future. The team reaches
consensus on the future plans for each product or product family for both demand and supply,
and communicates these to the organization and the executive team.

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Conclusion
Module Summary

Companies manage their supply chains by connecting the functions in the supply chain
Procurement, Manufacturing, and Fulfillmentvia supply chain planning processes. Supply chain
functions must be integrated to ensure that the materials are available for manufacturing,
manufacturing can produce the product, and fulfillment can deliver the product to the customer
when desired. SCP allows companies to plan and integrate the supply chain functions across all
entities at the execution and strategic levels.

S&OP is a critical, regular, and formal management process that reviews and communicates
future business, tactical, and demand and supply plans to ensure that they are realistic, aligned
with strategy, and executed effectively. S&OP maintains a balance between meeting marketplace
needs and using key company resources, i.e., a trade-off between customer service and costs,
while matching demand and supply.

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