It seems pretty straight-forward: a plant should plan production in such a way that the people and equipment are effectively utilized to produce products. True statement, but it’s a bit more complicated. First of all, you have to produce the right products. It would be nice if customers would buy what we produce, when we make it available. The world of “if you build it, they will come” might have existed (to some extent) in the middle of the last century but that is certainly not the case today. Customer taste and buying patterns are constantly changing and there’s plenty of competition that would be happy to serve those customers if our product is not available when the customer wants it.
So, the first complication is the need to coordinate the production schedule with demand so that we are making the right amount of the right products at the right time. Basic planning software will do that, of course. Just put in the forecast and the software will crank out a production schedule to fit expected demand – plus a material plan to lay out the acquisition of materials and components to support production. But one thing is for sure; the production plan is not going to make the most effective and efficient use of all manufacturing resources. That’s not even a consideration in traditional planning systems like materials requirements planning (MRP). It is assumed that manufacturing will figure it out somehow. To be fair, MRP/ERP systems usually provide additional software – Resource Planning, Rough-Cut Capacity Planning, Capacity Requirements Planning – to help us see how much of a mess the plan leaves for production to sort out.
The new breed of advanced planning systems (APS) takes another approach; APS plans materials and capacity simultaneously. The resulting production plan and schedule are the optimum mix of inventory and the use of production resources to meet demand and minimize inefficient operations and excess inventory, the two most controllable excess cost factors.
While the software does an excellent job of finding the best plan, mathematically, there’s still room for human reasoning and creativity in developing the best overall strategy for running the plant. The human element is embodied in the process known as Sales & Operation Planning, or S&OP.
The textbook S&OP cycle is a monthly review of the planning elements by an executive team representing the major company departments – sales and marketing, purchasing and inventory, production, finance, etc. The demand plan comes first. Then the software generates a first-cut production plan. The team then reviews both plans and this is where the human element really comes into play. The software can only change the production plan to make the pieces fit into a sensible plan. The team of humans, however, can close the loop by manipulating both sides of the equation.
Often, the machine-generated plan can be improved (better margins, better use of resources) by manipulating demand. This is not an option in the old way of thinking (the customer is king; demand is out of our control). In S&OP, however, the team is free to change demand to accommodate the more efficient use of manufacturing resources.
How can you change actual demand to make it fit the new plan, you may ask? That’s what marketing and sales do every day. Given this new roadmap of what demand should be, they can apply all of their tools to “shaping” demand through sales incentives (commission rates or bonuses, discounts or pricing), changes in availability (distribution plan, product placement), advertising, etc.
S&OP is a formalized process for getting all parts of the company to communicate, coordinate, and collaborate in developing a plan that makes the best use of company resources to satisfy a demand that produces the optimal performance – profit – for the owners, stockholders and ultimately the employees, suppliers and customers who benefit from their relationship with a healthy, viable business.
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