Building a foundation: The role of baseline demand and supply planning in S&OP

In Sales and Operations Planning (S&OP), a reliable baseline demand and supply plan forms the bedrock upon which successful businesses thrive. This critical component facilitates alignment with executive expectations and optimisation of enterprise resources.

The significance of baseline demand and supply planning cannot be overstated. It provides the necessary framework for organisations to anticipate and meet market demand effectively while optimizing operational efficiency. By appropriately forecasting demand and assessing supply capabilities, businesses can proactively address potential gaps or bottlenecks in their operations. The lack of a good baseline will quickly manifest in the lack of support from the actors in the S&OP process. It will be obvious to them that the baseline assumptions have not been fully complied with. Indications of this will be a tendency to postpone decisions that need to be made and people taking actions from the S&OP to delve deeper into the forecast assumptions – essentially enacting a strategy of ‘kicking the can down the road’.

A good demand plan rooted in baseline demand and supply planning enables organizations to align their strategies with executive expectations. By incorporating input from key stakeholders and considering market trends, customer preferences, and competitive dynamics, businesses can develop a demand plan that reflects the overarching goals and objectives of the organization. This alignment ensures that resources are allocated effectively, investments are prioritized appropriately, and revenue targets are met consistently.

To drive the establishment of a reliable baseline demand and supply plan requires a collaborative effort across departments, leveraging data-driven insights and advanced forecasting techniques. Data driven insights include understanding products that are in long term decline, those that are relatively flat and those products that are targeted for growth. It is tempting to override harsh market realities with targets for each product. This will bias the overall forecast upwards and will lead to lack of quality decisions being made. The characteristics of a good demand plan include good control of historical data (cleaned from outliers such as one-off events, known supply shortages or events that cannot be explained), an exec level recognition and understanding of the level and trend for all classes of products and growth assumptions supported by a thorough business plan. The point here is that those products in decline will absorb less costs and will be a drag on the profitability of established and growth products. An exec team blindly following a forecast when the history, future level and trend do not support the assumptions will not make the right decisions at the right time, and will in time put the financial health of the business at risk. Simply put, the very survival of a business rests on the S&OP actors understanding the forecast.

Similarly, a detailed supply plan derived from baseline demand designed to optimise enterprise resources and enhance operational agility. By analysing production capacities, inventory levels, and procurement processes, organisations can identify opportunities for efficiency improvements and cost savings. This detailed understanding of the supply chain enables businesses to mitigate risks, streamline processes, and respond swiftly to changes in demand or market conditions. However, just as in the case of the demand plan, the supply plan needs to be couched in reality as well. The case here is a lot more simple, i.e. use realistic run rates for the products. Oftentimes run rates can be political in nature and double up as ‘targets’ as well – mostly biased towards stretch goals and designed to provide operations with ‘something to chase’. If you work this through this would overassume performance and hide the ‘real plan’, and subsequently the list of key decisions that need to be made (e.g. outsource product, increase number of shifts, rationalise the portfolio, increase / decrease inventory). Exec will often be provided with a long list of SKUs that have become ‘slow moving and/or likely obsolete’. This is a direct result of not having a reliable demand plan and a supply plan built on real run rates.

Rick Davis, CEO at Demand Chain AI, Inc., developer of Puls8 SaaS Planning Solutions, that specialises in demand and supply planning and S&OP and IBP shared: “We often work with companies who want to accelerate and elevate their S&OP or IBP processes. One of the first things we want to know is how solid their demand plan is. The demand plan is the backbone of any S&OP or IBP process and to truly elevate the quality of the discussion, a solid, well-informed demand plan is a requirement. Too often companies leverage the S&OP process to debate the quality of the demand plan, which is NOT the purpose of an S&OP meeting. An undependable demand plan, of course affects the supply and financial plans as they are directly built from the demand plan itself. We encourage companies to leverage the resources available to deliver a better demand plan. This includes an unbiased statistical starting point, preferably driver based, a thorough assessment of the portfolio variability including an understanding of the drivers of variability, and an aggressive strategy to harvest and harness the demand signals which will help mitigate the risk from the variability. Last but not least, ensure that the demand planners are “touching” the forecast only when there is new news that requires an adjustment, and of course then measure the quality of those adjustments by incorporating Forecast Value Add (FVA) metrics into the forecast accuracy reporting. Providing a solid, transparent demand plan, tied to the drivers of variability, allows for an S&OP conversation around the assumptions within the plan which can be game-changing for an organisation.”

In conclusion, baseline demand and supply planning play a pivotal role in driving successful S&OP processes. The S&OP exec needs to provide a solid foundation for demand forecasting and supply optimization, and control the criteria by which a demand and supply plan is constructed. Organisations can enhance their ability to meet customer needs, drive profitable business growth, and achieve sustainable competitive advantage in today’s dynamic marketplace if they safe-guard the controls that deliver reliable demand and supply plans.

Read more in this series:

1. Empowering Leadership: Cultivating a culture of ownership through a compelling vision in S&OP
2. Building a Foundation: The role of baseline demand and supply planning in S&OP
3. Building Trust, Driving Innovation: Cultivating collaboration in S&OP
4. Empowering Decisions: Leveraging Insights for effective S&OP decision making
5. Synchronizing Success: Aligning technology and people in S&OP processes
6. Navigating Uncertainty: Harnessing what-if scenarios in S&OP
7. Continuous Improvement in S&OP: Sharpening the saw for sustained success