Understanding S&OP in Risk Management
Risk management and mitigation play a crucial role in Sales and Operations Planning (S&OP). In this blog post, we will delve into how S&OP can effectively identify and address risks.
Let’s explore the S&OP and the risk management strategies to mitigate potential disruptions and maximize operational efficiency.
What is Sales and Operations Planning (S&OP)?
Sales and Operations Planning (S&OP) is a strategic and structured process for companies to align business goals with forecasted demand through an effective allocation of operational resources. This involves cross-functional collaboration to come up with an accurate demand forecast and, thus, balance the appropriate supply to meet customer needs.
Implementing S&OP for Effective Risk Management
As noted in the article “Key Capabilities of S&OP for your Supply Chain”, an efficient S&OP process helps to increase corporate profitability through the strategic use of the company’s resources.
The S&OP process helps teams mitigate risks by:
- Aligning sales and operations teams
- Provides structure for data-driven decision making
- Preparing with scenario planning and simulation
- Applying continuous monitoring and adjustment
Thus, putting in place a holistic and structured S&OP plan ensures transparency across the organization and alignment with the overall business goals. This way, it grants the ability to manage risk in a timely manner to stay ahead of the competition and overcome uncertainties.
Risk management not only is a key capability of S&OP, but it is also a key benefit, granting companies the ability to identify and approach possible risks in time to secure their business.
Risk Identification and Mitigation Through S&OP
First things first: There’s no risk to manage if it hasn’t been identified. You need to be able to “name” the risks in your supply chain as these can impact the overall performance of your business.
Risks may appear differently in supply chain planning versus financial planning. In supply chain planning, risks frequently come from the accuracy of underlying assumptions – like whether the forecasted demand is accurate or whether production will hit the expected levels with the plant running without unscheduled downtime.
On the other hand, in financial planning risks are from a different nature. They may result from currency fluctuations, cash flow shortages, or challenging customer payment terms, among others.
Let’s be more specific and define the different types of risk you can identify and tackle through S&OP.
Key Risks Addressed by S&OP
Supply chain risks
These might range from disruptions in suppliers or transportation failures to geopolitical circumstances that impact your business. Having a robust and well-established S&OP process helps you to identify and resolve these risks.
The same happens with inventory capacity. S&OP balances the supply and the demand accurately and in real time to prevent excess inventory or stockouts. This results in the reduction of the risk of lost sales or holding costs.
Demand risks
These come with changes in the market – customer preferences and market trends – that could impact demand. Many products are seasonal which can impact the demand for finished goods and the supply of raw materials.
S&OP and specifically “scenario planning” play a crucial role in anticipating these changes and adjusting production plans accordingly.
Operational risks
These kinds of risks can arise from capacity utilization or process efficiency. By aligning production capacity with the forecasted demand and synching operations across departments, S&OP helps to reduce the risk of overburdening resources or underutilizing capacity. It also minimizes bottlenecks and inefficiencies in the production.
Financial risks
As part of the S&OP process, budgeting and financial planning ensure the right allocation of resources to minimize cost overruns. It also aligns sales and operations to meet sales targets and maintain steady revenue streams. Manufacturers always want to take on new business, but many times the process of determining if the new business will be profitable is not performed.
S&OP Best Practices for Effective Risk Management
Assessing Risk Severity and Impact
A key step in risk management is assessing the possible resulting “harm”. Missed orders provide a good example of the possible severe impact of failing to meet the expectations of the S&OP plan. When the organization and stakeholders involved in the process don’t follow the supply chain plan and implement it efficiently, orders for critical customers can be late or incomplete.
The impact can be huge: It could result in both a loss of business and a harm to the corporation’s reputation. Also, your company’s competition can get a chance to “get their foot in the door” by having their product qualified as a suitable replacement to your product given the risks associated with yours. Missed orders can squander years of sales and technical development work.
Revenue streams are also a target. If the finance department was counting on the revenue stream from the lost business, they will then not be able to meet their revenue forecasts.
Other consequences of a breakdown in the planning process include, among others, elevated labor costs coming from unscheduled overtime and increased shipping costs for expedited shipments.
Leveraging Likelihood of Events
An essential part of any risk management process is to leverage the likelihood of events. All team members involved in the planning process should distinguish between events that we can control versus events that are not under our control.
- Controllable events: These include planning for manufacturing shutdowns, accurately capturing customer demand and launching a sale or promotional event to drive up customer demand.
- Uncontrollable events: We can find, among others, natural disasters –such as the wildfires in Canada this year putting at risk the production of petroleum; component shortages – like the one the Electronics industry has faced since COVID and that is just starting to see the light; and labor strikes.
Your team needs to put in place a process that facilitates discussion among all key stakeholders. By following this process, you should come up with a list of the likelihood of controlled and uncontrolled events that can impact your supply chain.
Using Scenario and Contingency Planning to develop a Risk Mitigation Plan
A great tool that S&OP uses to evaluate the impact of unanticipated disruptions to your plan is “What if” scenario planning. By leveraging different scenarios, your team can draft different strategies to approach each situation. They can then use the results of this contingency planning to develop the appropriate mitigation plan for each possible scenario.
A mitigation plan is nothing more than a set of actionable strategies designed to solve unlikely events to mitigate the negative impact in your business. For example: If one supplier is based in a place where a natural disaster or an industrial accident that curtails their normal production rates occurs, qualifying multiple raw material suppliers provides companies with alternatives to avoid losing business.
Driving Business Resilience Through S&OP and Effective Risk Management
Implementing a robust S&OP process in your company will not only streamline operations but it will provide you with the right framework for identifying, assessing, and mitigating risks in your supply chain and, in the end, your business.
QAD S&OP software supports and enhances your S&OP process to help you align sales and operations, anticipate changes in customer demand, manage risk effectively and boost growth.
As Pierre Monchal, ADM‘s (NEOVIA) Corporate Supply Chain Director explains: “Properly anticipating our customers’ requirements has become strategic so that our entire supply chain — from purchasing through to distribution via the production plants — could be ready to meet those needs.”
“We have, therefore, gradually moved to a genuine culture of anticipating and adapting to the market, calling for improved demand forecasts and better fine-tuned preparation of operations,” he says.
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