The One Number of S&OP: Separating Myth From Truth

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One common notion in sales and operations planning (S&OP) is the “one number.”

What is the one number? What do companies mean by it and how do they use it in the S&OP process? Is it just a myth that S&OP leaders talk about? Let’s explore these questions to uncover the myths and truths about the one number:

Myth 1:

“One number in S&OP means the number that the company aspires to.”

I heard that a few times from commercial and finance leaders during S&OP meetings. This is not the one number in S&OP, but rather the “ambition” or what the company would perform in with all headwinds. S&OP needs to be realistic in bringing the good and bad news and expectations so that companies make decisions based on a realistic plan.

So, there needs to be two numbers — not one!

Myth 2:

“One number means the demand plan needs to be equal to the financial plan — sometimes called the budget or target.”

The financial plan is usually set prior to the beginning of the fiscal year. Business leaders are accountable on this target and earn bonuses on it. The financial plan is usually a top-down number that is planned to meet certain shareholder expectations and carries an element of ambition in it. Some companies simply force a demand/supply plan to be equal to the financial plan. This behavior leads to unrealistic demand/supply plans that are biased (often toward higher forecast and lower actual sales, resulting in unnecessarily high inventories). On the contrary, exposing the gap between the demand/supply plan and the financial target is one fundamental point in S&OP.

So, there needs to be two numbers — not one!

Myth 3:

“One number means that demand is equal to supply.”

This may be true in the long term, but there may be reasons why the demand plan is different than the supply plan in the short term. For example, building or depleting inventory is a contributing factor. There is a phase lead time for ordering raw and packing materials or components.

So, there needs to be two numbers — not one!

We have seen these myths. So, should we instead advocate a two- or even a three-number plan and forget about the notion of the one number in S&OP? Not really. Then, what does the one number really mean?

The one number means that the different functional leaders agree on one number of a balanced demand and supply plan through the S&OP process. This number can be updated every S&OP cycle.

The acid test for the “one number” is the following:

If someone who has not attended the executive S&OP meeting asks key meeting participants individually on the demand and supply plan that has been signed off on and the gap versus financial plan, the answers from each attendee should match.

That’s the one number! This includes all functions: sales, marketing, manufacturing, logistics, procurement, planning and others. It is about trust and alignment of the plan across functions.

Then, the next step after alignment on the “one number” is to turn the agreement into action and execution (i.e., not reverting to the functional biased numbers). This is an important point of credibility for the functional leaders to ensure to deliver against what has been agreed on through the S&OP — not to cut corners to potentially achieve some functional gains.

One number also allows the company to still be flexible to superimpose risks and opportunities to assess different scenarios. The one number is the one that is agreed on through the S&OP process. On top of it, the assessment of risks and opportunities is needed to understand the implication and therefore to reach a collective decision on how to respond to these potential changes that may occur in the future.

So, at the end of your next executive S&OP meeting, ask the different functional leaders about their understanding of the demand and supply plan. If you get the same answer, then you do have the “one number” that shows the different functions are holding hands on this plan.

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Micheal Youssef, Senior Director Analyst, Gartner Supply Chain

 

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