SUPSupply & productionStop 2 of 12
S&OP and IBP
The monthly cycle where sales, supply and finance agree on one plan, and how integrated business planning extends it.
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Without a shared process, every function plans on its own number. Sales expects 1 lakh units of shampoo next quarter. The plant can make 80,000. Finance’s budget assumed 90,000 and doesn’t want to pay for overtime. Each team is right from where it sits, and the result is stockouts in one place and excess stock in another.
Sales and operations planning (S&OP) is the monthly cycle that settles this. A typical rhythm:
- Portfolio review: launches, phase-outs and changes to the range.
- Demand review: sales and marketing agree the unconstrained demand plan.
- Supply review: operations checks capacity, materials and inventory against it and flags gaps.
- Pre-S&OP: the teams work out options, such as overtime, a co-packer, building stock ahead or shaping demand, and cost each one.
- Executive S&OP: leaders pick an option and sign off one plan.
For the shampoo case the decision might be: make 80,000 in-house, give 20,000 to a co-packer, and build some stock in October ahead of the festive peak. Everyone then works from the same numbers.
The classic supply options are a chase strategy (match production to demand month by month, changing capacity), a level strategy (produce at a steady rate and let inventory absorb the swings) or a mix of the two.
Integrated business planning (IBP) extends S&OP. It plans further ahead, often 24 months or more, works in money as well as units, connects to the financial plan and strategy, and tests scenarios.
Words to use
- Unconstrained demand
- What customers would buy if supply were unlimited; the starting point of the demand review.
- Chase vs level strategy
- Match output to demand each month, or produce steadily and let inventory absorb the swings.
- IBP
- Integrated business planning: S&OP extended to finance, strategy, longer horizons and scenarios.
One month, five steps
| Step | Who | Produces |
|---|---|---|
| Data gathering | Planning team | Last month’s actuals, updated statistical forecast, KPI pack |
| Demand review | Sales, marketing, demand planning | Unconstrained demand plan, with assumptions and risks |
| Supply review | Operations, procurement, logistics | Capacity and material check, gaps, supply options |
| Pre-S&OP (integrated review) | Planning, finance, function heads | Costed scenarios and a recommendation |
| Executive S&OP | Leadership team | Decisions and one signed-off plan |
Each step has a fixed date in the month and a clear output. The executive meeting should spend its time on decisions, not on reconciling numbers that should have been agreed earlier.
Chase or level: the classic supply choice
Demand for the next three months is 70,000, 80,000 and 120,000 units. Regular capacity is 90,000 a month, holding a unit for a month costs ₹5, and overtime production costs ₹12 a unit extra. Starting stock is zero.
- Level: produce 90,000 every month. Stock ends the months at 20,000, 30,000 and 0, so holding costs (20,000 + 30,000) × ₹5 = ₹2,50,000.
- Chase: produce 70,000, 80,000 and 120,000. The 30,000 above capacity in month 3 costs 30,000 × ₹12 = ₹3,60,000 in overtime, and spare capacity in the first two months goes unused.
Level is ₹1.1 lakh cheaper here, if the warehouse has room and the product keeps. A mix, such as building some stock and using some overtime, is often cheapest when storage is tight or overtime is limited.
What makes it work
- One set of numbers in units and money, so finance can see the plan’s revenue, cost and inventory.
- Assumptions written down, so the next cycle can check what changed and why.
- Decision rights: the executive meeting decides; the planners prepare options.
- A few KPIs reviewed every month: forecast accuracy and bias, service, inventory, and plan adherence.
How S&OP matures
Studies of S&OP practice describe a progression, for example the five-stage framework of Grimson and Pyke (2007): from no process, through a reactive meeting focused on last month’s problems, to a standard process with one agreed plan, then an integrated process that links finance and uses optimization, and finally a proactive one that plans profit and runs scenarios. Most companies sit in the middle stages, and the jumps are about behaviour as much as tools.
Why S&OP fails
- It becomes a supply meeting. Sales and leadership stop attending, and the plan is no longer a business decision.
- It looks backwards. Most of the time goes on explaining last month’s variances instead of deciding about months three to eighteen.
- Too much detail. Reviewing SKUs in the executive meeting crowds out the decisions only leaders can take.
- Two numbers. The operational plan and the financial budget drift apart, and each function quietly works to its own.
- No decisions. Options are presented but not chosen, so the gaps reach the factory unresolved.
What IBP adds
Integrated business planning extends S&OP in several directions:
- Money as well as units: revenue, margin, cash and inventory value are part of every plan, reconciled with the financial forecast.
- Longer horizon: 24 to 36 months, linking to the strategic plan and capital decisions.
- Portfolio and strategy: launches, phase-outs, pricing and investments are planned in the same cycle.
- Scenarios: what if demand is 15% lower, a supplier fails or a new plant is late? The leadership team chooses a plan knowing the alternatives.
Linking to the rest of planning
The signed-off plan sets the volumes the master schedule must deliver, the inventory targets for deployment, the capacity and workforce decisions, and the financial forecast. Persistent gaps between plan and execution flow back as agenda items, which is what makes S&OP a closed loop rather than a monthly report.
Interview kit
Practise it out loud
Answer each question yourself before opening the model answer.
S&OP is the monthly process that aligns demand, supply and finance on one plan. It runs through portfolio, demand and supply reviews, a pre-S&OP meeting to cost the options, and an executive meeting that decides. The output is one agreed volume plan with inventory and capacity decisions, such as overtime, co-packing or building stock. IBP extends it with financial integration, longer horizons and scenario planning.
Demand is 1 lakh units but capacity is 80,000. How would S&OP handle it?
The supply review flags the 20,000 gap, and pre-S&OP costs the options: overtime or extra shifts, a co-packer, moving volume to another plant, building stock in earlier months, or shaping demand towards products with spare capacity. The executive meeting picks one based on cost, service and risk, and the agreed plan goes to the master schedule.
How is IBP different from S&OP?
IBP keeps the S&OP cycle but integrates the financial plan and strategy, looks further ahead, plans in value as well as volume, and uses scenarios. It is more of a business-management process than an operations one.
Connected stops
Where this idea feeds in, or gets its inputs from.
Sources and further reading
- Chopra, S. & Meindl, P. Supply Chain Management: Strategy, Planning, and Operation. Pearson. Chapters on aggregate planning and sales and operations planning.
- Wallace, T. F. & Stahl, R. A. Sales & Operations Planning: The How-To Handbook. T. F. Wallace & Company.
- Grimson, J. A., & Pyke, D. F. (2007). Sales and operations planning: An exploratory study and framework. The International Journal of Logistics Management, 18(3), 322–346.
- Wallace, T. F. (2004). Sales & Operations Planning: The How-To Handbook (2nd ed.). T. F. Wallace & Company.