���ϳԹ���

The easiest analogy to understand the difference between sales and operations planning and budgeting is to think of your business as a football game. Before the start of a game, the coaches will devise a plan, comprised of various plays, to beat the competition. We’ll call that plan the “budget.”

As the game progresses events will occur that were not planned (e.g. turnovers, injuries, new plays by the opposing team that were not considered). In response to those unplanned developments, the coaching staff will need to make adjustments to the original plan if they are to stay on course to a win.

Business is no different. Before the beginning of a new fiscal year, the company’s management team will develop what they believe is a winning plan (i.e. the budget), but when things don’t go exactly to plan, course corrections will be needed. The value of S&OP is that it provides a platform to make those plan adjustments on a periodic basis, to help drive the company to meet or exceed the original goal (aka the budget).

S&OP and budgeting defined

Before we dive into more details, let’s first define the terms. The budgeting process —typically done annually— establishes a static time bound projection. It sets the sales plan and in turn the cost structure to meet the goal for the year. In comparison, the sales and operations planning (S&OP) process centers around periodic demand and supply plan reviews where variances are identified, and incremental changes are made to the plan as the year progresses. One can think of the S&OP process as an annual budgeting process done monthly, on a rolling 12-month basis.

What is the confusion between S&OP and budgeting?

In traditionally managed companies where S&OP is not being utilized, there may be a monthly review of the P&L (profit & loss) where variances are discussed, but there is rarely a discussion about how the plan should be modified given the identified variances. In these types of organizations, when operating against an unrealistic plan, instead of recasting the numbers to ensure alignment throughout the company, the management team will often continue to trudge forward with the hope that the situation will improve.

Reinforcing this disconnect, managers can sometimes find it difficult to adjust their plan based on emerging information, particularly when actual is less than budget and investors are involved. The thought of adjusting the plan down is seen as a concession to failure as opposed to a means to gain control. The fear of driving the stock price down or alerting the bank is a deterrent to change. Unfortunately, if the team follows the budget regardless of what is happening around them, they are destined for a bad outcome.

This is the root of the confusion between budgeting and sales and operations planning. How can a company stick to a firm budget and also make changes to the plan in the middle of the year?

Budgeting and S&OP: How they work together

The critical point is that an incremental change to the plan does not mean that the budget changes. Rather, it is a new line that shows the updated reality going forward. The budget, in most cases, will remain the same throughout the year, but the sales and operations plan (S&OP) will be a new projection that drives the company forward based on the new reality. Since sales and operations planning is usually updated monthly as a 12-month rolling projection, the budget becomes the starting sales and cost goal for the year, while the plan helps keep the business moving forward in response to changes.

This, in turn, helps management proactively address unforeseen events not included in the budget that could affect cost and inventory levels. With each subsequent monthly update, a waterfall is created that shows how the plan has deviated from the budget over time. The variance of actual to plan and budget helps drive root cause analysis to minimize surprises going forward.

When the sales and operations planning process is running the way it should, the variance between Plan and Budget sets the stage for one of the key functions of the executive team: tactical and strategic planning.

Effective S&OP processes drive better business results

If you never recognize and address the unexpected, failure is likely and can result in costly excess and obsolete inventory, unhappy customers, and shrinking revenue levels. But, if you present the latest plan and there is a variance against the budget, the S&OP process is the exact forum to resolve the differences. The management team, now aware of the variance, can form new tactics that can boost sales and recover the variance and ensure the supply plan follows. The by-product of the new tactics is a new demand plan that could yield a number closer to the original budget, but with a realistic plan to achieve the end result with minimal risk to supply.

Coming full circle back to the football analogy, Bill Belichick, the head coach of the New England Patriots, made this point during one of his press conferences. He cited Dwight Eisenhower: “In preparing for battle, I have always found that plans are useless, but planning is indispensable.” His point is that good planning is important but having the ability to effectively adjust as things change is even more critical to securing the win. That is why the most successful coaches are always prepared for the unforeseen and have contingencies in place when faced with the unexpected.

To net this out, the budget serves as the base plan to which all subsequent plans are measured against. If the goal is to hit budget by year-end, the monthly sales and operations planning process will allow for the game time adjustments that will help your team overcome the unexpected and stay on course to meet or exceed the company’s year-end goal.