Sales and operations plan

- To determine how much inventory your company will manage, you first look at the sales and operations plan also known as the S&OP. The S&OP defines how much product you will make during the year, and therefore, the materials, components, and sub-assemblies you plan to buy in order to make those final products. So in a sense, the S&OP creates your company's inventory. This should be the starting point of your inventory management efforts. The sales and operations plan helps you to make this very important strategic decision by combining two estimates or forecasts. First is the aggregate plan, which predicts how much you will have available to sell this year. This plan is based on how much inventory you have right now, and how much you think you can make throughout the year. The second estimate is the sales plan, which based on your demand forecast, predicts how much your customers will want to buy. Note that you are planning at the aggregate level for product groups or families. Levi's Jeans, for example will initially plan for production and sales of all men's blue jeans as one group, only later will they break the plan down by individual styles and sizes. Your goal here is to find the right balance between demand, what your customer wants, and supply, what you can provide. You are essentially comparing your aggregate production plan with your demand forecast. The purpose of this plan is to determine how to best meet that customer demand. This requires input from three distinct internal sources. First, the sales department, to determine expected sales to customers during this period. Second, the operations department, to determine your production capacity. And last, the finance department, to determine any financial constraints that may exist. Here's how these three departments, or factors work together to make strategic decisions about balancing supply and demand, which in turn, will determine your initial inventory plans. Let's say demand for your products is expected to increase, and you do not have the production capacity to make enough products to meet this demand. An easy solution is simply to log back orders for any orders you cannot complete. But this is not going to make your customers happy, and certainly we'll add pressure to your production operations. Assuming you don't want to lose those customers to the competition, you may decide to increase the supply side in order to meet the expected increase in demand. You can do this by adding machines to existing factories, or even adding new factories if needed. Pretty straightforward, right? But this is where financial constraints may step in to prevent you from balancing supply and demand so easily. You may not be able to afford such a move right now, or you may not be willing to accept the risk of adding capacity and inventory. It's a forecast, right? And forecasts are only an estimate of the future, you don't want to hold unneeded inventory. So financial constraints may dictate that you look for another approach to find the right balance at the right cost. A common solution is outsourcing. In this case, perhaps some of the more mature and stable products in this group can be produced for you by a contract manufacturer. That decision will create a different kind of inventory to manage, inventory that is outside your own system. Getting an early start in developing inventory control practices is very important to this decision. In this example, you clearly want to solicit input from key supply chain partners, like major suppliers, and contract manufacturers, and logistics providers. And after the decision is made, you also want to share important information with these key partners. These communication and coordination efforts will pay off by allowing you to meet demand, while maintaining proper control of your inventory. Sales and operations planning is truly a cross functional and highly integrated process. Your role within your company may not participate in such strategic actions, but it is very important to understand that this is where your inventory management practices should begin.