In the late 1980s, the proliferation of new products, the specialization of factories, and the growing competition in the consumer goods sector, especially with the emergence of major retailers such as Costco, Walmart, Walgreens, and Sears, made interdepartmental coordination issues increasingly evident and critical. Although some companies already applied orderly materials and inputs management for their individual plants (MRP[1]), they faced challenges in delivering quality to stores and increases in inventory levels.

Under this pressure, salespeople from P&G, Heinz, and other consumer goods companies requested more products each month than they actually sold to avoid stockouts, while operations promised more than they could produce to meet budget targets. Logistics, in turn, protected itself with more inventory and larger transport fleets than necessary. Each department pursued its own monthly objectives, such as fleet utilization, production costs, or sales volume, and coordination was relegated to the background. This resulted in higher costs and working capital, while at the same time, customer service suffered.

It was then that some consumer goods companies, like P&G, adopted the cross-functional coordination proposals that Richard Ling developed in his book “Orchestrating Success: Improve Control of the Business using Sales & Operations Planning” in 1988. The implementation of “S&OP” was a long process and was carried out more from individual operations than as a centralized effort. It required changes in roles and incentives, as well as in indicators and behaviors, but the impacts were tangible and substantial. For several companies, the key to successful implementation lay in actively managing the cultural change involved in shifting from maximizing sales or production to fulfilling the cross-functional commitment (e.g., selling the agreed-upon amount and mix of products, no more, no less). With this, improvements were felt from better service to retail (improvements in OTIF “On Time In Full” deliveries) to reduced necessary inventory and greater plant utilization, which resulted in a lower unit cost of the manufactured product placed on sale. Today, it is difficult to find a large consumer goods company that does not have S&OP as one of its main management processes. However, the development achieved in its application varies considerably from one company to another. A consumer goods company can apply S&OP for operational and tactical decisions, using artificial intelligence for its sales and inputs forecasts, establishing product portfolio (SKU)
alternatives and scenarios with resulting margin calculations, and scheduling agreements directly in their systems (e.g., SAP IBP, Oracle, Infor).

But is S&OP a useful process for companies outside the consumer goods sector? In particular, is it useful for companies that experience less volatility in sales volumes than in their inputs or production, such as commodity companies?

Our practical experience in implementing S&OP in commodity companies in Latin America has led us to propose a different approach, adapted to the particularities of each company. Some inherent characteristics of commodity companies distinguish them from consumer goods companies in terms of coordination. For example, in sectors such as mining, fruit exportation, the forestry industry, or upstream and midstream oil, differences are observed as in this illustration:

These differences raise some questions in the pursuit of comprehensive or cross-functional coordination and optimization of the company:

• How can the sales-operations coordination process be leveraged in companies where the value of coordination does not seem to lie in sales?
• If delivery volumes are constant, what factor should guide cross-functional coordination and commitment?
• If the major individual factor in profitability is plant utilization, why agree on volumes lower than the maximum?

Without understanding the ultimate objectives of the companies, and then proposing and answering the relevant questions for each industry, the benefits of powerful tools like S&OP become diluted and generate frustration within organizations. This has been our focus for the last 15 years – helping our clients to clearly define their needs and then better respond to their challenges. In that sense, we propose returning to some fundamental principles of S&OP:

1. Short-term profitability factors specific to the business: The participants in the process must understand that their purpose is to seek the optimal global profitability through coordination around a forecast of future volumes, prices, costs, and inventories. If for the industrial or commodity company this profitability is maximized with the utilization of certain assets rather than “OTIF” fulfillment to the customer, the process and its participants must take this into account.
2. The business cycle: Not all industries have a natural “monthly pulse” like retail and consumer goods – for example, automotive importation and distribution have commitments of 12 months (sometimes more) between ordering and selling the car, while other industrial companies have 3 months between a sales commitment and delivery. Before starting, it is essential to set the timeline for cross-functional commitment.
3. The philosophy of commitment fulfillment: Unlike traditional business management where “more is always better,” cross-functional commitment management delivers better results when the day-to-day and month-to-month work of all participants aims to fulfill the S&OP agreement exactly, no more, no less. It is a substantial difference. For example, Sales may have monthly incentives to sell or achieve higher absolute margins, without limits. Their incentives motivate them to exceed their sales projections. However, the resources allocated to produce what they sell are limited, so by selling more, Sales risks stockouts for its customers, leading to greater losses for the company and themselves. Adopting this commitment fulfillment philosophy is fundamental, regardless of the industry, as it stems from understanding the collective value beyond local or functional interests. It is usually the most difficult change to achieve.
4. Budget separation: For the reasons mentioned above, participants will have to separate their annual commitment to the budget from the monthly S&OP process. In the month-to-month, the commitments made in S&OP become priority and forward-looking, while the budget review process is left more as an explanation of results.
5. Sources of volatility: Another contribution of S&OP lies in identifying existing risks in operations that may prevent fulfilling the plan, particularly the sources of volatility. In consumer goods, it is common for the greatest volatility to be in sales; the supermarket decides to run a promotion, the weather is not favorable (e.g., beverages), the competitor launches a surprise campaign, etc. In export mining or basic product importation, sales volume does not change: the main source of volatility may be in a production plant (due to failures), in the quality of the extracted mineral, or in port unloading. S&OP should develop tools and processes to mitigate its effects.

With these considerations, commodity companies can design and apply a coordination model that effectively adapts to their specific business. This model may not align exactly with the traditional S&OP approach, where the ‘S’ stands for Sales. For example, in the copper mining industry, this model could encompass everything from drilling to logistics and the port.

Instead of focusing on sales predictive models, projection analyses could focus on port unloading or plant availability. However, applying the five principles outlined here will allow for better resource calibration. This will help align decisions at each step of the supply chain, reduce volatility, and ultimately improve margins.

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[1] Material Requirements Planning