To comment on any of these articles, email Chris Gray at cgr...@grayresearch.com


S&OP Resources


On-site S&OP Education

S&OP Instructor's Manual

S&OP Software

S&OP Consulting


Education Courses
On-site Workshops/Classes


Education Materials

S&OP Instructor's Manual
MPS Instructor's Manual


Consulting and Research
Class A Certification
Performance Assessment
Software Evaluation and Selection

MRP II Standard System Definition
Software Supplier Directory (140K)


eSOP - S&OP Software



Recommended Books
The Right Choice
by Chris Gray

The MRP II Standard System by Chris Gray and Darryl Landvater

Sales and Operations Planning Handbook by Don Rice and John Civerolo




Associates and Related Companies
Worldwide Excellence Partners
Partners for Excellence
Graham Barton (New Zealand)

Bill Belt Excellence (French language)

Who We Are
Chris Gray Biography
Books by Chris Gray

S&OP and Financial Planning

This article appeared in Foresight, the quarterly journal on applied forecasting from the International Institute of Forecasters.  It was adapted from Chapter 11 of Sales & Operations Planning Best Practices by John Dougherty and Chris Gray.  The Preview and Key Points are from Foresight: 



How can a company align its financial and operational plans? The key, according to John and Chris, is the S&OP process, which can supply critical monthly updates for financial planning, budgeting, investment decisions, and cash-flow management.



S&OP is a key tool for developing, monitoring, and adjusting financial, budgetary, and capital plans. It enables all plans to be looked at concurrently, thus helping to avoid the suboptimal practice of making changes intended to improve that one component while ignoring the effects on the other components.

The constant comparison and reconciliation between operating and financial plans in the S&OP process provides a clear and integrated direction by which each functional area can better meet overall financial, business, and strategic objectives.

We discuss how S&OP interacts with financial planning at four different points:

(1) Monthly updates to financial plans 

(2) Development of annual plans and budgets

(3) Capital investment decisions, and

(4) Managing cash flow.


S&OP and Financial Planning

By John Dougherty and Chris Gray 



How can a company be sure that its financial plans match its operational plans?

Now there’s a hanging curveball in the middle of the plate! Sales & Operations Planning (S&OP) is arguably the best tool to link financial planning with the detailed unit planning done in a manufacturing or distribution company.

The ultimate objective of S&OP is to help execute business, financial, product and functional strategies. It does this by focusing on the demand and supply plans of families of products in units. But what ensures that these plans, which can change every month, are always equal to the financial plans and budgets? 


Sorry, but S&OP does not ensure that the financial and operational plans are always equal, nor should it. Nor can it guarantee that published financial objectives will be met. 

Financial plans are targets set by the management team, often to motivate the organization to work harder and smarter to achieve maximum results. When these goals are purposefully set very high, they are sometimes called “stretch” goals. The term implies that these goals may be unrealistic and so may not be met every year. But the idea is that the performance will be better if the organization is reaching for a high goal rather than settling for less aggressive if more achievable goals. 

This scenario probably sounds familiar to most readers, since many companies use this approach; and though it can cause stress at times, it often produces better long-term results. For companies operating this way, all the budgets and operational plans for a new fiscal year will be set based on these stretch financial goals, leading money to be spent and resources utilized at every location and for every product based on these high numbers. And shouldn’t they be?

The answer is yes, but only if each and every location and product achieves sales and production at its target level. These targets are based on plans set months before the beginning of the year, which in turn are based on marketplace and supply-chain conditions and assumptions that may have already changed – and are quite likely to change even more in the ensuing months. 

Consequently, though many businesses regularly meet their annual, company-wide financial targets, the mix between product lines often varies during the course of the year from what was originally planned at the beginning.

Integrated as it is into the financial planning activities of a company, S&OP constantly compares the current projected demand and supply plans to the financial plans and targets. During the course of the year, these will exactly match each other only if every plan is right on target, or if the financial plans have been altered to match the changes in the operating plans. This generally occurs only if significant variations are identified that prevent the original financial plan or a family from being met. For most companies, this occurs once or twice a year, at most quarterly – if at all. 



Of course, many companies are able to achieve their stretch financial objectives, but rarely does it happen exactly as the plan was laid out prior to the beginning of the year.  Often due to changes outside the company’s control, some sales locations, divisions, or regions will not do as well as expected during the course of the year. And the same will be true for some product lines, or products within a product line.  

Once they begin to recognize the shortfalls, companies can try to change their tactics, re-deploying resources or simply redoubling their efforts. Sometimes this gets the lagging locations or products back on target, but sometimes not. What then? 

Well, if you can’t sell carrots in Guatemala, why not try selling more apples in Greenland? In short, companies will put their efforts into beating their original targets in some areas to make up for the shortfall in others. So if it all works out anyway, what’s the problem or risk?

None at all, as long as the supporting plans are adjusted accordingly. But if the detailed demand, supply, and inventory plans are not adjusted to match new realities, the company may continue to grow carrots and ship them to Central America instead of growing more apples to send to Greenland. 

If plans aren’t adjusted to realign how resources are used, the company may be straining to meet the old goals for one family and the new goals for the other. In the worst case, the newly developed sales may not be supported by current resources. Alternately, the company may spend extra resources (overtime, extra labor, premium freight, higher short-term material costs, etc.) to adjust the supply plans at the last minute to support the newly developed demand.

This is a scenario all too familiar to many manufacturing and distribution companies. It’s one that can be greatly mitigated, if not totally avoided, by an effective, timely S&OP process.



S&OP interacts with financial planning at four different points: monthly updates to the financial plans, the development of annual plans and budgets, as a basis for some capital investment decisions, and in managing cash flow. Each of these will be discussed in detail below.

Monthly Updates to the Financial Plans

Can we possibly be suggesting that any modern manufacturing company would want to change its financial plans every month? It’s not too far-fetched to think that many companies face competitive situations and rapidly changing markets where this might actually be desirable. But even if companies want to change their financial plans monthly, are they able to? And, perhaps more importantly, could they live with the consequences of constantly changing financial plans and targets?

With an effective S&OP process and a highly integrated set of operating and financial systems, it probably is possible for a company to monthly change significant portions of its financial plans and targets. Actually, it’s not a totally new idea; the concept of variable budgeting – that spending or expense budgets can vary, depending on some key activity such as sales volume, number of production workers, etc. – has been around for decades. 

For instance, if projected sales volumes for several different families are changed by the S&OP process, the associated supply plans may change as well. This could mean potential alterations in purchasing and manufacturing budgets, particularly in cases where certain product lines represent a large portion of a given plant location’s or supplier’s total activity. Changing sales volumes may also affect how management wants to allocate funds to advertising or other sales and marketing activities.

But even a relatively minor change to a single product line may ripple throughout the entire set of financial plans, including revenue, profit margins, product costs, overhead allocations, selling and administrative costs, and departmental operating budgets. Obviously, it would be no small task to change all of these numbers every month, and redistribute them to everyone in the organization who is tracking their own specific responsibilities against the original targets. 

Today’s modern, integrated ERP systems could facilitate this process. What really would be time consuming is the creation of all the human input, understanding, and acceptance necessary to make the adjusted budgets viable operational tools. After all, in most companies the initial budget is created in a multi-month process. It’s probably unrealistic to think that it can be changed in a dramatically shorter period of time. 

And since factors that change these numbers may themselves change  during the course of the year, this process would have to be repeated monthly – if indeed it could even be completed within a calendar month. Because of this, companies usually stick with the original financial plans and budgets, and just track the variances against them. 

For example, in Figure 1 (an illustration based on typically available S&OP data and formats) the sales and operations planning numbers have been converted to revenue and cost dollars and projected profits for comparison against the business plan. Four categories of management information are displayed:

  • Original business plan:  Budgeted sales at both the selling price and the product cost, as well as budgeted profit per period and cumulative

  • Current sales plan:  Actual sales to the current date and projected sales through the end of the year, at selling price and cost, along with current actual and projected profit both by period and cumulative

  • Sales plan to business plan gross profit comparison:  The variances between the gross profits based on the current sales plan versus budget, by period and cumulative

  • Gross margins:  The percentage budgeted versus the actual or projected for each period, based on the current sales plan


So, when companies do make changes to their financial plans and budgets during the course of the year, the number of times is small – limited to cases where there are extreme shifts in sales volumes or supply situations. Even in these cases, only those portions of the financial targets, plans, and budgets that are significantly affected are changed. Only rarely do companies change financial plans each month, and the reason isn’t just the significant amount of work involved, although that’s a consideration.

Most companies want to avoid a constantly moving target that clouds expectations and creates accountability problems, preferring to hold financial targets constant and adjusting the sales and operations plans to achieve them. And in some cases, companies prefer to hold each functional area to the original plan, since minor variations to plan may be balanced out by future performance variations – moving the cumulative year-to-date numbers back closer to the original targets.


S&OP’s Monthly Role in Financial Planning

If properly interfaced with financial planning systems, S&OP becomes an early warning system to identify sales or supply variances that affect the short-term financial numbers. If the trends continue, this could have a bigger impact later in the year. For example, increased sales could trigger extra costs from last-minute changes to the supply plan (like overtime or premium freight); decreased sales could result in excess inventory and, consequently, higher working capital levels.

S&OP helps identify and address these situations by displaying the cumulative financial impact of all actuals and projected future changes to demand, supply, backlog, and inventory plans. For instance, at the end of every month, the current monthly sales plans can be converted to dollars and compared to revenue plans, by month, quarter, and for the fiscal year.

Figure 2 shows a typical dollarized sales and operations plan with cumulative totals. In the example, four different categories of time-phased information are shown:

Business plan performance (current sales plan versus budget, in sales dollars)

Sales plan performance (most current actuals and future sales plan against the last sales plan, in sales dollars)

Supply (production) plan performance (actuals and current plan against budget, in cost dollars)

Finished goods inventory performance (actuals and current plan against budget, in cost dollars) 

The column “Current Year Expected Results” shows projected performance through the end of the current fiscal year. Columns to the right show the latest projections and cumulatives for the next fiscal year. 

Figure 2:  Sales and Operations Plan with Cumulative Totals


But this is only the beginning. S&OP also helps by:

  • Monitoring KPIs (performance measurements), such as actual sales versus targets in financial terms, forecast accuracy, customer backlogs, inventory levels, average profit margins, and others, which can highlight the variations from plan that, if continued, could cause bigger problems later in the year (increased supply-chain costs or inventories, as described above; cash flow problems; reduced profitability, etc.). Solving these problems inevitably becomes more costly when dealt with at the last minute, as opposed to identifying them earlier with enough time to find cost-effective solutions.
  • Providing a basis for simulation/“what if” planning. With the unit and financial data together in an accessible database, multiple iterations of future demand, supply, and inventory plans can be compared based on varying assumptions. 

    Some companies even maintain a standard practice of “high-low” planning, where they examine the implications of a “highest possible” forecast versus “lowest possible” and “most likely” forecasts for their most variable families or product lines. 

    Based on these different forecast numbers, they would project the range of future potential inventory balances, revenue totals, backlogs, and average customer lead times, and even potential shortages or customer service problems. This could lead to selective contingency planning or at least to more vigilant monitoring of the more critical scenarios.

  • Adjusting, where appropriate, demand and supply plans at the family level, to then be used as guidelines to modify all the detailed plans and schedules, inventory targets, lead times, guidelines, and other tactical data to properly plan for profitably supporting the new expected sales volumes.

    So, for instance, rather than continuing to manufacture and build inventory quantities of a product whose sales are falling below the original expected forecast, we adjust the demand and supply plans, thus avoiding excess inventories, and switching gears to devote limited resources to producing products that are actually selling.

  • Serving as a starting point for recalculating the new financial data, in those cases where management decides to alter the financial plans, targets, or budgets.

  • Providing a more reliable and rigorous process to replace or modify traditional business-performance reviews that most top management teams conduct on a monthly basis. 
  • Forwarding unit, financial, and KPI information to corporate management when a company is a division of a larger corporation.


S&OP's Role in Annual Financial Planning and Budgeting

One of the most arduous – and important – tasks for managers in any manufacturing company is budgeting. It’s often a thankless endeavor that’s never fully completed, with many iterations where numbers need to be tweaked (revenues and profits up, spending and expenses down) until the totals come out where senior management wants them. 

S&OP, or any other process, won’t replace the need for multiple iterations, since these represent the bringing together of “what we’d like” with “what we think we can live with.” And though painful for the participants, this has proven to be a relatively effective way of aligning members of an organization toward a common goal. 

But S&OP can help quite a bit with the base, or first set of numbers. Without S&OP, most companies start with the actual year-to-date numbers plus some data from previous years, plus whatever information they have about future products, markets, customers, and trends. The obligatory “10 to 15%” growth is added to these numbers – and then the wrestling match begins.

With S&OP, a company can start with the rolling projected demand, supply, and inventory plans that exist at the beginning of the financial planning/budgeting process, usually months in advance of the new fiscal year. The power of S&OP is to compare the interaction of the demand, supply, and inventory plans, no matter how synchronized they are. Since it often takes weeks or months to effectively adjust inventory and supply plans to changing demand plans, the S&OP plans are more likely to reflect future reality than the sales forecast alone. To support this process, the S&OP planning horizon must be at least 16 to 18 months to cover the balance of the current fiscal year plus the next one. 

This is one of the primary reasons why companies maintain an 18-to-24-month horizon for S&OP, even though very little month-to-month attention is paid to the part of the horizon that falls outside the current fiscal year.

By starting with these S&OP numbers in financial terms, the company is already dialing in much of their product and market intelligence, which is constantly being updated in the monthly S&OP process. Consequently, this first set of numbers is often more believable and defensible to management, especially since they’re familiar with the rigorous cross-functional analysis, discussion, and decision making that occur within the S&OP process.

Not only is this S&OP set of numbers a better starting point, it’s one that is much easier to obtain. Many companies find that the number of hours people need to put into the annual financial planning process can be reduced by as much as 50% when S&OP is used as the starting point. This is especially helpful where a company is a division of a larger company in a complex corporate structure, since the timing requirements are usually very strict to get all the numbers put together across the multiple segments of the business.


S&OP’s Role in Capital Planning and Investment Decisions

A vital factor in any business’s success is deciding how to invest for the future. This could involve replacing resources that have grown old or inefficient, refocusing resources to support volume growth or product lines, or fresh resource infusions to support new-product initiatives or different lines of business.

Many of these capital investments are needed to support specific product volumes that are part of either current or future demand and supply plans. Where this is the case, it’s an easy and obvious step to link the capital planning and justification process with S&OP’s constantly updated demand and supply plans, ensuring that all capital decisions and plans are based on the latest, most reliable product volume plans. It’s one more reason why everyone in the organization should be working toward keeping the S&OP plans as realistic as possible.

No complex system integration is normally required here. It’s simply a matter of setting company guidelines to insist that product volumes used in the capital appropriation request process be taken directly from S&OP, and updated whenever changed by S&OP. 

Basing capital decisions on S&OP represents a major time savings across the organization. Instead of having to develop new future product volume estimates whenever a capital appropriation request is being prepared, the numbers can be taken directly from the S&OP plans. Then capital investments will be based on the same projections as the annual financial planning and budgeting, and the day-to-day execution of demand and supply plans.


S&OP’s Role in Managing Cash Flow

In almost every case, a good S&OP process results in significant inventory reductions. Whenever management has a need for improving cash flow, S&OP should be one of the first places to look. Ensuring that demand and supply are balanced at the aggregate level is a prerequisite to fine-tuning narrow slices of inventory.

Since S&OP is a powerful tool for managing inventory levels, it can be seen as a key cash manager. For example, some companies have reduced their finished inventories by up to 67% (to 1/3 of the original total). They often attribute much of this to S&OP, since it provides a clear and effective mechanism to communicate inventory targets to the entire organization, and to ensure that the sales and production plans being pursued will support those targets.



S&OP is a key tool for developing, monitoring, and adjusting financial plans, budgets, and capital plans. By ensuring that all plans are looked at concurrently, it helps avoid product-line and functional or regional suboptimization. The constant comparison and reconciliation between operating and financial plans in the S&OP process result in a clear and integrated direction for sales, marketing, manufacturing, supply-chain management, planning, purchasing, and product development to adjust tactics and resources to better meet company financial objectives, and overall business and strategic goals as well.