S&OP Approaches with Order Promises based on Sales Lead Time in Manufacturers using Microsoft Dynamics 365 for Finance and Operations

Author’s Note: This represents the second of a two-part article about the use of sales lead time. The first part covered the significance of sales lead timeand explained several related policies.

Many manufacturers employ sales lead time as the basis for promised ship dates on sales orders, where it typically reflects a guaranteed lead time (in days) for shipment of stocked or make-to-order products. The use of sales lead time for order promises requires alignment of the S&OP (Sales and Operations Planning) approaches to support the ship date commitments.

This second of a two-part article employs a case study to illustrate various S&OP approaches to support order promises based on sales lead time, and it builds on the first article about the significance of sales lead timeand related policies. The case study makes it easier to explain the dominant business models for S&OP approaches and their key characteristics such as sales lead time. These considerations are reflected in the following sections within the article.  

1. Identify the Dominant Business Models for S&OP Approaches
2. Key Characteristics of the S&OP Approaches
3. Other Scenarios for S&OP Approaches with Order Promises based on Sales Lead Time
4. Additional Case Studies

The explanation applies to firms using Microsoft Dynamics 365 for Finance and Operations (D365FO) or previous versions of Dynamics AX (such as AX 2012 R3 or AX 2012) because the different versions employ the same functionality. The article extends previous explanations about common S&OP scenarios, sales order delivery promisesand master planning in manufacturing.

The case study represents a common scenario, where a single legal entity has multiple inventory locations defined by a site and warehouse, the item identifier consists of just the item number, coverage planning applies to the site/warehouse level, and production orders (or batch orders) are used to coordinate manufacturing activities.

1. Identify the Dominant Business Models for S&OP Approaches  

Most firms have several dominant business models for their S&OP approaches. Some of the dominant models apply to products representing a high percent of business volume, while others apply to products with low business volume. The dominant models also need to reflect considerations about order promises based sales lead time. It is easiest to explain the identification of these dominant models with a case study that represents a common scenario.

In this case study, a limited number of the manufactured products -- which represent about 10% of all salable items -- account for 80% of business volume. A large number of other products account for the other 20% of business volume. These products have different values for their sales lead time. This leads to four different S&OP approaches to support order promises based on sales lead time, as illustrated in Figure 1 and described below. The figure indicates the number of salable items and a percent of business volume for each S&OP approach and highlights the two approaches that apply to the 200 products representing 80% of business volume. The figure includes one approach that represents an outlier relative to dominant business models, since the applicable products comprise less than 1% of business volume. Figure 1 also displays the key characteristic of sales lead time for each S&OP approach, and a subsequent figure identifies the other key characteristics. 

The figure identifies a description and an example label for each S&OP approach, where the example labels include MTF+SS, MTF, MTO and ATO. The labels often reflect a company’s internal terminology for their products. The label provides an easy way to refer to an S&OP approach and its related characteristics. It can be assigned to items using an existing item-related field such as Buyer Group or Production Pool or using an additional field. Case 1 illustrates the use of an additional item-related field to identify the label.

Figure 1. Dominant Business Models for S&OP Approaches

• S&OP Approach #1 (MTF-SS): Forecasted Product with Safety Stock Requirements .This approach supports a 1-day sales lead time for a stocked product with replenishment based on demand forecasts and safety stock requirements. The item’s safety stock requirements reflect the demand variations relative to its forecasted quantity to achieve a 99% customer service level. Sales orders for the products may be created manually, or automatically via E-commerce transactions.
• S&OP Approach #2 (MTF): Forecasted Product.This approach supports a 2-week sales lead time for a forecasted product. Demand forecasts drive replenishment of the product’s components and sometimes of the product itself. However, the 2-week sales lead time provides sufficient visibility to produce the item to actual sales order demand, thereby reducing the need for finished goods inventory. Sales orders for the products are created manually.
• S&OP Approach #3 (MTO): Completely Make-to-Order Product.The sales lead time (of 3 months in this example) reflects the cumulative manufacturing time for the MTO product, where the cumulative time includes consideration of long lead time purchased components. The low business volume does not merit the use of stocked components described in Approach #4. This approach represents an outlier relative to dominant business models, since the applicable products comprise less than 1% of business volume.
• S&OP Approach #4 (ATO): Assemble-to-Order Product with Stocked Components.This approach supports a 2-week sales lead time for the ATO product because long lead time purchased components have been stocked in advance. These are termed stocked components, and they also require an S&OP approach described in the next point. The sales lead time provides sufficient visibility to purchase the other components with a short lead time (of 5 working days or less), and still produce to actual sales order demand.
• S&OP Approach #4a (STOCK-COMP): Stocked Components of ATO Products. This approach helps support the two-week sales lead time for ATO products, where a limited number of 50 stocked components are used in the 2000 different products. Some of these stocked components of ATO products are also used in the forecasted products. Demand forecasts and safety stock requirements drive replenishment of these stocked components, where a component’s demand forecasts reflect total demand (not just the demand related to ATO products). Forecast consumption logic for a stocked component reflects the Coverage Group policy of “Reduce forecast by” all transactions rather than by sales orders. A previous article covered the use of stocked components.

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