Integrated Business Planning (IBP) is an expanded form of Sales and Operations
Planning (S&OP) that spans the end-to-end value chain of a business, and
ties strategic, profitability-related objectives with short- and mid-term
operational planning decisions through cross-functional scenario analysis -informing
decisions around more profitable supplier collaboration, demand shaping, arketing,
product growth/development, and more.
At its finest, IBP is fully aligned with growth and
innovation metrics, having turned S&OP into a strategic business
partner. Visualize aligning your company’s operational decisions with
forward-looking financial performance across various timeframes, representing
complex trade-offs, constraints, and real-time business realities across the value chain; this is what a successful
IBP looks like!
For more than a decade, companies have struggled
with the term IBP and how it relates to sales and operations planning
(S&OP), sales and operations execution (SOE) sales inventory operations
planning (SIOP), sales and operations management (S&OM), and other
processes.
Despite knowing its importance, businesses have been slow to adopt integrated business planning. Many have yet to establish a fluid S&OP process.
Why Companies Struggle to Adopt IBP
So...why are companies still struggling to adopt
IBP? A few reasons include:
·
Conflicting goals among business units and barriers
due to the evolutions of processes and technologies
·
Existing technology design
·
Traditional methods of doing business
A recent study shows that 79% of companies continue to use spreadsheet planning, yet only 39% say that spreadsheets support a collaborative planning process.
Here’s the problem: Inflexible tools like
spreadsheets don’t allow for a cross-functional representation of the business.
Also, spreadsheets don’t provide forward-looking insights - a requirement for
IBP. Instead, spreadsheets produce infeasible plans, inhibit collaborative
planning, and suck loads of time that could be better spent elsewhere.
In one case study, a
snack food giant wasn’t meeting demand on its most profitable product due to
constrained capacities. When it tried utilizing its 20+ spreadsheets, they
continued to fall short of reaching targets and became well aware that they
were missing out on major profit opportunities.
Spreadsheets may work for isolated scenarios but not integrating functions to solve one common goal (meeting demand) while aligning with strategic objectives (e.g., recognizing additional profit opportunities). This is the essence of integrated business planning
Top 7 Barriers to Integrated Business
Planning
In addition to spreadsheets, here are a few other
barriers that we have found:
Technology and process structures don’t allow
integration. Traditional software solution designs differ in
structure, hindering integration. Supply chain software was built from the
ground up with a data model that was singularly focused toward certain areas
like demand, supply, logistics, etc. Financial planning and analysis tools
which model the General Ledger/Chart of Accounts from a transactional and
roll-up perspective take the opposite approach. As such, supply chain planning
and financial planning technologies were never destined to meet.
Complex skill set required. Optimization solutions present barriers within barriers: modeling a
complex supply chain often requires difficult coding and provides no
visualization.
Different cultures within the organization. Business units within the enterprise usually have a culture of its own;
the undertaking of understanding another unit’s goals while striving to reach
its own seemed impossible.
Linear scenario management tools. Like optimization, scenario management tools can’t replicate real-world
complexities, nor acknowledge that what-ifs are not linear.
Use of spreadsheets as a primary planning
tool. Maintaining the status quo use of spreadsheets
presents an inflexible resource unable to integrate and align business goals.
Inflexible solutions prevent data quality, access,
and management. Solutions are designed to operate a specific way,
and often unlike the business, meaning that the access to data or its quality
and management are reliant upon the system.
No C-Suite awareness. Understanding the meaning and feasibility of IBP often lies outside the
C-Suite periphery. As a relatively new process that has been difficult to put
into practice, IBP is an educational endeavor within the organization; IBP
fails to get the attention of the C-Suite that benefits from it most. The
CEO/CFO can be unaware of the benefits of IBP.
Clearly, navigating the challenges to implementing IBP
starts with understanding the advantages that IBP provides.
How Does IBP Work?
IBP represents the end-to-end business goals with a
process that takes into consideration each business silo and its various
functions. For example, is the operational plan represented in a cash flow
statement? If not, what good is an operating plan that includes a product mix
with margin contributions that put cash flow risk? It’s why the outcome
of IBP is a true business plan, rather than a demand plan, supply plan,
production plan, or a financial budget.
Through IBP, enterprises gain a single holistic
plan that unifies the business, seamlessly connecting corporate performance
management, financial planning processes, and operational planning systems.
This comprehensive business plan increases business alignment through the
sharing of performance strategies and helps quantify business risk so
enterprises can rapidly adapt to meet challenges.
Why We Need IBP Now More than Ever
Even in a good economy, financial pressure to
perform is paramount to maintaining a competitive edge and interesting enough,
no different than the factors driving IBP following the 2009 recession. These
include:
1. Demand
volatility has increased considerably for most
companies.
2. Supply
complexity has increased with options such as
subcontracting manufacturing and logistics operations — both of which are more
common. Supply chains are broader in scope, including goods that are
distributed across worldwide supply chains.
3. Input
cost volatility is a constant, increasing challenge for
profitability. No matter the commodity (e.g., aluminum, gas, or
petrochemicals), all experience sudden market changes.
4. Non-linear
connection between costs and volume fluctuates
with a mix of fixed and variable costs; some costs vary by volume and others by
time, making it more difficult to understand the financial implications of
business decisions.
Yet, IBP is essentially an outgrowth of S&OP
that fully aligns customer, product, demand, product, and strategic portfolios
across a value chain to drive the strategy of a company, its financial
performance, and its operational and tactical plans. This realization began as
early as decades ago but hasn’t gained much traction in implementation until
recently.
With process changes like global sourcing and
distribution, the complexities of the supply chain make it necessary to
synchronize operational plans with financial and strategic business goals and
understand impacts to the enterprise as a whole.
The Need for What-If Analysis for
Successful Integrated Business Planning
IBP is only possible with cross-enterprise, what-if
scenario planning across various planning horizons. With true integrated
business planning, new questions to new answers can be address — driving
unmatched value to every aspect of the value chain.
In one use case involving a product mix portfolio,
IBP can answer what-ifs such as:
·
What if we need to move from one raw material to
another, over the next several years?
·
What if we want to expand into new opportunities.
Where should we be investing?
·
What if we make changes in design, materials, and
production. How will it affect short- and long-term planning?
·
What if new capital expenditures are required today
and in the future?
·
What if we made acquisitions instead of more
capital expenditure projects?
The what-ifs allow companies to find optimal
scenarios in addition to optimizing the existing way of doing business.
In other words, what-if scenario analysis is what
allows companies to integrate their supply chain plans with finance,
manufacturing, procurement, sales, marketing, etc.
The Unmatched Benefits of IBP
IBP has some astounding impacts on those companies
who successfully adopt it. Some of the benefits we have seen are:
1. Profit improvements equal to 2-5% of annual revenue within the first
year alone
2. Reduced working capital expenses by 15% or more
3. Optimisation of logistics, capacity, procurement, supply and demand all
with the use of a single planning solution
4. Improved cross-functional collaboration, planning agility, risk
mitigation, and forecast accuracy
5. Reduced planning timeframes from weeks or months to just a few days or
hours.
6. Increased stakeholder value for the company, at large
7.
Broader trust in plans
6 Factors to Find the Best IBP Solution
Cloud-based technologies, machine learning, and
artificial intelligence (AI) sources have eliminated some technology barriers;
however, traditional methods continue to play a significant role in preventing
companies from using IBP.
When evaluating Integrated Business Planning
solutions, these should include:
1. Can execution characteristics, capabilities, and constraints be modeled
correctly in order to gain an achievable strategic plan?
2. Can the IBP solution co-create financial plans in sync with operational
plans? Note: a financial plan refers to audit quality financial statements
(e.g., Income statement, Balance Sheet, Cash Flow) which provide a full
financial picture?
3. Does this solution allow users to clearly understand variances – from a
budget to a plan, or a baseline to a scenario, at operational and financial
levels?)
4. Can the solution evaluate alternative “what-if” scenarios in the
formation of budgets, strategies, and operational plans? Can the scenarios
consider financials as constraints? Can the scenarios optimize to multiple
objective functions at the discretion of the user?
5. Can we drill down and understand the root causes of those gaps?
6. Does the solution have a concept of marginal contribution? This provides
the specifics needed to understand the targeted actions taken. If more of this
product is sold, will it have this impact? Is it worth it? If less of that
product is sold, will it have this impact? Are the risks worth taking?
Intelligent Modeling as a Requirement
for Successful IBP
Successful Integrated Business Planning includes
unique technology capabilities. Below are the most important ones:
1.
An underlying holistic model that represents the
business as it behaves in reality, including business, financial, and supply
chain constraints. Additionally, it is essential to know how variable and fixed
costs are incurred, the structure of reporting hierarchies, and process flows
with mass/energy balance.
2.
The integrated model should support advanced
analytics to enable users to identify and evaluate the best plans and
decisions, including:
·
Allowing users to simulate and optimize scenarios
with multiple objective functions
·
Supporting analyses from different angles (e.g.,
solving for optimal product mix rather than holding product mix constant, and
solving for a supply plan) allow users to communicate effectively and
understand the impact on key performance indicators.
·
Providing rich information, including detailed cost
analyses, marginal profitability, financial statements, key
bottlenecks/constraints, etc.
Contributed by: Tim Blake, Business Modelling Associates
(BMA). BMA is the official distributor for River Logic’s Enterprise Optimizer®
platform across Africa.
