Advanced IBP Leads to Better Service and Profitability

The desire to improve service is the main reason many companies are investing in information technology (IT).  Achieving this goal is very difficult without a robust Integrated Business Planning (IBP) process, formerly known as Sales & Operations Planning.  The goal of sales and operations planning is to achieve high service levels by effectively balancing demand with supply.  This requires both internal and external collaboration.  Internally, at a minimum, the manufacturing, demand planning, and sales and marketing groups must collaborate effectively in a IBP process.

To efficiently balance supply with demand, Supply Chain Planning (SCP) applications are evolving to provide better support for external collaboration, better integration with longer term business planning, and better simulation capabilities that support ad hoc contingency planning.

Most IBP processes are too inward facing.  For consumer products manufacturers, there is usually some level of interaction between sales and marketing and retailers surrounding promotions.  But this is often not properly factored into demand forecasts, and rarely into replenishment plans.  For industrial manufacturers, there might be some limited, and generally ineffective, forms of collaboration for trying to understand demand forecasts from channel partners.  But most S&OP collaboration has been focused on the internal interaction of manufacturing, sales and marketing, and the forecasting groups.  Better demand collaboration and more frequent data on what is actually selling improves forecasting, reduces process lags, and prevents the build-up of bullwhip inventory.

However, over the last decade, many companies have dramatically increased their use of contract manufacturing partners and offshore sourcing of key components.  While there are a few exceptions, most supply planning applications were not designed to support advanced forms of supply side collaboration.  Implementing more advanced forms of IBP in companies with increasingly outsourced supply chains will clearly require better supply side collaboration.

Some leading companies are evolving their IBP process to better integrate it with their budgeting and financial planning processes.  This is driven, in large part, by the fact that financial planning applications are making it far easier (although it’s still not easy) to do rolling quarterly budgets, rather than just one big budget per year.  This increase in the number of budget cycles makes it less likely that the assumptions in the budget will become outdated and the budget targets impractical and unrealistic.  It also enables the merging of IBP, which is generally conducted on a monthly basis, with budgeting done on a quarterly schedule.

The merging of IBP and integrated business planning begins with a granular understanding of profitability by customer and products.  This new form of integrated IBP and financial planning is increasingly leading CFOs to chair their companies’ IBP executive planning meetings.

The action items that come out of executive S&OP meetings should not be confined to the supply chain team.  Sales executives can play a key role in balancing supply with demand, particularly by communicating to customers that only the largest and most important (a polite way of saying “profitable”) customers are guaranteed the best service levels.

Having plan-versus-actual information is important to this new form of integrated IBP/financial planning.  During the executive IBP meeting, executives need to review how they are performing against budget targets, including revenues, costs, and profits.  Simulation tools are critical for both contingency analysis and ad hoc decision-making.  In preparing for the executive IBP meeting, key planners can conduct “what-if” analyses.  For example, they might run a simulation to understand what the impact would be if demand on key product families is 10 percent less than forecasted.  The sales and marketing team could then look at various solutions to this hypothetical (but quite possible) scenario.

Another IBP challenge occurs once the IBP team commits to a plan and the supply chain team tries to implement it over the course of the coming month.  For example, demand profiles may change so much from what was planned that continuing to manufacture or replenish to the plan becomes counterproductive.  Many companies have so many different SKUs that they cannot plan for all supply/demand contingencies.  Companies also struggle with determining what level of deviance from plan (which differs day-by-day during a 30-day planning horizon) should trigger an ad hoc executive IBP meeting and the need for ad hoc contingency planning.  Consumer goods companies are beginning to experiment with using real-time demand data to adjust replenishment plans several times a week.  Nevertheless, it is clear that plan-versus-actual budget reporting and simulation are important tools in closing the gap between what is planned for during budgeting cycles and what is actually achieved.

The majority of manufacturers do not have formal, documented IBP processes in place.  For the IBP process, the “crawl, walk, run” approach is particularly appropriate.  While I have discussed how IBP is becoming even more advanced based on enhanced functionality in SCP and financial budgeting applications, many companies are not even at the “crawl” stage yet.  Still, an understanding of where the “run” stage is heading can increase the speed with which companies can move to more advanced forms of IBP.

(This posting is an excerpt from a more detailed white paper ARC wrote on behalf of Kinaxis).

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