How Integrated Business Planning can improve your business and 3 specific considerations to ensure success!
Integrated Business Planning (IBP) connects strategy to execution, allowing companies to adapt and allocate its resources to its most rewarding areas, meeting customer demand in the most efficient and profitable way.
Properly applied, IBP help companies improve their customer service level and delivery lead times, reduce inventory levels, stabilize production and improve efficiency, and build strong cross-functional teams.
However, keep in mind:
1. You only have the Capacity you plan for – so plan it right
Why is this important? An imbalance in supply and demand is often bad for business. Too much supply means an over-dimensioned cost base and lower overhead absorption, with inefficient production runs, growing inventories and deteriorating morale from ensuing layoffs. On the other hand, too little supply leads to growing order backlogs and suffering customer delivery performance, increasing costs from overtime and overnight shipments, quality issues (struggling to catch up) and ultimately lost sales.
Can an imbalance in supply and demand ever be good? Yes, in cases where the projected excess demand is identified and lies well enough into the future, giving the company sufficient time to economically increase its capacity before that, it’s fine!
So how do you align your capacity with your demand? Executive Sales and Operations Planning (a key feature of IBP) help do just that. Properly applied:
it bridges long term strategic decision with daily operations through formalized and interdependent decision forums and feedback loops;
it aligns capacity with market demand (and facilitates informed tradeoffs across functions when plans cannot be reconciled) - through cross-functional collaborative consensus planning and preparatory alignment meetings; and
it balances intra-divisional targets towards common goals, regarding sales, profitability, productivity, service levels and (trade) working capital.
2. Set yourself up for success – let your forecast be your window into the future
Producing industries perform best in a stable and linear environment. Unfortunately, this is not how usual demand behaves. Toyota, the embodiment of Lean, solves this by having its internal dealers absorb demand variability through substantial retail and distribution finished-goods inventories, into which production can push its assembled products.
Most companies cannot afford the luxury of maintaining large finished-goods inventories to insulate production from fluctuating demand - but must find alternative ways to reduce the effects of demand variability. This is where forecasting plays an important role – allowing for timely and efficient resource adaptation and allocation.
In many companies, the biggest barrier to implementing Integrated Business Planning (or Sales and Operations Planning for that matter) is an aversion towards forecasting. Ironically enough, most of these companies have some form of forecasting already in place. The problem is often who delivers it, the quality of information, at what planning horizon it reflects, and at what level.
So, what should a forecast look like, and who should do it?
First of all, all businesses can be forecasted. It will never be 100% accurate, nor does it have to be. Sales should own and deliver the forecast, simply because they are closest to the market and customers.
A Sales forecast should be unbiased and reflect true demand. It should also be aggregated into one demand plan, in a format and language relevant and understood by those using it (volume, not value) covering the relevant planning horizon.
Different planning horizons require different levels of granularity. The shorter the horizon, the higher the level of granularity. IBP and S&OP forecasts are usually at a family or capacity group level (see figure 2). These categories should not be defined by commercial aspects alone, but rather linked to how and where the related products can be sourced or produced.
An IBP and S&OP forecast horizon should cover the time it takes to make decisions and sustainably and economically adapt and align resources and capacity to future demand - maintaining service level, margin, production rates and quality.
Make sure to apply 21st century technology to today’s supply chain challenges. Even though systems alone won’t make your IBP excel (but people), there are advanced AI and machine learning demand and supply planning decision support tools that help automate processes and improve your forecast accuracy and plan, as well as simulate outcomes.
Figure 2. SETPOINT Advisory | IBP and S&OP’s role in overall planning structure – aligning strategy with daily operations
3. Break your silos – true improvement comes from holistic & cross-functional collaboration
Companies often mistake IBP (or S&OP for that matter) for an operational concern, sometimes - if at all - involving Sales. This could not be more wrong.
Properly applied, IBP (and S&OP) links Demand Planning (Sales and Marketing), Supply Planning (Purchasing and Production), Portfolio Planning (Product Management and R&D) and Financial Planning (Finance) – aligning strategic direction and financial targets with operational decisions and execution across the entire business.
A company is never better than the sum of its functions. All parts of any production or service solution are interconnected and mutually dependent in generating one common successful outcome. This cross-functional end-to-end alignment can be challenging to achieve, as it involves multiple stakeholders with often conflicting agendas, targets and KPIs. These conflicts are not only prevalent in a company’s relationship with its external stakeholders, but internally as well.
IBP (and S&OP) help bridge these differences, focusing beyond pure divisional excellence (where individual optimization often takes place at the expense of the supply chain as a whole) towards one greater common goal.
Six success factors for achieving a cross functional and holistic IBP include:
Focus on the business as a whole. Align targets and incentives across the organization. Focus less on optimizing individual functions or divisions but set targets through the lens of the company as a whole.
Know and communicate your SETPOINT. Be as good as you can be. However, you cannot be better than your current resources and constraints allow, unless structural change takes place. Make sure target setting is aligned with your current abilities or ability to improve.
Create shared visibility through common dashboards. Be fact-based and data driven to avoid subjective interpretations and supply chain bias. Use targeted KPIs to focus efforts where it matters most (don’t drown your people in KPIs – you can’t measure everything).
Don’t forget the people. Even though Executives should own the IBP and S&OP process, overall behavior is key to driving sustainable change, and behavior comes from individual understanding and motivation to comply. Ensure your full team’s buy-in through clear responsibilities, end-to-end process visualization and IBP trainings.
Be steadfast in your approach. IBP takes discipline and joint responsibilities. Maintain meeting structures. Be true to decisions. Approved consensus plans should prioritize business that forward the organizations strategic and financial goals. No more sacred cows!
Continuously change for the better. IBP is not a one-off magic bullet that fixes all your problems in one go. Approach it as an ongoing process that needs to be continuously reviewed and revised, involving all stakeholders to avoid local sub optimization.