Integrated Business Planning Successful Execution Traditional Sales and Operational Planning often falls short in effectiveness, execution and scope. Integrated Business Planning is a business-focused, strategic evolution of S&OP which enables strategy alignment, integration of all planning functions and the ability to always plan for profit.
The Evolution from S&OP The Evolution from S&OP When first established in the 1980 s the intent of the Supply and Operations Planning (S&OP) process originally was to: Balance demand and supply Integrate financial and operational planning Link high-level strategic planning with day-to-day operations S&OP exists in some form at most organizations; however few have implemented an S&OP process that fully integrates all aspects of a company s supply chain functions. What S&OP Doesn t Achieve Most companies argue that they do have an S&OP process; however few would have implemented a process that fully integrates all aspects of the business. Many of these companies have implemented an S&OP process with a very strong focus on the demand management side (forecasting and promotions) but very weak on the logistics, operational make and supply-side and the financial side (overall profit). A common reason for this is a lack of strategic alignment, with senior management & functional departments often working (typically unintentionally)in a suboptimal fashion, at cross-purposes with each other working to attain their individual KPIs, whilst undermining actual end to end enterprise value. Figure 1 Lack of strategic alignment undermines enterprise value 2
The Evolution from S&OP The Intended S&OP Process The typical 5 Step S&OP Process includes a Product Management Review rolling to a Demand Review, a Supply Review, a Pre-SOP, where the majority of outstanding issues are resolved prior to being taken to the Executive SOP. The idea is that this would then give a fully integrated and holistic plan to be executed. Figure2 The Intended S&OP Process The Real S&OP Process However the reality is that very often key functions across the business are stuck in a constant churn as they work to resolve competing drivers and functional KPIs. The Interfunctional Pre-SOP cycle becomes a complex series of meetings, trade-offs, sub-optimal decisions (made without the appropriate decision-support and technology), and often power plays, as functions try to work to match supply and demand. Figure 3 The Reality of SOP Planning Review Cycle Constant Churn This is increasingly difficult if functional departments have non-aligned objectives, and if the process lacks the ability to test the profit implications of alternate plans. 3
The Evolution from S&OP Notably, a recent Gartner Survey defined 5 levels of Maturity with regards the effectiveness of S&OP implementations : Figure 4 Five Levels of S&OP Maturity The majority of companies surveyed did not get past Levels 1& 2 in their S&OP maturity whilst the true enterprise value derived from implementing S&OP is realised at Levels 3 & 4. Why have so many companies failed to progress further? The primary reasons identified by Gartner are: a lack of strategic direction, or poor communication of it; a poorly structured and poorly integrated supply chain/business process; poor management of lead times in the planning cycle (not making the right decisions at the right time); conflicting functional objectives, and very often fragmented, isolated systems and excessive use of spread-sheets are not providing the depth of decision-support required to effectively plan today s complex (often international) end to end supply chains. 4
The Evolution from S&OP Moving from S&OP to Integrated Business Planning While S&OP delivers value to businesses, especially in the area of demand management, it has often been constrained and limited as an operational function and is not an integrated process. Companies are beginning to understand that S&OP plans would have greater value when linked and aligned with overall financial and strategic plans The main objective of Integrated Business Planning (IBP) is to ensure business focus, alignment and synchronization across all functions of the business. First and foremost, IBP maximizes results from an organization s strategic point of view, while S&OP is usually executed as just a process that attempts to balance supply and demand. Traditionally it has been challenging for S&OP to link day-to-day operations with the strategic objectives of the company. IBP improves the effectiveness of S&OP processes by working to improve organisational alignment and synchronization across all functions to improve financial performance. IBP represents a holistic model of the company in order to better link strategic planning and operational planning with financial planning. One of the world s leading S&OP authorities, Tom Wallace, describes IBP in the following way: One way to look upon Integrated Business Planning is that you are doing S&OP and that you are doing it well Key areas where IBP adds more value than pure S&OP include: Greater financial integration Planning to profit Inclusion of strategic initiatives and activities Improved simulation and modeling Easier translation between detail and aggregate Improved decision making Improved trust within the management team The next section goes into more detail about IBP and how to successfully implement it. 5
Integrated Business Planning Integrated Business Planning Integrated Business Planning (IBP) is a business-focused, strategic evolution of S&OP which enables strategic alignment, integration of all planning functions and the ability to always plan for profit. IBP connects the planning functions across an organization giving an accurate, holistic model that aligns operations and strategy with the organization s financial performance. IBP will deliver three key benefits to an enterprise: Strategic alignment Holistic Integration of all planning functions The ability to reliably plan for profit IBP delivers its real power to business when the answers to planning questions at all levels and in all functions consider maximum profit as the key driver, and when different scenarios can be given promptly and scientifically. The underlying enabler for this is a supply chain model defined with all its business rules, constraints and demand and being able to use this model to test different scenarios to drive profitability. Strategic Alignment The first critical process is to align corporate and business unit strategy to the supply chain strategy, and on to an aligned operating model. This provides the context for the IBP process and the supporting technologies to operate within. From a comprehensive understanding of corporate strategy and a deep sense of purpose, world class companies design the optimal supply chain structure to deliver that strategy. It is in this context that IBP processes can be fully aligned to strategic objectives and used to integrate the supply chain. Integration across planning functions IBP resolves the challenges that enterprises face in implementing a comprehensive planning process - aligning corporate intent and supporting maximized profit. 6
Integrated Business Planning Plan for Profit Most modern companies have picked all the low hanging fruit using existing methodology and tools such as S&OP. Business leaders need to step up and reconsider whether these methods are really working the best for them. Organisations are entering a new era where planning for profit should be the key driver in all aspects of the supply chain planning process. The importance and value to a business of a well-functioning, integrated, strategically aligned planning process with the primary objective of profit optimisation is difficult to dispute. Some would argue that growth might be more important the profit. That may very well be the case but even so within the boundaries of the growth strategy maximize the profit is the key. There are times when a strategically aligned planning process may suboptimise profit in the short-term (for instance when a company may want to introduce a new product line, or customer segment, or market), but rather than simply focusing on sales revenue or volume, or simply balancing supply and demand, the decision that generates the most profit for the company as a whole is generally the correct one. This includes all aspects of the supply chain, the implications in production from a set up point of view, the implications on stockholding, the distribution and transport costs etc. Integrated Business Planning can deliver game-changing benefits to the business. The key factor is that in order to make the correct decisions for the business it means replacing traditional gut feeling and bias with correct data and science. 7
Successful IBP Execution The key to implementing a fully integrated and optimised planning process that will deliver unprecedented returns to a business is to follow a structured approach and utilise proven methodologies. Successful IBP implementation relies on the following: Define where you are now Define where you need to be Keys to Success Continuous Improvement 8
Define Where You Are Now In order to implement IBP it s important to understand the strategy of the company. What is it that makes your market-offering unique (or at least competitive and sustainable)? Once the strategy is understood you can then define a model that supports the strategy. If there is no defined strategy, then you may well need to define one. Before implementing IBP you need to understand critical aspects of your company s current state business and planning environment, including: the business and supply chain strategy the current supply chain and network structure the strengths and weaknesses of the current planning processes Understand The Business and Supply Chain Strategy Effective planning starts with a clear definition of a company s strategic and competitive position. This includes a clear understanding of target markets, customers and consumers, and how the company is going to effectively compete on that stage. There must be a clear vision of the company s basis of competition, and what the drivers of value are. From here, a supply chain strategy and an aligned business model can be derived. So, a critical part of the current state assessment would include a review of the strategic and supply chain plans, supported by one-on-one interviews with the Executive Team. It is interesting to note that as a part of this strategic review, it is often of benefit to refresh the strategic position. This can range from a full strategic review; or helping to develop a supply chain strategy (from the corporate strategy); or helping to identify the drivers of value within the business (what are the things that a company does that has the dramatic effect on enterprise value?). Understand The Current Supply Chain and Network Structure If planning effectiveness is to be improved, it is also necessary to understand a company s current network and supply chain structure. This is effectively what the planning processes are required to oversee and optimise, and would also form the basis of any future supply chain and optimisation model required in supporting the IBP. Again, the effort here will depend on how completely the current network and supply chain has been mapped, defined and understood within the business. The work effort could range from work-shopping a full definition of the supply chain to simply reviewing documentation supplied by the company. The full definition would include defining each supply chain node by attributes such as Purpose, Strategic Objectives, KPIs, Throughput Capacities, Constraints, etc. Once the supply chain definition is received then it is critiqued. Understand The Current Planning Processes It is then possible to complete a full analysis and critique of the current planning processes, including a review of the process, people, and enabling technologies currently supporting the business. By developing a physical documentation of the end-to-end planning process utilizing actual live documents (e.g. strategic plans and budgets; supporting data inputs; meeting agendas and actual minutes; screen dumps ) people are then drawn into this process and often it generates a more constructive critique of where the current planning processes are effectively supporting the business, and where they need to improve. From here, a platform is established to develop an idea of Where do we need to be? creating a vision for the future state planning processes. 9
Define Where You Need to Be This section describes where your business needs to be from an Integrated Planning point of view. The short answer is that you need to be executing a planning process that addresses the correct questions, in a timely manner. Accountability must be clearly defined and understood. Processes are clearly mapped out and you have well-defined KPI s to ensure that you are delivering to expectations. The most important areas to be defined up front are: Planning Horizon / Review Meeting frequencies short, medium, long-term Review Meeting Topics Without this, uncertainty and lack of clarity puts the implementation at risk. Planning Horizon and Review Meeting Frequencies The idea with implementing an IBP process is to provide a process for the management team to ensure business focus, alignment and synchronization across all functions of the business. This requires that planning horizons must be defined according to the unique requirements of your business. Typically, planning horizons reflect lead times associated with short-term, midterm and long-term planning decisions. Figure 5 Planning Cycles Regular review meetings will be associated with the different planning cycles, and their frequency needs to be defined up front. Long term planning Strategic Questions being addressed at this level are about introduction into new markets, new distribution channels, investment in improved production capabilities, new storage and logistical capacity, supplier agreements and sometime introduction of new products (based on the lead-time). The time horizon is generally 1 5 years and the frequency of the review meetings could be quarterly. 10
Mid term planning Tactical Address things like shift patterns, forecast performance, operational performance issues, short term storage issues, capacity issues that could require overtime or casuals, projected stock on hand, stock expiry issues, managing the product/customer tail (what should come off the market) and supplier reviews. The time horizon for this could be 2 12 months and the frequency of review meetings being once every month. Short term planning Operational At this level balancing demand and supply is key, load balancing, optimal shift schedule, optimised batch sizes, short-term promotions, stock expiry date issues and possibly supply adjustments. The time horizon for this could be 1 12 weeks and the frequency of review meetings being once or even twice a week. The definition of planning horizons and meeting frequencies could of course be different depending on the nature of the business involved. Review Meeting Topics Review topics will depend on the planning cycle. The following list, which is by no means exhaustive, covers topics that would be typically addressed: Long term planning Strategic Reviews Demand / Product Review In this review cycle you would be looking at the introduction of new product lines and new markets. Should we change the product / market mix?, What would this do to my overall supply chain cost / profitability?. Assess competitors and the market condition in general. In this review an aggregated demand would be the view. Supply review How are our suppliers performing?, What are the options for alternative suppliers?, Are there more profitable options to consider?. Capacity review. This is about testing different scenarios to identify the most profitable ones: Considering the demand review, do we need to change the production?, Do we need to add a production line?, What kind of productivity improvements should we introduce and to what cost?, Do we need to look at outsourcing part of the production?, Should we build another warehouse? Should we consolidate warehouses and if so where?. Mid term planning Tactical Reviews Gross Profit review The key focus of the IBP must be profit. In all aspects of the reviews profit must be the driving key factor. When reviewing the profit it is important to review the project forecast for the entire planning horizon. For the entire planning period revenue as well as all variable cost components of the supply chain should be looked at. This should be a rolling profit calculation. 11
Demand Review Considering the current constraints are we meeting all demand?, If not what should/could be dropped to still maximise the profit?, How are we performing in regards to the forecast accuracy? Product Review We need to review the product / market tail?, How much of the tail should be cut?, Where is the optimal cut from a profit point of view?, Review the new product introduction. Inventory review All of the following need to be considered from a profit maximization point of view: What is our projected inventory profile?, Are we having any expiry date issues?, Are we overstocked?, Do we have any sales opportunities?, Should we consider running promotions?, What is the inventory distribution across the network considering demand?, Are we optimizing safety stock? Operations review For the production side you will look at lead time vs capacity. What is the optimal number of shifts for the next planning period? Are we optimizing the utilization of our resources and assets? Supply review How are we tracking to our supply agreements?, Are we optimizing logistics between all supply points?, Are we optimizing supply batch sizes? Short term planning Operational Reviews As mentioned above, the reviews are very different depending on the lead-times. If you are in a fresh-food environment with very short lead-times then you will have different reviews compared to food with long shelf life. Demand Review Considering the current constraints are we meeting all demand?, If not what should/could be dropped to still maximise the profit? Inventory review What is our projected inventory profile? Are we having any expiry date issues?, Do we have any sales opportunities? Should we consider running in store promotions? Operations review For the production side you will need to look at lead time vs capacity. Do we need to prepare for overtime?, What are the optimal production batch sizes for the next few weeks? What the optimal number of shifts we should run over the next planning period? Other definitions In addition to planning horizons and regular review meetings, other aspects that need to be defined include: 12
Process flows A clear and detailed business process map or diagram creates clarity within the organisation. Accountability It is very important to define who is responsible for what. KPI s For the process to work it is important to define a number of KPI s. This will enable the team to focus on exceptions. It is important that the KPI s are aligned with the overall business performance and strategy. 13
Keys to Success There are a few essential keys to a successful IBP implementation. Don t underestimate the struggle to change Get the right team Plan it Use the right data Use the right enabler Walk before you run Don t Underestimate the Struggle to Change Chains of habit are too light to be felt until they are too heavy to be broken Warren Buffet If you are moving from a stage where each function operates in silos and where there is little interaction and where planning is based on gut feel and old habits, there is a big challenge ahead. As always when implementing new processes, it is a matter of people, process and technology. You may have defined the best possible process and you may have state of the art technology, however if you haven t got the people part right you will struggle. The Path to Effective Change: Ensure that the vision is well communicated Make sure you have the right people with the right skills Make sure there is enough incentives for the team Make sure there is enough dedicated time Make sure there are enough people assigned Act Figure 6 The Path to Effective Change 14
Get the Right Team Project Lead The project lead needs to be from the top management team. This means either the CEO or one of their direct reports, because the process will ultimately align the different functions with the overall strategy and connect all the different functions into one homogenous process. Project Team All departments must be represented: Sales (demand management) Operations Inventory management Planning Procurement IT It may also be wise to use an external consultant as the facilitator. Plan It As with any project there needs to be a plan and it must be well-communicated and everyone must understand their role, accountabilities and where they need to be and when. The plan must have a series of well-defined milestones that the project team be driven to reach. Discipline is a key aspect of a successful IBP process and it is good to make sure that the implementation of the IBP creates a foundation for this. Use the Right Data An IBP process is very dependent on accurate data (data integrity is essential). Since the core idea is to apply science to come up with the right plan, if you have a poor input, the likelihood of a good planning output is less likely. Accurate data is a key enabler in the process to be able to remove the gut feel. Secondly, make sure that the source of the data is the same. For example, if you compare sales data from different sources you will most likely end up with discrepancies. Use the Right Enabler IBP is not simple it requires the right supporting technology infrastructure. Excel spreadsheets, and even good business intelligence solutions are not designed for this purpose and do not have the power to support the complexity in a usable and meaningful way. The right technology becomes the enabler for the entire process. The appropriate solution should be built on supply chain modeling and optimization. It will enable overall profit-driven decision making by running what-if scenarios. At a tactical level it will give the best inventory management answers considering a complex range of factors such as expiry dates, lead-times, storage capacities, resource and asset utilization. It will take a holistic view of the entire supply chain and deliver the best (most profitable) plan that considers all factors. 15
Walk Before You Run The key is to make sure that the process and the infrastructure is in place. With that in place don t try to address all points at once. Work down a list and first try to address the low hanging fruit. A fully-integrated IBP process that considers all aspects of the supply chain will take some time to fine tune and taking on too much to start with will be overwhelming and it will be too difficult to determine what constraints and rules impact certain parts of the resulting plan, as there will be too much noise from all the other rules and constraints. Start small and then add constraints and business rules and more details as you are learning to execute the process. 16
Continuous Improvement Last but not least once the IBP process is defined and implemented, make sure that the business lives the process. It is easy to slip back into old patterns. Establishing a governance model over the IBP process ensures consistency, integrity and that there is a continued focus on improvements. This can be address by simply introducing two things: 6 monthly review of the IBP process Make sure that there is formal IBP review point every 6 months or so. This will give you a chance to stop reflect and make adjustments. This may be a good point to bring in an external consultant to facilitate this review. Independent and fresh eyes can be important to break down potential departmental barriers that still exist. KPI s (generally monthly) Ensure that you define a number of KPI s. You need to understand how you are tracking. Standard KPI s that should be considered include: Forecast Accuracy Fill rate Obsolete stock Inventory turnover rate Overtime Procurement cost to sales Utilization rate 17
Conclusion Many companies are still running their S&OP process on spreadsheets in silos. This is not good enough anymore. The low hanging fruit has been picked and in order to continue to improve and to stay competitive companies need to innovate their planning process. The most obvious way to do this is to execute a well-defined and operational integrated business planning process. IBP has delivered significant benefits to many businesses. According to a study conducted by Aberdeen Research, companies with a well implemented IBP process achieved: 17% improvement in profitability over the last two years 10% increase in gross margin over the last two years 7.5% increase in Return on Net Assets (RONA) over the last two years When aligning the planning process with the company strategy and when implementing an integrated fact-based planning solution that simultaneously respects all business rules and constraint throughout the supply chain - whether it is in regards to supply, demand, manufacturing or finance - bottom line improvements are bound to happen. The ability to analyze and predict the business-wide implications of changing demand and lead-time, and the ability to make the right decisions will be key to every well-run business. The Economist s Intelligence Unit last year produced a report Competitive advantage: enhancing supply chain networks for efficiency and innovation. As stated in this report: Increasingly, companies are placing the supply chain at the center of their strategies to innovate. It is going to require hard work, commitment and a sophisticated approach led from the top levels of an organization to meet the challenges of the increasingly competitive environment. Integrated Business Planning is a way to give companies control over the entire supply chain and make sure that it is operating in an integrated way to support the businesses strategy. It will also provide a foundation to continuously innovate and improve and it will provide the critical ability to focus on overall profitability for the business. I can t change the direction of the wind, but I can adjust my sails to always reach my destination Jimmy Dean 18
About the Authors Christer Liden, managing director of Optimity (Australia) blends vision, drive and 25 years industry experience throughout Europe, North America and Australia to deliver solutions of the highest-possible value for some of the region's leading supply chain organisations. Christer is a recognized expert in Integrated Business Planning, and supply chain optimization. Christer has authored several articles, including Planning for Profit in the Meat Industry, Moneyball your Supply Chain Using the right tool for Food and Beverage Planning Email: christer.liden@optimity.com.au phone: +61 416 086 423 James Feeney, managing director of Optimity (NZ) drawing on over 20 years global experience. His broad industry exposure includes food processing, manufacturing, financial and government services. He has directed projects, managed programs and consulted in over 120 transformation and performance improvement projects in 12 countries internationally. Email: james.feeney@optimity.com.au Phone: +64 21 276 0176 Optimity offers Integrated Business Planning solutions for organisations in the supply chain across a range of micro-verticals, including Food & Beverage, Building, Manufacturing and Distribution. Plan for Profit Optimity solutions allow businesses to make all strategic, tactical and operational planning decisions from an overall profit point of view. Supply Chain Optimisation Optimity's supply chain optimisation software tool brings simplicity, visibility and optimisation to supply chains, utilising powerful technology to ensure the absolute right decision is made every time. Optimity has delivered immediate and outstanding benefits in Australia, New Zealand and Europe, most recently delivering key supply chain optimisation solutions that enhanced strategic processes and S&OP processes, reconfigured the supply chain, simplified business and enabled businesses to "plan for profit", not just for sales and volume to some of the region's leading Food & Beverage producers and distributors. 19