Executive White Paper - Optimity Software · Successful IBP Execution The key to implementing a...

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.

Executive White Paper

The Evolution from S&OP

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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


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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 Inter-

functional 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.


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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.


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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.


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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.


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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 sub-

optimise 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.

Integrated Business Processing

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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


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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.


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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, mid-

term 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.


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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.


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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:


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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.


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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

‘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

Don’t Underestimate the Struggle to Change


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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.

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.

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.

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.

Get the Right Team

Plan It

Use the Right Data

Use the Right Enabler


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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.

Walk Before You Run


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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


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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


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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: [email protected]

Phone: +64 21 276 0176

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: [email protected]

phone: +61 416 086 423

About the Authors

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.

mailto:[email protected]

mailto:[email protected]

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