Elevate your S&OP to IBP journey for more financially-driven decision-making
Creating efficient business processes can significantly impact your company’s position in the market. Time spent now to optimize your supply chain and finance processes will pay huge dividends in the future.
There is a lot of buzz these days about transitioning from S&OP (sales and operational planning) to IBP (integrated business planning). A shortage of raw materials, long lead times, and logistical nightmares across the globe have put supply chain planning at the forefront of business strategy.
To overcome unpredictable challenges, your business processes need to be optimized and aligned across the organization.
Starting with S&OP
S&OP is a decision-making process done on a continuous basis to balance demand and supply, align production volume with sales volumes, and integrate financial and operating plans. This process culminates in a monthly meeting in which tactical decisions are made depending on the changing planning horizons.
When looking in the short term, S&OP will be used to forecast consumer demand fluctuations. Whilst in the long term, consumer trends need to be anticipated and forecasted.
For example, think about a company that produces carbonated beverages such as soda. It’s imperative to match supply (production volumes) and demand (sales volumes) as accurately as possible. Too many cans produced will lead to unnecessary inventory cost and waste cost due to the shelf life of the product. Planners must account for the shelf life of the product, as when it’s shorter it’s more challenging to forecast.
In contrast, too little production can result in poor customer service, such as not being able to deliver (on time), as well as possible loss of customers which has a negative impact on profits.
In order for this S&OP process to be optimized, the sales department must work with operations to create a single production-and-shipment plan. Essentially, operations should be aligned with corporate strategy.
The balancing act of Supply vs Demand
A pivotal part of the S&OP process is the balancing of forecasted demand with planned supply. There are different aspects in which demand and supply can be influenced.
Supply can be steered by buffering capacity (overtime, flexibilization, hiring/firing, multiple shifts, or outsourcing of employees), buffering inventories (an increase or decrease in capacity stocks), or buffering time (production time increase/decrease with penalties and unhappy customers as potential downsides).
Demand can also be manipulated through different tactics such as pricing strategies (depending on the price elasticity of the product) as well as promotional activities. Ideally, this should be done in conjunction with the financial objectives of the organization. Therefore, the importance of an integrated business planning process becomes apparent.
Moving towards IBP
IBP has been a phenomenon since the 90s but is recently really booming. Prior to this, the connection between business and supply chain strategies were limited. There was little or no emphasis on how supply chain strategy translated into real business value (quantity to value translation) and how internal supply chain processes were designed.
The implementation of IBP can be a powerful bridge between strategic planning and operational execution. An alignment of functional plans for the next 3-18 months is necessary, different scenarios should be prepared, and a model should be in place to identify and address gaps.
In IBP, the impact of supply chain on the income statement and balance sheet is quite significant. Providing good customer service can have a positive impact on sales revenue, and decisions regarding supply costs, capacity, planning and scheduling, inventory control, warehousing, and transportation can significantly affect the cost of goods.
Are you doing everything you can to elevate your S&OP to IBP transformation?
Measure yourself up against Gartner’s Five-Stages S&OP Maturity Model
Gartner’s S&OP Maturity Model provides a standardized way of evaluating the maturity of the S&OP process across organizations and industries. Let’s take a closer look at each stage.
Stage 1: React
In this stage, which is the least mature, there are no shared goals (site-specific plans), achievement misalignments, and siloed objectives.
Stage 2: Anticipate
In this stage, there is collaboration on the Operational Plan, however, this is Supply-centric (how much can be produced). Scaling and cost efficiency is present within each function.
Stage 3: Integrate
In this stage, there is horizontal end-to-end integration for the collaboration on the Operation Plan to balance Supply and Demand, which is Demand-centric (how much is needed for to sell). Single source of the truth data and able to manage trade-offs.
Stage 4: Collaborate
In this stage, there is vertical integration where Demand drives the Integrated Operational Plan. there is a focus on Outside-In financial measures instead of Inside-Out and there is a Multi-Enterprise focus for profitable demand-driven fulfillment through collaboration: internally, but also with customers and suppliers.
Stage 5: Orchestrate
In this stage, there is vertical integration where Supply, Demand, and Operations are driving the Integrated Operational Plan together. The technological landscape has been upgraded with more automatizations and decision-making over multiple layers.
A company at stage 4 or 5 is considered IBP because it has grown in maturity sufficiently to focus on business requirements rather than balancing supply and demand.
In an Inside-Out approach, an organization’s inner strengths and capabilities are considered to be the source of its success. Rather, the Outside-In approach emphasizes creating value for the customer, orienting towards the customer, and providing a great customer experience.
Why should any firm implement a proper IBP process?
Besides having a better understanding of your own firm, the process ensures higher and more predictable profitability by increasing transparency and showing more discipline between sales, operations, purchasing, and finance.
Companies that implemented S&OP and made it to the maturity levels of IBP, reported increases of 70% in terms of profitability, on-time delivery, inventory levels, and cost reduction. Smaller, but still significant improvements, were made in capacity utilization, cycle time reduction, new product introduction, and planning performance.
Having a tool that connects planning across your organization is essential for elevating your business planning. Anaplan is a leader in Supply Chain Planning Solutions as recognized by Gartner’s Magic Quadrant. Sonum International is an Anaplan Gold Partner with experience in implementing S&OP and IBP solutions.
During our implementation projects, we have witnessed firsthand the benefits. Feel free to reach out to us – we’re happy to advise you, wherever you are in your S&OP or IBP journey.