Integrated Business Planning (IBP) – A missing link between strategy and execution
In today’s business environment, companies often struggle with the synchronization of the functional areas involved in the planning and operations of the business. Oftentimes, this integral task is not supported with adequate leadership, triggering the misalignment of objectives across departments due to a lack of attention from the upper levels of management.
This can result in multiple business plans being used throughout the organization, creating a discrepancy between the operational and financial plans – Sales, Marketing, Finance, and Supply Chain operating on four different sets of business plans, leaving middle management to reconcile different views of what ‘demand’ will be. Businesses can fall victim to focusing on solving the urgent issue of the current day or an operational issue for the next month – as opposed to employing the foresight to focus on the comprehensive, company-wide operations planning beyond the immediate execution horizon (the next 2 – 24 months).
For example, a multinational Latin American food & beverage company encountered a significant business issue arising from the lack of communication between sales, operations, and finance. During the summer months, the company launched a new brand of natural juices, which became an instant hit. However, a few months later the sales forecast started to decline sharply, triggering the raw materials inventory of certain flavors of frozen pulp from a few months to over 10 years. Once finance started noticing that the monthly rent expense of cold storage was absurdly high, the leadership took action to investigate what was happening. Sales was solely focused on lifting volume, operations were too concerned on finding additional cold storage space given the rising inventory levels of frozen pulp, and finance did not have a set of forward-looking metrics to anticipate the economic impact of this inventory issue. This company took a hit of several millions of USD as an inventory write-off; in addition, they incurred costs to dispose thousands of tons of frozen pulp.
Integrated Business Planning is a cross-functional, collaborative planning process practice designed to obtain firm-wide consensus and establish future direction on one single operating plan. It focuses on the synchronization of all functions within and outside the organization, including customers and suppliers, in order to allocate resources in the most efficient way.
As the Consumer Products Goods (CPG) industry becomes more complex and competitive, Integrated Business Planning (IBP) serves as an enabler for companies to keep up with the market demands and complexity challenges. IBP enables its stakeholders to explore potential future outcomes, providing its users with an ideal decision-making environment, and allow for the creation of “win-win” arrangements between the company’s suppliers and customers.
Traditionally, Sales & Operations Planning (S&OP) aims to:
- Incorporate to the forecast base with incremental sales lift (e.g., advertising campaigns, promotions)
- Forecast new item launches based on funding and speed to shelf assumptions
- Obtain consensus on a constrained demand forecast
- Provide short-term visibility to new item / promotional performance to expand or cease a program
- Dollarize operational forecast and compare with financial plan to identify gaps to volume, sales, and gross profit targets
However, on an ever changing and more complex environment, these business actions are not enough to keep up with the demand-driven supply chains of the CPG industry. To overcome potential shortfalls, IBP enhances traditional S&OP by:
- Defining a set of metrics that facilitate performance tracking of not only outputs but also inputs (e.g., Sales volume plan, marketing plan) to enable exception based root cause investigation, while aligning cross functional areas to a set of numbers (i.e. shared metrics) that are linked to variable compensation.
- Executing forward looking scenario analysis to determine optimal actions including demand shaping, capacity flexing, gross margin impact, etc.
- Providing enhanced visibility to supply constraints as well as options to flex those constraints.
- Devising a Supply Chain Model that transforms through-out the product lifecycle taking cost and risk into account.
- Developing rules of the road that enable a managed process to ramp-up and ramp-down products.
Case Study – Adding value through an IBP implementation
A few years, I participated in a Supply Chain Capability Transformation project for a global beverage manufacturer and distributor (“BeverageCo”). During the assessment phase, quantitative and qualitative analyses were used to thoroughly understand the magnitude, potential root causes, and dependency of major issues impacting the Supply Chain of the company.
After performing a benchmarking analysis of BeverageCo’s peers, we found that many peers experienced a decline in gross margin during a global economic slowdown, but most were able to recover to pre-crisis levels in subsequent years. BeverageCo, however, was unable to recover in the following years. While trying to identify the root cause of the margin erosion, we also assessed the balance scorecards of key functional areas including Sales, Marketing, Finance, and Operations. Each functional area had 20+ metrics on which they were measured and compensated; some departments even had conflicting strategic goals. This was causing a lack of alignment of the different functional areas to work collectively to improve overall company’s profitability.
Providing Solutions – Metrics Alignment
An integral aspect of IBP is the creation of a set of shared metrics for performance measurement purposes, defined and agreed upon by the executive leaders of the organization. These metrics should serve as a directional beacon to align the incentives across key functional areas. The shared metrics should be limited, to approximately 5-8, in order to encourage focus on the most important and impactful KPIs across the organization. This ensures that each metric is adequately and efficiently tracked and analyzed while avoiding redundant and convoluted metrics.
For example, the company implemented the following five metrics which became a focal point for the executive leadership team to align the incentives of the organization
In the case of BeverageCo, volume was the primary concern of Sales. This functional area was not concerned (or compensated for) with the optimization of the product mix; its goals were based on total unit cases sold, regardless of the mix of high or low profit margin SKUs. On the other hand, Finance was very focused on net price per unit case, indirectly causing a conflict with sales objectives. As Sales tried to push higher volumes it could drive down margins and net price. Not only did the key functional areas have clearly opposing and conflicting goals, but they also lacked a clear medium to address operational and financial issues as they arose.
We followed an approach to illustrate how the individual metrics all contribute to drive the collective performance of the shared metrics in each functional area. To accomplish this in a project setting, we trained functional leaders on the relationship between function-specific KPIs (related to finance, marketing, operations or sales), and their impact on shared metrics.
Companies should be encouraged to create a balanced set of metrics across value levers such as revenue, operating margin, and asset efficiency, allowing them to link operational and tactical metrics to value creation and financial outcomes. This aligned behavior is reinforced by pegging key metrics to executive variable compensation and incentives, and creating a formal and recurring forum for cross-functional collaboration and communication. Lastly, the establishment of shared metrics creates a fact-based culture to discuss and manage performance across an organization, both vertically and horizontally. The tenor of management discussions is no longer anecdotal; functional leaders began to refer to hard facts—the variation in their key metrics.
In addition to shared metrics, we considered that CPG companies should have set of Supply Chain Operations Reference (SCOR) metrics defined by the Supply Chain Counsel. These metrics are standardized and provided a consensus view of supply chain management, allowing companies to do peer benchmarking with competitors across the globe. For BeverageCo, we defined 10 metrics, the majority being SCOR-based, which served as a comprehensive dashboard to manage the operations of the company:
- Forecast Accuracy: Level of accuracy of the weekly/monthly demand forecast process by measuring the difference between the monthly demand per SKU and the forecasted demand per week or month
- Case Fill Rate: The amount of cases shipped on the initial shipment versus the amount of cases ordered.
- Product Availability: The relative number of working days that the active SKUs can be delivered from stock compared to the total number of working days the active SKUs have to be delivered from stock
- On-time In-Full (OTIF): The relative number of customer orders that were available to deliver, delivered on time and in full compared to the accepted customer order request
- Inventory Coverage Days: The average number of days finished goods remain in inventory before being sold
- Production Plan Schedule Adherence: Absolute variance between actual production and planned production
- Supplier OTIF: The relative number of purchasing orders for one-way packaging materials that were available, and delivered on time and in full, compared to the agreed purchasing order
- Production Capacity Utilization: Actual use of capacity relative to the total installed capacity
- Transportation costs as a % of sales: All transportation costs measured as a % of sales
- Cycle time of returnable package: The total circulation time of returnable packaging materials is the time required to complete a full cycle from “filler to filler”
The implementation of shared and SCOR metrics facilitated the alignment of all the functions. Several facilitated workshops involving members of all functional areas were critical to define which metrics should be shared and which SCOR metrics would best serve as a dashboard to monitor the operational performance of BeverageCo.
These SCOR metrics could also be mapped to a value map framework, as well as how they directly and indirectly influence any shared metrics across the organization. This enables a business management practice to an aligned set of numbers that clearly tie from inputs (e.g., levers that influence operational metrics) to outputs (e.g., financial performance).
Providing Solutions – Forward-Looking Scenario Analysis
While defining the shared metrics enables alignment between functional areas, particularly with regards to strategic goals and future direction, we believe that there is still a need for a company’s functional areas to actively collaborate in order to achieve results. Whether or not a CPG company has a formal or informal Integrated Business Planning process, more oftentimes than not, the finance department’s involvement is not as active as it should be. Intra-month decisions are made without an accurate measure of the impact on the financial forecast.
However, it is critical that the organization has the capability to assess different scenarios based on the inputs from sales and operations, particularly its impact on gross profit.
As part of an initiative for BeverageCo, a forward-looking gross profit variance analysis tool was implemented.
- Finance would be responsible for analyzing and interpreting margin, while highlighting the variance of each driver (volume, mix, price, and cost).
- Marketing & Sales would provide insights as to what caused material impacts on volume, mix, and/or price. Disaggregating the dollar impact is insufficient; the IBP stakeholders need to understand the fundamental drivers of the variations to issue future corrective action.
- Operations would focus on changes regarding standard costs (production and logistics) and any relevant commodity price impacts.
By incorporating this analysis as a routine of the IBP process, all functions were accountable to anticipate any gross margin erosion or volume decrease. The teams would work collectively to assess different scenarios and enhance their decision making capabilities. They analyzed any gaps between the plan and the forecast, and then underwent corrective actions to avoid any adverse impacts to margin or profits.
The key goal was to incorporate more sophisticated scenario analysis and the need for decision support to determine the best profitability and risk alternatives. Ultimately, this allowed the client to make optimal decisions based on a comprehensive understanding of potential outcomes and enabled executive alignment on all critical decisions.