Increasingly, company executives are viewing supply chain functions as critical to business success. This shift has driven initiatives across organizations that aim to improve performance, lead to more effective decision-making processes, and balance and align supply and demand.
According to the Aberdeen Group report “Sales and Operations Planning: Strategies for Managing Complexity within Global Supply Chains,” being best in class versus a laggard in these areas can result in a 47 percent increase in year-over-year gross profit margins, a 2.7 percent decrease in year-over-year cash-to-cash cycle time, a 28 percent improvement in orders that are on-time-in-full and a 31 percent better forecast accuracy three months out. Research firms, solution providers, subject matter experts and even end users have difficulty agreeing on an industry standard term for this process. Some refer to it as sales and operations planning (S&OP) or sales, inventory and operations planning (SIOP); in the retail world, you can find merchandizing, inventory and operations execution (MIOE), or simply integrated planning; and others opt for integrated business planning (IBP).
Regardless of the name, its importance to company health is obvious, as it can significantly lower costs, increase agility, improve Customer Relations and boost profits. The industry may settle on a term one day. Until then, three overlapping concepts — executional, tactical and strategic planning — can help clarify the objectives and potential of this methodology.
Executional planning deals with balancing and aligning supply and demand in the near-term, often within the span of a planning cycle. Decisions tend to be prompted by exceptions and disruptions — and thus are made on the fly to ensure customer orders are met and financial objectives are made. This near-term planning horizon involves workflow; exception-based messaging; alerts; and visibility to supply, demand and transportation. Often, specific scenarios are analyzed — for example, if a customer order can be accepted, if people should work overtime or if expedited shipping is the best option.
Tactical planning encompasses just a few months to 18 months or more, depending on the business. The goal is to plan at an aggregated level and then make effective midcourse adjustments in resources and partners in order to respond to changes in demand. Activities include new product introduction planning, decisions about product life cycles, product-family-level demand projections, running high-level capacity analyses, optimizing inventory positions and making any adjustments that are necessary to meet expected demand while aligning with company objectives.
A multitude of scenarios can be run, including optimistic versus pessimistic plans, inventory postponement trade-offs, whether to add suppliers or production capacity, transportation and warehousing alternatives, and more.
Strategic planning describes high-level balancing and alignment over a long time horizon. Companies may look out three, five or 10 years to plan for new category introductions, moving a plant or warehouse, or entering new countries or regions. Some call this IBP, while others also include tactical and strategic activities under the IBP umbrella. Alternative scenarios are used to make financial projections, plan investments and compare potential strategies through volumetric and financial metrics.
With these three concepts in mind, consider the following breakdowns of the different tactics:
- S&OP is an integrated business management process through which an executive team continually achieves focus, alignment and synchronization among all functions of the organization. In practice, S&OP processes rarely stretch far enough to cover all the bases of integrated, tactical and strategic business planning and tend to focus on developing a demand consensus or tactical volumetric supply and demand balancing.
- SIOP is, frankly, a superfluous attempt to emphasize the importance of inventory. It’s unnecessary, but if you need to use this term to move your program forward, please continue to do so. Like S&OP, most SIOP processes focus on tactical volumetric balancing, rather than delivering true integrated planning capabilities.
- MIOE aims to establish a periodic planning process that meets the requirements of each business function, integrates company strategy with execution activities, and balances supply and demand while exceeding customer expectations. Retail planning activities — including merchandize planning, allocation, replenishment, and distribution and transportation — parallel the elements of what manufacturers call S&OP.
- IBP focuses on ensuring continuous alignment among demand, inventory, supply and manufacturing plans on the one hand, and between the tactical and strategic business plans on the other, in an effort to maximize operational performance and meet financial objectives. IBP is a fairly new competitive weapon for supply chain leaders in the battle to accelerate, direct and optimize business decisions for both near- and longterm planning. IBP encompasses S&OP, SIOP and MIOE across all time horizons.
Whether key stakeholders hail from sales, inventory, marketing, purchasing, production or finance functions, they are all from the same business and engaged in planning activities that are closely integrated. In this way, IBP is the best term to describe the regular actions, behaviors and processes that heighten performance, bring about better decision-making, and optimize supply and demand.
Ensure IBP success
The following step-by-step checklist comprises the main capabilities necessary to maximize IBP:
- Smoothly integrate S&OP and strategic planning under one comprehensive process. Align and synchronize your strategic and tactical planning, including S&OP, annual operations, and financial and strategic business planning. IBP should encompass strategic plans, initiatives, activities, and regional and multidivisional operational plans.
- Perform fast simulations, comparisons and what-if scenarios. You need unprecedented global visibility in order to drive a higher level of proactive decision-making. Make sure your team can model the entire supply chain, including plants, suppliers, storage facilities, partner capabilities, customer locations and lanes of transportation, so you can identify any disconnects between supply and demand months or years in advance.
- Compare actual performance to the plan. Global supply chains are always in motion. You need to quickly detect the differences between plans and actuals and then respond in an efficient manner. The ability to sense and highlight shifts in the extended supply chain — particularly as they relate to the agreed-upon plan — is vital. Then, you should be able to suggest an optimal solution while adhering to predetermined company goals and objectives through multiple scenario comparisons.
- Develop plans that evaluate both financial and volumetric performance. Establishing one comprehensive plan that spans strategic and tactical horizons reveals the true merits of multiple alternative paths. Break away from silos, and combine information from sales, marketing, production, procurement, transportation, finance and external partners in a single system to keep your team aligned while streamlining planning processes and responding effectively to supply chain disruptions or new opportunities. A good question to ask is, In addition to balancing financial criteria against constraints, demand prioritization and Customer Relations objectives, can we analyze alternative scenarios based on revenue, profit, capacities, Customer Relations and other critical business metrics?
- Plan across global, regional and multidivisional organizations. Although global supply chains continue to increase in complexity, often the biggest opportunities for cost reduction and Customer Relations improvements lie in the ability to manage the entire supply chain as a system. It’s important to be able to adapt to regional differences in business processes, currencies, objectives, metrics and supply chain structures in order shift regional plans into a consolidated strategy and identify previously hidden opportunities.
- Assess timing, impact and risk of new product introductions. With the number and frequency of launches on the rise, the need to address this area is critical because the most difficult planning problems often occur here. New product planning often takes place across multiple functions or even organizations. IBP can help facilitate this process through collaborative workflow and active messaging. In addition, the ability to compare the performance of a new product to the agreed-upon plan, quickly identify deviations and provide rich what-if analysis plays a major role in determining appropriate actions.
- Visualize operational risk and develop mitigation plans. Disruptions happen more often in today’s globally complex supply chains. For many, it’s only a matter of when, where and how often disruptions will affect Customer Relations and company profitability. The ability to visualize operational risk with enough detail, accuracy and lead time to successfully mitigate the potential hazards is a key business capability. You must sense disruptions and highlight data to enable management by exception. Again, powerful what-if analyses, network scenarios and graphical comparisons help identify an optimal response.
- Model your business over multiple time horizons. Most organizations perform both short-term tactical and long-term planning, at least in some form. In many cases, these processes land on conflicting paths forward because the planning is disconnected and run by different sets of people using different data, assumptions and supporting systems. Effective IBP requires all business-planning efforts across all time horizons to be synchronized. IBP is an effective tool in this regard because it supports the needs of all planning efforts and makes it easier for changes made in one plan to be reflected in others at the appropriate levels of aggregation and in suitable units and time horizons.
- Evaluate alternate product aggregations. Every business function needs to plan at different levels of aggregation to support its goals. Purchasing considers data by supplier; manufacturing views data by what is produced; transportation is concerned with optimizing lanes and loads; sales strategizes by region, customer and account; finance plans by business; and executive management reviews data on company performance. The plans of the various functions have unique purposes, but they all must be coordinated and based on uniform data. A flexible IBP data hierarchy enables simple, real-time changes to data aggregation.
Moving forward together
IBP is powerful because it brings together the often-fragmented worlds of strategic and tactical planning. In this way, the methodology can provide continuous alignment among supply, demand, inventory, manufacturing, tactical and strategic business plans in order to maximize operational performance and meet financial objectives. Now is the time to drive change in your organization.