Let us assume that your company has a very industrious sales team, which achieved a record in overall sales last year. Does not sound that bad, does it? But if you then take a look at the balance sheet, you might realize that this record does not correspond to your key profit figures.
This can happen, if the sales team sells the “wrong” products. A product from this category would be something that can be easily disposed of, while at the same time is very expensive with regard to procurement and production, so that in the end, you cannot achieve your desired margins.
If the sales team had collaborated with the other planners involved in the supply chain, this would probably not have happened. Something like this can also run in the opposite direction: Maybe your company manufactures products that the sales team is actually not able to sell? Or the production plan is fixed in a way, so that the procurement department is left wondering how they will ever be able to procure that amount of raw materials.
If your company has a complex supply chain, these kinds of tasks, involving multiple departments, become especially difficult to solve. But there is one solution: integrated planning!
From S&OP to Integrated Business Planning
When you first decide to dive into the topic of integrated planning, you will encounter a lot of acronyms, synonyms and buzz words. One of the more prominent terms in this area is sales & operations planning (or short: S&OP). The concept of S&OP was coined by Oliver Wight as early as 1980. If you reduce the concept to its key function, you can say that S&OP refers to collaborative planning on a strategic level. Among other things, it aims for a real consensus of company objectives by collaboration of all relevant supply chain planners. In this context, planning is centered on a mid-range time frame of 12 months. Although the concept is more than three decades old, it basically failed to establish itself on a broader scale, especially in Europe. The reasons are left to speculation. Maybe the predominant organizational structures on this side of the Atlantic did not get along well with the idea of collaboration.
A relatively new term is Integrated Business Planning (or short: IBP). This is basically an extension of the traditional S&OP concept. IBP is considered to be long-term, with a range of 24 to 36 months being considered. A stronger focus is placed on financial aspects as one of the goals of IBP is the display and the eventual closing of financial gaps in the company results. Moreover, IBP answers a question S&OP was not able to: If I plan it like this, will that really work?
The question here is not only if the planned sales can also be produced in time, but all questions that arise, if you consider every interdependency of all key figures within your supply chain.
Here are some examples:
- How will the increase of planned sales of a particular product group or a customer affect the production capacities?
- How will the overall contribution margin evolve based on the planned sales shift?
- Do the closed supplier contracts cover the fixed production plan?
- How are the company results affected by changed commodity prices?
- If we had higher personnel resources, how would this affect the production plan?
One thing is clear: in order to answer these questions, you need the right tools. If you are unable to simulate different scenarios, your planners will not be able to forecast the effects of their actions. Another thing becomes clear with this point: you do not need just any old tool, but rather a highly-developed software solution.
Key elements of integrated planning
As you can see, integrated planning concepts require a certain general framework, especially if planning is done on an aggregated or strategic level. In my opinion, real integrated planning is only achieved by taking the following steps:
- Integration in the organizational structure: integration requires corresponding processes, which enables collaboration. This means: You need to dispose of departmental thinking or goals and instead work towards shared company goals.
- Functional and horizontal integration of the supply chain: From procurement through to production and distribution and the sales department – all these processes need to be intertwined, in order to consider each other in the operative planning process. For this you need comprehensive processes as well as a technical gearing, without media breaks. Only by doing so will you be able to make simulations of holistic problems.
- Vertical integration of the supply chain: This is what S&OP is about. Through collaboration with all supply chain planners within a company and simulation of operative processes, valid strategic plans can be made, which can actually be implemented.
S&OP, IBP or integrated supply chain planning – each term basically refers to the same planning approach. In the end, you need an integrated planning concept for the whole supply chain, which is based on the corresponding organizational structure and encompasses both horizontal and vertical integration.
Have you ever asked yourself, if your sales team sells the “right” products, which are in line with your contribution margin? Or, what would you actually have to consider if you just changed one parameter in your annual plan? The path to this answer is a rocky one, but it is worth it!
Do you have practical experience with S&OP, IBP or integrated planning in general? Did the implementation turn out to be successful and if not, what was the reason? I look forward to your comments!