Successful companies like Heineken and Akzo have an excellent supply chain that is directly derived from their business and financial objectives. This allows them to make better choices and make quicker adjustments. This effective integration of strategy, finance and operational execution can be achieved through Integrated Business Planning (IBP). What exactly is IBP, what does it deliver and how do you implement it?
Success through supply chain
Successful companies not only have excellent products and good marketing but also an optimally designed supply chain. Not for nothing do we find successful companies like Heineken and McDonalds in Gartner's supply chain top 25.
In today's world where consumers can order twenty-four hours a day across multiple channels, demand fast delivery and where innovation has become a prerequisite, the supply chain plays a bigger role than ever. In the case of disruptive players such as HelloFresh, Ace & Tate or Bloomon, success is even based on an innovative supply chain, which is entirely based on optimal service to consumers as well as optimal cooperation with suppliers.
From S&OP to IBP
More and more boardrooms have realised that supply chain management is a strategic factor that contributes strongly to company profitability. This includes decision methodologies and steering tools that enable the translation of business strategy into value strategy, financial KPIs, marketing decisions and operations.
Sales & Operations Planning is a first step in this: a generally accepted method of matching supply and demand with on the one hand the volume demand from the market (demand) and on the other hand the company's available capacity (inventory and supply). This methodology focuses mainly on volume and is basically operational-tactical in nature.
Integrated Business Planning (IBP) is a process, and not a module of an ERP system as is often thought. In it, the desired business results, derived from the business strategy, are translated into the required financial and operational resources via product management. The overarching objective is then to minimise risks and maximise profits and/or cash flow. IBP thus goes beyond S&OP. Using the IBP process, the sales & operations planning process is targeted to achieve the company's strategic and financial objectives.
The IORP process as a management tool
The business result will always be influenced by three factors that are closely interrelated and need to be balanced. Prof Dr Bram Desmet has summarised these factors in the supply chain triangle:
- Service: the product range, delivery times, flexibility, after-sales service etc. This translates into revenues.
- Cost: the cost of raw materials, production, labour, etc.
- Cash: the capital requirement of production facilities, inventories, etc.
Choosing one aspect always means a trade-off for the other. For example, if you want to hold higher stocks to guarantee faster delivery times, this will entail additional costs. If you want to reduce purchasing costs, that can lower the quality of the product range. The supply chain triangle shows how these trade-offs are related.
The IBP process is the steering tool you use to make these trade-offs visible and translate them into financial figures. It allows you to make informed choices at strategic, tactical and operational level. You can also monitor the financial results of those choices and make adjustments where necessary.
The application of the IBP process
1. Strategic planning
The starting point and starting point of the IBP process is always the company's overall strategy. Based on this, objectives in terms of market position, profit, risks, cash flow, turnover, costs and margins are defined.
An important link between the overall strategy and its translation into tactical and operational decisions is the value strategy. A proven model for this is that of Treacy and Wiersema, which distinguishes three possible value strategies:
- Product leadership: a superior and unique product
- Customer intimacy: service excellence
- Cost leadership (or operational excellence): a competitively low price
By making a clear choice in this, the company can differentiate itself in the market from its competitors. When a company has several business units, a different value strategy can be chosen for each business unit.
IBP tooling helps to identify the market position relative to the competition (benchmarking) and thus choose the most promising value strategy. It is then important that this choice is translated throughout the organisation.
2. Marketing choices
In IBP, all factors are made financial. This also allows you to make better decisions on the product range and customer portfolio at the tactical level.
If a product contributes a lot to profits, you can decide to increase investment in that product on that basis. On the other hand, based on customer profitability, you can decide to put more or less focus on a particular customer segment. IBP tooling makes the actual profitability of customers and products transparent. You immediately see the effect of decisions on profitability and it therefore becomes possible to make objective considerations.
3. Financial KPIs
Based on the chosen value strategy, set different KPIs. For example, if the value strategy 'customer intimacy' has been chosen, the OTIF (on time in full) will have to be higher than if cost leadership has been chosen. In the latter case, it is precisely low costs that are important and a lower target may be acceptable for OTIF. Here again, the balance between the elements of service, cost and cash is clearly visible. Balancing these is a complex matter. IBP tooling contains advanced mathematical models to calculate the financial consequences of different choices and make their impact transparent. This enables you to make well-founded choices that contribute optimally to the financial result.
4. Operations driven by returns
In its basic form, S&OP is volume-based. IBP tooling makes the volumes of demand and supply planning financial (valorisation) by also adding costs and prices and making margins visible.
It allows you to translate the formulated value strategy into operational decisions needed to achieve the KPI targets and gives you insight into their impact on the bottom line. Moreover, this information is available in real-time, making it possible to adjust based on actual demand (demand sensing) and to steer demand (demand shaping). Here, supply chain management will enter into stronger collaboration with marketing and sales.
Top-down and bottom-up
The IBP process works both ways. On the one hand, the strategy is translated into the operation via the tactical layer consisting of brand/product planning, customer planning and financial planning; on the other hand, the impact of operational decisions on the result can be clearly seen. Because the IORP process is value-based, it is easy to see during the year how the realisation and forecast relate to the financial budgeting. This makes it clear where adjustments are desired or necessary.
Interim financial reports are easy to generate and the preparation of annual budgets is in fact no more than a push of a button. In particular, this makes collaboration with finance more constructive.
What should you pay attention to?
IBP is not yet a single term. For instance, IBP can mean the IBP process but it can also mean a specific module of an ERP system. If you want to implement the IBP process, now or in the future, it is important to check whether the provider of an S&OP tool is also able to offer the aforementioned functionalities that optimally support the IBP process.
In addition, it is very important to consider the human factor. It can seem threatening to sales, marketing or finance when, thanks to the IBP process, you become more involved in value strategy, product and customer portfolios or budgeting. Emphasise collaboration and make it clear that the purpose of that collaboration is to increase business results together.
Finally, you can take a bottom-up approach and you don't have to do everything at once. Packages like Arkieva are modular, making it possible to start with simple S&OP and later make the steps towards IBP. One builds on the other.
And what is 'strategy-driven IBP'?
As I mentioned, there is no unambiguous definition for IBP yet, no standard interpretation in the market. This article is built from the vision of IBP as we have developed it within Solventure. Based on this vision, we set up the IBP processes, fully supported by the Arkieva S&OP tooling. And based on this, we implement concrete solutions at our customers.
Strategy driven IBP as defined within Solventure is exactly what the name suggests: it is setting up the IBP process based on strategic input with the aim of achieving strategic objectives. The strategy-driven IBP process involves the full integration of strategic planning including integration of financial planning and analysis and linking to the S&OP process.
The future
I am convinced that IBP is the new norm in the supply chain. Very large and successful companies such as Akzo, Heineken and Shell, supported by specialised S&OP tooling, have successfully implemented the IBP process and achieved huge benefits. IBP offers a unique opportunity for supply chain directors to create real competitive advantage using supply chain management. Supply chain directors will thereby become more involved in corporate and business strategy, marketing and finance. It is a tool through which different functions, from the boardroom to the floor, can together demonstrably drive, monitor and improve the company's results.
Make acquaintance and gain more knowledge?
Michel van Buren (managing director Solventure Netherlands) and Prof Dr Bram Desmet (CEO Solventure) will present this thinking in the Masterclass "from S&OP to IBP" on Tuesday 5 November from 16:00 - 19:00 at the Jaarbeurs Utrecht. Bram Desmet will focus on the supply chain triangle and the strategic component of IBP. Michel van Buren will present a practical approach to grow from S&OP to IBP.
Would you also like to participate in the masterclass and are you also part of the target group?
Register here for ICT & Logistics and book the workshops of your choice.
This masterclass is exclusively open to senior managers, board level and executives working in the following sectors: food, agri, fmcg, manufacturing companies, process industry, chemical industry and automotive.
Author: Michel van Buren, director Solventure Netherlands
