Why is my Integrated Business Planning (IBP) process or Sales and Operations Planning (S&OP) process not seem to work?
I have encountered many frustrated IBP or S&OP leaders with a question on why they seem to have a good output from their monthly IBP or S&OP process, which includes an agreed plan that balances demand planning with supply chain. However, what is actually produced in the plant ends up being completely different. Delivery performance doesn’t seem to improve, commercial teams are frustrated that customer orders are not being fulfilled. Supply chain leader continues to blame an inaccurate Demand plan, finance doesn’t trust the information for the financial forecast resulting in a parallel financial forecast process and leadership is threatening to eliminate the team on IBP or S&OP because it obviously is not working. Why is this happening? There are many factors that can contribute to this dynamic and many often are hidden. Let’s explore three of these often-hidden issues.
Connecting the planning horizons: The IBP or S&OP planning horizon is intended to be a more aggregate longer range planning horizon with a monthly cadence, that is aligned to what is being done day to day. However, often this connection is weak or non-existent resulting in a disconnect with the execution of the plan. To resolve this issue the business requires a weekly tactical planning horizon that can become the execution arm for the IBP or S&OP process. During the weekly tactical planning horizon, organizations consider factors such as production schedules, staffing requirements, inventory levels, and customer demand. The aim is to optimize operational efficiency and ensure that the necessary resources are available to meet customer needs and fulfill orders. The weekly tactical planning horizon serves as a bridge between IBP or S&OP (long-term) and operational execution (short-term). It enables organizations to respond to changing market conditions, address immediate challenges, and make agile decisions within a relatively short time frame.
Lack of realistic plans: This is an interesting dynamic that I have seen many times in the IBP or S&OP processes that is often hidden from the organization. Here is what should happen in the IBP process:
- sales and marketing communicate an unconstrained demand plan.
- supply chain is then required to respond with available capacity.
- if the available capacity is not enough to meet the unconstrained demand
- then the demand is required to be constrained to meet the available capacity.
But no one likes constraining demand, as a result capacity is over-stated, or supply chain insists that unconstrained demand be entered into the system and they will figure it out. (Yes, I have actually seen this) In some cases supply chain or the business does not want to constrain demand because there is a belief that it will result in a loss of sales, and as long as miracles can happen then maybe we can book that sale. Although there is something to be said about optimism more often than not this results in back orders and disappointed customers.
It is also possible to have an unrealistic demand plan based on behavior or other biased approaches. An unrealistic demand plan can exist for many reasons here are few examples:
- Business ambition, sales targets or even AOP. This is where the demand plan isn’t established on what is realistic but what the business wants to achieve regardless of its ability to achieve. This is different than setting a target that you want the business to aspire to for the purpose of gap closing, but often organization don’t have that realistic view on what is actually achievable. Everyone knows the plan isn’t going to happen but goes along with it anyway. Bad news tomorrow is better than bad news today.
- The customer said this is what they want. Not taking into account that the customer may have an overly optimistic view and if this is the only input than it is likely not realistic.
- Overstating demand due to lack of confidence in supply chain’s ability to deliver. In this scenario sales and marketing will overstate their demand in the hope that they will get what they need. This will undoubtably lead to excess inventory.
- Understating demand to heroically beat the monthly financial plan. This will more likely lead to missed delivery and unhappy customers.
Realistic plans within the IBP or S&OP process refer to plans that are based on accurate data, feasible assumptions, and achievable targets. These plans take into consideration the organization’s capabilities, available resources, market conditions, and historical performance to create a practical roadmap for the future.
Supply Chain capability issues: Most supply chain organizations are very complex with many potential elements that can go wrong that will impact the manufacturing plant’s ability to execute a plan. In my experience, the following are examples that are rarely discussed as they are sometime difficult to address.
- Order promising: Although sometimes this work is not technically part of supply chain, (sometimes it is) promising orders plays a critical part in establishing realistic plans. Here is what happens. In your IBP process, given the capacity constraints the demand plan is constrained. But customers place orders that may not follow their allocation rules. So, the orders come in at the unconstrained level or more because the customer knows you are constrained and wants to increase their orders to miraculously get more. (Yes, this does happen) Promise dates are assigned based on customer request, contract lead time, or some other factor other than capability. What this means is that these orders flow into the system and will likely immediately drive back orders and drive you supply chain people mad. There needs to be control of the orders to ensure that promise dates are assigned based on the plant’s ability to achieve that delivery date, everything else is pushed out.
- Inventory accuracy: many organizations don’t have a good control over their inventory and the measures in place are financially driven rather than supply chain. This means if you are measuring inventory accuracy in dollars than the measure is useless for supply chain. Here is what happens: if you don’t have good inventory accuracy (98%,) then any production schedule you put together is going to have problems. Once materials pick the parts for production many of the parts are not there, or can’t be found and the schedule must then be revised. Operations, not wanting an idle assembly operation will look ahead and see what they can run and pull orders up to meet what parts they have available and at the end of the day only 30% of the original production schedule is actually produced. In this scenario, even if you had a perfect forecast the plant is unlikely able to deliver it.
- Master data integrity in the system. Whichever ERP tool you use, the system must be maintained for accuracy, and I have often spoken about this ad nauseam and yet it is such a common problem. Often the system is used as repository and all planning is completed via excel spreadsheets and then uploaded into the system. The business cannot benefit from the expertise of the system if the information is not correct. This will impact your ability to execute to the plan requiring constant adjustments.
In conclusion, IBP or S&OP presents organizations with a powerful approach to strategic planning and execution. By integrating various business functions, IBP offers benefits such as increased visibility, better decision-making, and improved alignment. However, implementing IBP comes with its share of challenges discussed above. Overcoming these challenges requires dedicated effort, strong leadership, and a willingness to embrace change. To address these complexities, organizations can seek the assistance of professional services that specialize in IBP implementation. At Delve Planning Architects, we can provide expertise in data integration, change management, process alignment, and technology implementation, helping organizations navigate the challenges and maximize the benefits of IBP. By leveraging these services, organizations can accelerate their journey towards effective integrated planning and gain a competitive edge in today’s dynamic business landscape.
