integrated business planning cycle

A better way to drive your business

Managing the availability of supply to meet volatile demand has never been easy. Even before the unprecedented challenges created by the COVID-19 pandemic and the war in Ukraine, synchronizing supply and demand was a perennial struggle for most businesses. In a survey of 54 senior executives, only about one in four believed that the processes of their companies balanced cross-functional trade-offs effectively or facilitated decision making to help the P&L of the full business.

That’s not because of a lack of effort. Most companies have made strides to strengthen their planning capabilities in recent years. Many have replaced their processes for sales and operations planning (S&OP) with the more sophisticated approach of integrated business planning (IBP), which shows great promise, a conclusion based on an in-depth view of the processes used by many leading companies around the world (see sidebar “Understanding IBP”). Assessments of more than 170 companies, collected over five years, provide insights into the value created by IBP implementations that work well—and the reasons many IBP implementations don’t.

Understanding IBP

Integrated business planning is a powerful process that could become central to how a company runs its business. It is one generation beyond sales and operations planning. Three essential differentiators add up to a unique business-steering capability:

• Full business scope. Beyond balancing sales and operations planning, integrated business planning (IBP) synchronizes all of a company’s mid- and long-term plans, including the management of revenues, product pipelines and portfolios, strategic projects and capital investments, inventory policies and deployment, procurement strategies, and joint capacity plans with external partners. It does this in all relevant parts of the organization, from the site level through regions and business units and often up to a corporate-level plan for the full business.
• Risk management, alongside strategy and performance reviews. Best-practice IBP uses scenario planning to drive decisions. In every stage of the process, there are varying degrees of confidence about how the future will play out—how much revenue is reasonably certain as a result of consistent consumption patterns, how much additional demand might emerge if certain events happen, and how much unusual or extreme occurrences might affect that additional demand. These layers are assessed against business targets, and options for mitigating actions and potential gap closures are evaluated and chosen.
• Real-time financials. To ensure consistency between volume-based planning and financial projections (that is, value-based planning), IBP promotes strong links between operational and financial planning. This helps to eliminate surprises that may otherwise become apparent only in quarterly or year-end reviews.

An effective IBP process consists of five essential building blocks: a business-backed design; high-quality process management, including inputs and outputs; accountability and performance management; the effective use of data, analytics, and technology; and specialized organizational roles and capabilities (Exhibit 1). Our research finds that mature IBP processes can significantly improve coordination and reduce the number of surprises. Compared with companies that lack a well-functioning IBP process, the average mature IBP practitioner realizes one or two additional percentage points in EBIT. Service levels are five to 20 percentage points higher. Freight costs and capital intensity are 10 to 15 percent lower—and customer delivery penalties and missed sales are 40 to 50 percent lower. IBP technology and process discipline can also make planners 10 to 20 percent more productive.

When IBP processes are set up correctly, they help companies to make and execute plans and to monitor, simulate, and adapt their strategic assumptions and choices to succeed in their markets. However, leaders must treat IBP not just as a planning-process upgrade but also as a company-wide business initiative (see sidebar “IBP in action” for a best-in-class example).

IBP in action

One global manufacturer set up its integrated business planning (IBP) system as the sole way it ran its entire business, creating a standardized, integrated process for strategic, tactical, and operational planning. Although the company had previously had a sales and operations planning (S&OP) process, it had been owned and led solely by the supply chain function. Beyond S&OP, the sales function forecast demand in aggregate dollar value at the category level and over short time horizons. Finance did its own projections of the quarterly P&L, and data from day-by-day execution fed back into S&OP only at the start of a new monthly cycle.

The CEO endorsed a new way of running regional P&Ls and rolling up plans to the global level. The company designed its IBP process so that all regional general managers owned the regional IBP by sponsoring the integrated decision cycles (following a global design) and by ensuring functional ownership of the decision meetings. At the global level, the COO served as tiebreaker whenever decisions—such as procurement strategies for global commodities, investments in new facilities for global product launches, or the reconfiguration of a product’s supply chain—cut across regional interests.

To enable IBP to deliver its impact, the company conducted a structured process assessment to evaluate the maturity of all inputs into IBP. It then set out to redesign, in detail, its processes for planning demand and supply, inventory strategies, parametrization, and target setting, so that IBP would work with best-practice inputs. To encourage collaboration, leaders also started to redefine the performance management system so that it included clear accountability for not only the metrics that each function controlled but also shared metrics. Finally, digital dashboards were developed to track and monitor the realization of benefits for individual functions, regional leaders, and the global IBP team.

A critical component of the IBP rollout was creating a company-wide awareness of its benefits and the leaders’ expectations for the quality of managers’ contributions and decision-making discipline. To educate and show commitment from the CEO down, this information was rolled out in a campaign of town halls and media communications to all employees. The company also set up a formal capability-building program for the leaders and participants in the IBP decision cycle.

Rolled out in every region, the new training helps people learn how to run an effective IBP cycle, to recognize the signs of good process management, and to internalize decision authority, thresholds, and escalation paths. Within a few months, the new process, led by a confident and motivated leadership team, enabled closer company-wide collaboration during tumultuous market conditions. That offset price inflation for materials (which adversely affected peers) and maintained the company’s EBITDA performance.

Our research shows that these high-maturity IBP examples are in the minority. In practice, few companies use the IBP process to support effective decision making (Exhibit 2). For two-thirds of the organizations in our data set, IBP meetings are periodic business reviews rather than an integral part of the continuous cycle of decisions and adjustments needed to keep organizations aligned with their strategic and tactical goals. Some companies delegate IBP to junior staff. The frequency of meetings averages one a month. That can make these processes especially ineffective—lacking either the senior-level participation for making consequential strategic decisions or the frequency for timely operational reactions.

Finally, most companies struggle to turn their plans into effective actions: critical metrics and responsibilities are not aligned across functions, so it’s hard to steer the business in a collaborative way. Who is responsible for the accuracy of forecasts? What steps will be taken to improve it? How about adherence to the plan? Are functions incentivized to hold excess inventory? Less than 10 percent of all companies have a performance management system that encourages the right behavior across the organization.

By contrast, at the most effective organizations, IBP meetings are all about decisions and their impact on the P&L—an impact enabled by focused metrics and incentives for collaboration. Relevant inputs (data, insights, and decision scenarios) are diligently prepared and syndicated before meetings to help decision makers make the right choices quickly and effectively. These companies support IBP by managing their short-term planning decisions prescriptively, specifying thresholds to distinguish changes immediately integrated into existing plans from day-to-day noise. Within such boundaries, real-time daily decisions are made in accordance with the objectives of the entire business, not siloed frontline functions. This responsive execution is tightly linked with the IBP process, so that the fact base is always up-to-date for the next planning iteration.

A better plan for IBP

In our experience, integrated business planning can help a business succeed in a sustainable way if three conditions are met. First, the process must be designed for the P&L owner, not individual functions in the business. Second, processes are built for purpose, not from generic best-practice templates. Finally, the people involved in the process have the authority, skills, and confidence to make relevant, consequential decisions.

Design for the P&L owner

IBP gives leaders a systematic opportunity to unlock P&L performance by coordinating strategies and tactics across traditional business functions. This doesn’t mean that IBP won’t function as a business review process, but it is more effective when focused on decisions in the interest of the whole business. An IBP process designed to help P&L owners make effective decisions as they run the company creates requirements different from those of a process owned by individual functions, such as supply chain or manufacturing.

One fundamental requirement is senior-level participation from all stakeholder functions and business areas, so that decisions can be made in every meeting. The design of the IBP cycle, including preparatory work preceding decision-making meetings, should help leaders make general decisions or resolve minor issues outside of formal milestone meetings. It should also focus the attention of P&L leaders on the most important and pressing issues. These goals can be achieved with disciplined approaches to evaluating the impact of decisions and with financial thresholds that determine what is brought to the attention of the P&L leader.

The aggregated output of the IBP process would be a full, risk-evaluated business plan covering a midterm planning horizon. This plan then becomes the only accepted and executed plan across the organization. The objective isn’t a single hard number. It is an accepted, unified view of which new products will come online and when, and how they will affect the performance of the overall portfolio. The plan will also take into account the variabilities and uncertainties of the business: demand expectations, how the company will respond to supply constraints, and so on. Layered risks and opportunities and aligned actions across stakeholders indicate how to execute the plan.

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Trade-offs arising from risks and opportunities in realizing revenues, margins, or cost objectives are determined by the P&L owner at the level where those trade-offs arise—local for local, global for global. To make this possible, data visible in real time and support for decision making in meetings are essential. This approach works best in companies with strong data governance processes and tools, which increase confidence in the objectivity of the IBP process and support for implementing the resulting decisions. In addition, senior leaders can demonstrate their commitment to the value and the standards of IBP by participating in the process, sponsoring capability-building efforts for the teams that contribute inputs to the IBP, and owning decisions and outcomes.

Fit-for-purpose process design and frequency

To make IBP a value-adding capability, the business will probably need to redesign its planning processes from a clean sheet.

First, clean sheeting IBP means that it should be considered and designed from the decision maker’s perspective. What information does a P&L owner need to make a decision on a given topic? What possible scenarios should that leader consider, and what would be their monetary and nonmonetary impact? The IBP process can standardize this information—for example, by summarizing it in templates so that the responsible parties know, up front, which data, analytics, and impact information to provide.

Second, essential inputs into IBP determine its quality. These inputs include consistency in the way planners use data, methods, and systems to make accurate forecasts, manage constraints, simulate scenarios, and close the loop from planning to the production shopfloor by optimizing schedules, monitoring adherence, and using incentives to manufacture according to plan.

Determining the frequency of the IBP cycle, and its timely integration with tactical execution processes, would also be part of this redesign. Big items—such as capacity investments and divestments, new-product introductions, and line extensions—should be reviewed regularly. Monthly reviews are typical, but a quarterly cadence may also be appropriate in situations with less frequent changes. Weekly iterations then optimize the plan in response to confirmed orders, short-term capacity constraints, or other unpredictable events. The bidirectional link between planning and execution must be strong, and investments in technology may be required to better connect them, so that they use the same data repository and have continuous-feedback loops.

Authorize consequential decision making

Finally, every IBP process step needs autonomous decision making for the problems in its scope, as well as a clear path to escalate, if necessary. The design of the process must therefore include decision-type authority, decision thresholds, and escalation paths. Capability-building interventions should support teams to ensure disciplined and effective decision making—and that means enforcing participation discipline, as well. The failure of a few key stakeholders to prioritize participation can undermine the whole process.

Decision-making autonomy is also relevant for short-term planning and execution. Success in tactical execution depends on how early a problem is identified and how quickly and effectively it is resolved. A good execution framework includes, for example, a classification of possible events, along with resolution guidelines based on root cause methodology. It should also specify the thresholds, in scope and scale of impact, for operational decision making and the escalation path if those thresholds are met.

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In addition to guidelines for decision making, the cross-functional team in charge of executing the plan needs autonomy to decide on a course of action for events outside the original plan, as well as the authority to see those actions implemented. Clear integration points between tactical execution and the IBP process protect the latter’s focus on midterm decision making and help tactical teams execute in response to immediate market needs.

An opportunity, but no ‘silver bullet’

With all the elements described above, IBP has a solid foundation to create value for a business. But IBP is no silver bullet. To achieve a top-performing supply chain combining timely and complete customer service with optimal cost and capital expenditures, companies also need mature planning and fulfillment processes using advanced systems and tools. That would include robust planning discipline and a collaboration culture covering all time horizons with appropriate processes while integrating commercial, planning, manufacturing, logistics, and sourcing organizations at all relevant levels.

As more companies implement advanced planning systems and nerve centers , the typical monthly IBP frequency might no longer be appropriate. Some companies may need to spend more time on short-term execution by increasing the frequency of planning and replanning. Others may be able to retain a quarterly IBP process, along with a robust autonomous-planning or exception engine. Already, advanced planning systems not only direct the valuable time of experts to the most critical demand and supply imbalances but also aggregate and disaggregate large volumes of data on the back end. These targeted reactions are part of a critical learning mechanism for the supply chain.

Over time, with root cause analyses and cross-functional collaboration on systemic fixes, the supply chain’s nerve center can get smarter at executing plans, separating noise from real issues, and proactively managing deviations. All this can eventually shorten IBP cycles, without the risk of overreacting to noise, and give P&L owners real-time transparency into how their decisions might affect performance.

P&L owners thinking about upgrading their S&OP or IBP processes can’t rely on textbook checklists. Instead, they can assume leadership of IBP and help their organizations turn strategies and plans into effective actions. To do so, they must sponsor IBP as a cross-functional driver of business decisions, fed by thoughtfully designed processes and aligned decision rights, as well as a performance management and capability-building system that encourages the right behavior and learning mechanisms across the organization. As integrated planning matures, supported by appropriate technology and maturing supply chain–management practices, it could shorten decision times and accelerate its impact on the business.

Elena Dumitrescu is a senior knowledge expert in McKinsey’s Toronto office, Matt Jochim is a partner in the London office, and Ali Sankur is a senior expert and associate partner in the Chicago office, where Ketan Shah is a partner.

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Integrated Business Planning

14 October 2019

What is Integrated Business Planning – and how does it differ from Sales & Operations Planning?​

Sales and Operations Planning (S&OP) is a cross-functional decision-making process that you can use to steer your organisation to better balance demand and supply. With S&OP, you bring the functions in the organisation together, and help them speak the same language and have the same plan. Also, you can use S&OP to help bridge the gap between long-term strategic plans and short-term operational plans. Integrated Business Planning (IBP) builds on the S&OP process, and by including finance to a higher extent it enhances the S&OP framework to:​

• ​Make timely decisions that are driven by company profitability rather than silo targets​
• Base decisions on clearly mapped fact-based scenarios rather than gut feelings​
• Integrate the rolling business plan with the financial budget on a continuous basis ​​

By doing S&OP/IBP, you will continually achieve focus, alignment and synchronisation among all functions of the organisation.​

​The difference lies in the maturity…​

Wallace and Stahl originally defined S&OP as: “S&OP is a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning and to link high-level strategic plans with day-to day operations”. If you compare this definition with the definition of IBP, you see that there is very little difference. However, as S&OP has matured there now seems to be an agreement amongst practitioners that S&OP is most relevant for the first three maturity levels, while the value of IBP comes into its own in the last two, in terms of scope and involvement.

To us, IBP is a more advanced version of the S&OP process, using S&OP as a foundation. In IBP, tools and systems are usually more integrated and automated than in S&OP. The core process and the people side has the same origin for both.

So, why should you care about IBP?​

There are a lot of reasons why you should care about Integrated Business Planning.

IBP helps you to:​

• Establish a framework for decision-making​
• Link operations, sales and finance processes by speaking the same language​
• Drive decisions towards profit maximisation and so that they support the company strategy​
• Agree on a clear set of roles and responsibilities across functions​
• Create transparency across your entire organisation​

Our take on Integrated Business Planning

Integrated business planning is about doing what is best for the company and therefore the overall purpose of the ibp process is to establish one overall plan for the company..

The S&OP/IBP process has an aggregated focus on, e.g. product group level, customer group and capacity group level, that enables policies, rules and parameters to be communicated to the tactical and operational planning processes.​ Targets and policies are supplied downwards, while capabilities and actual performance are sent up​:

When we work with our S&OP/IBP process, it must therefore have a long-term focus that is aligned with the other planning processes in our planning hierarchy​.

We describe S&OP/IBP in four core steps:​

1. Demand planning:

Covers the process of creating and validating an unconstrained demand signal (Sales Forecast) 18-24 months ahead. It includes input from relevant participants from the commercial side.

After the sign-off, the forecast feeds two recipients: Supply to plan capacities and Finance to support financial planning and forecasting.​

2. Supply planning:

The unconstrained demand signal is translated into a demand plan per factory, including “inter-company” requirements.

The supply situation (i.e. raw materials, capacity, inventory) is reviewed and gaps are identified.​ Options to synchronise the supply chain are identified and discussed.​

3. Balancing and decisions:

All local plans are consolidated to get a global overview. Different what-if scenarios are analysed to support the overall risk assessment of the plan.

Based on the scenario evaluation, decisions are made and recommendations are presented to executive members.​

4. Follow-up and communication:

Once the decisions have been made and final adjustments have been made to overall plan, the final committed plan is communicated and executed. This also includes a follow-up on decision-making and KPIs.​

A well-established S&OP/IBP process is characterised by:

• A single consensus demand plan​
• Look-out over a period of +18 months​
• Cross-functional participation in S&OP – including finance​
• A senior leadership-owned process​
• Formal targets with accountability in place​
• The proper discipline in the organisation to adhere to S&OP decisions – people execute according to what is decided​
• The ability to reconcile demand and supply plans and identify gaps and imbalances​
• The ability to conduct what-if modelling supporting S&OP decisions​

The human factor of IBP/S&OP

People, people, people​

In any implementation, the impact you achieve is highly dependent on whether you succeed in encouraging people to work according to the new processes and with the desired behaviour. ​And implementing S&OP/IBP is no exception. You can only achieve the full potential of S&OP/IBP if you remember that it is essential to invest time and focus on the human side: in people!

Stakeholder management is key​

People are an essential part of successful S&OP/IBP. Many stakeholders are involved in the S&OP/IBP process, as it covers many different areas of the business. Different stakeholders will inevitably bring different mindsets and objectives to the table, and one of the biggest challenges you will meet in any type of S&OP/IBP implementation is how you handle all of the many different stakeholders. Here, stakeholder management is a crucial competence.

To be successful in S&OP/IBP, you must therefore build the right competencies within both change management and stakeholder management. Hereby, you can unlock the latent potential faster and with greater impact.

Understanding human nature​

We believe it’s important to invest equal time in building the following three competencies to achieve successful S&OP/IBP implementation:​

Regarding S&OP/IBP, we can break down the understanding of human nature into seven topics, where you should spend most time:​

• ​Ensuring involvement across the entire business value chain through interviews, workshops and feedback​
• Making sure that roles are clarified, possibly through gamification​
• Setting the right strategic goals of S&OP/IBP – creating a clear impact case that is linked to the company strategy​
• Resolving KPI conflicts​
• Having top-down managers as role models in the process (live S&OP/IBP)​
• Facilitating communities for knowledge sharing and career building​
• Training in stakeholder management: motivation, communication, relations and trust and human reactions

Do you need stakeholder management coaching?​

We have a training concept called “Stakeholder management in S&OP/IBP” which builds upon proven methods from project management, change management, leadership development and personal development. ​ We created the training framework to meet the needs we saw for different roles to work together in the everyday S&OP process (and related planning processes). In the framework, we therefore focus more on “running the business” than on “changing the business” – even through there are many similarities.​ We apply the training framework in S&OP projects/after projects, in S&OP training and at S&OP conferences. The training framework contains tools in four main areas:​

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Adding value to your S&OP process

Strategy to drive decision-making.

IBP will enable the organisation to work effectively with the integration in their performance management model and allow for the strategic decision-making to be pushed downwards in the organisation. During the S&OP meetings, decisions can be made on profitability, markets, channels etc. that fit with the strategic direction and defined targets due to improved transparency of data and the simulation of various scenarios.

The performance management model will consist of top-down and bottom-up activities. Business review meetings will be held to review and discuss the gaps between actual performance and the defined targets. Actions are then identified to close those gaps.

Moving towards dynamic planning

The periodic review and update of the S&OP will provide valuable input to finance and allow for them to establish a dynamic financial forecast process based on simple assumptions. Read how Royal Greenland aligned their decision-making and planning process to their strategy.

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Novozymes on their use of Integrated Business Planning

How to start, where to begin?

It all sounds good and easy, but how do you get started? Where do you begin? ​ First of all, it is important that you make the effects of the S&OP/IBP initiative and how it will link to the overall strategy clear for the business.​​ Secondly, when getting started you need to secure sponsorship from decision-makers, as this ensures commitment among key stakeholders. ​ ​We propose focusing on four elements when implementing or improving Integrated Business Planning:

These steps can help you get going and ensure that you consider (what we believe to be) core enablers of getting started with S&OP/IBP. But, if you have high ambitions and limited time to deliver changes/impact, you might also benefit from visiting our page about the project methodology “Half Double” . 

The IBP maturity assessment 2020

Would you like to know more about S&OP/IBP maturity? Then you can read our maturity assessment and delve into a whole host of insights on IBP maturity.

Dive into the survey results

Our survey includes insights on 50 companies’ IBP maturity across industries. The assessment started in December 2019 and the first results were published in January 2020.

Let your company's maturity guide​ you

You must always consider your current maturity when you initiate an S&OP/IBP project. There is no “one-size-fits-all” approach for S&OP/IBP projects, as each project is shaped individually by the starting point, as well as the definition of specific targets for maturity improvement. But you can consider a number of generic key elements when you initiate the project.​

How do you get started with your S&OP/IBP project? ​

You can follow this checklist that summarises the key elements of a good S&OP/IBP project. And remember, practice makes perfect.

It is about the journey, not the destination​

We often start out with S&OP/IBP as a project. We end the project after the first full cycles are executed and have the ambition of the process being fully implemented in the organisation. However, this rarely holds true. S&OP/IBP is about people who have to change their behaviour – and it takes time to fully integrate behavioural changes into your organisation. ​This means that S&OP/IBP is a constant journey, and if it is a good process, every process cycle should provide new knowledge and new ideas for process improvement.​

Learn fast through pilots​

Often, we tend to chase the perfect process template before starting to work in new ways in our organisations. If we work in this way, implementation and learning come rather late in the project. Therefore, we recommend that you take an agile approach and test through pilots already early in the project. This allows you to collect feedback early in the process which enables you to improve the process right from the beginning. ​

Therefore, start with a minimum viable product and improve along the way

Digitalisation

Digitalising your S&OP/IBP process - a game-changer for solid business decisions​

It is entirely possible to have a well-functioning S&OP process without having digitalised the decision-making process. But if you want to take your decision-making to the next level, you can do so by digitalising your S&OP process with system support. When you enable process data and use it in one unified data model, you increase transparency for decision-making across departments in your organisation. ​ If you digitalise your S&OP/IBP process you can create better overviews and key decision parameters which enables you to make better decisions. But do not forget the human aspect – because at the end of the day, it is real people who has to make the decisions.

The digital way forward is to go cloud-based

When you make data-driven decisions, it is essential that you have all relevant information at hand. Most commonly, companies use MS Excel as the tool to collect information and structure knowledge from various functions in the organisation. But it can often be a challenge to combine the information from local Excel sheets and create a unified data model.

One set of data creates deeper insights​

We recommend that you use a cloud-based solution, that is accessible across all departments of the global organisation and provides information in real-time in one unified data model. Having only one set of data helps you to create deeper insights​.

You can find cloud-based solutions from several providers. SAP provides one of the global digital cloud-based solutions in their platform called SAP IBP.

SAP IBP is a strong platform for Integrated Business Planning

You can use SAP IBP to analyse your data and make solid decisions. The platform offers a variety of functionality such as:​

• One cloud-based data model across Sales, Marketing, Operations, Finance​
• Integration of SAP and third party systems ​
• Analysis and execution of what-if scenarios​
• Excel front-end with slice & dice of data for fast analyses​
• Dashboards and analytics for ​process meetings

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