The Future of Planning - Integrated Business Planning Driven by Operational Models

Prior posts have identified key characteristics of Integrated Business Planning which include a review of high level goals, definition, structure, implementation approach, and best practices.  However, the posts have danced around what is the heart and soul of integrated planning, the models that support:

• Bottom up, discrete operational plans that align the operational departments, financial plans that monetize the operational plans and capital plans that enhance operational efficiency.
• Top down, strategic plans that drive strategic projects and expenditures to enhance operational efficiency, market share, product introduction.

The next series of posts will drill into the discrete operational and financial plans as well as methodologies for the strategic and capital plans.  In both the discrete operational and financial plans, the key component that supports an iterative planning and replanning process is the models.

In this post we will analyze discrete operational plans.

Operational Planning

To discuss operational planning, let’s take a look at sales and operational planning (S&OP), which embodies the best set of concepts for this discussion. S&OP is typically applied to manufacturing organizations but all companies are involved in some method of S&OP planning:

• Manufacturing needs to optimize the production facility while harmonizing it with customer demand/sales, resource/raw material availability, production process, and inventory levels. 
• Retailers need to optimize shelf space utilization by merging/balancing sales with customer, market, promotional demand, and shipping/distribution capacities to the stores as well as related financial impact to gross margin.
• Services companies need to coordinate sales against available human resources to deliver the services.  Some services organizations hire first and sell to the resources they have, others sell first and hire resources to deliver the services to the desired level of utilization.

Sales and operational planning (S&OP) is a process for matching demand and supply within a consensus management framework.  It is typically defined in terms of operational units (hours, units, megawatts, etc) and is a common sense approach to ensure that organizations have a structured framework for matching demand exposure to supply capabilities through the harmonization of various functional areas.

The diagram below depicts a series of inputs/models/processes that drive the S&OP process.

The first step is to create a monthly rolling sales forecast that contains projections for the coming 18 to 24 months.  This process includes both a sales forecast from the field (typically optimistic), tempered with analysis from the Marketing department of previous year’s data, market trends and marketing programs.  The sales forecast is typically planned based on how the product/service is sold, i.e. customer/product/channel.

Demand Planning

Demand planning validates the sales forecast and tempers it with an understanding of the sources of sales as well as current inventory levels and customer service policies. The initial demand planning steps include converting the sales forecast into units, then separating by customer/product/channel and how the product is manufactured or delivered.  

Supply Planning

Supply planning is typically performed by an operations group on the production planning side who analyzes the ability to achieve the demand plan by reviewing availability of resources and production capacity (in the case of services this would be headcount).

S&OP Reconciliation of the Plans

This step merges/reconciles the demand and supply plans with constraints to create an optimal plan.   It is important this process has the ability to chase both demand and supply constraints and opportunities equally.  Many implementations only focus on the demand side of the plan which hides revenue opportunities created by excess supply capacities or key customer opportunities.    

Finalize S&OP and Move to Production

The final step in the monthly S&OP process is to finalize the plan and release it to production.  This is typically done in the monthly S&OP meeting and includes representatives from Marketing and Sales with the demand side plan, and Operations and Supply Chain management with the supply side plan, and Finance.  This meeting helps to foster a ‘single version of the truth’ for this month’s production cycle.

For a more detailed look at the templates and models behind this process check out the white paper “Finance’s role in Bridging the S&OP Gap with Corporate Performance Management”

This model fits in the overall framework of the post on August 3, 2011 (click here to review) as shown in the diagram below:

Once the S&OP process is completed and customer demand, and operational capacities and constraints are reconciled into a production plan, Finance can monetize the plan in the Financial Planning aspects of the Integrated Business Planning process (next week’s blog).