Coco Crum: The 7 differentiators between S&OP and IBP

Welcome to the S&OP Experts Blog Series.  This series features a weekly Q&A with an industry thought leader on sales and operations planning trends and strategies. Follow-up 'question and answer' sessions are hosted in the S&OP section of the Supply Chain Expert Community.  Registered community members may submit their questions for the expert of the week.

Colleen “Coco” Crum, a managing principal with Oliver Wight Americas, is considered a thought leader and innovator in demand management and sales and operations planning.  As a consultant and educator with Oliver Wight Americas since 1995, she has assisted companies across the manufacturing spectrum, including agricultural chemicals, consumer goods, electronics, entertainment, telecommunications, pharmaceutical, biotechnology, steel, and aerospace and defense industries. In doing so, she has contributed to advancing the methodology of how to successfully integrate demand and supply processes both inside a business enterprise as well as throughout the supply chain.  Colleen "Coco" Crum's full bio can be found here.

Kinaxis: What do you believe is behind the surge of activity around S&OP?

Coco: As my co-author, George Palmatier, and I state in our book, “Demand Management Best Practices,” the pace for adopting business processes is slow. The earliest implementation of S&OP occurred in the early 1980s. We should know, as Oliver Wight pioneered S&OP at that time and continues to bring innovations to clients. As a result, today S&OP is transitioning into Integrated Business Planning (IBP). As you will read later, the benefits are dramatically higher for companies that do S&OP/IBP well versus those who do not. Widespread use of sales and operations planning did not occur until the mid-1990s. In our experience, it takes a minimum of ten years for fundamental changes in business practices to become widely adopted. It takes another five to ten years for these changes to become a routine way of doing business for the majority of companies. Today, S&OP is a “hot” for the following reasons:

1. It is becoming a standard practice and is now evolving into Integrated Business Planning for companies with mature processes. Companies that do not have at least a standard practice of S&OP, operating at a capable level, have more difficulty competing against companies that have effective S&OP/IBP processes.
2. Software firms have started to push S&OP, as software for S&OP/IBP has been lacking. Unfortunately, only a few software firms offer dedicated S&OP/IBP software that: a) integrates all elements of S&OP/IBP and b) provides both executive graphical views as well as quantitative and qualitative information required to support a robust S&OP/IBP process.

Kinaxis: Do you think the definition of S&OP is clear in the marketplace?  If not, is that a problem? How do you define S&OP?

Coco: The definition has become clouded. Some companies do integrated detailed planning over the short-term planning horizon without executive management involvement and call it S&OP. Some software firms, sensing that S&OP is hot, position as S&OP the use of multiple software modules for detailed planning, even calling it “real-time” S&OP. Following is the widely accepted definition of S&OP/IBP:

A process led by senior management that evaluates and revises time-phased projections for demand, supply, new product development, strategic projects and the resulting financial plans. This is done on a monthly basis, on a planned 24-month rolling horizon.

It is a decision-making process that realigns the tactical plans for all business functions in all geographies to support the company’s business goals and targets.

A primary objective of S&OP/IBP is to reach consensus on a single operating plan, to which executives of the management team hold themselves accountable, and allocates the critical resources of people, equipment, inventory, materials, time and money to most effectively satisfy customers in a profitable way.

Compare the above definition, especially the words that are highlighted, with your company’s S&OP/IBP process. Is your company really doing S&OP/IBP?

Kinaxis: How important is a maturity model for S&OP?  Do companies have to be at the most advanced stage of S&OP to claim to be doing S&OP?

Coco: There are different levels of maturity for S&OP/IBP that range from:

1. Disconnected management processes, but there is a desire to do S&OP,
2. Foundational S&OP in which there is primarily a supply chain focus of balancing demand, supply, and inventory,
3. Capable S&OP in which all company functional plans are aligned (product and portfolio management, demand management, supply management, and financial management). The process focuses on making decisions to keep plans aligned and agreeing on the tactics required to execute the plan (with a strong set of KPIs),
4. Integrated Business Planning, which has a strong focus on identifying gaps between the latest projections versus the company’s strategic objectives. The process is used to focus on competitive priorities.
5. Integrated Business Management in which the process drives responsive optimization of the business in pursuit of business strategy. The process focuses on the use of alternative scenario planning to reconcile gaps between latest projections vs business plan and strategy and to perform contingency planning and risk management.

Results from Oliver Wight clients and studies by research firms, like Aberdeen and Ventana Research, show that companies at all levels of maturity achieve operational and financial benefits from S&OP/IBP. Companies operating S&OP/IBP at a higher levels of maturity achieve significantly greater operational and financial benefits than those companies that are not doing S&OP at all or have a Foundational process with a supply chain focus.

Kinaxis: Many are advocating the evolution of S&OP to Integrated Business Planning?  Are you a proponent of IBP? Tying the financial plan/measures directly into the process is a key component of IBP, what else distinguishes IBP from S&OP?

Coco: Oliver Wight has pioneered the evolution of S&OP to include product management and financial management. We also are leading the transition of S&OP to IBP. Here are the characteristics of IBP, which are the chief differences from S&OP:

1. More robust financial integration
2. Inclusion of strategic plans, initiatives and activities
3. More robust product and portfolio review
4. Improved simulation, modeling, and scenarios
5. Improved operational risk visibility and management
6. Gap identification and improved decision making
   
7. Easy, effective translation of aggregate plans to detail plans, and vice versa

George Palmatier and I have co-authored an article on the Transition of S&OP to IBP, which can be obtained here.

Kinaxis: Organizational thinking is often inherently bound by the dimensions of the “box” it is currently in because people don’t question working assumptions strongly enough. Do you believe “process inertia” is a barrier to advancing S&OP processes?

Coco: Companies certainly struggle with using assumptions effectively in the S&OP/IBP process. Planning over a 24+-month horizon requires an assumption based process. In addition to developing competence in the utilization and management of assumptions, companies are hindered by software being quantitative based. Few S&OP software packages handle assumptions well - there are exceptions.

Kinaxis: Can the S&OP process be carried out without technology? Does this relate to the S&OP maturity model?

Coco: One reason that companies do not evolve their processes and get stuck at the Foundational (supply chain) level is the lack of technology dedicated to supporting best practice S&OP/IBP. Spreadsheets just don’t cut it. Technology to support S&OP requires:

1. Executive management views of the business shown in graphical format so that exceptions can be quickly and readily grasped
2. Views of product and portfolio management; aggregate demand plans and assumptions;  aggregate supply plans, assumptions, and resource planning; and financial projections (revenue, margin, and inventory investment at a minimum),
3. Graphical way of portraying gaps between the latest projections and the business goal and strategies,
4. Documentation of assumptions, risks, and opportunities for all functional plans
5. Quick simulations of various scenarios and contingency modeling with “side-by-side” comparisons and documentation of assumptions, risks, and opportunities
6. Action item management.

Kinaxis:Is it possible to have an effective S&OP process that only looks at the aggregate or “volume” level? How important it is to consider the operational feasibility of the S&OP plan?

Coco: For more than two decades a best practice, or “Class A” behavior, for S&OP/IBP has been that all approved plans must be “doable.” This means that resources must be available and approved to execute all functional plans. Resource planning (manufacturing, operations, sales, marketing, product development, and financial) is a key element of S&OP/IBP.

Kinaxis: There is indeed a great deal of cross-functional cooperation and collaboration that is required for managing S&OP – how are companies enabling this, and are they doing it successfully?

Coco: It starts at the executive level. The S&OP/IBP process culminates each month in a Management Business Review in which the executive team reviews the latest projections, projected gaps in achieving business and strategic objectives, as well as resource projections and other needs in order to execute the plans. With strong leadership by the president, COO, or GM (also called the “person in charge”), the leadership team over time begins to think in terms of the health and welfare of the company, rather than optimizing a function at the expense of the company. This is a chief difference between Foundational S&OP and Capable S&OP/IBP. Companies that achieve the greatest benefits from S&OP/IBP use the process as a collaborative executive management process for running the business – this is the essence of S&OP/IBP. Consider these results from an Aberdeen study, which provide hard evidence that it pays to do S&OP/IBP well:

Ask yourself:

• What would a profit margin of 12% above the industry norm and 21% above the laggard companies mean to my company’s stock performance and return to shareholders?
• What is my company’s customer retention rate? What would be the impact on sales productivity and marketing and sales costs if our customer retention rate was over 90%?

Additional Resources

• S&OP frequently asked questions