By Paul Homchick
Over the last 30 years companies have invested great sums of money in enterprise systems chasing a vision of unified data, goals and execution. CEOs expected that installing these systems would lead to a calm and stately progression towards their revenue and earnings goals. But, though billions of dollars have been spent on large corporate data centers filled with hardware supporting data warehouses and large complex systems, there has been little progress in really improving the predictability and reliability of business plans.
The realities of globalization have turned today's business environment volatile, with unstable demand and extended supply chains, while, at the same time, regulatory mandates such as Sarbanes-Oxley demand improvements in the accuracy and predictability of corporate earnings forecasts. However, most managers, lacking the tools to discern the feasibility or ensure accuracy of their strategic and earnings planning, set very conservative goals, thus limiting the performance of their organizations.
Manufacturing resource planning (MRP) systems were originally seen as tools for improving manufacturing efficiency, allowing the examination and manipulation of material requirements and capacity to produce a manufacturing plan that would deliver products without delay and at minimum cost. Unfortunately, early MRP systems were cumbersome and failed to deliver on their promises because they regarded material balancing and capacity balancing as separate, when the problems were actually tightly intertwined. MRP installations only became really successful upon the adoption of advanced supply chain planning systems that allowed the generation of plans with simultaneous material and capacity feasibility.
The development of sales and operations planning (S&OP) was driven by a similar insight, the need for simultaneous and concerted tactical planning connecting sales, manufacturing and distribution. Managers and supply chain professionals realized that it wasn't sufficient to match supply with demand; you needed a unified plan, based on consensus, with all functions (Marketing, Sales, Product Development, Manufacturing and Logistics) executing sub-plans driving towards a commonly agreed goal.
While a good S&OP process insures that operations are synchronized and proceeding smoothly, this is of limited value to senior managers unless those operations are achieving the strategic and financial goals of the enterprise. Additionally, firms still see a lack of predictability and accuracy in their strategic and financial forecasting. This experience is driving a move to the next level of corporate planning: "integrated business planning" (IBP), which is sometimes referred to as "profitable business planning."
In most corporations, while S&OP now provides coordination between Sales, Manufacturing and Distribution, there are still disconnects and gaps between Finance, Strategy and Operations. Corporate Finance sets revenue and profit goals with minimum validation from Manufacturing that the company has the resources, material or capacity to meet these goals. On the operations side, Manufacturing is developing plans to balance demand and supply within capacity constraints, assuming that demand is a given, and seldom knows if the resulting plan will meet cost and revenue budgets that support the company's profit goals. The Sales department agrees to quotas that meet Finance's revenue goals without a complete understanding of the profitability of different product mixes or what manufacturing can deliver.
Integrated business planning bridges these gaps in corporate planning processes by integrating strategic planning, as well as financial budgeting and forecasting systems, with operations planning from the S&OP processes. This marriage of planning processes insures that revenue goals and budgets developed by Finance are validated against a detailed, bottom-up operating plan, and that the operating plan is reconciled against financial goals.