There are obvious benefits to implementing Integrated Business Planning but many organisations still continue to work in traditional silos and firefight their way through as it is perceived as too costly and difficult to change. But is doing nothing a really sensible option ?
Doing Nothing is Expensive
Doing nothing and maintaining the status quo is always the easy option. Being able to firefight and be a supply-chain hero is actually quite satisfying. You get to solve problems every day, working frantically to push urgent orders out of the door to meet your customer deadlines and get congratulated on a job well done. But is this really the best way to work? What is it actually costing you to continue to work this way?
The argument for doing nothing is that you can’t afford to change. Change costs money in terms of people, processes and systems to support it. But have you considered what your current ways of working are actually costing you? There is a cost of delay when you do nothing. Every month that you continue to work in the same old way means you are spending money unnecessarily. How much will you have wasted in the next 4 quarters?
Integrated Business Planning to Save Money
Here I cover several areas where Integrated Business Planning improves the bottom line.
Optimizing Inventory
All manufacturing & distribution businesses carry inventory in order to meet demand within the customer lead time. That inventory could be in finished goods, work-in-progress, components or raw materials. The major driver of inventory is to hedge against uncertainty in the supply chain. Sales want everything in stock so they increase their forecasts. Supply chain are measured on service level so they increase the safety stock. Production want the line to keep running so they stock more components. The uncertainty is a result of not having a single agreed plan in the business and everyone has their own forecasts and view of what demand will be. The result is sometimes called the bullwhip effect as inventory levels are driven up at every level of the supply chain.
Integrated Business Planning provides an agreed, company wide view of what demand will be and how it will be fulfilled. There is only one forecast for the business so the uncertainty is removed and subsequently the need to compensate with additional inventory is also removed.
A conservative estimate for inventory carrying cost is around 20% per annum. So for a company holding £10M of inventory this will be costing them £2M a year. If they were to continue ‘as is’ with their existing way of working and maintain this inventory then some would say this has cost them nothing. However, if they were to implement a proper IBP process and were able to reduce their inventory by just 10% to £18M, there would be a bottom line saving in the inventory carrying cost from £2M to £1.8M a year. So another way of looking at this situation is if they continue with their current way of working the cost of delay is £200K a year.
Delivering On Time In Full
Every company strives for maximum ‘on time in full’ (OTIF) delivery to their customer but inevitably there are occasions this is not always achieved. When orders are not fulfilled the revenue is lost and in some cases may not be recovered. Furthermore, the customer may levy a fine for late or missing items so there is a double penalty of the lost revenue and the imposed fine. For example in August 2017 Walmart published new stricter penalties for their suppliers that mean a fine of 3% of the total invoice value for missing and late items.
IBP enables organisations to meet those customer deadlines without all the stress and at the same time actually improve profitability. By optimizing the level of inventory within the supply chain, IBP improves OTIF performance which in turn improves the order-to-cash cycle and avoids fines from the customer.
Research by the Aberdeen Group in April 2016* showed that organisations utilizing Integrated Business Planning had a customer service level improvement of 4.3% and an order-to-cash cycle reduction of 15 days compared to those companies who were not using IBP.
Reducing Operational Costs
Increasing revenue through improved OTIF is a worthy objective. However accountants have a saying “turnover is vanity, profit is sanity, cash is reality”. Managing operational cost is a key driver to ensure the organisation makes a profit and can continue to invest and grow the business.
Supply chains that are performing sub-optimally have higher operational costs. To try and meet OTIF targets when materials and finished goods are unavailable results in expediting activities such as paying for premium freight and paying a higher price for locally sourced materials on shorter lead times. For manufacturing companies, trying to meet urgent demand means having to interrupt production plans and run smaller batches which causes more frequent and costly changeovers and increases the manufacturing cost per unit.
Through Integrated Business Planning, organisations have visibility of an agreed, robust plan which in turn drives the correct decisions in terms of inventory and production plans. Requirements to expedite materials and interrupt the production plan are minimized as the correct decisions have been made based on sound assumptions as opposed to wishful thinking.
Improving Financial Visibility
Knowing when cash will be available allows the organisation to plan activities that can drive revenue and reduce cost. For example it can fund trade activity such as promotions that can take market share from competitors. Alternatively it can allow suppliers to be paid earlier and in turn receive a discount on the invoice price, thus reducing costs and increasing profit.
This is only possible when there is a realistic view of demand and supply that has been translated into a cash-flow forecast using accounts receivable and payable information (ie. when you expect to be paid by customers for deliveries and when you have to pay suppliers for materials). An effective IBP process provides a cash-flow forecast that enables the organisation to plan ahead and take advantage of such opportunities.
The Aberdeen Group research referred to earlier showed that 76% of organisations with IBP were able to evaluate and optimise inventory & service policy to maximise cash-flow and profitability. This compared to only 26% of organisations without IBP.
There are many advantages of implementing Integrated Business Planning in terms of improved customer service, optimizing inventory levels, purchasing and production plan stability and ultimately the growth of revenue and profit. By moving away from working in silos and fire-fighting out of trouble, the organisation is working on a single, agreed plan that meets the operational and financial objectives of the business
* Integrated Business Planning (IBP) : Capability Advantage for IBP Users vs. Non users, Bryan Ball, April 2016
