Integrated Business Planning for Effective Decision Making Pap… · Informative guides on industry best practice Inspiring Business Performance Integrated Business Planning for Effective

In format ive gu ides on indust ry best pract ice

Inspiring Business Performance

Integrated Business Planning for Effective Decision Making

Creating the decision imperative

THE OL IVER WIGHT – WHITE PAPER SER IES

2

Introduction

Today, Integrated Business Planning sits at the heart of many organisations as the

management process that runs the business, covering all the core functions from

product development and operations, to sales, marketing and finance.

Its real power is in enabling the key decisions that influence the future direction of the company and the achievement of the strategic plan. As the capability of a business’s processes mature, these decisions become increasingly complicated and their timing ever more critical. However, the very practicality of structuring the Integrated Business Planning process so it really does enable effective and timely decision-making, is a challenge, which shouldn’t be underestimated. The most difficult decisions are those relating to issues, which will face the business in the future, since by definition, the future is unknown and

there will always be unforeseen events, and circumstances that are subject to variation. Nonetheless decisions made today will have a defining effect on the business in one, two, or five year’s time. Deferring or avoiding these decisions can prove fatal. The key lies in configuring the Integrated Business Planning process, so it creates the same practical and emotional response for the decision-maker when reviewing future planned performance as it does when they are faced with the reality of past or current performance. It then becomes clear they have to act immediately to recover the situation.

By Jerry Shanahan

Oliver Wight Partner


3

The future is a thing of the past

The very purpose of Integrated Business Planning is to allow the organisation’s senior executive to plan the business across a rolling horizon of 24-months or more. Integrated Business Planning lets the leadership team see into the future, to identify the issues heading towards the business and the financial gaps emerging between the bottom-up ‘actual’ plan and the top-down business plan; and to make real decisions ‘now’ to affect that position.

Nonetheless, whilst many organisations have already obtained real advantage from Integrated Business Planning, the number of companies maximising its decision-making benefits, remains limited.

Companies, which mature their Integrated Business Planning process to the point where

consistent and repeatable business processes are established, will realise the “low hanging fruit” of opportunity Integrated Business Planning brings. However, as demands on the business increase, the focus must shift to establishing reliable and transparent scenarios in real-time that enable key strategic decisions for the business to be made - and at the right time.

Herein lies the challenge - with so many unknowns about the future, how can a business know it is making the right decisions today, to positively influence the business performance of tomorrow? The answer lies in creating a sense of urgency for the future, and for this we need to look to the past.


4

Decision-making based on historical performance

• A sense of urgency to make a decision as soon as a gap is identified

As a result of these attributes, the KPI data is ultimately believed and the imperative for making a decision is therefore created. The decision-maker, who has confidence in the performance management system, can put their entire focus on figuring out what decisions need to be made to try and bring the KPI back on track. Unfortunately by now, it can be too little, too late. By their very nature these KPIs reflect the historical performance of the company, so any decisions made are reactionary. The decision-maker is trying to recover business, which is already lost or compensating for gaps in performance, which have already occurred. The mistakes have already been made.

The traditional approach to performance management means companies have become adept at ensuring they have a suite of Key Performance Indicators (KPIs) to track the health of the business. Typically:

• On Time In Full (OTIF)• Order Fulfilment Cycle Time• Inventory Turns• Revenue to Plan• Gross Margin to Plan• Cash to Cash cycle time to Plan

Successful performance management systems, which have clear accountability and which inspire prompt decision-making for gap closing, all display common attributes:

• Efficient gathering of data required for KPIs• Accurate calculation of KPIs• Clear presentation of KPIs for the decision-

maker• Obvious sizing of any gap between current

and expected performance


5

The decision imperative

Lead-times associated with different types of decisions can vary from the immediate up to 24 months and beyond (see figure 2 overleaf). The decision scenarios need to be presented, so this lead-time is clearly visible. Above all, the decision imperative needs to be clear, so that everybody understands that if an explicit decision has not been made, it is tantamount to making an implicit decision. In other words the likely outcome is that the performance gap will indeed arise, as and when predicted, and that the consequences for the business may well be disastrous.

Clearly, a paradigm shift in decision-making behaviour may be required. Integrated Business Planning, is designed to facilitate this, with each of its five core process reviews specifically structured to enable effective decision-making behaviour. Yet before Integrated Business Planning can be harnessed to enable effective decision-making, the organisation must reach an appropriate level of maturity.

The challenge is to create a performance management system with the same decision-making imperative and attributes that allows the business to plan ahead rather than just reacting to the past. Chief among these attributes is creating a sense of urgency when analysing business issues projected into the future; not easy to do. While they may well be able to see “gaps” in future plans coming, many companies will instinctively feel they either have plenty of time to sort it out, or circumstances will most likely change again by the time they get there. So why make a decision now that could end up having to be reversed later?

Of course for past performance, the imperative is there for immediate decision-making; withperformance off track the problem is here and now. Yet, when it comes to potential gaps in the future, time is the all-important consideration; the potential scenarios affecting decisions have to be presented in such a way that the lead-time associated with implementing them is crystal clear to the decision-maker.

Figure 1: Decision imperative: the extended business horizon Oliver Wight International


6

The maturity journey

Business Planning and further subdivided into ‘transitions’. It is only as an organisation reaches transition 4 at the top of phase 2 that the scope of Integrated Business Planning increases to include finance, new products, marketing, sales and operations in a true ‘one plan’ and ‘one set of numbers’ business environment. It is here the challenge of creating management intelligence information to enable effective decision-making becomes more complex. This complexity is driven by the need to run various scenarios (in a timely fashion) based on the future predictions, so alternatives can be considered and the optimum decision reached.

Figure 2: Creating the Decision Imperative

Figure 3 opposite shows the maturity journey organisations take when striving for business excellence. The chart to the left in figure 3 shows the major ‘phases of maturity’: moving from the fire fighting environment of phase 1 to the business process control of phase 2; knowledge-based automation at phase 3; and the completely IT-enabled, seamless operations of Phase 4. While few organisations will ever even see the need to reach phase 4, it is a fundamental that every business gets to the top of phase 2 before it can look forward to sustainable success - i.e. it must eliminate failure in all its processes and ensure the business is in control.

To the right of Figure 3, phases 1 and 2 are expanded in the context of Integrated

Oliver Wight International


7

Figure 3: The Business Maturity Map for Integrated Business Planning

Decision-making in Integrated Business Planning

The five monthly steps of the Integrated Business Planning process are (in sequence): product review, demand review, supply review, reconciliation review and management business review.

One of the truly defining features of Integrated Business Planning is the Integrated Reconciliation process that feeds the reconciliation review. This process operates throughout the monthly cycle picking up the highlighted issues and gaps from each of the individual review steps, and in so doing supports decision-making and reconciliation at the earliest possible moment.

By the time the reconciliation review itself takes place, a review pack of information will have been created, highlighting the key issues and the decisions required for consideration by the senior leadership team at the subsequent management business review. How this information is presented is absolutely critical to enabling decision-making - the gaps must be clearly visible and the integrity of the data, beyond question. It is the role of the Integrated Business Planning process leader to ensure this is achieved before it is presented to the leadership team for decision-making.



8

Figure 4: The Oliver Wight Integrated Business Model

The challenge of future determination

creating a single deterministic view of the future is next to impossible or at best, open to serious scrutiny and challenge. When this happens, there is a real danger Integrated Business Planning reviews will deteriorate into a continuous challenging of the data, without any decisions being made. So, to create true decision-making forums, it is vital to recognise the fundamental difference between reacting to historical performance (ex-post) and planning for future performance (ex-ante). And the fundamental difference is that the past is indeed deterministic – it has already happened – while the future is made up of a wide range of possible events and circumstances, about which, informed assumptions have to be made.

Since Integrated Business Planning is the model for running the business, the leadership team naturally expects a clear view of any issues and gaps between planned performance as set out in the (top-down) strategic/business plans, versus the (bottom-up) projection of where the business is actually heading. For many organisations though, the latter can be very difficult to create and if it is not done effectively, it limits the benefits that can be extracted from their Integrated Business Planning process.

Creating the bottom up view of the future is no trivial task and in reality, is dependent on so many stochastic assumptions that



9

Integrated Business Planning recognises this and puts great emphasis on assumptions management and scenario planning to ensure all the various alternatives are considered by decision-makers, so they can then choose what they believe to be the best alternative. For this to be the case depends on the robustness and depth of predictive performance planning in being able to highlight the optimum scenarios for closing gaps in future performance.

In more mature or complex organisations, Integrated Reconciliation evolves to become the more expansive Integrated Business Optimization, and this evolution is essential if executives are to understand the key issues facing such a business, and to make decisions quickly and with confidence.

Enabling decision-making in complex organisations - the role of Integrated Business Optimization

In such organisations, Integrated Business Optimization is the very engine room of Integrated Business Planning and is the critical success factor for effective decision-making at the highest level; it is the guardian of the “one set of numbers” essential to planning. Driven by strategic objectives, it brings together the full, integrated picture and management issues identified in the product, demand and supply reviews, right across the organisation, whatever its geographical or structural profile.

To operate effective Integrated Business Optimization, organisations must determine what the key deliverables of the business for the future are, and then build capability to present the (bottom-up) planned view of those key deliverables versus the top-down expectations. For organisations that have reached a level of maturity matching transition 3 or 4 in the maturity map shown in Figure 3, enabling decision-making at this level can be an especially challenging task and typically benefits from the sort of external help that Oliver Wight can provide.

To achieve truly Integrated Business Optimization, the key lies with the core fundamentals of effective change management – a focus on the “sweet spot” of People, Process & Tools (see figure 5 overleaf).

While every successful Integrated Business Planning process requires consideration of these three elements, the emphasis changes according to the maturity of the process. For example, companies at a very low level of maturity (phase 1, transition 1), which are spending a lot of time fire fighting and managing unplanned events, will get significant benefit simply by putting an Integrated Business Planning process in place. However, for high-maturity organisations, where business processes are consistent and repeatable (phase 2, transition 4), the Integrated Business Planning process needs to deliver real-time scenario planning if it is to support timely decision-making within the business. To achieve this, much more sophisticated tools need to be deployed.


The right tools for the job

It is vital to first establish excellent processes and behaviours, but IT tools, which support real-time scenario presentation, will radically advance the benefits to be derived from Integrated Business Planning.

These tools need to be able to model the business’s future performance based on a variety of possible scenarios. For this, the traditional deterministic techniques of linear programming will have to be updated to include stochastic modelling and simulation capabilities in real-time environments.

Since Integrated Business Planning has become the ‘gold standard’ for the way successful businesses are run, this has led to

the development of increasingly sophisticated tools to facilitate the process. Technology now includes the means to manage qualitative information, such as assumptions, risks and opportunities, as well as the development and comparison of multiple scenarios. As a result, organisations, which have progressed their Integrated Business Planning process to a high level of maturity, can expect the support they need for it to deliver the next wave of business benefits. With credible information sourced from the right tools, Integrated Business Planning process owners can focus on analysis of the information and creating the decision-imperative - just like the one, which occurs instinctively when reviewing past performance.

Figure 5: Focus on Integration of People, Process & Tools Oliver Wight International


11

Summary

integration between people, process and tools is critical; recognising that at phase 2 levels of maturity, the dependency on tools becomes that much greater.

Much can be achieved by looking at the key characteristics of how decisions get made in an ex-post (historical) performance management system. Designing the Integrated Business Planning process so these same characteristics can be re-created when reviewing future scenarios, will allow businesses to continue their progression on the maturity journey and to continue to reap the rewards from Integrated Business Planning.

Integrated Business Planning continues to be adopted across all industry sectors as the preferred model for managing the business.

The proliferation of the process has come about because when successful companies talk about how they have achieved success, they invariably refer to an Integrated Business Planning process sitting at the heart of the organisation. For companies, which have reached a high level of maturity, the challenge of maximising the ongoing benefits from Integrated Business Planning, will be met by creating the decision-making imperative for the key decision-makers within the process. As always, focusing on the “sweet spot” of

Inspiring Business Performance

Oliver Wight EAME LLPThe Willows, The Steadings Business CentreMaisemore, Gloucester, GL2 8EY

T: +44 (0)1452 [email protected]

www.oliverwight-eame.com

Oliver Wight Asia/Pacific

131 Martin Street, BrightonVictoria 3186, Australia

Oliver Wight Americas

P.O Box 368, 292 Main Street

New London, NH 03257, USA

About Oliver Wight

Oliver Wight has a 40 year track record of delivering business improvement to some

of the world’s best-known organisations. We believe that sustainable improvement can

only be made through your own people. So unlike other consultancy firms, we transfer

our knowledge to you, which means you can achieve performance levels and financial

results that last.

At the leading edge of management thinking and practice, our Integrated Business Planning (IBP) model lies at the heart of our clients’ journey to outstanding business performance. Oliver Wight originated Sales and Operations Planning in the 1980s and IBP can most simply be described as advanced S&OP; evolving from its production planning roots over 40 years into

the fully integrated management and supply chain collaboration process it is today. IBP allows the senior executive to plan and manage the entire organisation over a 24 month horizon, aligning tactical and strategic plans each month and allocating critical resources to satisfy customers in the most profitable way.

The information contained is proprietary to Oliver Wight International and may not be modified, reproduced, distributed or utilized in any manner in whole or in part, without the express prior written permission of Oliver Wight International.

Documents

Integrated Business Planning for Effective Decision Making Pap… · Informative guides on industry best practice Inspiring Business Performance Integrated Business Planning for Effective