Is that the right question? Or should we ask whether there are any differences between Sales and Operations Planning (S&OP) and Integrated Business Planning (IBP)?
There has been a heated debate about this since the 1990’s, when the consulting management firm Oliver Wight coined the term.
Oliver Wight defines IBP as “a process that drives the alignment of all functions across an organization, models and creates readiness for alternate outcomes, drives deployment of strategy, and enhances collaboration across supply chains.”
In this article we will dive into the key aspects of this definition and compare them with those in S&OP for you to know about both S&OP and IBP and decide if they are different.
Focus
The focus of S&OP is balancing demand and supply. The concept was born when back in the 1980’s, Richard Ling—a consultant at Oliver Wight at that time—was working on production planning challenges when companies didn’t have the right inventory.
The original definition is similar to stages one through three in Gartner’s SOP maturity tool. With IBP, the focus is on having one single plan that encompasses all functions.
It is a cross-functional process that tightly integrates operational plans to financials and strategy. IBP translates operational planning into financial performance and identify gaps against the budget.
Wight’s definition of IBP captures this concept with “drives the alignment of all functions across an organization” and “drives deployment of strategy”. These are stages four and five in Gartner’s S&OP maturity tool.
Scope
S&OP centers on supply chain and manufacturing, which represents between 50%-60% of total manufacturing costs. For example, S&OP doesn’t cover workforce management, R&D, and CapEx (Capital Expenses).
IBP, instead, has a wider scope, comprising all the business costs. IBP extends to the whole organization. McKinsey emphasizes this point by stating that IBP is “more effective when focused on decisions in the interest of the whole business.
An IBP process designed to help P&L owners make effective decisions as they run their business creates requirements different from those of a process owned by individual functions such as supply chain or manufacturing.”
As IBP comprehends all the business, it is common to find redundancies and non-value-added activities with Financial Planning and Analysis (FP&A) that resides in Finance.
Considering this, it is important that companies take a step back to define a holistic and cohesive planning process for the organization.
Execution
Supply Chain runs S&OP with decision meetings in a monthly cadence. It can be at the executive or director level. Execution focuses on finding a solution that balances demand and supply, starting with the demand plan.
In the case of IBP, as it is the link to strategy and has a solid integration with Finance—including measuring the operations impact in financial terms in what-if scenarios— the CFO or another executive from the commercial or supply chain area leads it. The starting point is the Income Statement or Profit and Loss Statement (P&L).
Some suggest that Finance should own the IBP process because of the strong connection with Finance and to be seen as separate from Supply Chain. I, personally, don’t share this perspective.
If CEOs come from financial, commercial, and operational backgrounds—including Tim Cook, Apple CEO, former COO under Steve Jobs—why can’t the COO or CSO lead IBP? Of course, Supply Chain needs to master the language of the business that is Finance and Accounting, as explained later in this article.
Approach
S&OP follows a 5-stage approach that consists of the following:
- Data gathering
- Demand plan
- Supply plan
- Pre-review S&OP meeting
Executive S&OP meeting
The goal is to balance demand and supply by identifying a workable solution. S&OP horizon extends from three to 18 months.
As it is a more strategic process and involves all functions, IBP spans from three to 36 months. The approach involves a close integration with finance.
For example, the IBP team runs scenario-based simulations to quantify the impact on the financials and make decisions considering the company as a whole.
This aligns with Oliver Wight’s definition of IBP that “models and creates readiness for alternate outcomes.” Portfolio product rationalization is also part of the IBP process.
Language
Predominantly, the language in the S&OP process uses physical units. Indeed, the different participants speak in different units of measure. Marketing talks about cases.
Logistics conversations are about truckloads, pallets, and cartons. Procurement discusses about “eaches.”
In most advanced S&OP or IBP processes, the language is value and financial metrics including EBIT, EBITDA, margins, cash, and working capital. It is the language of the business.
This is Finance and Accounting, the language spoken at the C-suite. Understanding this language is helpful for supply chain practitioners’ careers as well as to reach higher maturity levels with S&OP.
Conclusion
Whether IBP is a separate process from S&OP, or it is S&OP at the highest level, a less mature S&OP focuses on balancing demand and supply, using physical and supply chain metrics. It is still siloed in supply chain.
A more mature S&OP or IBP is a strategic management process with a holistic approach, considering the company as a whole for decision making.
The integration with Finance is fundamental and the language is about value and financial metrics. The team talks about profit, margin, working capital and cash.
Some of you may consider that S&OP and IBP are different. Others may hold the opposite view. What truly matters is that to fully capture the operational and financial benefits of S&OP/ IBP, companies must strive for reaching the highest maturity level.
