Skip to main content

Understand the Pitfalls of IBP Before Embarking on a Supply Chain Transformation

By March 6, 2023Uncategorized

GEON Performance Solutions purchases plastic pellets and add plastic compounders to make products of different strength, resilience, and flexibility.

When a company undergoes a digital transformation, the transformation should be based on an understanding of what they want to achieve. A transformation that is based on the idea that by putting in new applications the company will automate a process, or processes, and provide more and better data to make decisions, is a poor foundation for a true transformation.

When companies want to digitally transform their supply chain capabilities, moving to an integrated business planning process (IBP) is often at the heart of the transformation. The roots of IBP are in sales & operations planning (S&OP). S&OP is usually a month-long cross functional process that involves five steps. The output from the monthly process is an updated plan that balances demand with supply over a 24-month time horizon. Ideally, IBP adds a stronger financial perspective to the process that in theory optimally balances customer service with profitability and even cash flow.

The IBP Process Over Promises and Under Delivers

Research by McKinsey concludes that all too often IBP is an ineffective process. “In a survey of 54 senior executives, only about one in four believed that the processes of their companies balanced cross-functional trade-offs effectively or facilitated decision making to help the P&L (profit and loss) of the full business.”  Dean Sorenson concurs. Mr. Sorenson has studied integrated business planning for many years. In one article, Mr. Sorenson points out that IBP works better for small manufacturers than large ones. The simplifying assumptions small companies make don’t significantly impact the quality of the plan produced. But with growing complexity, Mr. Sorenson continues – “where resource consumption is more likely to vary by product and customer” – the IBP process “isn’t the strategic process that its proponents proclaim.” The simplified assumptions allow companies “to manage margins, supply chain costs, and inventories”, but “it does not enable them to manage enterprise costs, profit, and working capital.”

When it comes to these simplifying assumptions, the assumptions around overhead, according to Mr. Sorenson, are a particular culprit. Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. Too often overhead costs are allocated using broad averages, rather than doing so in a more targeted manner. An analogy to peanut butter is often used. Peanut butter is spread uniformly over an entire piece of bread. An effect of peanut-butter costing is that overhead costs may be underapplied or overapplied to cost objects such as products or customers.

GEON Embarks on a Digital Transformation

GEON Performance Solutions is embarking on a supply chain transformation. Their vision guiding this transformation is the creation of a highly effective IBP process. IBP should be a process that aligns and balances “tradeoffs” between financial and operational outcomes at all organization levels and across multiple functions and business units. The desired operational outcomes include delighting customers with the price, quality, services, and delivery performance. Financial performance is based on delivering those operational outcomes while still achieving the desired profitability and cash flow. In short, what GEON hopes to achieve with IBP is what most companies that have undertaken this journey have failed to achieve.

GEON Performance Solutions is a global leader in plastic compounded solutions and the leading brand in polyvinyl chloride compounds. At a high level, what GEON does is purchase plastic pellets and add plastic compounders to make products of different strength, resilience, and flexibility. The products that are produced by this make-to-order process come in a variety of shapes, colors, and sizes to fit the needs of a variety of different industries.

GEON, headquartered in Westlake Ohio, has about 1000 employees. The company has 11 production facilities across North America and China. These plants, in turn, produce roughly 2000 products. The company ships directly to customers and also to distributors.

Crawl, Walk, Run

Richard Herrin is the director of integrated business planning at GEON. Mr. Herrin came out of retirement in October of 2021 to join GEON. Mr. Herrin knows from personal experience that the IBP process often over promises and under delivers. Mr. Herrin had retired because of deep discouragement and growing frustration stemming from the inefficient business planning processes of his previous employer. Mr. Herrin’s wife had pointed out to him that when COVID ended, and planning was done in person instead of on Zoom (where he turned off the video feed), it would be impossible for Mr. Herrin to hide his red face and exasperation at the poor decisions being made. He acknowledged that was true and retired.

But then he was recruited by the chief financial officer, John Glavin, to join GEON. GEON is owned by SK Capital. SK Capital is a private investment firm focused on the specialty materials, chemicals, and pharmaceuticals sectors. SK Capital targets investments where they can leverage their industry and operating experience to improve an investment company’s growth, cash flow and risk profile. Mr. Herrin was a good fit. He presented a vision of moving from the kind of antiquated sales and operations planning (S&OP) done at many companies, to an advanced form of integrated planning. Mr. Herrin viewed the fact that he would report to the CFO as a good sign, a sign that GEON was interested in making decisions that were financially sound.

Mr. Herrin has been doing sales & operational planning (S&OP), and now integrated business planning, for over 40 years. As such, he understood both the potential of the process and the road blocks.

Achieving a more mature IBP process is hard work. It is a journey that never ends. GEON elected to take a crawl, walk, run approach where they would start with a simpler process, more akin to an advanced form of S&OP, and over time reach an IBP process that lives up to its promise.

For example, while GEON has over 2000 customers, initially they are manually building forecasts for 600 customers and 1200 ship-to locations. In the future, statistical analysis will be incorporated so that more customers will be included in the forecast and forecasting will often be done at a customer group level where customers from a similar market are grouped because their demand patterns are similar. The goal is to avoid complexity if it does not add value.

To begin the journey, GEON needed a better supply chain planning tool. They needed an end-to-end platform to connect data, decisions, and operations; a solution that would systematically align actions to goals and then track how well the plan was executed; finally, the tool had to support the creation of multiple robust scenarios. GEON selected a solution from John Galt Solutions and are happy with its capabilities.

The company’s near-term goals are to use the new process and tool to reduce the amount of noise and firefighting; establish a consistent company-wide planning process; and establish data driven analytics to support effective decision making. From a scenario perspective, the company wants to move away from a one number plan to a monthly plan that has base-case, best-case, and worst-case scenarios.

A one number plan, Mr. Herrin told me, “is like an Excel spreadsheet. It’s just a set of numbers. What you’re missing is the word narrative. A plan is like a Word document. It’s the narrative. It says, ‘here’s the plan. Here are the scenarios in that plan. Here’s the base case. Here’s the best case that could happen and these are the tail winds that could make that happen. And here is the worst case, and the head winds that would cause this to happen. And here is how we’re going to monitor those winds’” to know what scenario we are in. One way GEON determines whether they are in a base-case, worst-case, or best-case scenario is by monitoring their orders on a weekly basis and comparing what they expected to occur with what is occurring.

Strategic Planning Depends Upon Robust Costing

While Mr. Herrin wants to avoid unnecessary complexity, he fully understands that more granular costing needs to be part of the journey. For example, a customer that frequently changes their order size, asks that the order be rushed, and takes a long time to pay is a lot less profitable than most companies that practice peanut butter costing understand. Similarly, a product with a good margin that moves through a critical bottlenecked machine very slowly is less profitable than a low margin product that moves through the bottleneck quickly.

The solution to peanut butter costing is activity-based costing. Mr. Herrin of GEON understands that activity-based costing can be taken down to a level where it is not providing incremental value. Nevertheless, he wants to use the IBP process to tackle the larger customer and product costs that really do matter. This will be done in a step-by-step manner. The executive meeting will generate lean six sigma projects where analysts are tasked with going out and discovering more granular costs. The improved costing information will then be used to improve the supply chain planning model. This will lead to a living model that over time gets deeper and more accurate.

For example, a few analysts might be tasked with discovering how the profitability of an order is linked to the transportation costs associated with that order.  A plant in Ohio delivering a shipment to a customer in Minnesota may well find that the profitability of that order is less than an order for the same product delivered to a customer in Kentucky. The supply chain model can incorporate this more granular costing by creating customer specific bills of materials and routings.

Plan Your Cash Flows!

It is possible for a fast-growing, profitable company to go out of business because of negative cash flows. A negative cash flow occurs when a company is burning cash more quickly than they are generating it. GEON does plan on growth. Acquisitions may be used to boost growth.

For GEON, one goal of the IBP process is to produce a cash flow statement for the next 24 months. “Cash flow is what I’m going to use to fund my operations and to grow,” Mr. Herrin explained. Every decision I’m making in my in my monthly process ought to be focused on which (plan) gives me the best cash flow projection.”

The data for a SCP model to do cash flow projections exists. Every order has payment terms associated with it. This order detail can allow a company to forecast how quickly they will be paid when they fulfill that order. Very few companies are currently using the IBP process to generate cash flow projections.

As GEON comes to better understand their customer and product costs, more meaningful conversations with customers can occur. In terms of profitability there are customers that are very profitable, moderately profitable, and even customers that are unprofitable. The same is true of products. In time, the IBP process will help GEON to better understand what kind of financial terms they should be offering to their customers. The actions that come out of the IBP meeting could also empower sales people to have honest conversations with their customers on what the customers need to do to reduce GEON’s costs of fulfilling an order to them and thus allow GEON to offer them better service terms.


McKinsey research shows that mature IBP processes can significantly improve coordination and reduce the number of surprises. “Compared with companies that lack a well-functioning IBP process, the average mature IBP practitioner realizes one or two additional percentage points in EBIT. Service levels are 5 to 20% higher. Freight costs and capital intensity are 10 to 15% lower—and customer delivery penalties and missed sales are 40 to 50% lower. IBP technology and process discipline can also make planners 10 to 20% more productive.” But to achieve these results, companies need to know where the potholes and avoid them.

The post Understand the Pitfalls of IBP Before Embarking on a Supply Chain Transformation appeared first on Logistics Viewpoints.

Leave a Reply