Good IBP processes are developed to run future scenarios for a business, the best businesses are thinking about how these scenarios might play out and what actions they need to take to deliver the strategy. At the end of the day a great IBP process is both the vehicle of change to deliver the strategy and the first indicator that the strategy may need to change.
However, most if not all businesses think of the scenarios they put into the process themselves and they only run a limited number of these each time they churn the cycle because ultimately the process is slow and each iteration needs to be controlled and measured by their functional experts, interpreted and fed into the next decision cycle for consideration.
What perhaps is the most entertaining element when you stand back from what you are doing is that we see people make decisions on precise numbers from a long-term model that shows capacity will hit 86% or customer service will drop to 99.2%, yet these precise numbers are build up from predictions, calculations and estimations.
In the analogue world, running these scenarios and even thinking of the likely outcomes and comparing them is market leading, most businesses we know either don’t even have a long-term view of their entire business or if they do they run a single scenario and make decisions based on that.
Yet if we share this approach with people that model economies or stock market futures they would think we are pretty primitive. So, what can we do?
Firstly we need accept that any scenario or decision logic that enters a model is flawed if we start with a fixed number, not only because the outcome is highly unlikely to be the actual end result, but because most businesses who do you use scenario planning would use very disparate scenarios to show differences and therefore each outcome would drive significantly different decisions, meaning the business ultimately is driven down a decision path from the starting point.
Each Scenario we run follows the basic push logic;
Fixed Volume input x fixed know variables = outcomes (eg need a manufacturing line in WA)
Therefore, we should not start with input scenario’s to drive future states, we should conclude with outcome scenario’s, what that would mean is the IBP process now sits at the heart of decision making and not as the calculation engine that churns inputs.
To do this, we need to use stochastic modelling (random probability) on inputs and variables, running a simulation multiple times (potentially up to 10,000) to provide the most likely outcomes with the combined probabilities, with this information we then make informed scenario decisions that fit the future states most likely outcome. The part here is that when you combine all the probable events it is likely there are only a limited number of feasible decision outcomes.
The switch here is a move to pull logic, where the first step in the process would run many iterations to find the most probably outcomes unconstrained.
Probably Inputs x Probably variables = most import decision points and actions
From this point the business can set scenarios’ such as a new line or removal of a Warehouse that address the most probable outcomes and re-run the modelling to create the IBP outcomes, or if the variable is not a critical factor leave as a variable factor.
In a simple worked example; a business runs three scenarios’ of volume a key manufacturing site in two scenario’s is over capacity and in one they need two new lines to be installed and in the other only one line. The strategic decision of the business is do they go with Scenario one, two or three. Where its an educated guess at best.
Run that model through the new thinking and the outcomes would look very different using stochastic modelling (probabilities), where the outcomes might show at least 92% of the time one additional line is required, 62% of the time two new lines are required and only 8% no additional line is required. The decision now is based on most probable outcomes and the only question is the risk factor the business is comfortable in.
In this thinking, IBP is both the turbo charged engine room and the brain, which should allow it to be embedded as part of your business rather than the standalone process we all think is often to slow for us and big decisions are made outside of the process.