Planning For Profit In The Food Processing Industry

Integrated Business Planning (IBP) helps food processors maximize profits by optimizing the balance between supply and demand.

This whitepaper looks at some of the main differences between IBP and traditional Sales & Operations Planning (S&OP) and why companies looking for a competitive edge should invest in IBP. We also discuss some of the primary considerations for a successful IBP implementation, including system support requirements.

Planning for Profit in the Food Processing Industry
Food processing industries such as meat, dairy, seafood, and some horticulture all deal with divergent product structures. A single input - that must be used in its entirety - is processed into multiple outputs with different values.

This type of supply chain is more complex to plan than most other food and beverage industry segments. But with complexity comes opportunity, and food processors who successfully address the planning challenges will significantly improve their bottom line.

Traditional planning approaches - Risks and shortcomings
In the last few decades, many food processors have tried to implement Sales and Operations Planning (S&OP) to achieve a balanced plan. S&OP can be defined as a set of decision-making processes that aims to:

Balance demand and supply.
Integrate financial planning and operational planning.
Link high-level strategic plans with day-to-day operations.

Unfortunately, S&OP has rarely been implemented as intended, and planning has remained departmentalized rather than becoming more holistic and integrated, leading to poor synchronization and continued sub-optimization of the overall value chain.

Before we move on to Integrated Business Planning (IBP), let’s first take a closer look at the main S&OP process stages and some of the problems food processors encounter due to a siloed planning process:

Demand Review
(Non-integrated S&OP)

Sales try to produce forecasts that meet or exceed the sales budget.
Forecasts are prepared without proper consideration of production capacity, product mix, and primary supply availability.
Promotions are planned without considering the need to “balance the input”, the resulting stock on hand, and the overall impact on profits.

Operational Review
(Non-integrated S&OP)

The production team must figure out what the forecast means from a capacity and load perspective. They also need to work out how to balance the demand plan with the primary input (e.g., milk, livestock, fish, etc.). However, the production team might not look at this until 1-2 weeks before execution, leaving little slack to address any issues.
When operations have determined surplus and livestock requirements, they send the information back to the sales and sourcing teams. The sales team must now urgently address any imbalances and typically end up with a combination of promotions and freezing, or even the dumping of product - all of which harm profits.

Supply Review
(Non-integrated S&OP)

With a poor quality primary supply forecast, the sourcing team can’t adequately plan the livestock procurement and inevitably end up with last-minute high-cost supplementary purchases.
Sales will work to ‘pull’ product through to meet their targets. Still, the supply side ends up ‘pushing’ an often pre-planned quantity into the supply chain – leaving planning and operations to deal with resulting inventory surpluses and shortfalls on an ad-hoc basis.

More often than not, S&OP implementations result in a heavily biased and fragmented process, where decisions are made based on intuition and localized KPIs rather than facts and overall profitability. Ultimately, without the ability to plan and optimize the supply chain as a whole, the S&OP process will fail to deliver on its promise to balance supply and demand.

Integrated Business Planning for the Food Processing Industry
To maintain their competitive edge, food processing companies must balance the input for maximum profits while simultane- ously optimizing sourcing activities, pricing, promotions, and product mix.

Integrated business planning (IBP) aligns all business functions with the primary objective of improving financial performance.

To maximize the impact of IBP, companies must use Supply Chain Planning software capable of modeling and optimizing the supply chain as a whole.

The supply chain model, or “digital twin”, captures all supply chain costs, business rules, and operational constraints, providing a framework for optimization and machine learning algorithms. The optimized plans provide the IBP process stakeholders with the visibility and decision support needed to link strategic, operational, and financial planning.

Crucially, IBP does not discard S&OP – instead, it adds value by offering a way to implement S&OP better. With this in mind, let’s now take another look at the process review stages and find out how IBP, when supported by a modern Supply Chain Optimization solution, helps overcome the risks and shortcomings of traditional S&OP:

Demand Review (IBP)
One of the main advantages of supply chain optimization is that the demand forecast integrates seamlessly with the supply chain digital twin. With built-in profit optimization capabilities, the sales team can test both the forecast’s feasibility and profitability against all supply chain costs, rules, and constraints. If unable to deliver the plan in full, they can easily see what’s short. By validating the initial demand plan, the team will be able to:

Use promotions in a more targeted way. Promotions should primarily be used to maximize profit - not as a quick fix to push volume. This task is a lot easier when the impact of promotions on profitability is clear.
Understand the impact of capacity vs. load. With complete visibility of any capacity issues from the outset, there’s more time to find cost-effective alternatives.
Get a better picture of the livestock requirements. Because the solution considers minimum and maximum supply constraints, the team can quickly determine if the demand plan is feasible.
Visualize projected stock on hand. Planners get a complete view of any surplus due to unbalanced demand.
Optimize the entire supply chain for maximum overall profit. The profit optimization technology ensures that you always have a clear view of your plan’s overall profitability – from the first iteration to the last.

The first pass informs the sales team whether they can fulfill demand while meeting their volume and profitability targets. If not, they can revise the demand plan, using promotions or other short-term channels to drive sales and improve profitability. If processing capacity or supply is an issue, operations can immediately start investigating solutions.

Operational Review (IBP)
Suppose the first cut of the processing plan doesn’t deliver the required result, and the issues are on the production side. In that case, the operations team can look at ways of adjusting capacity and re-balancing workload over time, e.g., through overtime, additional shifts, and alternative processing resources and locations.

Possible capacity adjustments and their associated costs can be represented in the digital twin. Once available in the digital twin, these options are automatically evaluated during the optimization phase and deployed as needed to maximize profits.

The operations team can also manually adjust business constraints. In this case, the model is tested again against the defined demand and the profit impact assessed.

Supply Review (IBP)
If supply is the primary constraint, the sourcing team can get to work straight away. Ideally, all contracts and prices are digitized and made available to the supply chain model. In this case, the contracts are considered upfront by the optimization engine. Both the main supply and possible supplementary product can be modelled and included in the optimization.

If profitability or performance targets are not met, the sourcing team can review their contracts or look at buying supplements. Once any changes to the sourcing parameters are updated in the model, the plan is re-generated and re-evaluated against the defined demand. Thanks to the optimization engine’s speed, this can be done as many times as necessary, ensuring the business always moves forward with the best possible plan.

IBP – Maximizing overall profits
The main strength of IBP - and what makes it far more likely to succeed than a traditional S&OP approach - is that the entire organization works from the same model of the supply chain, with one set of data and a common goal – maximizing profits.

Effective IBP is made possible by modern supply chain planning and optimization software. The right solution will validate your demand plan and optimize every aspect of your supply chain to deliver the most profitable plan.

When complete supply chain plans can be generated in minutes and different scenarios analyzed on the fly, the entire planning process becomes more streamlined and proactive.

With a holistic view of the supply chain and the data driving it, focus shifts from data accuracy and who’s version of the truth is most valid towards a quest for a common goal. As process stakeholders start to realize the impact of IBP, they naturally become more engaged, and the real business benefits will begin to show.

With inventory surpluses and shortages visualized, food processing companies that have implemented IBP are far less likely to end up with fire sales, excessive freezing of fresh product, expensive short-lead time purchasing, and margin eroding promotions.

The IBP process synchronizes your entire value chain and lets you create demand and supply plans that maximize your overall profits, rather than just meeting basic sales volume targets.

Establish is a supply chain consulting firm focusing on supply chain strategy, transportation consulting services, warehouse design & improvements and supply chain planning.